<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 31, 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
99 Park Avenue 10016
New York, NY
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 949-4200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of Registrant's Common Stock, $0.01 par
value, as of February 12, 1999, is 42,303,038 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEK GLOBAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS (UNAUDITED)
($'s in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues
Net product sales $ 5,353 $ 8,942
Service income 621 298
------------ ------------
Total revenues 5,974 9,240
Costs and expenses:
Cost of product sales 3,340 6,544
Cost of services provided 988 1,008
Sales and marketing 1,553 1,853
Research and development 676 633
General and administrative 4,030 4,011
Depreciation and amortization 1,393 1,329
------------ ------------
Operating loss (6,006) (6,138)
Other income (expense):
Interest (1,092) (683)
Other (36) 16
------------ ------------
Loss before income taxes (7,134) (6,805)
Income tax benefit -- --
------------ ------------
Net loss (7,134) (6,805)
Less: preferred dividends (665) (298)
------------ ------------
Net loss applicable to common shareholders (7,799) (7,103)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax 390 (1)
------------ ------------
Comprehensive income (loss) $ (7,409) $ (7,104)
============ ============
Net loss per share applicable to common shareholders
(basic & diluted) $ (0.18) $ (0.17)
============ ============
Weighted average number of common shares outstanding
(basic & diluted) 42,303,038 42,056,269
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
2
<PAGE>
INTEK GLOBAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($'s in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
Dec. 31, 1998 Sept. 30, 1998
------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,191 $ 5,719
Accounts receivable, net of allowance for doubtful accounts
of $842 in December 1998 and $993 in September 1998 3,884 3,870
Inventories 20,511 17,677
Deposits 846 1,750
Amounts due from related parties 310 396
Prepaid expenses and other current assets 1,503 1,796
--------- ---------
Total current assets 29,245 31,208
--------- ---------
PROPERTY AND EQUIPMENT, NET 24,160 23,569
OTHER ASSETS:
Note receivable 140 580
Intangible assets, net 20,744 20,961
Inventory-long term 3,549 3,189
Other 612 607
--------- ---------
Total other assets 25,045 25,337
--------- ---------
TOTAL ASSETS $ 78,450 $ 80,114
========= =========
CURRENT LIABILITIES:
Accounts payable 6,356 7,062
Amounts due to related parties 2,930 2,499
Accrued liabilities 6,531 7,420
Notes payable-third party 6,949 3,299
Notes payable-related party 2,500 --
--------- ---------
Total current liabilities 25,266 20,280
--------- ---------
LONG TERM DEBT:
Notes payable - third party 2,044 2,038
Notes payable - related party 30,792 30,733
Other 60 65
--------- ---------
Total long term debt 32,896 32,836
--------- ---------
PREFERRED STOCK - Mandatorily Redeemable 36,117 35,452
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 60,000,000 shares authorized
43,305,620 shares issued at December 31, 1998 and
September 30, 1998 433 433
Capital in excess of par value 107,840 108,471
Treasury stock, at cost, 1,002,582 shares at December 31, 1998
and September 30, 1998 (2,099) (2,099)
Accumulated deficit (120,752) (113,618)
Currency translation adjustment (1,251) (1,641)
--------- ---------
Total shareholders' equity (deficit) (15,829) (8,454)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 78,450 $ 80,114
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
3
<PAGE>
INTEK GLOBAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($'s in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,134) $(6,805)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,393 1,329
Changes in operating assets and liabilities:
Accounts receivable and amounts due from related parties 68 821
Deposits 904 --
Inventories (3,198) (243)
Income taxes receivable from related parties -- 262
Prepaid expenses and other current assets 298 (556)
Accounts payable and amounts due to related parties (287) 297
Accrued liabilities (897) (1,350)
Accrued liabilities to related parties -- (490)
Deferred income -- (627)
Other (25) (26)
------- -------
Net cash used in operating activities (8,878) (7,388)
------- -------
Cash Flows From Investing Activities:
Proceeds from sale of marketable securities -- 7,458
Expenditures for property and equipment, net (1,690) (1,338)
Expenditures for FCC licenses (167) (28)
Collection of note receivable 440 --
Other 93 20
------- -------
Net cash provided by (used in) investing activities (1,324) 6,112
------- -------
Cash Flows From Financing Activities:
Net change in bank overdraft 2,538 778
Proceeds from long term debt 1,651 --
Proceeds from long term debt-related party 2,500 1,200
Repayment on long and short term debt (441) --
Purchase of treasury stock -- (79)
Other 30 (15)
------- -------
Net cash provided by financing activities 6,278 1,884
------- -------
Effect of foreign exchange rates on cash 396 309
------- -------
Net increase (decrease) in cash and cash equivalents (3,528) 917
Cash and cash equivalents at beginning of period 5,719 1,909
------- -------
Cash and cash equivalents at end of period $ 2,191 $ 2,826
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 138 $ 43
Cash paid for income taxes $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements
4
<PAGE>
INTEK GLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) PRESENTATION
The unaudited condensed consolidated financial statements included
herein have been prepared by Intek Global Corporation (the "Company" or
"Intek Global"), pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations. These unaudited condensed consolidated financial
statements should be read in conjunction with Management's Discussion and
Analysis and the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K for the period ended September
30, 1998.
These financial statements have been prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") used in the United States
("U.S."). Such accounting principles differ in certain respects from GAAP
used in the United Kingdom ("U.K."), which is applied by the Company's
Securicor Electronics Limited ("SEL") subsidiary (formerly known as Securicor
Radiocoms Limited) for local and statutory financial reporting purposes.
The information furnished herein reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the
condensed consolidated financial statements for the interim periods presented
taken as a whole. These adjustments are of a normal and recurring nature.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. Actual results may differ from these estimates. The results of
the interim periods are not necessarily indicative of results to be expected
for the entire year.
(2) FINANCIAL INSTRUMENTS
The Company may periodically hedge foreign purchase commitments. The
Company regularly monitors its foreign currency exposures and ensures that
hedge contract amounts do not exceed the amounts of the underlying exposures.
At December 31, 1998, the Company had outstanding hedge contracts of Japanese
Yen Y104,451,000 to cover its firm foreign purchase commitments of
Y239,594,000 leaving an exposed position of Y135,143,000 equating to
$1,189,000. Additionally, at December 31, 1998, the Company's hedge contracts
totaled $861,000 at the contracted rate and had a fair value of $919,000.
Gains and losses on foreign currency firm commitment hedges are deferred and
included in the basis of the transactions underlying the commitments.
(3) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
(Unaudited)
------------- -------------
<S> <C> <C>
Raw materials $ 6,981 $ 6,077
Work in progress 2,928 2,681
Finished goods 14,151 12,108
------------- ------------
Subtotal 24,060 20,866
Inventory not likely to be used or sold within
one year (3,549) (3,189)
------------- ------------
Total current inventories $ 20,511 $ 17,677
============= ============
</TABLE>
5
<PAGE>
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
Estimated December 31, September 30,
Useful Lives 1998 1998
(Years) (Unaudited)
------------- ------------- -------------
<S> <C> <C> <C>
Land - $ 413 $ 423
Buildings 11 to 50 2,882 2,735
Site equipment 10 16,109 15,893
Production & test equipment 3 to 10 4,101 4,077
Furniture, fixtures and computers 3 to 10 3,181 3,190
Equipment held for rental 3 to 5 3,587 2,451
----------- -----------
Total property and equipment, at cost 30,273 28,769
Less accumulated depreciation (6,113) (5,200)
----------- -----------
Net property and equipment $ 24,160 $ 23,569
=========== ===========
</TABLE>
(5) INTANGIBLE AND LONG LIVED ASSETS
Intangible assets consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
(Unaudited)
------------- -------------
<S> <C> <C>
Excess of cost over fair value of net assets
acquired (goodwill):
Intek Global USA USA, Inc. $ 9,755 $ 9,755
Data Express 1,386 1,386
---------- -----------
11,141 11,141
FCC licenses acquired from third parties 11,500 11,333
Trademarks and patents 81 81
---------- -----------
Total intangibles 22,722 22,555
Less accumulated amortization (1,978) (1,594)
---------- -----------
Net intangibles $ 20,744 $ 20,961
========== ===========
</TABLE>
(6) SEGMENT REPORTING
During fiscal 1998, the Company restructured itself to integrate its
design, manufacturing, distribution and airtime operations. The Company
operates in one industry segment as a provider of spectrum-efficient wireless
communications technology, products and services. Products include linear
modulation ("LM") and non-LM based radios, and products manufactured under
contract for third parties. Services include subscriber revenues, royalties,
equipment rental, and non-warranty repair. All prior year segment information
has been restated to reflect the current year's structure of the Company's
internal organization. The Company's geographic data from continuing
operations for the three months ended December 31, 1998 and 1997 are as
follows ($'s in thousands):
6
<PAGE>
<TABLE>
<CAPTION>
Revenues (Unaudited)
3 Months ended
December 31
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Geographic Areas
- ----------------
United States
Unaffiliated $ 3,568 $ 3,202
To foreign affiliates - -
Foreign
Unaffiliated 2,406 6,038
To United States affiliates 777 98
Total sales between geographic areas (777) (98)
---------- -----------
Consolidated Revenues $ 5,974 $ 9,240
========== ===========
</TABLE>
<TABLE>
<CAPTION>
Long Term Assets (Unaudited)
------------------------------
December 31, September 30,
1998 1998
------------- -------------
<S> <C> <C>
United States $ 44,896 $ 44,270
Foreign 4,309 4,636
---------- -----------
Total consolidated long term assets $ 49,205 $ 48,906
========== ===========
</TABLE>
(7) RELATED PARTY TRANSACTIONS
Related parties of Intek Global include Securicor Communications
Limited ("Securicor"), a corporation formed under the laws of England and
Wales, and its ultimate parent company, the directors and officers of Intek
Global and companies that are affiliated with Directors of the Company.
Related party transactions, other than those disclosed elsewhere in the Notes
to the Consolidated Financial Statements and in the Company's annual report
on Form 10-K, are disclosed below.
The Company believes that the terms of the transactions and the
agreements described below are on terms at least as favorable as those which
it could otherwise have obtained from unrelated parties. 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 to obtain certain
support and administrative services for SEL from Securicor and/or its
affiliates for the purpose of enabling the Company to manage an orderly
transition in its ownership of SEL during fiscal 1997. During fiscal 1997,
approximately $0.7 million of support and administrative service costs
(including services of Edmund Hough, Intek Global's former Chief Executive
Officer) were billed to Intek Global by Securicor. As of December 31, 1998,
these costs remained unpaid by Intek Global.
SEL sells products to Securicor. In the first quarter of fiscal year
1999, revenues from such sales were
7
<PAGE>
$451,000. There were no sales to Securicor during the first quarter of fiscal
year 1998.
DIRECTORS, OFFICERS AND AFFILIATED COMPANIES
John Simmonds, a former director of the Company, is affiliated with
Simmonds Capital Limited ("SCL"), Simmonds Mercantile and Management Inc.
("SMM") which is a company that is controlled by SCL and Midland
International Corporation ("MIC"). Mr. Simmonds resigned from the Board of
Directors in July 1998. Steven Wasserman, a director and Secretary of the
Company, is a partner of the law firm Kohrman Jackson & Krantz. Robert Kelly,
a director of the Company, is a partner of the law firm Squire, Sanders &
Dempsey L.L.P., which acquired the practice of Kelly & Povich, P.C. John
Wareham, a director of the Company, is the President of the management
consulting and executive recruiting firm Wareham Associates, Inc.
The law firm Kohrman Jackson & Krantz performs legal services for
the Company and its subsidiaries for which it received fees of approximately
$ 9,000 during the first quarter of fiscal 1999. In addition, Mr. Wasserman
receives $2,000 per month as compensation for his services as the secretary
of the Company.
The law firm of Squire, Sanders & Dempsey L.L.P., which acquired the
practice of Kelly & Povich, P.C., received fees of approximately $203,000
during the first quarter of fiscal 1999. Mr. Kelly is a member of the
Company's Board of Directors.
The firm of Wareham Associates, Inc. provides management consulting
and executive recruiting services to the Company for which it received fees
of approximately $66,000 during the first quarter of fiscal 1999.
The Company retired $440,625 in debt related to the repurchase in
March, 1998 of 352,500 shares of Intek Global common stock from Simmonds
Capital Limited in a private transaction.
Directors are compensated for services at the rate of $4,000 per
year plus $500 per meeting to a maximum of $10,000 per director.
The Company has entered into several related party borrowings with
Securicor (see note 8). Roger Wiggs and Michael Wilkinson, directors of the
Company, are also officers of Securicor. Directors fees for Messrs. Wiggs and
Wilkinson are paid to Securicor plc.
(8) DEBT
RELATED PARTY BORROWINGS
In December 1997, the Company entered into a loan agreement
("December 1997 Facility") with Securicor replacing all prior loan agreements
providing the Company the ability to borrow up to $29.5 million. The December
1997 Facility bears interest at 11.5% per annum, payable at June 30, 2003.
Interest is accrued each month, and on June 30 of each year, is to be added
to the principal amount outstanding. Principal payments are to be $0.5
million per month for 12 months beginning July 1, 2001, $1.0 million per
month for 11 months beginning July 1, 2002, with the remaining balance due
and payable on June 30, 2003. The obligations under the December 1997
Facility can be prepaid by the Company at any time in $1.65 million
increments without penalty. The December 1997 Facility has to be repaid if
Securicor ceases to be the beneficial owner of more than 50 percent of Intek
Global common stock as a result of any transaction except the direct or
indirect transfer of the Intek Global common stock by Securicor and also is
subject to mandatory prepayments at the rate of 50 percent of the net
proceeds of any financing by the Company exceeding $8.0 million. At December
31, 1998, the amount payable under the December 1997 Facility totaled $30.7
million, consisting of original principal borrowings of $29.5 million and
capitalized interest of approximately $1.2 million.
In December, 1998 the Company entered into an additional financing
arrangement ("December 1998 Facility") with Securicor providing the Company
the ability to borrow up to $25 million. Loans provided under this
convertible subordinated debt facility will accrue interest at the rate of
11.5 percent per annum and will mature on December 31, 1999. The rate of
conversion, if the conversion feature is selected by Securicor
Communications, will be based on the market value of Intek Global common
stock over specified periods. At December 31, 1998, the
8
<PAGE>
amount payable under the December 1998 financing arrangement totaled $2.5
million.
As a result of the above arrangements, as of December 31, 1998,
related party borrowings will be repaid as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal Year
--------------
<S> <C>
1999 $ -
2000 2,500
2001 1,500
2002 7,500
2003 21,792
Thereafter -
-------
$33,292
=======
</TABLE>
During the first quarter of fiscal 1999, interest expense for
related party borrowings totaled approximately $983,000.
THIRD PARTY BORROWINGS
In December 1997, Intek Global USA entered into a revolving credit
facility ("Credit Facility") with a non-bank lender. The Credit Facility
makes available $5.0 million through December 1999. Borrowings under the
Credit Facility are secured by the assets of Intek Global USA and bear
interest at 1.5% above the lender's base rate (as defined). The Credit
Facility contains, among other covenants, a covenant relating to leverage,
limitations on Intek Global USA's ability to repay intercompany indebtedness
and repayment provisions related to change in control of Intek Global USA.
The Company uses the Credit Facility for issuance of letter of credit
commitments on behalf of Intek Global USA, and for borrowings for working
capital. As of December 31, 1998, there was indebtedness outstanding of
approximately $2.2 million and letter of credit commitments of $1.5 million
under this Credit Facility.
In December 1997, Intek Global completed the acquisition of selected
assets of Wireless Plus. The purchase price paid by the Company to Wireless
Plus included a secured subordinated note in the amount of approximately $2.6
million bearing interest at the rate of 8% per annum payable annually. The
note principal is payable in two equal annual installments due in February
1999 and February 2000.
In March 1998, Intek Global repurchased 352,500 shares of Intek
Global common stock at $2.75 per share in a private transaction for a total
of $969,375 (Note 7). The purchase price paid by the Company included notes
in the aggregate amount of $440,625. The notes were non-interest bearing and
were repaid on December 15, 1998.
In August 1998, the Company entered into a purchase agreement with
ComTech. The purchase price paid by the Company to ComTech included a
three-year promissory note in the amount of $408,039, bearing interest at the
rate of 9% per annum. The note principal is payable in two installments in
fiscal 2000 and 2001.
SEL has an overdraft agreement of 2.0 million pounds sterling
(approximately U.S. $3.2 million) with a bank. Borrowings under the Agreement
are unsecured at an adjustable rate of 1% over the prevailing U.K. base rate.
The rate at December 31, 1998 was 7.0%. The Company uses the overdraft
Facility for borrowings for working capital. As of December 31, 1998, there
was indebtedness of approximately $3.2 million under this overdraft agreement.
In addition, the Company has other borrowings related primarily to
the acquisition of property and equipment from third parties in the aggregate
amount of $410,000.
As a result of the above agreements, as of December 31, 1998, third
party borrowings will be repaid as follows ($s in thousands):
9
<PAGE>
<TABLE>
<CAPTION>
Fiscal year
--------------
<S> <C>
1999 $ 6,950
2000 1,615
2001 384
2002 102
2003 2
Thereafter -
----------
$ 9,053
==========
</TABLE>
(9) COMMITMENTS
SITE LEASES
The Company has entered into 231 site leases for the housing of
radio base station equipment and antenna systems related to the Intek Global
USA network. These leases may vary in term from 1 to 5 years with provisions
for subsequent extensions upon the mutual agreement of the parties. In
addition, the Company has lease commitments for office space, vehicles and
office equipment. As of December 31, 1998, total future minimum lease
payments are as follows ($'s in thousands):
<TABLE>
<CAPTION>
Fiscal year
--------------
<S> <C>
1999 $1,743
2000 1,800
2001 1,041
2002 329
2003 149
Thereafter 221
------
$5,283
=====
</TABLE>
PURCHASE COMMITMENTS
As of December 31, 1998, Intek Global USA had a purchase commitment
with its main supplier of radios to purchase approximately $2.1 million of
inventory.
(10) LEGAL PROCEEDINGS
The Company, David Neibert, the Company's Vice President of Spectrum
Management, and Nicholas R. Wilson, a former Chairman of the Company ("Intek
Global Defendants") were named with forty other defendants in a complaint
(Scott, et al. Steingold, et al.) filed in U.S. District Court for the
Northern District of Illinois in November, 1997. The lawsuit purported to
allege claims under the Racketeer Influenced Corrupt Organizations Act
("RICO"), the Securities Exchange Act of 1934 and various common law state
claims in connection with, among other things, the sale and marketing of
interests in certain partnerships formed to operate specialized mobile radio
("SMR") systems and in connection with the operation of those partnerships.
Plaintiffs seek rescissory damages with interest and punitive damages
allegedly relating to their purchases of SMR partnership interests. No
specific amount of alleged damages is mentioned in the complaint.
The plaintiffs also had filed, and have now withdrawn against the
Intek Global Defendants, a motion for a temporary restraining order and
preliminary injunction seeking to freeze the assets of all defendants. The
Intek Global Defendants filed a motion to dismiss the complaint on various
grounds. In response plaintiffs sought leave to
10
<PAGE>
file a second amended complaint, which request was granted by the court.
Intek Global requested plaintiffs to withdraw all claims against the Intek
Global defendants on the grounds that they are frivolous. On February 3,
1998, plaintiffs filed an amended complaint which purported to allege claims
under RICO, the Securities Act of 1933, the Securities Exchange Act of 1934
and various common law state claims in connection with, among other things,
(i) the sale and marketing of interests in certain SMR partnerships and (ii)
purported improper dissipation of assets of certain of the SMR partnerships.
Plaintiffs seek rescissory damages with interest and punitive damages
relating to such asserted claims. No specific amount of alleged damages is
mentioned in the amended complaint.
The Intek Global Defendants moved to dismiss the amended complaint.
On September 30, 1998, the Court granted in part and denied in part the Intek
Global defendants' motion to dismiss the complaint and dismissed plaintiffs'
RICO claims with prejudice. The Court granted plaintiffs leave to replead all
claims (except their RICO claims) that were timely under the applicable
statute of limitations.
On October 23, 1998, the plaintiffs filed a third amended complaint
which purported to allege claims under Section 10(b) and 20 of the 1934 Act
and Rule 10b-5 promulgated thereunder, Section 12(1) and 12(2) of the 1933
Act and control person liability thereunder, and various common law state
claims in connection with, among other things, the sale and marketing of
certain SMR Partnerships and the purported dissipation of assets of certain
of these Partnerships. Plaintiffs seek rescissory damages with interest and
punitive damages in an amount to be determined. On December 14, 1998, Intek
Global Defendants filed a motion to dismiss the third amended complaint.
Management of the Company has stated that in its opinion, this lawsuit will
not have a material adverse affect on the Company's consolidated financial
position or results of operations.
In addition, from time to time, the Company is involved in other
litigation relating to claims arising out of its operations in the normal
course of business. In the opinion of the Company's management, after
consultation with outside counsel, the ultimate dispositions of such matters
will not have a materially adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion sets forth certain factors which produced
changes in the Company's results of operations during the three months ended
December 31, 1998 as compared with the same period in the prior year as
indicated in the Company's consolidated financial statements. The following
should be read in conjunction with the Financial Statements and related notes
contained in Item 1 to this report and in conjunction with the financial
statements and notes thereto included in the Company's latest annual report
on Form 10-K for the year ended September 30, 1998 (the "Annual Report").
Historical results of operations are not necessarily indicative of results
for any future period. All material intercompany transactions have been
eliminated in the results presented herein.
Certain matters discussed in this Quarterly Report may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") and as such may involve
risks and uncertainties. The Annual Report contains a detailed description of
such risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities
in the market and statements regarding the Company's mission and vision. The
Company's actual results, performance or achievements may differ
significantly from the results, performance, or achievements expressed or
implied in such forward-looking statements.
OVERVIEW
The Company's mission is to create and supply spectrum efficient
wireless technologies, products and services worldwide and to establish the
Company as a dominant player in the wireless communications business.
The Company provides two-way 220 MHz specialized mobile radio
("SMR") services to its subscribers under the Roamer One-TM- brand name on
systems utilizing the Company's patented and proprietary linear modulation
technology. The Company is authorized to provide services across the U.S. and
will install sites relative to customer requirements. The Company's SMR
sites, including four major regional and national markets, are referred to
herein as the Intek Global USA Network. The Company has devoted, and expects
to continue to devote, substantial financial and management resources to the
development of the Intek Global USA Network. Additionally,
11
<PAGE>
the Company licenses LM Technology and has developed, and continues to
develop, new products utilizing LM Technology for other frequency bands with
a focus on the 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 and
licenses.
The Company presently has in inventory a substantial number of
completed 220 MHz base stations and radios, as well as components for the
manufacture of additional base stations and radios. This inventory is
intended for sale to the National Rural Communications Cooperative ("NRTC"),
to successful bidders in the recently completed Federal Communication
Commission ("FCC") Phase II 220 MHz auctions, public safety market and
dealers, as well as for utilization in the Intek Global USA Network.
The Company has positioned itself strategically as a vertically
integrated provider of spectrum efficient technologies, products and
services. In addition to incorporating the benefits of LM into its products
which are sold to third parties and used on the Intek Global USA Network, the
Company also licenses its technology to third party manufacturers. The
Company has redirected its marketing campaign of the Intek Global USA Network
from a national campaign to a focused specific geographic campaign. The
Company has focused its direct sales effort in the top tier markets while
developing marketing relationships with dealers and others in the middle and
lower markets. The construction and expansion of the Intek Global USA
Network, as well as equipment sales to third parties will be impacted by
factors such as the FCC Phase II Licensing auction which concluded in
November 1998. Intek Global has acquired two 10-channel nationwide, seven
15-channel regional, and 172 10-channel Economic Area ("EA"), or local,
Business Radio airwave licenses. As part of a co-funding partnering
arrangement with the NRTC, Intek Global shares with NRTC the approximately
$12 million cost of the new licenses. The Company will assign one nationwide
and certain EA licenses to NRTC, disaggregate six regional and one EA
licenses and partition certain EA licenses to NRTC.
The Company expects to incur operating losses and experience a
negative cash flow from operations for at least one year, primarily because
expenses related to the buildout of the Intek Global USA Network and the
investment required to build the Intek Global USA subscriber base continue
to exceed revenue.
RESULTS OF OPERATIONS
The Company operates predominately in a single industry segment:
provision of spectrum-efficient wireless communication technology, products
and services. Revenues are generated by product sales and the provision of
services including communications, technology, and non-warranty repair.
During the fourth quarter of fiscal 1998, Intek Global sold its
non-core, U.K.-based land mobile radio distribution and maintenance assets
("ESU Assets") to Securicor Information Systems Limited ("SIS"), a subsidiary
of Securicor. The three months ended December 31, 1997 include the results of
ESU, while the three months ended December 31, 1998 do not include the
results of ESU.
THREE MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTH PERIOD ENDED
DECEMBER 31, 1997
REVENUES
OVERVIEW
Total revenues decreased by $3,266,000 (35%) from $9,240,000 during
the first quarter of fiscal 1998 to $5,974,000 during the first quarter of
fiscal 1999. Product sales decreased by $3,589,000 (40%) from $8,942,000 to
$5,353,000 while service revenues increased by $323,000 (108%) from $298,000
to $621,000. Excluding sales of $2,895,000 by ESU during fiscal 1998, the
decrease in product sales was $694,000 (8%).
PRODUCT SALES
Sales of site equipment and mobile radios for the first quarter of
fiscal 1999 were $2,781,000. Sales for the comparable quarter of fiscal 1998
were $6,046,000. However, sales of radios for the first quarter of fiscal
1998
12
<PAGE>
included revenues of $2,895,000 by ESU. Excluding sales by ESU, sales of
radios for the first quarter of fiscal 1998 were $3,151,000. Compared to the
first quarter of fiscal 1998, the sales of site equipment and mobile radios
for the first quarter of fiscal 1999 decreased by $370,000 or 12%. This
decrease was primarily caused by subscribers renting, rather than purchasing,
radios in the first quarter of fiscal 1999.
Contract manufacturing decreased by $324,000 (11%) from $2,896,000
during the first quarter of fiscal 1998 to $2,572,000 during the first
quarter of fiscal 1999. Revenues for the first quarter of fiscal 1998
included the first phase of a large defense contract that was completed
during fiscal 1998. The second phase of the contract is expected to begin
subsequent to the first quarter of fiscal 1999.
In November 1998, Intek Global announced a strategic alliance with
NRTC to develop jointly 220 MHz narrowband business radio networks for NRTC
member utilities across the country relying exclusively on LM-based
equipment. NRTC members will be able to utilize the Roamer One brand under an
exclusive royalty agreement to sell LM-based equipment and airtime services
in their territories. As part of that agreement, the Company and NRTC entered
into a five year non-binding agreement for NRTC to purchase up to $50.0
million of products from the Company. To date, a binding master purchase
order for $5.0 million of products has been issued by NRTC. Subsequent to
December 31, 1998 a specific draw of $1.2 million was issued by NRTC against
the master purchase order. See "Liquidity and Capital Resources --- Future
Capital Needs and Resources".
SERVICE INCOME
Service income for the first quarter of fiscal 1999 was $621,000,
compared to $298,000 for the first quarter of fiscal 1998.
Subscriber revenues generated by the Intek Global USA Network were
$316,000 for the first quarter of fiscal 1999, an increase of $264,000
compared to $52,000 for the first quarter of fiscal 1998. At December 31,
1998, Intek Global USA had approximately 11,388 subscribers compared to
10,500 at September 30, 1998 and approximately 2,200 at December 31, 1997.
Due to the sale of ESU, there were no subscriber revenues during the first
quarter of fiscal 1999 compared to $149,000 for the same period of fiscal
1998. Excluding ESU subscriber revenues, subscriber revenues increased
$472,000 (317%) during the first quarter of fiscal 1999 compared to the first
quarter of fiscal 1998.
Non-subscriber income includes royalties, equipment rental and
non-warranty repair. Non-subscriber revenues for the first quarter of fiscal
1999 were $305,000, compared to $97,000 for the first quarter of fiscal 1998.
The increase of $208,000 was primarily due to non-warranty repair and
equipment rental.
COST OF GOODS AND SERVICES PROVIDED AND GROSS PROFIT MARGIN
OVERVIEW
Total cost of revenues decreased by $3,224,000 (or 43%) from
$7,552,000 to $4,328,000. Gross Margin decreased by $42,000 (or 3%) from
$1,688,000 to $1,646,000.
COST OF PRODUCT SALES
The cost of product sales decreased by $3,204,000 from $6,544,000
(73% sales) to $3,340,000 (62% sales). Cost of sales as a percentage of sales
was favorably impacted by improved manufacturing cost controls and the
growing strength of the U.S. Dollar against the Japanese Yen, providing
reductions in the cost of products purchased in Japan. Gross margin decreased
by $385,000 from $2,398,000 (27% sales) to $2,013,000 (38% sales).
COST OF SERVICE PROVIDED
The cost of service provided decreased by $20,000 from $1,008,000
during the first quarter of fiscal 1998 (338% revenues) to $988,000 during
the first quarter of fiscal 1999 (159% revenues). Gross margin increased by
$343,000 from a loss of $710,000 (238% revenues) to a loss of $367,000 (59%
revenues).
13
<PAGE>
Cost of subscriber service revenue includes site and certain
technical and customer support expenses, net of reimbursement received from
the owners of licenses managed by the Company. Site expenses are primarily
tower lease, telephone, and insurance. Technical support includes system
maintenance, consulting fees, travel and equipment rental required for
optimizing and supporting the network of base stations. Customer support
includes phone-based assistance to subscribers. Support for additional
licenses acquired from third parties after the first quarter of fiscal 1998
and creation of the infrastructure to support subscribers resulted in
increases during the first quarter of fiscal 1999. Intek Global USA's site
and technical support expenses were $878,000 during the first quarter of
fiscal 1999, compared to $637,000 during the first quarter of fiscal 1998.
OTHER OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses decreased by $300,000 (16%) from
$1,853,000 during the first quarter of fiscal 1998 (20% revenues) to
$1,553,000 during the first quarter of fiscal 1999 (26% revenues). The
decrease is due to a redirection of the Company's marketing campaign of the
Intek Global USA Network from a national campaign to a focused specific
geographic campaign. Sales and marketing expenses are primarily salaries and
commissions, travel, advertising promotion, trade shows, and preparation of
promotional materials.
RESEARCH AND DEVELOPMENT
Research and development expenses of $676,000 (11% revenues) for the
first quarter of fiscal 1999 were 7% higher than the expenses of $633,000 (7%
revenues) for the first quarter of fiscal 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses of $4,030,000 (68% revenues) for
the first quarter of fiscal 1999 were $19,000 higher than the expenses of
$4,011,000 (43% revenues) for the first quarter of fiscal 1998. General and
administrative expenses consist of salaries, consultants, office rent, legal,
audit, public relations and shareholder relations costs, insurance, and
recruiting.
DEPRECIATION AND AMORTIZATION
Total depreciation and amortization increased by $64,000 (5%) from
$1,329,000 during the first quarter of fiscal 1998 to $1,393,000 during the
first quarter of fiscal 1999.
OPERATING LOSS
Intek Global's operating loss was $6,006,000 for the first quarter
of fiscal 1999, compared to a loss of $6,138,000 for the first quarter of
fiscal 1998.
INTEREST EXPENSE
Interest expense for the first quarter of fiscal 1999 was $1,092,000
compared to $683,000 for the first quarter of fiscal 1998. Of the total,
$109,000 related to borrowings from third parties and $983,000 related to
borrowings from Securicor.
NET LOSS
The consolidated net loss after taxes for the first quarter of
fiscal 1999 was $7,134,000. The net loss for the first quarter of fiscal 1998
was $6,805,000.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary historical source of cash has been borrowings
from Securicor.
CASH FLOWS
For the first quarter of fiscal 1999, the Company used $8,878,000 in
cash for operating activities, $1,690,000 was spent for capital expenditures
and $167,000 was spent for FCC licenses. The Company received $440,000 from
the collection of a note related to the sale in December 1996 of non-core
assets consisting of land and building owned by the Company. Through its
financing activities, the Company obtained approximately $6,689,000 in new
debt, of which $2,500,000 was from Securicor and the balance related to bank
lines of credit. The Company retired $441,000 in debt related to the
repurchase in March 1998 of 352,500 shares of Intek Global common stock from
Simmonds Capital Limited in a private transaction.
In December 1998, the Company entered into an additional financing
arrangement ("December 1998 Facility") with Securicor providing the Company
with the ability to borrow up to $25 million. The arrangement provides that
amounts outstanding bear interest at 11.5%, payable quarterly in cash or
deferred at the Company's discretion, and is due December 31, 1999.
Outstanding debt under the arrangement is convertible at any time at
Securicor's discretion into the Company's common stock at various conversion
prices. The conversion price for the first $12.5 million of amounts
outstanding will be the average closing price for the last 20 trading days
prior to the date the Company's Board of Directors approved the arrangement
and the next $12.5 million of amounts outstanding will be set at the average
closing price of the Company's common stock for the 20 trading days prior to
the date of each draw by the Company comprising that amount. At December 31,
1998, the amount payable under the December 1998 Facility totaled $2.5
million.
During the third quarter of fiscal 1998, the Company recorded a
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 first quarter of fiscal 1999,
approximately $0.5 million, related primarily to severance payments, was
charged against the restructuring reserve resulting in a remaining balance of
approximately $0.9 million at September 30, 1998. The remaining amount of the
restructuring reserve is expected to be utilized during the remained of
fiscal 1999.
FUTURE CAPITAL NEEDS AND RESOURCES
In the future, the Company will require capital to build sites for
the Intek Global USA Network, perform other upgrading functions to the
current network, and, to fund operating expenses. The requirement for future
working capital will be driven and highly dependent on the rate of loading
subscribers (with mobile radios) onto the Intek Global USA Network and the
capital requirements of the Company's distribution, manufacturing and
research and development subsidiaries.
The Company and NRTC entered into a Master Distribution Agreement,
dated September 4, 1998 (the "Distribution Agreement"), to provide for the
appointment of NRTC and the members of its cooperative ("Members") as
distributors to purchase LM-based equipment (the "Contract Products") from
the Company for resale to their customers in certain exclusive geographic
areas. The Distribution Agreement targets the sale of approximately $50
million of Contract Products to NRTC and its Members over the first five
years of the Distribution Agreement, and as of December 31, 1998, NRTC and
its Members have placed orders for approximately $5 million of Contract
Products. NRTC and each of its Members will be authorized to use the "RoameR
One" trademark and trade name in connection with resales of the Contract
Products to their customers and may further elect to obtain the exclusive
right to such use in designated geographic areas for an annual royalty fee
ranging from $15,000 to $25,000, depending on the number of base stations
constructed. The Distribution Agreement permits NRTC and its Members to
purchase the Contract Products at the lowest rate quoted or charged by Intek
Global USA to any of its dealers or customers within the U.S. and also
provides for a 0.5% discount on
15
<PAGE>
future purchases of Contract Products, if the amount of such purchases for
the preceding year exceeds $10 million. In addition, NRTC has been granted
stock options 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.
The management of the Company believes that, with the new $25
million financing agreement entered into with Securicor on December 16, 1998,
the Company's current available capital is sufficient to fund its fiscal 1999
operations. However, if negative events occur in fiscal 1999 and subsequent
to fiscal 1999, the Company will require additional cash resources to fund
operations. There can be no assurance that additional financing will be
available on reasonable terms or at all.
EFFECTS OF INFLATION
The Company was not affected in any material respect by inflation
during the first quarters of fiscal 1999 or 1998.
YEAR 2000
The Company described its three-phase program for the Year 2000
("Y2K") information systems compliance in Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's annual report on Form 10-K for the period ended September 30, 1998.
The Company is proceeding to implement the program as outlined in the annual
report and the estimated costs associated with Y2K compliance by the Company
remain the same.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk exposure is the potential loss arising
from changes in interest rates and its impact on foreign currency rate
fluctuations.
Exposure to variability in foreign currency exchange rates
(primarily Japanese Yen) relating to foreign purchase commitments is managed
periodically through the use of hedges. The Company does not enter into any
derivative transactions for speculative purposes. The sensitivity of earnings
and cash flows to variability in exchange rates is assessed by applying an
appropriate range of potential rate fluctuations to the Company's assets,
obligations and projected results of operations denominated in foreign
currency. Based on the Company's overall foreign currency rate exposure at
December 31, 1998, movements in foreign currency rates would not materially
affect the financial position of the Company. As of December 31, 1998 The
Company had outstanding forward exchange contracts to exchange Japanese Yen
for U.S. dollars in the amount of $861,000.
16
<PAGE>
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
In addition to the litigation described in Note 10, from time to
time, the Company is involved in other litigation relating to claims arising
out of its operations in the normal course of business. In the opinion of the
Company's management, after consultation with outside counsel, the ultimate
dispositions of such matters will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
Item 2. Changes In Securities.
(a) None.
(b) None.
(c) None.
(d) Not applicable.
Item 3. Defaults Upon Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit No.
- -------------
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)
4. Instruments defining the rights of security holders, including indentures (1)
10. Material contracts (1)
15. Letter re: unaudited interim financial information (1)
18. Letter re change of accounting principles (1)
19. Report furnished to security holders (1)
23. Consents of experts (1)
24. Power of attorney (1)
27. Financial Data Schedule (4)
99. Additional exhibits (1)
</TABLE>
17
<PAGE>
(1) Not Applicable.
(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) Included in this report.
(b) Reports on Form 8-K.
None
18
<PAGE>
INTEK GLOBAL CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATED: February 12, 1998
INTEK GLOBAL CORPORATION
By: /s/ George A. Valenti
---------------------------------------
George A. Valenti
Chief Financial Officer
19
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
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<RECEIVABLES> 4,726,000
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