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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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)
DELAWARE 04-2450145
(STATE OF INCORPORATION) I.R.S. EMPLOYER
IDENTIFICATION NUMBER
99 PARK AVENUE 10016
NEW YORK, NY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
Registrant's telephone number, including area code: (212) 949-4200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
(Title of Each Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of December 18, 1998, the aggregate market value of voting stock held by
non-affiliates was approximately $19,375,874. The number of shares outstanding
of the Registrant's Common Stock was 42,303,038 as of December 18, 1998.
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ITEM 6. SELECTED FINANCIAL DATA
The following data for fiscal years 1998, 1997 and 1996 is derived from
the Company's audited financials and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere herein
and the data for fiscal years 1995 and 1994 is derived from the audited
financials of Securicor Radiocoms Limited, a predecessor corporation in the
continuing business of the Company.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
(THOUSANDS, EXCEPT SHARE AMOUNTS)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (1)
Total Revenues $35,654 $42,284 $23,899 $32,601 $18,080
Total Costs and Expenses (2) 97,196 68,222 34,317 33,997 21,397
Operating Loss (2) (61,542) (25,938) (10,418) (1,396) (3,317)
Net Loss (64,419) (26,999) (9,089) (1,171) (3,272)
Loss applicable to Common $(66,463) $(27,999) $(9,089) $(1,171) $(3,272)
Shareholders
Net Loss Per Share applicable to $(1.58) $(0.74) $(0.36) $(0.05) $(0.13)
Common Shareholders
Weighted Average Number of 42,151,142 37,885,371 25,000,000 25,000,000 25,000,000
Shares Outstanding
BALANCE SHEET DATA: (1)
Total Assets (2) $80,114 $112,565 $50,253 $37,463 $18,176
Working Capital 10,928 21,289 (5,268) 3,538 2,614
Long Term Debt 68,288 45,577 32,837 23,187 20,155
Shareholders' Equity (Deficit) (2) $(8,454) $53,848 $(21,289) $(12,949) $(11,726)
</TABLE>
- ------------------------
1 See Note 2 "Basis of Presentation and Summary of Significant Accounting
Policies - Principles of Consolidation" in Consolidated Financial Statements and
Notes thereto appearing elsewhere herein.
2 See Note 2 "Basis of Presentation and Summary of Significant Accounting
Policies - "Intangible and Long Lived Assets" and Note 3 "Restructuring Charges"
in Consolidated Notes to Financial Statements appearing elsewhere herein. On
December 3, 1996, the Company acquired all of the outstanding common stock of
Radiocoms for 25,000,000 shares of common stock of the Company and recorded
$38.6 million to goodwill. In fiscal 1998, management of the Company concluded
that goodwill arising from the Radiocoms reverse acquisition was not
recoverable. The Company recorded a charge equal to the unamortized balance of
the goodwill attributed to the Radiocoms reverse acquisition of approximately
$34.4 million in fiscal 1998 and recorded a restructuring charge of
approximately $1.6 million in the third quarter of fiscal 1998 related primarily
to planned staff reductions, terminations of leases associated with the
consolidation of office space and site leases and equipment removal and other
costs.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Consolidated Financial Statements and related notes contained in Item 14 to this
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.
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from those discussed herein. Factors that might cause such a
difference include, but are not limited to, those discussed under the caption
"Business-Forward-Looking Statements" and "Business-Risk Factors."
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 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 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 has developed and continues to develop 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
products including those utilizing LM Technology.
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 NRTC, to successful bidders in the recently
completed FCC Phase II 220 MHz auctions, public safety market and dealers, as
well as for utilization in the Roamer One 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 Roamer One Network, the Company also licenses
its technology to third party manufacturers. The Company has redirected its
marketing campaign of the Roamer One 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 Roamer One Network, as well as equipment sales to third parties
will be impacted by factors such as the Phase II Licensing auction held by the
FCC in November 1998. The FCC notified Intek that it will be awarded two
10-channel nationwide, seven 15-channel regional, and 172 10-channel EA, or
local, Business Radio airwave licenses. As part of a co-funding partnering
arrangement with the NRTC, Intek will share 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.
During the fourth quarter of fiscal 1998, Intek sold non-core,
U.K.-based LMR distribution and maintenance assets to SIS. The sale price for
the ESU assets was $8,500,000 resulting in a gain of $3,055,000. Due to the
related party nature of the sale, the gain was recorded as a direct increase in
shareholder equity (deficit). The sales price is subject to a post closing
adjustment up to (pound)500,000 (approximately $800,000) if the revenue
generated from the assets during the period of two years ending September 30,
2000 is less than 2 times the aggregate revenue from the assets generated during
the year ended September 30, 1998.
The Company expects to incur operating losses and have a negative cash
flow from operations for at least one year. This will result from expenses
related to the buildout of the Roamer One Network and the investment required to
build the Roamer One subscriber base.
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RESULTS OF OPERATIONS
As discussed more fully in Note 2 "Basis of Presentation and
Significant Accounting Policies --- Principles of Consolidation" to the
Consolidated Financial Statements and Notes thereto appearing elsewhere herein,
results of operations for all years presented include Radiocoms but, Roamer One,
MUSA and Intek corporate are only included for the periods subsequent to
December 3, 1996 (i.e., the fiscal year ended September 30, 1998 and the
ten-month period ended September 30, 1997.)
The Company operates in a single industry segment: provision of
spectrum-efficient wireless technology, products and services. Revenues are
generated by product sales and the provision of services including
communications, technology, and non-warranty repair.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES
OVERVIEW
Total revenues decreased by $6,630,000 (16%) from $42,284,000 in fiscal
1997 (12 months of Radiocoms and 10 months of non-Radiocoms) to $35,654,000 in
fiscal 1998. Product sales decreased by $10,097,000 (26%) from $38,606,000 to
$28,509,000 while service revenues increased by $3,467,000 (94%) from $3,678,000
to $7,145,000.
PRODUCT SALES
Sales of products for fiscal 1998 were $28,509,000, compared to
$38,606,000 for fiscal 1997. Sales in fiscal 1997 were favorably impacted by
improved deliveries of products to fill accumulated backorders, whereas sales in
fiscal 1998 returned to more normal levels. Sales in the first half of fiscal
1998 were negatively impacted by late deliveries of a new line of radios from a
major supplier. The supplier began to ship selected products on a timely basis
in late December 1997. Sales began to increase during the second half of 1998
due to an improved supply of product and an aggressive marketing campaign.
The percentage of product sales that rely on products supported by the
Company's Japanese supplier of non-LMT radios and supplies was approximately
31%, 35% and 5% in 1998, 1997 and 1996, respectively.
In November 1998, Intek 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 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. See "Liquidity and Capital Resources --- Future Capital Needs and
Resources".
SERVICE INCOME
Service income for fiscal 1998 was $7,145,000, compared to $3,678,000
for fiscal 1997.
Subscriber revenues generated by the Roamer One Network were $630,000
for fiscal 1998, an increase of $596,000 compared to $34,000 for fiscal 1997.
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 six wide-area geographic markets.
At September 30, 1998, Roamer One had approximately 7,800 internally generated
subscribers as well as approximately 2,700 subscribers from the Wireless Plus
acquisition for a total of approximately 10,500 compared to approximately 1,000
at September 30, 1997. Subscriber revenues generated in the U.K. by the ESU
Assets were $575,000 in fiscal 1998 compared to $717,000 in fiscal 1997. As
mentioned previously, the ESU assets were sold during the fourth quarter of
fiscal 1998.
Non-subscriber income includes royalties, equipment rental and
non-warranty repair. Non-subscriber revenues for fiscal 1998 were $6,515,000,
compared to $3,644,000. The increase of $2,871,000 was primarily due to
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non-warranty repair and sales by ESU. The ESU assets were sold during the fourth
quarter of fiscal 1998.
In the third quarter, the Company entered into a 5-year technology,
development and supply agreement between its LMT subsidiary and Nokia. Nokia's
Trans European Trunked Radio product lines proposes to incorporate key
components of the Company's proprietary LM Technology. The TETRA standard is the
only European standard for digital professional mobile radio.
South Korea's Kukjae Electronics, Ltd. Co. ("Kukjae"), one of Korea's
leading manufacturers of mobile radio equipment, agreed in February 1998, to
adopt the Company's patented LM Technology. The agreement, which was entered
into in February 1998, allows 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. Pursuant to
the agreement, the Company provided Kukjae with the equipment and technical
assistance needed to develop a demonstration system to introduce LM Technology
to Korean industry, academic and government authorities. The demonstration
period has not yet been sufficient to determine the financial impact of this
agreement on the Company.
COST OF GOODS AND SERVICES PROVIDED AND GROSS PROFIT MARGIN
OVERVIEW
Total cost of revenues decreased by $12,109,000 (or 30.6%) from
$39,585,000 (12 months of Radiocoms and 10 months of non-Radiocoms) to
$27,476,000. Gross Margin increased by $5,479,000 (or 203%) from $2,699,000 to
$8,178,000.
COST OF PRODUCT SALES
The cost of product sales decreased by $17,704,000 from $37,846,000
(98% sales) to $20,142,000 (71% sales). The primary reason for the decrease
included the fact that Radiocoms' cost of product sales decreased $12,300,000
due to a decline in sales volume and that 1997 also included a $4.7 million
write-off of slow moving and obsolete inventory. Cost of LMR product sales
decreased $3,500,000 compared to the prior year, as LMR sales in fiscal 1997
were favorably impacted by a backlog of orders which were filled during the
first several months following the acquisition of Midland by Intek. Cost of
Roamer One's product sales decreased $1,062,000 due to a shift from selling
radios to renting radios. The cost of product sales as a percentage of sales
was favorably impacted by improved manufacturing cost controls (approximately
$400,000) implemented by Radiocoms such as improved labor efficiency and
lower material costs, and by the strength of the U.S. Dollar against the
Japanese Yen which provided reductions in the cost of LMR products purchased
in Japan (approximately $800,000).
COST OF SERVICE PROVIDED
The cost of service provided increased by $5,595,000 from $1,739,000 in
fiscal 1997 (47% revenues) to $7,334,000 in fiscal 1998 (103% revenues). Gross
Margin decreased by $2,128,000 from $1,939,000 (53% revenues) to a loss of
$189,000 (3% 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 in fiscal 1998 and creation of the infrastructure to support subscribers
resulted in increases during fiscal 1998. Roamer One's site and technical
support expenses were $4,401,000 in fiscal 1998, compared to $2,084,000 for
fiscal 1997.
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OTHER OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses increased by $4,146,000 (98%) from
$4,214,000 in fiscal 1997 (10% revenues) (12 months of Radiocoms and 10 months
of non-Radiocoms) to $8,360,000 in fiscal 1998 (23% revenues). Sales and
marketing expenses have been increasing monthly due to the creation of a sales
organization in connection with the loading of the Roamer One Network. Sales and
marketing expenses are primarily salaries and commissions, travel, advertising
promotion, trade shows, and preparation of promotional materials.
During fiscal 1998, the Company redirected its marketing campaign of
the Roamer One Network from a national campaign to a focused specific geographic
campaign. The intent is to reduce selling cost per subscriber while developing a
selling model that can be duplicated in other geographic areas throughout the
nation.
RESEARCH AND DEVELOPMENT
Research and development expenses of $1,913,000 (5% revenues) for
fiscal 1998 were 41% lower than the expenses of $3,266,000 (8% revenues) for
fiscal 1997 (12 months of Radiocoms and 10 months of non-Radiocoms). This
reduction was due to an increased focus on high priority projects using internal
resources and a corresponding reduction in use of sub-contract and consulting
labor.
GENERAL AND ADMINISTRATIVE
General and administrative expenses of $16,735,000 (47% revenues) for
fiscal 1998 were $58,000 higher than the expenses of $16,677,000 (39% revenues)
for fiscal 1997 (12 months of Radiocoms and 10 months of non-Radiocoms). General
and administrative expenses consist of salaries, consultants, office rent,
legal, audit, public relations and shareholder relations costs, insurance, and
recruiting.
DEPRECIATION AND AMORTIZATION
Depreciation of fixed assets and amortization of the intangible assets
related to the acquisition of all the issued and outstanding common stock of
Radiocoms (the "Radiocoms Acquisition") and the acquisition from Midland
International Corporation, a wholly-owned subsidiary of Simmonds Capital
Limited, its U.S. land mobile radio distribution business, and certain of its
assets ("the Midland Transaction") were $6,711,000 and $4,480,000, respectively,
for fiscal years 1998 and 1997 (12 months of Radiocoms and 10 months of
non-Radiocoms). The 50% increase in depreciation and amortization expense for
fiscal 1998 from that reported in fiscal 1997 results from the inclusion of
additional Roamer One and Midland USA, Inc. ("MUSA") plant and equipment in
fiscal 1998, together with a full year of amortization of the intangible assets
related to the Radiocoms Acquisition which did not begin until December 3, 1996.
RESTRUCTURING CHARGES
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 service functions and to
eliminate and deconstruct certain communications sites related to its air time
services product line. See Note 3 to the financial statements for further
discussion of the restructuring reserve.
The timing of the restructuring charge coincided with the Company's
initiation of its strategic planning process that began in the third quarter
of fiscal 1998. The Company expects the consolidation and relocation of the
administrative services functions into Kansas City, Missouri, which was
substantially completed in December 1998, to result in an annual reduction in
its overall operating expenses (primarily related to facility occupation and
personnel costs) of approximately $800,000. In conjunction with its plan, the
Company has decided to eliminate and deconstruct certain sites that are not
deemed essential to the Company's growth strategy. The Company estimates that
while annual service income will not be materially impacted, the annual cost
of services provided will be reduced by $300,000. However, it is anticipated
that the total savings will be offset by expenses incurred related to
expansion of its network and services in the Company's four major geographic
operating areas.
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During the fourth quarter of 1998, approximately $200,000, primarily
severance, was charged against the restructuring reserve resulting in a
remaining balance of $1.4 million at September 30, 1998. The remaining amount of
the restructuring reserve is expected to be utilized during fiscal 1999.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining useful life of long-lived and intangible
assets might warrant revision or that the remaining balance of these assets may
not be recoverable. The Company evaluates the recoverability of its long-lived
and intangible assets by measuring the carrying amount of the assets against the
estimated undiscounted future cash flows associated with those assets. At this
time our evaluation indicates that the future undiscounted cash flows of certain
long-lived and intangible assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their estimated fair value.
During the fourth quarter of fiscal 1998, management concluded that
goodwill arising from the Radiocoms Acquisition (Note 4), attributable to
Roamer One, was not recoverable. Management reached the conclusion that the
Radiocoms reverse acquisition goodwill was not recoverable when the Company
revised its strategic plan after the Company's success at the recent FCC
auction. The Company's strategic planning process, which began during the
third fiscal quarter, was concluded subsequent to the September 1998 FCC
Phase II auction and included 5 year forecasts prepared for each operating
subsidiary ("Strategic Forecasts"). New markets for the Company became
available for spectrum and equipment sales by the Company as a result of the
FCC Phase II auction and the Company's partnering arrangement with NRTC (Note
5). Prior to the FCC Phase II auction, Roamer One owned or managed site
specific Phase I FCC licenses in the 220 MHz spectrum. The Company intended
to build a network on a national basis which attributed substantially higher
forecasted growth in the Acquisition Forecasts (defined below). Subsequent to
the FCC Phase II auction, management reconfirmed its decision to focus on
vertically integrating networks in four major geographic operating areas.
Such changes in strategy would result in substantially slower growth
attributable to Roamer One subscriber revenues compared to forecasts prepared
in connection with the Radiocoms Acquisition ("Acquisition Forecasts").
The Strategic Forecasts anticipated that Roamer One would operate at a
negative cash flow for the next five years because of the significant start up
losses and capital expenditures to be incurred in building its subscriber base.
Further, subscriber growth would be significantly slower than originally
forecasted in the Acquisition Forecasts. The Acquisition Forecasts reflected
positive operating results and cash flow in the second year of the Acquisition
Forecasts. The Acquisition Forecasts reflected significant subscriber growth and
system management fees generated on a national basis and reflected only very
modest capital costs for the subscriber network and the FCC licenses. The
Strategic Forecasts reflected Roamer One's performance from the date of
acquisition, including the substantially higher network and FCC license costs
incurred by it, reflected substantially lower subscriber growth than forecasted
in the Acquisition Forecasts and reflected the Company's decision to focus on
vertically integrating networks in four major geographic operating areas which
would result in slower subscriber growth. Based on the projected operating
losses and the negative cash flows contained in the Strategic Forecasts,
management did not believe that the Radiocoms acquisition goodwill was
recoverable and did not believe it was appropriate to select arbitrarily a
shorter amortization life. Accordingly, pursuant to SFAS 121, the Company
determined that changes in circumstances had occurred requiring the need to
assess the impairment of Roamer One's long-lived assets. As a result, the
Company recorded a charge equal to the unamortized balance of the Radiocoms
reverse acquisition goodwill of approximately $34.4 million. However, under the
Strategic Forecasts, Roamer One would be an integral part of the continuing
operations notwithstanding Roamer One's forecasted operating and cash losses for
the foreseeable future.
Management determined that the fair value of the other long-lived
assets on Roamer One's and the Company's other subsidiaries' books, consisting
of the site equipment, long-term inventory, FCC licenses and goodwill applicable
to other acquisitions, approximated their carrying value.
In connection with the site equipment and long-term equipment inventory
of the Company, the Company has 230 base stations in inventory and equipment
from certain underutilized sites. Management believes the market for these
products will begin to open when the FCC issues the Phase II licenses. The
equipment is not technologically obsolete and the Company's anticipated needs
for site/base stations and anticipated NRTC sales and sales to others, make such
assets recoverable. Prior to the recent FCC auction, there was a shortage of
spectrum which hampered equipment sales for the entire industry. The anticipated
sales prices for these products less costs to sell exceed the carrying value of
this equipment.
The Company can package the base stations with spectrum and sell the
packages to dealers. In connection with the FCC licenses, the Phase I licenses
currently owned become more valuable because the FCC removed certain
restrictions. As a result, the Company has more flexibility as to their uses
together with the Phase II licenses which increases the market universe of
subscribers. The method used for determining fair value of the FCC licenses was
the fair market value of the Phase II licenses recently auctioned by the FCC.
The Company concluded the carrying cost of those Phase I licenses was
realizable. Thus, management determined that no write downs to the FCC licenses
were necessary.
The Company concluded that the carrying cost of the Midland goodwill
on the books of the Company was realizable based on expected cash flows from
operations as evidenced by the Strategic Forecasts. In connection with the
Data Express goodwill, the Company has recently completed the acquisition of
Data Express, and management concluded that such goodwill was not impaired.
OPERATING LOSS
Intek's operating loss including charges for restructuring and
impairment of long-lived assets was $61,542,000 for fiscal 1998, compared to a
loss of $25,938,000 for fiscal 1997 (12 months of Radiocoms and 10 months of
non-Radiocoms). In addition to a fiscal 1998 restructuring charge of $1,613,000
and a $34,388,000 write-off of goodwill, the loss was due to growth in
subscriber revenue not being sufficient to offset the cost of the
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Roamer One Network's infrastructure and subscriber acquisition cost, as well as
from product shortages caused by late deliveries of a new line of radios from a
major supplier.
INTEREST EXPENSE
Interest expense for fiscal 1998 was $2,862,000 compared to $2,894,000
for fiscal 1997 (12 months of Radiocoms and 10 months of non-Radiocoms). Of the
total, $141,000 related to borrowings from third parties and $2,721,000 related
to borrowings from Securicor (of which $1,233,000 was added to principal and the
balance is accrued).
NET LOSS
The consolidated net loss after taxes for the year ended September 30,
1998 was $64,419,000. The net loss before charges for restructuring and
impairment of long-lived assets was $28,418,000. The net loss for the year ended
September 30, 1997 was $26,999,000 including Radiocoms for the entire year and
Roamer One, MUSA and corporate for the ten months ended September 30, 1997
PREFERRED DIVIDENDS
Pursuant to the terms of the Radiocoms Acquisition, $20 million of
intercompany balances between Radiocoms and Securicor were converted into 20,000
shares of Radiocoms preferred stock with a par value of $1 per share. The
intercompany balance in excess of the redemption value of the Radiocoms
preferred shares was contributed to the capital account of Radiocoms. The
preferred shares must be redeemed on June 30, 2006 and bear a dividend rate of
6%. Dividends of $1,000,000 and $1,200,000 were accrued and contributed to the
capital account in fiscal 1997 1998 respectively.
Effective March 1, 1998, Securicor purchased, pursuant to a Preferred
Stock Purchase Agreement dated December 29, 1997, 12,408 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") for $12,408,000.
Proceeds from the sale of the Series A Preferred Stock were applied against the
principal balance of the December 1997 Facility. The liquidation value of the
Series A Preferred Stock is $1,000 per share and par value is $.001 per share.
Dividends accrue at the rate of eleven and one-half (11 1/2%) percent of the
original issue price of $1,000 per share and are cumulative. The holder of the
Series A Preferred Stock has the right to convert the Series A Preferred Stock
into shares of Common Stock if the market price of Common Stock exceeds $6.00
for 20 consecutive trading days. Intek may cause the Series A Preferred Stock to
be converted if the market price is or exceeds $9.00 for 20 consecutive trading
days. The holder of the Series A Preferred Stock has the right to convert the
Series A Preferred Stock into shares of Common Stock if Intek does not redeem
the Series A Preferred Stock by June 30, 2003. The Series A Preferred Stock is
subject to adjustments for stock dividends, stock splits or share combinations
of Common Stock or distribution of a material portion of Intek's assets to the
holders of Common Stock. The Series A Preferred Stock does not have voting power
except as provided by Delaware corporate law. During fiscal 1998, Intek accrued
dividends totaling $844,000 which are included in the total Intek Global
preferred stock balance at September 30, 1998 of $13.3 million.
LOSS APPLICABLE TO COMMON SHAREHOLDERS
After deducting dividends on preferred stock, the loss applicable to
common shareholders for the year ended September 30, 1998 was $66,463,000,
compared to the loss $27,999,000 for the year ended September 30, 1997. After
adjusting fiscal 1998 for the restructuring charge and write-off of goodwill,
the net loss applicable to Common Shareholders was $30,462,000, an increase of
$2.4 million over fiscal 1997's loss.
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FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES
OVERVIEW
Because Securicor acquired more than a 50% controlling interest in
Intek through the Radiocoms Acquisition, the Radiocoms Acquisition was treated
as a reverse acquisition for accounting purposes, with Radiocoms considered the
acquiring company, although Intek is the surviving company under corporate law.
Accordingly, the consolidated financial statements for fiscal 1997 include only
the accounts of Radiocoms and its subsidiaries prior to the date of the
acquisition (December 3, 1996) and statements for fiscal 1996 include only the
accounts of Radiocoms and its subsidiaries.
Total revenues increased by $18,385,000 (77%) from $23,899,000 in
fiscal 1996 (Radiocoms only) to $42,284,000 in fiscal 1997 (12 months of
Radiocoms and 10 months of non-Radiocoms). Product sales increased by
$15,610,000 (68%) from $22,996,000 to $38,606,000 while service revenues
increased by $2,775,000 (307%) from $903,000 to $3,678,000.
PRODUCT SALES
Sales of products for fiscal 1997 were $38,606,000, compared to
$22,996,000 for fiscal 1997. Fiscal 1997 product sales in the U. S. were
favorably impacted by improved deliveries of products to fill orders that had
been previously backordered by the prior owner because of working capital
limitations. Radiocoms for fiscal 1997 had a 66% increase from that reported in
fiscal 1996, primarily due to an equipment supply contract the Company obtained
from the U.K. Ministry of Defense.
SERVICE INCOME
Service income for fiscal 1997 was $3,678,000, compared to $903,000 for
fiscal 1996. Of this income, $717,000 in fiscal 1997 and $903,000 in fiscal 1996
was directly related to the ESU operations.
COST OF GOODS AND SERVICES PROVIDED AND GROSS PROFIT MARGIN
OVERVIEW
Total cost of revenues increased by $19,501,000 from $20,084,000
(Radiocoms only) to $39,585,000 (12 months of Radiocoms and 10 months of
non-Radiocoms). Gross margin decreased by $1,116,000 (29%) from $3,815,000 (16%
revenues) to $2,699,000 (6% revenues).
COST OF PRODUCT SALES
The cost of product sales increased by $17,993,000 from $19,853,000
(86% sales) in fiscal 1996 to $37,846,000 (98% sales) in fiscal 1997. Cost of
sales as a percentage of related sales was abnormally high due to the fact that
fiscal 1997 included a $4.7 million write-off of slow moving and obsolete
inventory and to the cost of certain LM base stations sold being in excess of
the related revenue received.
In fiscal 1997, the Company determined that certain inventory
manufactured by its UK subsidiary relating to both third party products and the
Company's LM products were slow moving or obsolete. Accordingly, the Company
recorded a charge of $4.7 million against the cost of product sales to reduce
the value of the inventory to its estimated net realizable value.
COST OF SERVICES PROVIDED
The cost of service revenues increased by $1,508,000 from $231,000 in
fiscal 1996 (26% revenues) to $1,739,000 in fiscal 1997 (47% revenues).
Cost of subscriber 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 consulting fees, travel and
equipment rental required for optimizing and supporting the network of base
stations. Customer support includes phone-based assistance to subscribers.
During fiscal 1997, a significant portion of these expenses were related to
operation and maintenance of sites which had not been loaded with subscribers.
9
<PAGE>
OTHER OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses increased by $2,946,000 (232%) from
$1,268,000 in fiscal 1996 (5% revenues) (Radiocoms only) to $4,214,000 in fiscal
1997 (10% revenues) (12 months of Radiocoms and 10 months of non-Radiocoms).
Sales and marketing expenses have been increasing monthly due to the creation of
a sales organization in connection with building the subscriber base on the
Roamer One Network. 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 $3,266,000 (8% revenues) for
fiscal 1997 (12 months of Radiocoms and 10 months of non-Radiocoms) were not
materially different from the expenses of $3,154,000 (13% revenues) for fiscal
1996 (Radiocoms only).
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $8,376,000 (101%) from
$8,301,000 (35% revenues) in fiscal 1996 (Radiocoms only) to $16,677,000 (39%
revenues) in fiscal 1997 (12 months of Radiocoms and 10 months of
non-Radiocoms). General and administrative expenses consist of salaries,
consultants, office rent, legal, audit, public relations and shareholder
relations costs, insurance, and recruiting.
DEPRECIATION AND AMORTIZATION
Depreciation of fixed assets and amortization of the intangible assets
related to the Radiocoms Acquisition and Midland Transaction were $4,480,000 and
$1,510,000, respectively, for fiscal years 1997 (12 months of Radiocoms and 10
months of non-Radiocoms) and 1996 (Radiocoms only). The 196.7% increase in
expense for fiscal 1997 from that reported in fiscal 1996 results from the
inclusion of Roamer One and MUSA plant and equipment in the fiscal 1997
calculation, together with the amortization of the intangible assets related to
the Radiocoms Acquisition which did not begin until December 3, 1996.
OPERATING LOSS
Intek's operating loss was $25,938,000 for fiscal 1997 (12 months of
Radiocoms and 10 months of non-Radiocoms), compared a loss of $10,418,000 for
fiscal 1996 (Radiocoms only). The loss was due to subscriber count not being
sufficient to offset the cost of the Roamer One Network's.
OTHER INCOME (EXPENSE)
INTEREST
Interest expense for fiscal 1997 (12 months of Radiocoms and 10 months
of non-Radiocoms) $2,894,000 compared to $1,715,000 for fiscal 1996 (Radiocoms
only). Of the interest expense, $883,000 related to borrowings from third
parties and $1,364,000 related to borrowings from Securicor (of which $858,000
was added to principal and the balance is accrued) and $647,000 was imputed
interest on convertible debt and warrants resulting from the Company's capital
raising efforts.
10
<PAGE>
GAIN ON SALE OF LONG TERM ASSETS
During the month of December 1996, the Company sold real property
relating to a discontinued operation for a gain of $766,000. Offsetting this is
a loss on the write-down of fixed assets in the amount of $442,000.
NET LOSS
The consolidated net loss after taxes for the year ended September 30,
1997 was $26,999,000 including Radiocoms for the entire year and Roamer One,
MUSA and corporate for the ten months ended September 30, 1997. For the year
ended September 30, 1996, the net loss (attributable only to Radiocoms) was
$9,089,000
PREFERRED DIVIDENDS
Pursuant to the terms of the Radiocoms Acquisition, $20 million of
intercompany balances between Radiocoms and Securicor were converted into 20,000
shares of Radiocoms preferred stock with a par value of $1 per share. The
intercompany balance in excess of the redemption value of the Radiocoms
preferred shares was contributed to the capital account of Radiocoms. The
preferred shares must be redeemed on June 30, 2006 and bear a dividend rate of
6%. Dividends of $1,000,000 relating to 1997 shall be paid through the issuance
of preferred shares. Dividends of $1,000,000 were accrued and contributed to the
capital account in fiscal 1997.
LOSS APPLICABLE TO COMMON SHAREHOLDERS
After deducting unpaid dividends on preferred stock of Radiocoms held
by Securicor related to the Radiocoms Acquisition, the loss applicable to common
shareholders for the year ended September 30, 1997 was $27,999,000 (12 months of
Radiocoms and 10 months of non-Radiocoms), compared to a loss of $9,089,000 for
the year ended September 30, 1996 (Radiocoms only).
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.
CASH FLOWS
For the year ended September 30, 1998, the Company used $15,554,000 in
cash for operating activities, $7,130,000 was spent for capital expenditures and
$8,257,000 was spent for FCC licenses. Through its financing activities, the
Company raised approximately $15,515,000 in new debt from Securicor. The Company
also incurred $2,425,000 of short term debt of which $992,000 was related to
capital leases, $441,000 related to bank lines of credit used to repurchase
Common Stock in a private transaction and the balance was related to the
acquisition of the FCC licenses and Wireless Plus assets. Of the $1,694,000
increase in of long term debt, $1,374,000 also related to the acquisition of the
Wireless Plus assets while the balance was capital leases. The Company received
proceeds of $7,458,000 from the sale of its investment in E.F. Johnson ("EFJ")
and repurchased $1,329,000 in Common Stock in the public market and in a private
transaction.
In December 1997, the Company entered into a loan agreement ("December
1997 Facility") with Securicor which replaced all prior loan agreements. The
December 1997 Facility provides 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 common stock as a result
of any transaction except the direct or indirect
11
<PAGE>
transfer of the Intek 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 September 30, 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.
Effective March 31, 1998, Securicor purchased, pursuant to a Preferred
Stock Purchase Agreement dated December 29, 1997, 12,408 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") for $12.4 million.
Proceeds from the sale of the Series A Preferred Stock were applied against the
principal balance of the December 1997 Facility. The liquidation value of the
Series A Preferred Stock is $1,000 per share and par value is $.001 per share.
Dividends accrue at the rate of eleven and one-half percent (11 1/2%) of the
original issue price of $1,000 per share and are cumulative. The holder of the
Series A Preferred Stock has the right to convert the Series A Preferred Stock
into shares of Common Stock if the market price of Common Stock exceeds $6.00
for 20 consecutive trading days. Intek may cause the Series A Preferred Stock to
be converted if the market price is or exceeds $9.00 for 20 consecutive trading
days. The holder of the Series A Preferred Stock has the right to convert the
Series A Preferred Stock into shares of Common Stock if Intek does not redeem
the Series A Preferred Stock by June 30, 2003. The Series A Preferred Stock is
subject to adjustments for stock dividends, stock splits or share combinations
of Common Stock or distribution of a material portion of Intek's assets to the
holders of Common Stock. The Series A Preferred Stock does not have voting power
except as provided by Delaware corporate law.
During fiscal 1997, the Company received stock of Transcrypt
International in exchange for its investment in 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 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 was reimbursed during the second quarter of
fiscal 1998 by Securicor.
During the third quarter of fiscal 1998, the Company recorded a
restructuring charge of approximately $1.6 million related primarily to planned
staff reductions, termination of leases associated with the consolidation of
office space and site leases, and equipment removal costs. In conjunction with
the restructuring, the Company has decided to eliminate and deconstruct certain
sites that are not deemed essential to the Company's growth strategy,
consolidate office space and reduce the number of associated sales force. In
addition, the Company has consolidated financial and customer service functions
at its headquarters in Kansas City, Missouri to gain efficiencies and economies
of scale. During the fourth quarter of 1998, approximately $200,000, related
primarily to severance payments, was charged against the restructuring reserve
resulting in a remaining balance of approximately $1.4 million at September 30,
1998. The remaining amount of the restructuring reserve is expected to be
utilized during fiscal 1999.
During the fourth quarter of fiscal 1998, Intek sold 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
sale price for the ESU Assets was $8,500,000 resulting in a gain of $3,055,000.
In December 1997, MUSA entered into a revolving credit agreement
("Credit Agreement") with a non-bank lender. The Credit Agreement makes
available $5.0 million through December 1999. Borrowings under the Credit
Agreement are secured by the assets of MUSA and bear interest at 1.5 percent
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 uses the Credit Facility for issuance of letter of
credit commitments on behalf of MUSA, and for borrowings for working capital. As
of September 30, 1998, there was indebtedness of approximately $0.7 million
under this new line of credit.
INVESTMENTS
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 August 1998, the Company entered into an agreement with National
Rural Telecommunications Cooperative, subsequently amended in November 1998,
pursuant to which the Company, through its wholly-owned
12
<PAGE>
subsidiary, ILAC, and NRTC agreed to participate jointly in the recent FCC
auction for certain Phase II licenses in the 220-222 MHz band (the "Licenses").
The agreement provides for the purchase by ILAC of certain Licenses in the
auction on a cost-sharing basis and the post-auction partitioning and
disaggregation of awarded Licenses between NRTC and ILAC. As a result of the
recently concluded auction, ILAC will be awarded two 10-channel nationwide,
seven 15-channel regional, and 172 10-channel EA or local, Business Radio
airwave Licenses at a total cost of approximately $12.2 million. 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. ILAC's
portion of the cost for Licenses awarded in the Auction is approximately $6.6
million. In addition, ILAC has incurred a penalty charge of $57,200 for
withdrawn high bids on Licenses subsequently awarded at lower bids during the
Auction and has been assessed an additional holdback charge of $25,602 for
withdrawn high bids with respect to Licenses which were not awarded during the
Auction. If such Licenses are subsequently awarded in a later auction (which is
presently scheduled to commence June 15, 1999) at a price equal to or greater
than the withdrawn ILAC bid price, ILAC would be entitled to a return of this
holdback charge. However, if such Licenses are subsequently awarded at less than
the ILAC withdrawn high bid price, ILAC would be liable for the difference,
which the Company estimates its total contingent liability with respect to such
Licenses to be approximately an additional $853,403. At September 30, 1998, the
Company was reflecting a deposit related to the auction of approximately $1.8
million in the accompanying consolidated balance sheets.
In August 1998, the Company entered into an asset purchase agreement
(the "Purchase Agreement") with ComTech Communications, Inc. ("ComTech"), to
purchase eleven licenses granted by the FCC in the 220-222 MHz band spectrum
(the "Licenses") and certain equipment and other personal property, subscription
contracts, accounts and lists and management and purchase option agreements
relating to the Licenses which were owned by ComTech. The purchase price is
$458,039, with $50,000 payable upon execution of the Purchase Agreement and the
balance payable upon the final transfer of the Licenses to the Company by the
FCC in the form of a three-year promissory note of the Company in the amount of
$408,039 and bearing interest at the rate of 9% per annum. The Company will
receive a credit of $41,640 against the purchase price for each License that is
not so transferred to the Company. As part of the same transaction, the Company
and ComTech entered into a management agreement pursuant to which Company
manages the systems subject to ComTech's supervision and control until the final
transfer of the Licenses to the Company by the FCC.
In addition to the transactions described above, Roamer One and ComTech
entered into a letter of intent and resale agreement in September 1998 to
provide for the purchase by Roamer One of a 5-channel Phase I national FCC
License from ComTech and the design and construction of a national network by
Roamer One using the License's frequencies for the provision of paging services
and two-way land mobile radio services. Under the resale agreement, Roamer One
is required to design and construct the radio system to resell airtime on the
network. The equipment used for the base station transmitters will be leased by
ComTech from MUSA under a separate equipment lease agreement. Under the resale
agreement, Roamer One is responsible for all operating expenses, including site
leases and taxes, and has agreed to pay ComTech, initially, $284 per month for
each channel of any radio system operated by Roamer One to resell airtime on the
network. Effective as of May 1, 1998, and through June 30, 1999, Roamer One will
pay ComTech the greater of $284 per month per channel in operation or $39,760
per month, and as of July 1, 1999, for the remaining term of the resale
agreement, Roamer One will pay ComTech the greater of $284 per month per channel
in operation or $37,500 per month. The Purchase Agreement may be terminated by
either party if the FCC has not granted any of the Assignment Applications with
respect to Licenses sought to be acquired by the Company from ComTech by
March 1, 1999. A termination of the Purchase Agreement terminates the
Management Agreement between the Company and ComTech. The Equipment Lease
Agreement between Midland and ComTech may be terminated upon 30 days notice
by either party and certain other events. The resale agreement between
ComTech and Roamer One may be terminated by Roamer One during the period
January 4, 1999 through January 15, 1999 upon notice to ComTech. The Company
is evaluating its options under this agreement as a result of its recent
success in the FCC auction. In the event the Company terminates the
agreement, the agreement provides that Roamer One will be obligated to make
certain payments to ComTech.
FUTURE CAPITAL NEEDS AND RESOURCES
In the future, the Company will require capital to build sites for the
Roamer One Network, perform other upgrading functions to the current network,
and, to fund operating expenses. The requirement for future working
13
<PAGE>
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.
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 1, 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 MUSA
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.
In December 1998, the Company entered into an additional financing
arrangement for $25 million with Securicor. 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 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.
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 fiscal 1998, 1997 or 1996.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which would
cause a system failure or other computer errors, leading to disruptions in
operations. In fiscal 1998, the Company developed a three-phase program for Y2K
information systems compliance. Phase I is to identify those systems with which
the Company has exposure to Y2K issues. Phase II is the development and
implementation of action plans to be Y2K compliant in all areas by the end of
the second quarter of fiscal 1999. Phase III, to be completed by mid-1999, is
the final testing of each major area of exposure to ensure compliance. The
Company has identified three major areas determined to be critical for
successful Y2K compliance; (1) financial and informational system applications,
(2) manufacturing applications and (3) third-party relationships.
The Company, in accordance with Phase I of the program, has conducted
an internal review of all systems
14
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and is contacting all software suppliers to determine major areas of exposure to
Y2K issues. In the financial and information system area, a number of
applications have been identified as being Y2K compliant due to their recent
implementation. The Company's core financial and reporting systems are Y2K
compliant. One subsidiary's billing software is not compliant and will be
replaced. A number of alternatives have already been identified and the
replacement software will be installed by March 31, 1999. In the manufacturing
area, the Company has identified areas of exposure. While the Company has the
ability to produce its own core products, and has assurances from major third
party suppliers that Y2K issues are being addressed, if suppliers of parts and
components for production are adversely affected by Y2K issues, there can be no
assurance that supply of products will not be affected. In the third-party
manufacturing area, the Company has contacted most of its major suppliers. Most
of these parties state that they are or intend to be Y2K compliant by 2000.
Other suppliers who are not Y2K compliant by June 1999 will be replaced if, in
Management's opinion, continuity of supply of products or services is in
jeopardy. In all areas the Company plans to create contingency plans in the
first half of 1999 for those functions that it identifies as most susceptible to
disruption. There can be no assurance that these contingency plans will
successfully avoid service disruption.
The Company believes that the total cost to be incurred to become
compliant in all areas will not exceed $800,000.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
(1) The following financial statements are included in this Annual
Report:
Report of Independent Public Accountants for the years ended September 30,
1998 and 1997 F-1
Report of Independent Auditors for the year ended September 30, 1996 F-2
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
years ended September 30, 1998, 1997 and 1996. F-3
Consolidated Balance Sheets at September 30, 1998 and 1997. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
September 30, 1998, 1997 and 1996. F-5
Consolidated Statements of Cash Flows for the years ended September 30, 1998,
1997 and 1996. F-6
Notes to Consolidated Financial Statements F-7 to F-28
(2) Financial Statement Schedules:
Report of Independent Public Accountants i
Report of Independent Auditors ii
Schedule II - Valuation and Qualifying Accounts iii
</TABLE>
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See Index to Exhibits of this Annual Report on Form 10-K for a list of
Exhibits filed with this Annual Report.
16
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
July 29, 1999.
INTEK GLOBAL CORPORATION
By: /S/ GEORGE A. VALENTI
-----------------------------------
George A. Valenti
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Intek Global Corporation:
We have audited the accompanying consolidated balance sheets of Intek Global
Corporation (a Delaware corporation) and subsidiaries as of September 30, 1998
and 1997, and the related consolidated statements of operations and
comprehensive income (loss), shareholders' equity (deficit) and cash flows for
the year ended September 30, 1998, and the related consolidated statements of
operations and comprehensive income (loss), shareholders' equity (deficit) and
cash flows for the year ended September 30, 1997 (See Note 2), consisting of the
statements of operations and comprehensive income (loss), shareholders' equity
(deficit) and cash flows for Securicor Radiocoms Limited, predecessor
corporation in the continuing business of Intek Global Corporation and
subsidiaries for the period from October 1, 1996 through December 2, 1996
(Pre-Reverse Acquisition), and the statements of operations and comprehensive
income (loss), shareholders' equity (deficit) and cash flows of Intek Global
Corporation and subsidiaries for the period from December 3, 1996 through
September 30, 1997 (Post-Reverse Acquisition). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intek Global Corporation and
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri,
December 16, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Securicor Radiocoms Limited:
We have audited the accompanying statements of operations and comprehensive
income (loss) and cash flows of Securicor Radiocoms Limited (predecessor company
to Intek Global Corporation) for the year ended September 30, 1996. These
financial statements are the responsibility of the Radiocoms' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United Kingdom which are substantially the same as those used in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Securicor
Radiocoms Limited for the year ended September 30, 1996, in conformity with
generally accepted accounting principles used in the United States of America.
London, England BAKER TILLY
24 January 1997 Chartered Accountants
F-2
<PAGE>
INTEK GLOBAL CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1995 AND
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
($'s in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------------
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Revenues
Net product sales $ 28,509 $ 38,606 $ 22,996
Service income 7,145 3,678 903
------------- ------------ ------------
Total revenues 35,654 42,284 23,899
Costs and expenses:
Cost of product sales 20,142 33,146 19,853
Cost of product sales - inventory write-off -- 4,700 --
Cost of services provided 7,334 1,739 231
Sales and marketing 8,360 4,214 1,268
Research and development 1,913 3,266 3,154
General and administrative 16,735 16,677 8,301
Depreciation and amortization 6,711 4,480 1,510
Restructuring charges 1,613 -- --
Impairment of long-lived assets 34,388 -- --
------------- ------------ ------------
Operating loss (61,542) (25,938) (10,418)
Other income (expense):
Interest (2,862) (2,894) (1,715)
Gain on sale of long term assets -- 324 --
Other (15) 351 --
------------- ------------ ------------
Loss before income taxes (64,419) (28,157) (12,133)
Income tax benefit -- 1,158 3,044
------------- ------------ ------------
Net loss (64,419) (26,999) (9,089)
Less preferred dividends (2,044) (1,000) --
------------- ------------ ------------
Net loss applicable to common shareholders $ (66,463) $ (27,999) $ (9,089)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax 186 (2,588) 749
------------- ------------ ------------
Comprehensive income (loss) $ (66,277) $ (30,587) $ (8,340)
------------- ------------ ------------
------------- ------------ ------------
Net loss per share applicable to common shareholders
(basic & diluted) $ (1.58) $ (0.74) $ (0.36)
------------- ------------ ------------
------------- ------------ ------------
Weighted average number of common shares outstanding
(basic & diluted) 42,151,142 37,885,371 25,000,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-3
<PAGE>
INTEK GLOBAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($'s in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,719 $ 1,909
Marketable securities -- 8,148
Accounts receivable, net of allowance for doubtful accounts
of $993 in 1998 and $863 in 1997 3,870 6,488
Inventories 17,677 12,289
Deposits 1,750 --
Amounts due from related parties 396 4,701
Prepaid expenses and other current assets 1,796 894
----------- ------------
Total current assets 31,208 34,429
----------- ------------
PROPERTY AND EQUIPMENT, NET 23,569 21,555
OTHER ASSETS:
Note receivable 580 556
Intangible assets, net 20,961 48,340
Inventory-long term 3,189 6,980
Other 607 705
----------- ------------
Total other assets 25,337 56,581
----------- ------------
TOTAL ASSETS $ 80,114 $ 112,565
----------- ------------
----------- ------------
CURRENT LIABILITIES:
Accounts payable $ 7,062 $ 6,110
Amounts due to related parties 2,499 2,005
Accrued liabilities 7,420 3,928
Deferred income -- 977
Notes payable -- third party 3,299 120
----------- ------------
Total current liabilities 20,280 13,140
----------- ------------
LONG TERM DEBT:
Notes payable -- third party 2,038 --
Notes payable -- related party 30,733 24,223
Other 65 354
----------- ------------
Total long term debt 32,836 24,577
----------- ------------
PREFERRED STOCK -- Mandatorily Redeemable 35,452 21,000
----------- ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 60,000,000 shares authorized
43,305,620 and 42,398,096 shares issued at 1998 and 1997,
respectively 433 424
Capital in excess of par value 108,471 105,220
Treasury stock, at cost, 1,002,582 and 465,582 shares at
1998 and 1997, respectively (2,099) (770)
Accumulated deficit (113,618) (49,199)
Accumulated other comprehensive income --
Currency translation adjustment (1,641) (1,827)
----------- ------------
Total shareholders' equity (deficit) (8,454) 53,848
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 80,114 $ 112,565
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-4
<PAGE>
INTEK GLOBAL CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1995 AND
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
($'s in thousands, except shares)
Years ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Capital Accumulated
In Other
Common Stock Excess Treas- Compre-
--------------------------- of Par ury Accumulated hensive
Shares Amount Value Stock Deficit Income
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SEPTEMBER 30, 1995 100,000 $ 250 $ (100) $ -- $ (13,111) $ 12
Net loss -- -- -- -- (9,089) --
Foreign currency translation
adjustments -- -- -- -- -- 749
------------ ----------- ------------ ----------- ----------- -----------
BALANCE SEPTEMBER 30, 1996 100,000 250 (100) -- (22,200) 761
Eliminate stock of Radiocoms (100,000) (250) 100 -- -- --
Purchase Radiocoms for stock 25,000,000 250 84,982 -- -- --
Intek shares December 3, 1996 14,239,416 142 26,383 (770) (11,025) --
Intek loss October 1, 1996
through December 3, 1996 -- -- -- -- (3,407) --
Eliminate Intek historic deficit -- -- (14,432) -- 14,432 --
Adjust shares for Midland assets (155,000) (1) (644) -- -- --
Imputed interest on warrants -- -- 652 -- -- --
Shares issued for loan extension fee 34,000 -- 203 -- -- --
Exercise of warrants 1,758,776 18 6,495 -- -- --
Write off deferred financing cost
related to note converted to stock -- -- (215) -- -- --
Shares issued for interest 14,602 -- 60 -- -- --
Shares issued for equipment and
licenses purchased from ADC
and PPC 1,206,302 12 2,176 -- -- --
Employee stock grant 300,000 3 560 -- -- --
Preferred stock dividends -- -- (1,000) -- -- --
Net loss -- -- -- -- (26,999) --
Foreign currency translation
adjustments -- -- -- -- -- (2,588)
------------ ----------- ------------ ----------- ----------- -----------
BALANCE SEPTEMBER 30, 1997 42,398,096 424 105,220 (770) (49,199) (1,827)
Purchase treasury shares -- -- -- (1,329) -- --
Shares issued for licenses 506,916 5 968 -- -- --
Shares issued for acquisition of
Data Express 400,608 4 1,272 -- -- --
Gain on sale of assets to related party -- -- 3,055 -- -- --
Preferred stock dividends -- -- (2,044) -- -- --
Net loss -- -- -- -- (64,419) --
Accumulated other comprehensive income
-- currency translation adjustments -- -- -- -- -- 186
------------ ----------- ------------ ----------- ----------- -----------
BALANCE SEPTEMBER 30, 1998 43,305,620 $ 433 $ 108,471 $ (2,099) $ (113,618) $ (1,641)
------------ ----------- ------------ ----------- ----------- -----------
------------ ----------- ------------ ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Total
Share-
holders'
Equity
(Deficit)
------------
<S> <C>
BALANCE SEPTEMBER 30, 1995 $ (12,949)
Net loss (9,089)
Foreign currency translation
adjustments 749
------------
BALANCE SEPTEMBER 30, 1996 (21,289)
Eliminate stock of Radiocoms (150)
Purchase Radiocoms for stock 85,232
Intek shares December 3, 1996 14,730
Intek loss October 1, 1996
through December 3, 1996 (3,407)
Eliminate Intek historic deficit --
Adjust shares for Midland assets (645)
Imputed interest on warrants 652
Shares issued for loan extension fee 203
Exercise of warrants 6,513
Write off deferred financing cost
related to note converted to stock (215)
Shares issued for interest 60
Shares issued for equipment and
licenses purchased from ADC
and PPC 2,188
Employee stock grant 563
Preferred stock dividends (1,000)
Net loss (26,999)
Foreign currency translation
adjustments (2,588)
------------
BALANCE SEPTEMBER 30, 1997 53,848
Purchase treasury shares (1,329)
Shares issued for licenses 973
Shares issued for acquisition of
Data Express 1,276
Gain on sale of assets to related party 3,055
Preferred stock dividends (2,044)
Net loss (64,419)
Accumulated other comprehensive income
- currency translation adjustments 186
------------
BALANCE SEPTEMBER 30, 1998 $ (8,454)
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-5
<PAGE>
INTEK GLOBAL CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1995 AND
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS
($'s in thousands)
<TABLE>
<CAPTION>
Years ended September 30,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (64,419) $ (26,999) $ (9,089)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,711 4,480 1,510
Impairment of long-lived assets 34,388 -- --
Interest capitalized into principal 3,527 -- --
Stock compensation to employees -- 563 --
Other -- 350 29
Changes in operating assets and liabilities:
Accounts receivable and amounts due from related parties 4,231 1,384 3,477
Allowance for doubtful accounts 252 -- --
Deposits (1,735) -- --
Inventories (2,215) 11,376 (2,984)
Income taxes receivable from related parties -- 2,330 --
Prepaid expenses and other current assets (77) 1,375 67
Accounts payable and amounts due to related parties 2,430 902 (1,513)
Deposits (42) -- --
Accrued liabilities 112 (443) (601)
Accrued liabilities to related parties -- 342 --
Deferred income (667) 194 (1,209)
Restructuring reserve 1,424 -- --
Other 526 (93) --
---------- ----------- ----------
Net cash used in operating activities (15,554) (4,239) (10,313)
---------- ----------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of marketable securities 7,458 1,853 --
Expenditures for property and equipment, net (7,130) (9,226) (1,657)
Expenditures for FCC licenses (8,257) (2,016) --
Expenditures for other long term assets 71 (6,477) --
Proceeds from sale of long term assets 8,500 2,311 96
Other 152 (428) --
---------- ----------- ----------
Net cash provided by (used in) investing activities 794 (13,983) (1,561)
---------- ----------- ----------
Cash Flows From Financing Activities:
Net change in bank overdraft 653 (1,252) (731)
Proceeds from short term debt 2,425 71 --
Proceeds from long term debt 1,694 4,000 --
Proceeds from long term debt-related party 15,515 19,452 12,463
Repayment of long and short term debt -- (5,347) --
Purchase of treasury stock (1,329) -- --
Other (6) 282 --
---------- ----------- ----------
Net cash provided by financing activities 18,952 17,206 11,732
---------- ----------- ----------
Effect of foreign exchange rate changes on cash (382) 936 (42)
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 3,810 (80) (184)
Cash and cash equivalents at beginning of year 1,909 417 601
Cash acquired in reverse acquisition -- 1,572 --
---------- ----------- ----------
Cash and cash equivalents at end of year $ 5,719 $ 1,909 $ 417
---------- ----------- ----------
---------- ----------- ----------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 317 $ 578 $ 1,715
Cash paid for income taxes -- -- --
Cash received for income taxes
(U.K. group tax relief received from related party) -- 3,117 285
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-6
<PAGE>
INTEK GLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Intek Global Corporation, a Delaware corporation, is a provider of
spectrum-efficient wireless communications technology, products and services. At
the Annual Meeting of Shareholders held on February 18, 1998, the shareholders
approved the change of the Company's name from Intek Diversified Corporation to
Intek Global Corporation.
With the exception of certain products distributed by Midland USA, Inc
("MUSA"), a Delaware corporation, and Securicor Radiocoms Limited ("Radiocoms"),
a corporation formed under the laws of England and Wales, both wholly-owned
subsidiaries of Intek, the communication services and products of the Company
utilize linear modulation technology ("LM Technology" or "LMT"). Roamer One,
Inc., a Delaware corporation and a wholly-owned subsidiary of Intek, is a
provider of high quality wireless voice and data communications services in the
U.S., operating on the 220-222 MHz ("220 MHz") frequency ("Roamer One Network)
and Radiocoms is a manufacturer of the systems and radios used by among others,
the Company's specialized mobile radio ("SMR") sites. In addition, Radiocoms,
through a subsidiary, is involved in the research and development of products
and other applications of LM Technology. During fiscal 1998, the Company formed
Intek License Acquisition Corporation ("ILAC"), a Delaware corporation and a
wholly-owned subsidiary of Intek, to participate in a Federal Communications
Commission ("FCC") auction and to acquire FCC licenses from third parties.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
On December 3, 1996, Securicor Communications Limited ("Securicor"),
a corporation formed under the laws of England and Wales, acquired more than
a 50 percent controlling interest in Intek through the Radiocoms Acquisition
(Note 4). Accordingly, the Radiocoms Acquisition was treated as a reverse
acquisition for accounting purposes. Radiocoms was considered the acquiring
company, although Intek was the surviving company under corporate law. The
consolidated financial statements for fiscal 1996 include only the accounts
of Radiocoms and its subsidiaries, all of which were wholly-owned. Included
in reported results of operations for fiscal 1996 (pre-reverse acquisition
period), are revenues and cost of sales of $9.0 million and $8.8 million,
respectively, from the sales of products and services by Radiocoms to other
current Intek subsidiaries.
Subsequent to the date of the Radiocoms Acquisition (post-reverse
acquisition periods), the consolidated financial statements include the accounts
of Intek and its subsidiaries. All material intercompany accounts and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform with the current period presentation.
USE OF ESTIMATES AND SIGNIFICANT RISKS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company's business, financial condition and future prospects are
subject to a number of risks and contingencies. Those that the Company regards
currently as among the most significant are summarized below.
RISK OF UNCERTAIN MARKET ACCEPTANCE. LM Technology is a relatively new
technology and there is a risk that the marketplace may not accept the potential
benefits of the technology or that the technology may not perform to
expectations. The commercial viability of the Roamer One Network is dependent
upon the performance of the LM Technology and acceptance of such technology by
the marketplace. Until products utilizing LM Technology
F-7
<PAGE>
progress through the commercial development stage, manufacturing costs may be
substantially higher than competing products and the Company may be forced to
sell equipment below its manufactured costs.
If Intek's products using LM Technology are not commercially accepted
or do not have the capabilities the Company believes they have or can have, or
manufacturing costs cannot be reduced, the future results of operations of the
Company could be significantly and negatively impacted.
COMPETING SERVICES. Competition in the sale of wireless communication
products and services is fierce. Given the wide variety of available wireless
services, new subscribers will only be acquired if the Company has a service
needed by potential subscribers and priced, along with the cost of the necessary
radio equipment, attractively when compared to competing services and products.
As a result, there is no assurance that the services provided on the Roamer One
Network or the technology and products developed by the Company will be
competitive with services, technology and products of other wireless
communications companies.
SUPPLIER RISK. If the Company's Japanese supplier of non-LM Technology
radios and accessories was no longer available, Intek's financial position and
results of operations would be adversely impacted. The percentage of product
sales that rely on products supported by the Company's Japanese supplier of
non-LMT radios and supplies is approximately 31%, 35% and 5% in 1998, 1997 and
1996, respectively.
DEPENDENCE ON GOVERNMENTAL REGULATION. The current and planned
operations of the Company can be adversely impacted by delayed or adverse
actions by various regulatory authorities and it is impossible to predict, with
any certainty, how the Company's operations will be impacted by the actions of
these regulatory authorities. In most international markets there are similar,
and in some instances, more stringent governmental regulatory overviews
regarding wireless communications services and products including those offered
by the Company.
NEED FOR ADDITIONAL CAPITAL. The Company will require additional cash
resources to fund operations if its business plan is not realized. There can be
no assurance that additional financing will be available on reasonable terms or
at all.
REVENUE RECOGNITION
With respect to the sale of equipment, including systems and site
equipment, revenue is recognized upon acceptance of the equipment by the
customer. The Company recognizes subscriber revenue from airtime billings upon
provision of the service. In those instances where subscribers are billed for
airtime service provided from sites managed by the Company, gross billings are
included in service income and distributions to licensees are included in cost
of services provided.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
In March 1995, Securicor acquired 925,850 shares of voting preferred
stock and a warrant to acquire 291,791 shares of common stock of E.F. Johnson
Company ("EFJ"), a U.S.-based communications company (the "EFJ Investment"), for
$10 million. Concurrent with this transaction Radiocoms entered into an
agreement with EFF to deliver to EFJ certain inventory products and to grant
manufacturing and technology licenses to EFJ valued at approximately $9.7
million. On June 17, 1996, Securicor transferred its EFJ Investment to
Radiocoms. Radiocoms accounted for the EFJ Investment using the cost method.
Under the agreement between the Company and Securicor relating to the Radiocoms
Acquisition, Securicor agreed to reimburse the Company for the difference
between the original $10 million carrying amount of the EFJ Investment and the
proceeds the Company would receive from the sale of the EFJ Investment.
During fiscal 1997, the Company exchanged the EFJ Investment for
374,609 shares of common stock of a publicly-traded company, Transcrypt
International (the "TI Investment"), with a fair value of $8.1 million, when
Transcrypt International acquired EFJ. The Company and Transcrypt International
are not related parties. The
F-8
<PAGE>
$1.9 million difference between the carrying value of the EFJ Investment and the
fair value of the TI Investment would be recovered from Securicor, thus no gain
or loss was recognized on the exchange. At September 30, 1997, the $1.9 million
difference was included in amounts due from related parties. Under the
provisions of FAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", the Company classified the TI Investment as "available for
sale", and at September 30, 1997, had reflected the TI Investment at its fair
value using quoted market prices published by The Nasdaq Stock Market.
During fiscal 1998, the Company sold its TI Investment for
approximately $7.4 million in a firm commitment public offering through
Nationsbanc Montgomery Securities, Furman Selz and Dain Bosworth Incorporated.
The Company did not recognize a realized loss from the sale of the TI Investment
since the difference between the original fair value ($8.1 million) and the
sales price would be recovered from Securicor pursuant to the stock purchase
agreement for the Radiocoms Acquisition. During fiscal 1998, the Company
received approximately $2.6 million from Securicor representing the difference
between the original $10 million carrying amount of the EFJ Investment and the
$7.4 million received from the sale of the TI common stock.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and include manufacturing labor and overhead.
Inventories at September 30 consist of the following ($'s in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Raw materials $ 5,526 $ 4,020
Work in progress 2,681 1,311
Finished goods 12,659 13,938
----------- ----------
20,866 19,269
Total long term inventories (3,189) (6,980)
----------- ----------
Total current inventories $ 17,677 $ 12,289
----------- ----------
----------- ----------
</TABLE>
At September 30, 1998 and 1997, the Company has classified
approximately $3.2 million and $7.0 million, respectively, of completed base
stations and components for the manufacture of additional base stations as
non-current assets since there is no assurance that the inventory will be
utilized by the Company or sold to third parties during the subsequent fiscal
year.
In fiscal 1997, the Company determined that certain inventory
manufactured by its UK subsidiary relating to both third party products and the
Company's LM products were slow moving or obsolete. Accordingly, the Company
recorded a charge of $4.7 million against the cost of product sales to reduce
the value of the inventory to its estimated net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives. The Company's policy is
to begin depreciation on site equipment when the site is ready for commercial
use. The Company interprets "ready for commercial use" to mean that the
communications site is operating at the minimum level required to provide
acceptable communications services to customers. The evidence that the Company
uses to determine whether the communications site is ready for commercial use is
the fact that the communications site begins to generate revenues.
Property and equipment at September 30, with their estimated useful
lives, consist of the following ($'s in thousands):
F-9
<PAGE>
<TABLE>
<CAPTION>
Estimated
Useful Lives
(Years) 1998 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Land -- $ 423 $ 402
Buildings 11 to 50 2,735 3,008
Site equipment 10 15,893 13,206
Production & test equipment 3 to 10 4,077 3,843
Furniture, fixtures and computers 3 to 10 3,190 2,755
Equipment held for rental 3 to 5 2,451 4,163
---------- -----------
Total property and equipment 28,769 27,377
Less accumulated depreciation (5,200) (5,822)
---------- -----------
Property and equipment, net $ 23,569 $ 21,555
---------- -----------
---------- -----------
</TABLE>
INTANGIBLE AND LONG LIVED ASSETS
Statement of Financial Accounting Standards ("FAS") No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of" ("FAS 121") requires that long-lived assets and certain
identifiable intangibles, including goodwill, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Intangible assets consist of goodwill, which
represents the excess of the purchase price of an acquisition over the fair
value of the net assets acquired, and costs allocated to FCC licenses, patents
and trademarks as a result of business or systems acquisitions. These assets are
amortized on a straight line basis over their estimated useful lives of 15
years.
<TABLE>
<CAPTION>
Intangible assets at September 30, consist of the following (in thousands):
1998 1997
------------- -------------
<S> <C> <C>
Excess of cost over fair value of net assets acquired (goodwill):
Midland USA, Inc. $ 9,755 $ 9,755
Radiocoms reverse acquisition -- 38,573
Data Express 1,386 --
---------- -----------
11,141 48,328
FCC licenses acquired from third parties 11,333 2,899
Trademarks and patents 770 --
---------- -----------
Total 23,244 51,227
Less accumulated amortization (2,283) (2,887)
---------- -----------
Intangibles, net $ 20,961 $ 48,340
---------- -----------
---------- -----------
</TABLE>
The Company continually evaluates whether events and circumstances have
occurred that indicate remaining estimated useful life of long-lived and
intangible assets may warrant revision or that the remaining balance of these
assets may not be recoverable. The Company evaluates the recoverability of its
long-lived and intangible assets by measuring the carrying amount of the assets
against the estimated future cash flows, undiscounted without interest,
associated with those assets. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived and intangible assets are
not sufficient to recover the carrying value of such assets, the assets are
adjusted to their estimated fair values.
During the fourth quarter of fiscal 1998, management concluded that
goodwill arising from the Radiocoms Acquisition (Note 4), attributable to Roamer
One, was not recoverable. Management reached the conclusion that the
F-10
<PAGE>
Radiocoms reverse acquisition goodwill was not recoverable when the Company
revised its strategic plan after the Company's success at the recent FCC
auction. The Company's strategic planning process, which began during the
third fiscal quarter, was concluded subsequent to the September 1998 FCC
Phase II auction and included 5 year forecasts prepared for each operating
subsidiary ("Strategic Forecasts"). New markets for the Company became
available for spectrum and equipment sales by the Company as a result of the
FCC Phase II auction and the Company's partnering arrangement with NRTC (Note
5). Prior to the FCC Phase II auction, Roamer One owned or managed site
specific Phase I FCC licenses in the 220 MHz spectrum. The Company intended
to build a network on a national basis attributing substantially higher
forecasted growth in the Acquisition Forecasts (as defined below). Subsequent
to the FCC Phase II Auction, management reconfirmed its decision to focus on
vertically integrating networks in four major geographic operating areas.
Such changes in strategy would result in substantially slower growth
attributable to Roamer One subscriber revenues compared to forecasts prepared
in connection with the Radiocoms Acquisition ("Acquisition Forecasts").
The Strategic Forecasts anticipated that Roamer One would operate at a
negative cash flow for the next five years because of the significant start up
losses and capital expenditures to be incurred in building its subscriber base.
Further, subscriber growth would be significantly slower than originally
forecasted in the Acquisition Forecasts. The Acquisition Forecasts reflected
positive operating results and cash flow in the second year of the Acquisition
Forecasts. The Acquisition Forecasts reflected significant subscriber growth and
system management fees generated on a national basis and reflected only very
modest capital costs for the subscriber network and the FCC licenses. The
Strategic Forecasts reflected Roamer One's performance from the date of
acquisition, including the substantially higher subscriber network and the FCC
license costs incurred, reflected substantially lower subscriber growth than
forecasted in the Acquisition Forecasts and reflected the Company's decision to
focus on vertically integrating networks in four major geographic operating
areas which also generated a slower subscriber growth. Based on the projected
operating losses and the negative cash flows contained in the Strategic
Forecasts, management did not believe that the goodwill was recoverable and did
not believe it was appropriate to select arbitrarily a shorter amortization
life. Accordingly, pursuant to SFAS 121, the Company determined that changes in
circumstances had occurred requiring the need to assess the impairment of Roamer
One's long-lived assets. As a result, the Company recorded a charge equal to the
unamortized balance of the Radiocoms reverse acquisition goodwill of
approximately $34.4 million. However, under the Strategic Forecasts, Roamer One
would be an integral part of the continuing operations notwithstanding Roamer
One's forecasted operating and cash losses for the foreseeable future.
Management determined that the fair value of the other long-lived assets
on Roamer One's and the Company's other subsidiaries' books, consisting of site
equipment, long-term inventory, FCC licenses and goodwill applicable to other
acquisitions, approximated their carrying value and thus were not written down.
Effective October 1, 1999, certain modifications were made to depreciation
policies, which will not be material to future operating results.
In connection with the site equipment and long-term inventory of the
Company, the Company has 230 base stations in inventory and equipment from
certain underutilized sites. Management believes the market for these products
will begin to open when the FCC issues the Phase II licenses. The equipment is
not technologically obsolete and the Company's anticipated needs for site/base
stations and anticipated NRTC sales and sales to others, make such assets
recoverable. Prior to the recent FCC auction, there was a shortage of spectrum,
which hampered equipment sales for the entire industry. The anticipated sales
price for these products less costs to sell exceed the carrying value of this
equipment.
The Company can package the base stations with spectrum and sell the
packages to dealers. In connection with the FCC licenses, the Phase I licenses
currently owned become more valuable because the FCC removed certain
restrictions. As a result, the Company has more flexibility as to their uses
together with the Phase II licenses which increases the market universe of
subscribers. The method used for determining fair value of the FCC licenses was
the fair market value of the Phase II licenses recently auctioned by the FCC.
The Company concluded that the carrying cost of the Phase I licenses was
realizable. Thus, management determined that no write-downs, to the FCC
licenses, were necessary.
The Company concluded that the carrying costs of the Midland goodwill on
the books of the Company was realizable based on expected cash flow from
operations as evidenced by the Company's Strategic Forecasts. In connection with
the Data Express goodwill, the Company has recently completed the acquisition of
Data Express, and management concluded that such goodwill was not impaired.
ACCRUED LIABILITIES
Accrued liabilities at September 30 consist of the following ($'s in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Payroll $ 1,383 $ 591
Restructuring reserve 1,424 -
Accrual for radio replacement 1,555 -
Other 3,058 3,337
----------- ----------
Total accrued liabilities $ 7,420 $ 3,928
----------- ----------
----------- ----------
</TABLE>
INCOME TAXES
The Company and its domestic subsidiaries file consolidated Federal and
combined state income tax returns. The Company accounts for income taxes in
accordance with the liability method in computing deferred income taxes.
F-11
<PAGE>
Radiocoms files its tax returns with local U.K. tax agencies. Prior to
the Radiocoms Acquisition, Radiocoms' losses were compensated for by its parent
company based on the effective corporate tax rate.
The Company provides for deferred income taxes relating to timing
differences in the recognition of income and expense items (primarily relating
to depreciation, amortization and certain leases) for financial and tax
reporting purposes. Such amounts are measured using current tax laws and
regulations.
The Company has recorded valuation allowances against the realization
of its deferred tax assets. The valuation allowance is based on management's
estimates and analysis, which includes tax laws which may limit the Company's
ability to utilize its tax loss carryforwards.
FINANCIAL INSTRUMENTS
The Company's management believes that the fair value of all financial
instruments approximates carrying value.
The Company is exposed to foreign currency exchange risk related to the
non-LM technology inventory purchased from its Japanese supplier. The Company
periodically enters into foreign currency forward contracts to minimize the
impact of currency movements on firm purchase commitments from this supplier.
The counterparty for these instruments is a major financial institution. The
Company accounts for these foreign currency forward contracts using hedge
accounting. The terms of the derivatives are set to approximate the inventory
purchase dates. The Company regularly monitors its foreign currency exposures
and ensures that total amount of the foreign currency forward contracts do not
exceed the firm purchase commitments subject to the foreign exchange risk. Gains
and losses on the foreign currency forward contracts are deferred and recognized
when the related inventory purchases are recorded. The Company does not enter
into derivative financial instruments for trading or speculative purposes.
Details of the hedging of firm foreign purchase commitments as of
September 30 follows (Y's and $'s in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Firm foreign purchase commitments Y 407,771 Y 374,817
Outstanding hedge contracts 170,000 210,000
---------- -----------
Unhedged position Y 237,771 Y 164,817
---------- -----------
---------- -----------
Unhedged position $ 1,768 $ 1,375
---------- -----------
---------- -----------
Outstanding hedge contracts at contract rate $ 1,270 $ 1,800
Outstanding hedge contracts at fair value $ 1,264 $ 1,762
(based upon market prices at balance sheet date)
</TABLE>
FOREIGN CURRENCY
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars for consolidation and reporting purposes. Assets
and liabilities are translated into U.S. dollars using the exchange rate at each
balance sheet date and a weighted average exchange rate for each period is used
for revenues and expenses. Cumulative translation adjustments are recorded as a
separate component of shareholders' equity (deficit).
NET LOSS PER SHARE
Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS is consistent with the calculation of basic EPS while
giving effect to any dilutive potential common shares outstanding during the
period. The weighted average number of common shares outstanding during fiscal
1998 was 42,148,964. Stock options for 4,251,666 common shares at various prices
ranging from $1.688 to $6.125 were not included in the diluted EPS calculation
as
F-12
<PAGE>
the effect would be anti-dilutive (Note 12). Likewise, warrants for 318,750
common shares at an exercise price of $4.59 were not included in the diluted EPS
calculation as the effect would be anti-dilutive (Note 10).
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal year 1998, the FASB issued FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
Intek does not anticipate adopting FAS 133 early. FAS 133 must be adopted no
later than the first quarter of fiscal 2000. Management of the Company has not
yet evaluated the impact FAS 133 will have on the Company's financial position
or results of operations
3. RESTRUCTURING CHARGES
During the third quarter of fiscal 1998, the Company recorded a
pre-tax restructuring charge of $1,613,000, as a result of its strategic plan
which included 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. Activities related to
the reserve created as a result of that charge are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
OFFICE
STAFF LEASE SITE LEASE EQUIPMENT
REDUCTIONS TERMINATIONS TERMINATIONS REMOVAL TOTAL
------------ -------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Restructuring reserve--June 30, 1998 $776 $210 $427 $200 $1,613
Cash payments (193) (71) (4) (27) (295)
Adjustments 70 36 0 0 106
---- ---- ---- ---- ------
Balance at September 30, 1998 $653 $175 $423 $173 $1,424
---- ---- ---- ---- ------
---- ---- ---- ---- ------
</TABLE>
To gain efficiencies and economies of scale, the Company decided to
consolidate its offices and employee base by closing its Torrance, California
office and its Princeton, New Jersey office, relocate its corporate office to
New York City and relocate its consolidated financial and customer service
functions to Kansas City, Missouri. In connection with the Company's plans to
consolidate its operations into Kansas City and to relocate its corporate
office, the Company identified selected employee positions to eliminate. The
employee groups identified for termination were primarily those employees
located in California and New Jersey who were unwilling to relocate to Kansas
City, Missouri. The terminations were involuntary and the Company notified
its employees before September 30, 1998 that such terminations would be
forthcoming as a result of the office consolidations. The majority of the
terminations occurred in July 1998 and the termination dates differed
depending on circumstances. Termination dates began as early as July 8, 1998
and are expected to continue through fiscal 1999. As of September 30, 1998,
the Company had made severance payments of approximately $193,000. The
remaining balance of the restructuring reserve at September 30, 1998 relates
to severance payments to be paid to the remaining employees identified for
termination - primarily employees in upper management positions or employees
critical to transitioning key responsibilities to the Kansas City, Missouri
location. Normal salary and benefits paid to those employees identified for
termination, up to the date they depart the Company, are reflected in current
period costs and expenses and have not been charged to the restructuring
reserve.
In connection with the Company's decision to consolidate and relocate
certain administrative services functions, the Company identified leases in
Torrance, California and Princeton, New Jersey that the Company no longer
required for its operations. As a result, the Company recorded its best estimate
of the net costs of the noncancelable operating leases at those locations and
included them as part of the restructuring reserves. The offices in California
and New Jersey were not owned by the Company. The major equipment located at
these two
F-13
<PAGE>
locations has been or will be redeployed elsewhere within the Company.
In conjunction with the restructuring, the Company decided to eliminate
or "deconstruct" certain communication sites that are not deemed essential to
the Company's growth strategy in its four major geographic operating areas. The
Company identified approximately 40 sites in twelve states that are not part of
the Company's four major geographic operating areas, and will deconstruct those
sites. Deconstruction of sites represents ceasing all operations at the sites
and recovering the Company's equipment (I.E., base stations, combiners, etc.)
from those sites. Costs included by the Company in the restructuring reserve
related to the deconstruction of the sites include net costs related to
noncancelable operating site leases, and costs to remove the equipment and
write-off of unrecoverable installation costs (estimated at approximately
$2,000 - $7,000 per site.) At September 30, 1998, the Company had completed
deconstruction of approximately one-third of the sites.
Deconstructing of the sites is expected to be completed in fiscal 1999.
At September 30, 1998, equipment with a net book value of
approximately $3 million was located at the sites identified for
deconstruction. The Company expects the majority of the equipment to be
utilized by the Company at future sites that the Company constructs for
itself or for others. As a result, no impairment or revaluation has been
taken on this equipment and depreciation has not been suspended.
4. BUSINESS ACQUISITIONS
MIDLAND USA
On May 2, 1996, Intek formed MUSA. Effective August 1, 1996, MUSA
acquired from Midland International Corporation ("MIC"), a wholly-owned
subsidiary of Simmonds Capital Limited ("SCL"), its U.S. land mobile radio
distribution business and certain other assets (the "Midland Transaction"). The
original purchase price was 2,500,000 shares of Intek common stock. Pursuant to
the terms of the Midland Transaction, a post closing reduction to the purchase
price of 155,000 shares, or $645,000, was made.
RADIOCOMS
On December 3, 1996, Intek consummated the acquisition (the "Radiocoms
Acquisition") of all the outstanding common stock of Radiocoms. Radiocoms
designs, develops, manufactures, distributes and installs a range of land mobile
radio equipment, including its own LM Technology equipment. The purchase price
for the Radiocoms Acquisition was 25,000,000 shares of Intek common stock. The
Radiocoms Acquisition, approved by the stockholders of Intek at a Special
Meeting held on December 3, 1996, was consummated on the same date. Upon the
consummation of the Radiocoms Acquisition, the Company became a provider of
spectrum-efficient wireless communications technology, products and services.
The following unaudited proforma income statement information (in
thousands, except per share amounts) is presented as though the Radiocoms
Acquisition and the Midland Transaction had occurred on October 1, 1995:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues $ 44,475 $ 22,569
Net loss $ (32,780) $ (20,073)
Proforma net loss per share (basic and diluted) $ (0.81) $ (0.53)
Weighted average shares outstanding 40,381,715 38,172,732
</TABLE>
The proforma financial information is presented for informational
purposes only and it is not necessarily indicative of the operating results that
would have occurred had the Radiocoms Acquisition and the Midland Transaction
been consummated as of the above date, nor is it necessarily indicative of
future operating results.
F-14
<PAGE>
As discussed below, the Radiocoms Acquisition has been accounted for as
a reverse acquisition, and the Company's financial statements have been prepared
as if Radiocoms acquired Intek under the purchase method of accounting. The
excess of cost over the fair value of net assets acquired at December 3, 1996,
was being amortized over 15 years. (Note 2 "Intangible and Long Lived Assets").
The purchase price was determined based on the fair value of the Intek common
stock outstanding at the date of the Radiocoms Acquisition and has been
allocated to the underlying Intek assets and liabilities based on fair values at
the date of the Radiocoms Acquisition. A summary of the purchase price
allocation is as follows (in thousands):
<TABLE>
<S> <C>
Net working capital $(1,138)
Excess of cost over fair value of
net assets acquired (goodwill) 38,573
Net property, plant & equipment 10,179
Other non-current assets 12,918
Other non-current liabilities (6,054)
-------
Total $54,478
-------
-------
</TABLE>
DATA EXPRESS
In May, 1998, the Company completed the stock acquisition of Mobile
Data Solutions, Inc. ("Data Express"), a developer and provider of wireless data
solutions for the mobile marketplace. Data Express's main product (for which it
holds a non-exclusive license) is a satellite Global Positioning System based
automatic vehicle location system for mobile fleet operators. The system
provides real-time information on the location of all fleet vehicles as well as
a full tracking history of any given vehicle's previous movements. The Company
issued 400,608 shares of its common stock valued at approximately $1.3 million
plus cash for total consideration of $1.5 million. The acquisition was accounted
for under the purchase method of accounting and resulted in goodwill of
approximately $1.4 million. Data Express' results of operation prior to the
acquisition were not material.
5. ACQUISITION OF NEW SYSTEMS
KRYSTAL SYSTEMS
On November 11, 1996, the Company entered into an agreement to acquire
from Krystal Systems, Inc. up to 25 constructed, but unloaded, 220MHz systems
and related FCC licenses ("Krystal Systems"). The Company acquired a total of 23
of the Krystal Systems for a total of approximately $4.1 million in cash of
which approximately $3.7 million was paid during fiscal 1997 and the balance was
paid during fiscal 1998.
AMERICAN DIGITAL CORPORATION
During September 1997, the Company consummated two agreements with
American Digital Corporation ("ADC") and 22 holders of 220 MHz FCC licenses. The
agreements provided for the Company to acquire the licenses from the licensees
and the site equipment from ADC for total consideration equal to approximately
$1.9 million. 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 724,167 shares of Intek
common stock (valued for purposes of the transaction at approximately $1.3
million), provided that the number of shares (682,735) would be adjusted if the
FCC licenses underlying the managed systems were not validly issued or contained
technical defects; (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; and (e) a cash payment
of $119,000. Closing of the transactions (and payment of the purchase price)
occurred upon receipt of, and uncontested grant by the FCC of, the licenses to
Roamer One.
During fiscal 1997, the Company issued 682,735 shares of Intek common
stock, valued at approximately $1.9 million for the ADC site equipment and FCC
licenses acquired through September 30, 1997. Of the total
F-15
<PAGE>
shares issued in fiscal 1997, 264,354 shares were issued to Ventel, Inc. (see
below). During fiscal 1998, the Company issued an additional 41,432 shares of
Intek common stock, valued at approximately $76,000, for the remaining ADC site
equipment and FCC licenses acquired.
PAGERS PLUS
During the period July 12, 1997 through August 12, 1997, the Company
entered into purchase and sale agreements with 25 licensees of 220 MHz FCC
licenses managed by the Company on behalf of Pagers Plus Cellular ("PPC"). The
agreements provided that the Company would acquire (subject to the satisfaction
of certain conditions) 25 licenses and site equipment for a purchase price equal
to 989,051 shares of Intek common stock (valued for purposes of the transaction
at approximately $1.8 million) plus cash payments totaling approximately $0.8
million. During fiscal 1997, the Company issued 523,567 shares of Intek common
stock, valued at $938,000 for the PPC site equipment and FCC licenses acquired
through September 30, 1997. All of the shares issued in fiscal 1997 were issued
to Ventel, Inc. (see below). Closing of the transactions and payment of the
remaining purchase price occurred in December 1997 upon receipt of uncontested
grant by the FCC of the licenses to Roamer One. At that time, the Company issued
an additional 465,484 shares of Intek common stock, valued at approximately
$834,000 for the remaining PPC site equipment and FCC licenses acquired.
VENTEL, INC.
Ventel is in the business of providing financing to various 220 MHz SMR
management companies (including ADC and PPC) in the U. S. During fiscal 1997,
the Company (a shareholder of Ventel) entered into an agreement with Ventel (the
"Ventel Agreement"), which provided for the sale and transfer of certain
outstanding loans, security agreements, and the rights related to the collateral
for such security agreements from Ventel to the Company. Such loans were made by
Ventel to ADC and PPC for the purpose of constructing 220MHz systems. These
systems are the subject of purchase agreements (described above) between various
licensees, ADC, PPC and the Company. The Ventel Agreement provided that the
Company would acquire the security agreements and rights to the collateral in
exchange for a payment to Ventel of 787,921 shares of Intek common stock, valued
at approximately $1.4 million and $100,000 in cash. All shares were issued to
Ventel in fiscal 1997. The value of the shares issued were allocated to the site
equipment and FCC licenses acquired from ADC and PPC, and the loans were
cancelled.
WIRELESS PLUS
In December 1997, Intek completed the acquisition of selected assets of
Wireless Plus, Inc. ("Wireless Plus"), a Hayward, California-based specialized
mobile radio provider. The acquired assets include approximately 2,700
subscriber accounts, 19 five channel FCC licenses for operation of 220 MHz
frequencies, and 12 five-channel and eight single-channel management agreements
with third party licensees within the 220 MHz spectrum for total consideration
of approximately $5.3 million. In addition, two licenses managed by Wireless
Plus were purchased directly from the licensees for an aggregate purchase price
of $106,406. The purchase price paid by the Company to Wireless Plus was as
follows: (a) $100,000 paid as a deposit in November, 1997, (b) $500,000 in cash
on February 17, 1998, (c) $106,579 in cash for each license transfer granted by
the FCC to be paid at the time such transfer is completed, and (d) a secured
subordinated note in the amount of approximately $2.6 million bearing interest
at the rate of 8% per annum payable annually. Note principal is payable in two
equal annual installments due in February 1999 and February 2000. At the date of
the acquisition, the radio equipment used by existing Wireless Plus subscribers
was not LMT-compatible. As part of the acquisition, the Company agreed to
provide the subscribers with LMT-compatible radio equipment and return the old
radio equipment to Wireless Plus. As a result, the Company accrued a liability
of $1.7 million for the costs to replace the radios. As of September 30, 1998,
the balance of the accrual for radio replacement was approximately $1.6 million.
COMTECH
In August 1998, the Company entered into an asset purchase agreement
(the "Purchase Agreement") with ComTech Communications, Inc. ("ComTech"), to
purchase eleven licenses granted by the FCC in the 220-222 MHz
F-16
<PAGE>
band spectrum (the "Licenses") and certain equipment and other personal
property, subscription contracts, accounts and lists and management and purchase
option agreements relating to the Licenses which were owned by ComTech. The
purchase price is $458,039, with $50,000 payable upon execution of the Purchase
Agreement and the balance payable upon the final transfer of the Licenses to the
Company by the FCC in the form of a three-year promissory note of the Company in
the amount of $408,039 and bearing interest at the rate of 9% per annum. The
Company will receive a credit of $41,640 against the purchase price for each
License that is not so transferred to the Company. As part of the same
transaction, the Company and ComTech entered into a management agreement
pursuant to which Company manages the systems subject to ComTech's supervision
and control until the final transfer of the Licenses to the Company by the FCC.
In addition to the transactions described above, Roamer One and ComTech
entered into a letter of intent and resale agreement in September 1998 to
provide for the purchase by Roamer One of a 5-channel Phase I national FCC
License from ComTech and the design and construction of a national network by
Roamer One using the License's frequencies for the provision of paging services
and two-way land mobile radio services. Under the resale agreement, Roamer One
will design and construct the radio system to resell airtime on the network. The
equipment used for the base station transmitters will be leased by ComTech from
MUSA under a separate equipment lease agreement. Under the resale agreement,
Roamer One is responsible for all operating expenses, including site leases and
taxes, and has agreed to pay ComTech, initially, $284 per month for each channel
of any radio system operated by Roamer One to resell airtime on the network.
Effective as of May 1, 1998, and through June 30, 1999, Roamer One will pay
ComTech the greater of $284 per month per channel in operation or $39,760 per
month, and as of July 1, 1999, for the remaining term of the resale agreement,
Roamer One will pay ComTech the greater of $284 per month per channel in
operation or $37,500 per month. The Purchase Agreement may be terminated by
either party if the FCC has not granted any of the Assignment Applications with
respect to Licenses sought to be acquired by the Company from ComTech by March
1, 1999. A termination of the Purchase Agreement terminates the Management
Agreement between the Company and ComTech. The Equipment Lease Agreement between
Midland and ComTech may be terminated upon 30 Days notice by either party and
certain other events. The Resale Agreement between ComTech and Roamer One may be
terminated by Roamer One during the period January 4, 1999 through January 15,
1999 upon notice to ComTech. The Company is evaluating its options under this
agreement as a result of its recent success in the FCC auction. In the event the
Company terminates the agreement, the agreement provides that Roamer One will be
obligated to make certain payments (approximately $500,000) to ComTech.
FCC AUCTION
In August 1998, the Company entered into an agreement with National
Rural Telecommunications Cooperative ("NRTC"), subsequently amended in November
1998, pursuant to which the Company, through its wholly-owned subsidiary, ILAC,
and NRTC agreed to participate jointly in the recent FCC auction (the "Auction")
for certain Phase II licenses in the 220-222 MHz band (the "Licenses"). The
agreement provides for the purchase by ILAC of certain Licenses in the Auction
on a cost-sharing basis and the post-auction partitioning and disaggregation of
awarded Licenses between NRTC and ILAC. As a result of the conclusion of the
Auction in November 1998, ILAC will be awarded two 10-channel nationwide, seven
15-channel regional, and 172 10-channel Economic Area ("EA"), or local, Business
Radio airwave Licenses at a total cost of approximately $12.2 million. 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.
ILAC's portion of the cost for Licenses awarded in the Auction is approximately
$6.6 million. In addition, ILAC has incurred a penalty charge of $57,200 for
withdrawn high bids on Licenses subsequently awarded at lower bids during the
Auction and has been assessed an additional holdback charge of $25,602 for
withdrawn high bids with respect to Licenses which were not awarded during the
Auction. If such Licenses are subsequently awarded in a later auction (which is
presently scheduled to commence June 15, 1999) at a price equal to or greater
than the withdrawn ILAC bid price, ILAC would be entitled to a return of this
holdback charge. However, if such Licenses are subsequently awarded at less than
the ILAC withdrawn high bid price, ILAC would be liable for the difference,
which the Company estimates its total contingent liability with respect to such
Licenses to be approximately an additional $853,000. At September 30, 1998, the
Company was reflecting a deposit related to the Auction of approximately $1.8
million in the accompanying consolidated balance sheets.
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
F-17
<PAGE>
("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 Master 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 1, 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 MUSA to any of its dealers or customers within the
United States 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.
As part of the Master Distribution Agreement, the Company agreed to
enter into a separate agreement with NRTC, subject to all the terms and
conditions of the Master Distribution Agreement, to grant NRTC the option to
purchase up to 1,250,000 of Intek common stock. Upon the execution of the
Master Distribution Agreement, NRTC was entitled to an option to purchase
200,000 shares. For each block of $5 million of Contract Products purchased
over the term of the Master Distribution Agreement, NRTC is entitled to an
option to purchase 100,000 shares, up to a maximum of 800,000 shares. NRTC is
entitled to an option to purchase 250,000 shares of the Company common stock
if it meets certain conditions related to the ordering, purchase and payment
of Contract Products over the life of the Master Distribution Agreement. NRTC
has the right to exercise any option it receives from the Company at any time
during the term of the Master Distribution Agreement. If the Master
Distribution Agreement is terminated on or prior to September 4, 2003, NRTC
shall have the right to exercise the options it has received or the portion
of the options it has earned until the earlier of one year from the date of
the termination of the Distribution Agreement or September 30, 2004. 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.
The Company intends to account for the NRTC stock options in
accordance with EITF 96-18. "Accounting For Equity Instruments That Are
Issued To Other Than Employees For Acquiring, Or In Conjunction With Selling,
Goods Or Services." The fair value of the first option to purchase 200,000
shares of Company common stock will be recorded as a contract acquisition
cost, reflected as a long-lived asset and amortized to income over the term
of the Master Distribution Agreement. The fair value of each option granted
as a result of NRTC purchasing $5 million of Contract Products will be
recorded as a cost of product sales in the period the sales are recorded. The
fair value of the option for the final 250,000 shares of Company common stock
will be recorded as a cost of product sales when it is probable that the
certain conditions will be met by NRTC. Since the exercise price of the
options is not known until the exercise date, the Company will follow
variable accounting for all options granted until such time as NRTC earns the
options. The Company anticipates recording the fair value of the option to
purchase 200,000 shares of Intek 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.
6. PENSION PLAN
Radiocoms contributes to the pension plan of Securicor, which maintains
a defined benefit pension plan that covers executives and other senior
employees. The plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company and
compensation rates near retirement. Contributions to the plan reflect benefits
attributed to employees' services to date, as well as services expected to be
earned in the future. The pension costs are assessed on the advice of
independent qualified actuaries using the projected unit credit method.
Actuarial valuations are performed at least every three years. The most recent
actuarial valuation was April 5, 1997 and in accordance with the provisions of
FAS No. 87, "Employers' Accounting for Pensions", at September 30, 1998 and
1997, there were no unfunded accumulated benefit obligations. The assets are
held in separate trustee administered funds. For fiscal 1998, 1997 and 1996,
Radiocoms' share of the costs of the Securicor's defined benefit pension plan
amounted to $140,000, $200,000 and $200,000, respectively.
F-18
<PAGE>
7. INCOME TAXES
The Company's benefit for the income taxes consists of the following
for the three fiscal years ended September 30 ($'s in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ -- $ 628 $ --
Foreign -- 530 3,044
---------- ----------- ----------
Total Current $ -- $ 1,158 $ 3,044
Deferred -- -- --
---------- ---------- ---------
Total $ -- $ 1,158 $ 3,044
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Management has provided a valuation allowance on the Company's total
net deferred tax assets due to the Company's history of losses. The valuation
reserve was increased by $18,265,000 and $3,866,000 for September 30, 1998 and
1997, respectively.
The approximate tax effect of temporary differences which gave rise to
significant deferred tax assets and liabilities at September 30 are as follows
($'s in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ---------
<S> <C> <C> <C>
Deferred tax items (Federal, state and foreign):
Accrued liabilities $ 1,634 $ 690 $ --
Allowance for doubtful accounts receivable 140 16 --
Amortization of Roamer One startup costs 28 64 --
Disallowed interest expense 1,256 174 --
Depreciation (655) (156) --
Depreciation (foreign) 42 (178) (63)
Development costs (foreign) 1,623 (2,779) 3,275
Equipment site reserve 1,011 -- --
General provisions (foreign) 10 -- --
Contributions carryforward 6 -- --
Operating loss carryforwards 14,001 5,453 --
Operating loss carryforwards (foreign) 6,392 3,939 145
---------- ----------- ---------
25,488 7,223 3,357
Valuation allowance (25,488) (7,223) (3,357)
---------- ----------- ---------
Net deferred tax liability $ -- $ -- --
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
A reconciliation of the provision (benefit) for income taxes to the
amount computed at the Federal statutory rate of 34 percent for the three fiscal
years ended September 30 is as follows ($'s in thousands):
F-19
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ------------
<S> <C> <C> <C>
Benefit at statutory rate $ (23,797) $ (9,573) $ (4,125)
Statutory rate difference (foreign) 102 277 121
Goodwill amortization / write-off 12,620 729 --
Accruals 1,355 521 --
Operating losses offset by capital Gain (foreign) 1,189 -- --
Operating losses not currently available for use
nor available for group relief (foreign) 2,172 3,660 1,045
Operating losses not currently available for use 6,348 3,369 --
Other 11 (141) (85)
---------- ----------- ------------
$ -- $ (1,158) $ (3,044)
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
At September 30, 1998, the Company had net operating loss carryforwards
available for Federal and State income tax purposes of approximately $36.7
million and $21.9 million, respectively. The net operating loss carryforwards
expire in the year 2008 and thereafter for Federal income tax purposes and in
the year 1999 and thereafter for state income tax purposes. The Company also had
foreign net operating losses of approximately $6.4 million, which do not have an
expiration date.
For Federal income tax purposes, a corporation that undergoes a "change
of ownership" pursuant to Section 382 of the Internal Revenue Code of 1986
("Code"), as amended is subject to limitations on the amount of its net
operating loss carryforwards, which may be used in the future. In addition, the
use of certain other deductions attributable to events occurring in periods
before such an ownership change, that are claimed within the five year period
after such ownership change, may also be limited (such deductions, together with
net operating loss carryforwards, "pre-change losses"). Upon consummation of the
Radiocoms Acquisition, an ownership change under Section 382 did occur. As a
result, the Company's annual limitation for using "pre-change losses" is
approximately $0.8 million.
Foreign losses may also be limited due to the change in ownership of
the Company. In addition, Radiocoms will no longer be reimbursed by Securicor
for benefits of Radiocoms losses.
8. DEBT
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 $5.0 million through December 1999. Borrowings under the Credit
Agreement are secured by the assets of MUSA and bear interest at 1.5% 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 uses the Credit Facility for issuance of letter of
credit commitments on behalf of MUSA, and for borrowings for working capital. As
of September 30, 1998, there was indebtedness outstanding of approximately $0.7
million and letter of credit commitments of $0.3 million under this Credit
Agreement.
In December 1997, Intek completed the acquisition of selected assets of
Wireless Plus (Note 5). 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 repurchased 352,500 shares of Intek common stock
at $2.75 per share in a private transaction for a total of $969,375 (Note 11).
The purchase price paid by the Company included notes in the aggregate amount of
$440,625. The notes are non-interest bearing and are due and payable on
December 15, 1998.
F-20
<PAGE>
In August 1998, the Company entered into a purchase agreement with
ComTech (Note 5). 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.
Radiocoms has an overdraft agreement of 1.0 million pounds sterling
(approximately U.S. $1.6 million) with a bank. Borrowings under the Agreement
are unsecured at an adjustable rate of 1% over the prevailing U.K. base rate.
The year-end rate was 7.75%. The Company uses the overdraft Facility for
borrowings for working capital. As of September 30, 1998, there was indebtedness
of approximately $0.7 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 $410,000.
As a result of the above agreements, as of September 30, 1998, third
party borrowings will be repaid as follows ($'s in thousands):
<TABLE>
<CAPTION>
Fiscal year
-----------
<S> <C>
1999 $ 3,299
2000 1,615
2001 384
2002 102
2003 2
Thereafter --
----------------
$ 5,402
----------------
----------------
</TABLE>
RELATED PARTY BORROWINGS
Prior to the Radiocoms Acquisition, Securicor had extended a limited
use $15.0 million line of credit to MUSA. In connection with the Radiocoms
Acquisition, Securicor made available to the Company a $15.0 million line of
credit (which replaced the MUSA $15.0 million line of credit) to fund Intek's
working capital needs. The September 1996 Facility could be drawn upon by Intek
so long as it maintained a net worth of at least $20.0 million. The September
1996 Facility bore interest at the rate of prime (defined as the average of
prime rates announced by certain specified banks), plus 1.0 percent through
December 31, 1997, and thereafter interest was to accrue at the rate of 11.0
percent, compounded annually. The principal balance at September 30, 1997 was
approximately $10.8 million, plus accrued interest of approximately $1.0
million.
In March 1997, the Company borrowed $6.0 million for working capital
purposes from Securicor. The unsecured borrowings was evidenced by an 11 percent
note payable due the earlier of (1) the receipt of funds by Intek from a private
or public offering of Intek common shares; or (2) October 18, 1998.
Additionally, during May 1997, the Company borrowed $4.5 million from Securicor
to retire certain outstanding debentures and an additional $2.0 million in
September 1997. The May and September loans bore interest at 12.5 percent and
were repayable under the same terms as the 11 percent note payable. Interest on
these notes was due upon maturity of the notes. Accrued interest on these loans
at September 30, 1997, was approximately $506,000.
In December 1997, the Company entered into a loan agreement ("December
1997 Facility") with Securicor which replaced all prior loan agreements. The
December 1997 Facility provides 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 common stock as a result
of any transaction except the direct or indirect transfer of the Intek common
stock by Securicor and also is subject to mandatory prepayments at the rate of
50
F-21
<PAGE>
percent of the net proceeds of any financing by the Company exceeding $8.0
million. At September 30, 1998, the amount payable under the December1997
Facility totaled $30.7 million, consisting of original principal borrowings of
$29.5 million and capitalized interest of approximately $1.2 million.
As a result of the above agreements, as of September 30, 1998, related
party borrowings will be repaid as follows ($'s in thousands):
<TABLE>
<CAPTION>
Fiscal Year
------------
<S> <C>
1999 $ --
2000 --
2001 1,500
2002 7,500
2003 21,733
Thereafter --
------------
$30,733
------------
------------
</TABLE>
In December, 1998 the Company entered into an additional financing
arrangement for $25 million with Securicor (Note 17). During fiscal 1998 and
1997, interest expense for related party borrowings totaled $2.7 million and
$1.4 million, respectively.
9. PREFERRED STOCK
RADIOCOMS
In December 1996, the Company consummated the Radiocoms Acquisition
(Note 4). Prior to the consummation of this transaction, Securicor forgave
approximately $12.0 million due it by Radiocoms and accepted 20,000 shares of
$1,000 par value per share of preferred stock from Radiocoms ("Radiocoms
Preferred Stock") for the remaining balance due. The preferred stock is
mandatorily redeemable on June 30, 2006 at its par value and bears a dividend
rate of 6 percent. During fiscal 1998 and 1997, Radiocoms accrued dividends of
$1.2 million and $1.0 million, respectively, which are included in the total
Radiocoms preferred stock balance at September 30, 1998, of $22.2 million.
INTEK GLOBAL
Effective March 1, 1998, Securicor purchased, pursuant to a
Preferred Stock Purchase Agreement dated December 29, 1997, 12,408 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Stock") for
approximately $12.4 million. Proceeds from the sale of the Series A Preferred
Stock were applied against the principal balance of the December 1997 Debt
Facility (Note 8). The liquidation value of the Series A Preferred Stock is
$1,000 per share and par value is $.001 per share. Dividends accrue at the
rate of 11 1/2% of the original issue price of $1,000 per share and are
cumulative. Dividend payments are due upon the conversion or redemption of
the Series A Preferred Stock. The holder of the Series A Preferred Stock has
the right to convert the Series A Preferred Stock into shares of Intek common
stock if the market price of Intek common stock exceeds $6.00 for 20
consecutive trading days. Intek may cause the Series A Preferred Stock to be
converted if the market price is or exceeds $9.00 for 20 consecutive trading
days. The holder of the Series A Preferred Stock has the right to convert the
Series A Preferred Stock into shares of Intek common stock if Intek does not
redeem the Series A Preferred Stock by June 30, 2003. The Series A Preferred
Stock is subject to adjustments for stock dividends, stock splits or share
combinations of Intek common stock or distribution of a material portion of
Intek's assets to the holders of Intek common stock. The Series A Preferred
Stock does not have voting power except as provided by Delaware corporate
law. During fiscal 1998, Intek accrued dividends totaling $844,000 which are
included in the total Intek Global preferred stock balance at September 30,
1998 of $13.3 million.
F-22
<PAGE>
10. SALES OF SECURITIES OUTSIDE THE UNITED STATES UNDER REGULATION S OF
THE SECURITIES ACT
On February 29, 1996, the Company raised $2.5 million through the
issuance of a Senior Secured Debenture ("Senior Debenture") to MeesPierson ICS
Limited, a U.K. limited liability company ("MeesPierson"). The Senior Debenture
was secured by land and a building owned by the Company (the "Property"). Intek
also issued 50,000 shares of Intek common stock to MeesPierson as a closing fee
for its investment banking services. The Senior Debenture matured on August 31,
1996. In exchange for an extension until the earlier of October 31, 1996 or the
sale of the Property, Intek paid to MeesPierson accrued interest through August
1, 1996, issued 25,000 shares of Intek common stock to MeesPierson and issued
5,000 shares of Intek common stock to Octagon Capital Canada Corporation for an
agent's fee. In exchange for a further extension to January 31, 1997, Intek
issued MeesPierson 34,000 shares of Intek common stock valued at approximately
$0.2 million. The Senior Debenture was paid in full on December 31, 1996.
On April 26, 1996, The Company sold a series of 6.5% Notes in the
aggregate principal amount of $5.0 million (the "Notes"), maturing April 25,
1999. During fiscal 1997, holders of the Notes exercised warrants to convert all
$5.0 million of the Notes into Intek common stock at an average discount of 18
percent below market price. This discount, in the amount of approximately $0.9
million, was a pre-reverse acquisition expense of Intek. A portion of accrued
interest was repaid through issuance of Intek common stock valued at
approximately $0.1 million.
On November 1, 1996, the Company sold a series of 6.5% Notes in the
aggregate principal amount of $2.0 million (the "November 1996 Notes") maturing
on October 31, 1999. Net proceeds to the Company, after fees and broker's
commissions, were approximately $2.0 million. All accrued interest is due and
payable at the time the November 1996 Notes mature or upon the exercise of the
warrants. During the quarter ended March 31, 1997, holders of the Notes
exercised warrants to convert all $2.0 million of the Notes into Intek common
stock at an average discount of 28% below market price. This discount, in the
amount of approximately $0.6 million, was charged to interest expense during
fiscal 1997.
On February 6, 1997, the Company sold a series of 7.5% convertible
debentures (the "February 1997 Debentures") and Warrants (the "February 1997
Warrants") to three purchasers. Net proceeds to the Company, after fees and
broker's commissions, were approximately $4.0 million. The February 1997
Debentures matured on February 6, 2000 and bore interest at the rate of 7.5
percent per annum. All accrued interest was due and payable at the time the
February 1997 Debentures matured or upon their conversion to Intek common stock.
The debt conversion price was the lesser of $3.83 or 80% of the average closing
bid price for the 5 trading days prior to conversion resulting in a discount of
$0.8 million. The Company assigned value to the beneficial conversion feature
and was amortizing such value to interest expense. In May 1997, the Company
redeemed the February 1997 Debentures in exchange for a cash payment equal to
the principal amount of the debentures plus a redemption premium of 10 percent
and all accrued and unpaid interest. The unamortized balance of the beneficial
conversion feature relating to the February 1997 Debentures at the date of
redemption was approximately $0.4 million. The February 1997 Warrants are
exercisable at $4.59 per share and are subject to customary anti-dilution
adjustments. The February 1997 Warrants were estimated by the broker to have a
value of $0.1 million, which was included in interest expense in fiscal 1997.
All February 1997 warrants were outstanding and unexercised at September 30,
1998.
11. COMMON STOCK REPURCHASE PLAN
On November 24, 1997, the Board of Directors of the Company adopted a
share repurchase plan whereby the officers of the Company are authorized to
expend up to $1.0 million to acquire up to 1 percent of Intek common stock.
During fiscal 1998, the Company repurchased 184,500 shares of Intek common
stock, $0.01 par value in the open market at a cost of $359,000. In March 1998,
the Board of Directors terminated the share repurchase plan.
In March 1998, Intek repurchased 352,500 shares of Intek common stock
at $2.75 per share from SCL in a private transaction for a total of $969,375.
Pursuant to the terms of the transaction, Intek paid SCL cash in the amount of
$528,750 and notes in the aggregate amount of $440,625. The notes are
non-interest bearing and are due and payable on December 15, 1998.
F-23
<PAGE>
12. STOCK-BASED COMPENSATION PLANS
EXECUTIVE STOCK GRANT
In connection with his employment by the Company in August 1997, the
chief executive officer of the Company received, among other things, 300,000
shares of Intek common stock. The employment agreement provides that in the
event the fair market value of the 300,000 shares on December 31, 1998
("December Fair Value"), is less than $1.0 million, the Company will pay the
executive an amount equal to the difference between $1.0 million and the
December Fair Value. The payment will be made, at the executive's option, in
cash, Intek common stock or a combination thereof. In fiscal 1997, the Company
recorded compensation expense of approximately $1.0 million, related to the
executive stock grant.
STOCK OPTION PLANS
The 1988 Key Employee Incentive Stock Option Plan ("1988 Plan")
provides for the granting of options on up to 500,000 shares of Intek common
stock. The stock options are exercisable over a period determined by the Stock
Option Committee, but no longer than ten years after the date they are granted.
The options are exercisable at a price equal to the average of the closing per
share bid and asked price of the Intek common stock on the date an option is
granted ("Fair Market Value") or 110 percent of Fair Market Value for persons
who have in excess of a 10 percent voting interest in all classes of the
Company's stock prior to the date of grant. The dollar amount of options issued
under the Plan in any calendar year is limited to $100,000 per person in value,
plus any unused limit carry-over. At the Annual Meeting of Stockholders held on
February 18, 1998, the stockholders approved a modification in the1988 Plan so
that options granted under this plan qualify as "incentive stock options" within
the meaning of Section of 422 of the Internal Revenue Code (IRC). At September
30, 1998, there were 436,666 options outstanding under the 1988 Plan, of which
approximately 120,000 options were exercisable.
In September 1994, the Board of Directors approved the 1994 Stock
Option Plan ("1994 Option Plan") and the 1994 Director's Option Plan ("1994
Director's Plan"). The two plans were approved by Intek's stockholders at the
Annual Meeting of Stockholders held on July 5, 1995. The 1994 Option Plan and
the 1994 Director's Plan provide for the granting of options to purchase up to
600,000 and 300,000 shares, respectively, of Intek common stock.
The 1994 Option Plan provides for the granting of "incentive stock
options" and "nonqualified stock options", which are not intended to qualify
under any provision of the Code. No optionee may be granted stock options to
purchase more than 60,000 shares in any fiscal year. At September 30, 1998,
there were 350,000 options outstanding under the 1994 Option Plan, of which
approximately 250,000 options were exercisable.
Under the terms of the 1994 Directors' Plan, each director is entitled
to receive, on the date of his or her initial election as a director, an option
to purchase 20,000 shares of Intek common stock. No person may receive an option
pursuant to the 1994 Directors' Plan more than once. At September 30, 1998,
there were 160,000 options outstanding under the 1994 Directors' Plan, of which
approximately 80,000 options were exercisable.
Under both 1994 plans, the option exercise price equals the fair market
value of Intek common stock at the date of grant. Historically, under both 1994
plans, options have vested after one year and expire after ten years. The
100,000 options granted under the 1994 Option Plan during fiscal 1998 vest at a
rate of 20% per year.
At the Annual Meeting of Stockholders held on February 18, 1998, the
stockholders approved the 1997 Performance and Equity Incentive Plan ("1997
Incentive Plan"). The 1997 Incentive Plan authorized the Compensation Committee
of the Board of Directors to issue up to a total of 4,000,000 shares to attract,
retain and motivate key employees, nonemployee directors and independent
contractors. The 1997 Incentive Plan authorizes the following awards based upon
Intek common stock: stock options, stock appreciation rights, stock awards,
stock units, performance shares, performance units and cash awards. No awards
may be granted under the 1997 Incentive Plan after November 20, 2007. Stock
options issued under the 1997 Incentive Plan may be either nonqualified or
incentive stock options within the meaning of Section 422 of the IRC. The term
of nonqualified stock options may be no longer than twenty years and ten years
for incentive stock options. The Compensation Committee shall specify the
vesting period of each stock option issued. At September 30, 1998, there were
3,305,000 stock options outstanding under the 1997 Incentive Plan, of which
approximately 365,000 options were exercisable. At September
F-24
<PAGE>
30, 1998, the Company had not issued any stock appreciation rights, stock
awards, stock units, performance shares, performance units or cash awards under
the 1997 Incentive Plan.
A summary of the stock options issued under the 1988 Plan, the 1994
Option Plan, the 1994 Directors' Plan and the 1997 Incentive Plan, and changes
during the fiscal years ended September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- -------------------- --------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 735 $3.67 315 $4.16 475 $3.69
Granted 3,695 2.39 420 3.30 72 5.88
Exercised -- -- -- 225 3.80
Forfeited 178 3.46 -- -- -- --
Expired -- -- -- -- 7 1.75
----- ---- ----- ---- --- ----
Outstanding, end of year 4,252 2.56 735 3.67 315 4.16
----- ---- ----- ---- --- ----
Options exercisable at year-end 815 3.18 315 4.16 315 4.16
----- ---- ----- ---- --- ----
----- ---- ----- ---- --- ----
Weighted average fair value of
Options granted during the year $2.15 $1.93 $4.22
----- ----- -----
----- ----- -----
</TABLE>
The 4,251,666 options outstanding at September 30, 1998, have the
following exercise prices and weighted average remaining contractual lives:
<TABLE>
<CAPTION>
Weighted Average
Remaining
Exercise Price Shares Contractual Life (Years)
-------------- ------ ------------------------
<S> <C> <C>
$1.688 40,000 9.09
$1.970 800,000 8.95
$2.000 600,000 9.89
$2.500 2,005,000 9.45
$3.000 226,666 6.28
$3.125 20,000 8.40
$3.190 40,000 9.85
$3.750 230,000 5.99
$4.000 210,000 9.67
$5.875 60,000 7.23
$6.125 20,000 8.18
---------
4,251,666
</TABLE>
As of September 30, 1998, options available for future grant were as
follows:
<TABLE>
<S> <C>
1988 Plan 5,834
1994 Stock Option Plan 48,000
1994 Directors' Plan 85,000
1997 Incentive Plan 695,000
---------
833,834
</TABLE>
The Company accounts for these plans under Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. As long as the exercise price of the stock options is not less
than the fair value of the Intek common stock at the date of grant, no
compensation expense is recognized. Had compensation expense for these plans
been determined consistent with the requirements of FAS
F-25
<PAGE>
No. 123 "Accounting for Stock-based Compensation" ("FAS 123"), the Company's net
loss and loss per share would have been increased to the following pro forma
amounts during the three fiscal years ended September 30 ($'s in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C> <C>
Net loss applicable to
common shareholders: As Reported $(66,463) $(26,999) $(9,089)
Pro Forma (68,941) (27,264) (9,393)
Net loss per share
applicable to common
shareholders (basic and
diluted): As Reported (1.58) (0.74) (0.36)
Pro Forma (1.63) (0.75) (0.38)
</TABLE>
Because the FAS 123 method of accounting has not been applied to
options granted prior to October 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for the options granted during the three fiscal years ended
September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate (percent) 5.64 5.85 5.40
Expected dividend yield (percent) 0.0 0.0 0.0
Expected lives of option (years) 4.8 3.0 3.0
Expected volatility (percent) 98.4 84.3 118.1
</TABLE>
13. 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. Related party transactions, other than those]
disclosed elsewhere in the Notes to the Consolidated Financial Statements, 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. 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.
SECURICOR
Pursuant to a Support Services Agreement dated December 3, 1996, by and
between the Company and Securicor, the Company agreed, in connection with the
Securicor Transaction, to obtain certain support and administrative services for
Radiocoms from Securicor and/or its affiliates for the purpose of enabling the
Company to manage an orderly transition in its ownership of Radiocoms during
fiscal 1997. During fiscal 1997, approximately $0.7 million of support and
administrative service costs (including services of Edmund Hough, Intek's former
Chief Executive Officer) were billed to Intek by Securicor. As of September 30,
1998, these costs remained unpaid by Intek.
During the fourth quarter of fiscal 1998, Intek 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
sale price for the ESU Assets was $8.5 million resulting in a gain of $3.1
million. Due to the related party nature of the sale, the gain was recorded as a
direct increase in shareholders' equity (deficit). The sales price is subject to
a post closing adjustment up to L 500,000 (approximately $800,000) if the
revenue generated from the
F-26
<PAGE>
assets during the period of two years ending September 30, 2000 is less than 2
times the aggregate revenue from the assets generated during the year ending
September 30, 1998.
Radiocoms sells products to Securicor. In fiscal years 1998, 1997, and
1996, revenues from such sales were $3.2 million, $6.8 million, and $6.9
million, respectively.
DIRECTORS, OFFICERS AND AFFILIATED COMPANIES
John Simmonds, a former director of the Company, is affiliated with
SCL, Simmonds Mercantile and Management Inc. ("SMM") which is a company that is
controlled by SCL and MIC. 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 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
$111,000 and $237,000, respectively, during fiscal 1998 and 1997. In addition,
Mr. Wasserman received $1,000 per month as compensation for his services as the
secretary of the Company until January 1, 1997, at which time his compensation
was increased to $2,000 per month.
The law firm Kelly & Povich, P.C. performed legal services for the
Company and its subsidiaries as of December 1996. Mr. Kelly is a member of the
Company's Board of Directors. During fiscal 1998 and 1997, Kelly & Povich, P.C.
received fees of approximately $170,000 and $55,000, respectively. Squire,
Sanders & Dempsey L.L.P. received fees of $38,000 during fiscal 1998 and
received no fees during fiscal 1997.
The firm of Wareham Associates, Inc. provides executive recruiting and
management consulting services to the Company for which it received fees of
$249,000 during fiscal 1998 and no fees during fiscal 1997.
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 fiscal 1998, the
Company paid directors fees of $61,000 and as of September 30, 1998, had accrued
$9,000 for unpaid directors fees. For fiscal 1997, the Company paid directors
fees of $48,000 and as of September 30, 1997, had accrued $9,000 for unpaid
directors fees.
The Company has entered into several related party borrowings with
Securicor (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.
Pursuant to a consulting agreement, the Company paid $10,000 a month to
Nicholas R. Wilson until the Company notified Mr. Wilson on March 21, 1997 that
it was terminating the agreement. Mr. Wilson was the Chairman of the Board of
Directors until his resignation on December 3, 1996. During fiscal 1997 and
1996, the Company paid Mr. Wilson $80,000 and $120,000, respectively.
Pursuant to an oral management agreement between SCL and the Company,
the Company paid SCL $10,000 per month and SCL made available to the Company the
services of Messrs. Simmonds, Dunstan and Heinke, each of whom were officers and
directors of the Company. The agreement was terminated effective January, 1997.
During fiscal 1997, the Company paid $40,000 to SCL pursuant to this agreement.
Pursuant to an oral consulting agreement with SMM, the Company paid SMM
$8,000 per month for consulting services. During fiscal 1997, the Company paid
$32,000 to SMM. Effective February 1, 1997, the Company terminated the agreement
and ceased such payments.
In March 1998, Intek repurchased 352,500 shares of Intek common stock
at $2.75 per share from SCL in a private transaction.
During fiscal 1997, the Company entered into two agreements with ADC
and 22 holders of 220 MHz FCC licenses (Note 5). John Simmonds and SCL were
shareholders of ADC when the agreements were consummated.
The Company and SCL had an arrangement whereby Roamer One purchased
equipment and installation services from SCL. During fiscal 1997 and 1996,
Roamer One purchased approximately $8,000 and $2.3 million,
F-27
<PAGE>
respectively, of radio equipment and installation services from SCL. The
agreement was terminated during fiscal 1997.
On September 19, 1996, MUSA entered into an agreement with MIC, whereby
MIC agreed to permit MUSA to make use of the services of the supplier liaison
office maintained by MIC in Japan and MIC's purchasing representative in Korea.
During fiscal 1998 and 1997, MUSA paid $56,000 and $140,000, respectively, to
MIC. This agreement was terminated in January, 1998.
On September 19, 1996, MUSA and SCL entered into a Computer Services
Agreement pursuant to which SCL agreed to provide MUSA access to the IBM AS400
computer system, including hardware and software, currently owned by SCL, for
data processing purposes. During fiscal 1998 and 1997, MUSA paid $16,000 and
$218,000, respectively, to SCL. This agreement was terminated on October 31,
1997.
On December 3, 1996, the Company entered into a Registration Rights
Agreement to provide certain holders of Intek common stock, including SCL, MIC,
Roamer One Holdings, Securicor, Securicor International Limited and Anglo York
Industries, Inc. with certain demand and "piggy-back" registration rights with
respect to the Intek common stock owned by the holders. Each is a stockholder of
the Company and, collectively, such stockholders own approximately 70 percent of
Intek common stock at September 30, 1998.
14. COMMITMENTS AND CONTINGENCIES
SITE LEASES
The Company has entered into 231 site leases for the housing of radio
base station equipment and antenna systems related to the Roamer One network.
These leases may vary in term from 1 to 5 years with provisions for subsequent
extensions upon the mutual agreement of the parties. In addition, the Company
has lease commitments for office space, vehicles and office equipment. As of
September 30, 1998, total future minimum lease payments are as follows ($'s in
thousands):
<TABLE>
<S> <C>
1999 $2,362
2000 1,800
2001 1,041
2002 329
2003 149
Thereafter 221
------
$5,902
------
------
</TABLE>
PURCHASE COMMITMENTS
As of September 30, 1998, MUSA had a purchase commitment with its main
supplier of radios to purchase approximately $3.8 million of inventory (Note 2).
15. LEGAL PROCEEDINGS
The Company, David Neibert, the Company's Executive Vice President, and
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 in
November, 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
F-28
<PAGE>
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 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 moved to dismiss the amended complaint. On
September 30, 1998, the Court granted in part and denied in part the Intek
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 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. The Intek Defendants have until December 14, 1998 to answer the
third amended complaint, or otherwise plead. In the opinion of the management of
the Company, 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.
16. 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 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 fiscal years ended September 30, is
presented below. Revenues are attributed to geographic areas by destination of
the goods or services. Sales to European customers are reflected as European
revenues. Radiocoms' sales to U.S. customers are reflected as U.S. sales.
F-29
<PAGE>
<TABLE>
<CAPTION>
Revenues ($'S In Thousands)
--------------------------------------------------------
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
GEOGRAPHIC AREAS
Domestic:
United States $ 13,563 $ 16,710 $ --
---------- ------------ ------------
To foreign affiliated -- 7 --
---------- ------------ ------------
13,563 16,717 --
---------- ------------ ------------
Foreign:
Europe (primarily the United Kingdom) 22,091 25,574 23,899
To United States affiliates 1,649 12,442 8,984
---------- ------------ ------------
23,740 38,016 32,883
---------- ------------ ------------
Total sales between geographic areas (1,649) (12,449) (8,984)
---------- ------------ ------------
---------- ------------ ------------
Total consolidated revenues $ 35,654 $ 42,284 $ 23,899
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Long Term Assets ($'S In Thousands)
---------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
United States $ 44,270 $ 70,316 $ --
United Kingdom 4,636 7,820 16,816
---------- --------- ------------
Total consolidated long term assets $ 48,906 $ 78,136 $ 16,816
---------- --------- ------------
---------- --------- ------------
</TABLE>
17. SUBSEQUENT EVENTS
Subsequent events, other than those disclosed elsewhere Notes to the
Consolidated Financial Statements, are disclosed below.
In December 1998, the Company entered into an additional financing
arrangement for $25 million with Securicor. 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 will be the average closing price for the last
20 trading days prior to the date the Company's Board of Directors approved the
arrangement and the next $12.5 million will be set at the average closing price
of the Company's common stock for the last 20 trading days prior to the date of
each draw on the facility.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE OF
INTEK GLOBAL CORPORATION
To the Board of Directors of
Intek Global Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated balance sheets of Intek Global Corporation as of September 30, 1998
and 1997, and the related consolidated statements of operations and
comprehensive income (loss), shareholders' equity (deficit) and cash flows for
the year ended September 30, 1998, and the related consolidated statements of
operations and comprehensive income (loss), shareholders' equity (deficit) and
cash flows for the year ended September 30, 1997, consisting of the statements
of operations and comprehensive income (loss), shareholders' equity (deficit)
and cash flows for Securicor Radiocoms Limited, predecessor corporation in the
continuing business of Intek Global Corporation and subsidiaries for the period
from October 1, 1996 through December 2, 1996 (Pre-Reverse Acquisition), and the
statements of operations and comprehensive income (loss), shareholders' equity
(deficit) and cash flows of Intek Global Corporation and subsidiaries for the
period from December 3, 1996 through September 30, 1997 (Post-Reverse
Acquisition), all included in this Form 10-K and have issued our report thereon
dated December 16, 1998. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule of
Intek Global Corporation listed in Item 14 (a)(2) of Part IV of this Form 10-K
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule, for the periods referred to
above, has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Kansas City, Missouri,
December 16, 1998
i
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE OF
INTEK GLOBAL CORPORATION
To the Board of Securicor Radiocoms Limited:
We have audited in accordance with generally accepted accounting principles used
in the United States of America, the statements of operations and comprehensive
income (loss) and cash flows of Securicor Radiocoms Limited (predecessor company
to Intek Global Corporation) for the year ended September 30, 1996, included in
this Form 10-K and have issued our report thereon dated 24 January 1997. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of Intek Global Corporation listed in
Item 14 (a)(2) of Part IV of this Form 10-K is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule, for the period referred to above, has been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
London, England BAKER TILLY
24 January 1997 Chartered Accountants
ii
<PAGE>
INTEK GLOBAL CORPORATION
RADIOCOMS INCLUDED FROM OCTOBER 1, 1995 AND
INTEK, ROAMER ONE, AND MIDLAND USA INCLUDED FROM DECEMBER 3, 1996
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
($'s in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning of costs and Charged to end of
Period expenses other accounts Deductions period
------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Fiscal 1998 $ 863 350 $ -- $ 220 $ 993
Fiscal 1997 128 735 -- -- 863
Fiscal 1996 475 -- -- 347 128
Restructuring reserve
Fiscal 1998 -- 1,613 -- 189 1,424
Fiscal 1997 -- -- -- -- --
Fiscal 1996 -- -- -- -- --
</TABLE>
iii
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<S> <C> <C>
3.1(i) Articles of Incorporation of Intek Global Corporation (the
"Registrant"). (3)
3.1(ii) By-Laws of the Registrant. (2)
10.1 Employment Agreement dated as of September 8, 1997 between the
Registrant and Robert J. Shiver. (4)
10.2 Amendment to Employment Agreement dated as of January 12, 1998
between the Registrant and Robert J. Shiver. (6)
10.3 Employment Agreement dated as of April 21, 1997 between the
Registrant and Donald Goeltz. (6)
10.4 Employment Agreement dated as of August 27, 1998 between Intek
Global Corporation and George Valenti. (6)
10.5 Employment Agreement dated December 8, 1997 between the Registrant
and Louis Monari. (6)
10.6 Employment Agreement dated July 15, 1998 between the Registrant and
Robert Hardy. (6)
10.7 Second Amended and Restated Loan Agreement dated as of December 29,
1997, between Intek Global Corporation as Borrower and Securicor
Communications Limited as Lender. (4)
10.8 Promissory note dated December 29, 1997, in the amount of
$29,500,000 made by Intek Global Corporation to the order of
Securicor Communications Limited. (4)
10.9 Preferred Stock Purchase Agreement dated as of December 29, 1997,
between Intek Global Corporation and Securicor Communications
Limited. (4)
10.10 Loan and Security Agreement dated December 24, 1997, by and between
Summit Commercial/Gibraltar Corp., as Lender and Midland USA, Inc.,
as Borrower. (4)
10.11 Subordination Agreement dated December 24, 1997, by and among Intek
Global Corporation and Summit Commercial/Gibraltar Corp. (4)
10.12 Master Distribution Agreement dated September 4, 1998 between the
Registrant and National Rural Telecommunications Cooperative
("NRTC"). (6)
10.13 Auction Partitioning and License Partitioning Agreement between the
Registrant, Intek License Acquisition Corp. and NRTC dated
August 17, 1998. (6)
10.14 Amendment to Auction Participation and License Partitioning
Agreement dated November 6, 1998. (6)
10.15 Amendment to Master Distribution Agreement dated November 6, 1998
between the Registrant and NRTC. (6)
10.16 Escrow Agreement dated as of September 10, 1998 between the
Registrant and NRTC. (6)
10.17 Agreement dated as of August 14, 1998 between Securicor Radiocoms
Limited and Securicor Information Systems Limited. (6)
11. Statement re computation of per share earnings. (5)
12. Statement re computation of ratios. (5)
13. Annual Report, Quarterly Report on Form 10Q. (5)
16. Letter on change in certifying accountant. (5)
18. Letter on change in accounting principles. (5)
21 Subsidiaries (6)
22. Published report regarding matters submitted to vote. (5)
23.1 Consent of Arthur Andersen LLP (1)
23.2 Consent of Baker Tilly (1)
27 Financial Data Schedule (1)
28. Information from report furnished to state insurance Regulatory Authority (5)
</TABLE>
(1) Included in this Report.
(2) This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994, filed with the Commission
on April 17, 1995 (Commission File No. 0-9160), and incorporated
herein by reference.
(3) This exhibit is contained in the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 filed with the
Commission on May 15, 1998 (Commission File No. 0-9160), and
incorporated herein by reference.
(4) This exhibit is contained in the Registrant's Annual Report on Form
10-K for the year ended September 30, 1997, filed with the Commission
on January 12, 1998 (Commission File No. 0-9160), and incorporated
herein by reference.
(5) Not applicable
(6) This exhibit is contained in the Registrant's Annual report on
Form 10-K for the year ended September 30, 1998, filed with the
Commission on December 24, 1998 (Commissiion File No. 0-9160),
and incorporated herein by this reference.
<PAGE>
EXHIBIT 23.1
CONSENT OF PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports, included in the Form 10-K, as amended, into the
Company's previously filed Registration Statement File Nos. 033-61529,
033-60505 and 333-51039.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Kansas City, Missouri
July 28, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated January 24, 1997,
with respect to the financial statements of Intek Global Corporation included
in the Form 10-K of Intek Global Corporation dated September 30, 1998.
/s/ Baker Tilly
Baker Tilly
Chartered Accountants and
Registered Auditors
London, England
July 29, 1999
