<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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, $0.01 par
value, as of May 13, 1999, is 42,303,038 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEK GLOBAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (Unaudited)
($'s in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues
Net product sales $ 5,990 $ 5,016 $ 11,343 $ 14,055
Service income 802 3,027 1,423 3,228
---------------- --------------- ----------------- ------------------
Total revenues $ 6,792 $ 8,043 $ 12,766 $ 17,283
Costs and expenses:
Cost of product sales 4,628 3,890 7,968 10,434
Cost of services provided 1,251 2,602 2,239 3,610
Sales and marketing 1,428 2,229 2,981 4,082
Research and development 413 532 1,089 1,165
General and administrative 3,746 3,937 7,776 7,948
Depreciation and amortization 1,413 1,619 2,806 2,948
Strategic planning charges 336 336
---------------- --------------- ----------------- ------------------
Operating loss $ (6,423) $ (6,766) $ (12,429) $ (12,904)
Other income (expense):
Interest (1,410) (721) (2,502) (1,404)
Other (69) 15 (105) 31
---------------- --------------- ----------------- ------------------
Loss before income taxes $ (7,902) $ (7,472) $ (15,036) (14,277)
Income tax benefit - - -
---------------- --------------- ----------------- ------------------
Net loss $ (7,902) $ (7,472) $ (15,036) $ (14,277)
Less: preferred dividends (657) (295) (1,322) (593)
---------------- --------------- ----------------- ------------------
Net loss applicable to common shareholders $ (8,559) $ (7,767) $ (16,358) $ (14,870)
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of tax (342) (171) 48 (172)
---------------- --------------- ----------------- ------------------
Comprehensive income (loss) $ (8,901) $ (7,938) $ (16,310) $ (15,042)
---------------- --------------- ----------------- ------------------
---------------- --------------- ----------------- ------------------
Net loss per share applicable to common
Shareholders
(basic & diluted) $ (0.21) $ (0.18) $ (0.38) $ (0.35)
---------------- --------------- ----------------- ------------------
---------------- --------------- ----------------- ------------------
Weighted average number of common
Shares outstanding
(basic & diluted) 42,303,038 42,201,852 42,303,038 42,128,258
---------------- --------------- ----------------- ------------------
---------------- --------------- ----------------- ------------------
</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) Sept. 30,
Mar. 31, 1999 1998
----------------- --------------
<S> <C> <C>
CURRENT ASSETS::
Cash and cash equivalents $ 2,311 $ 5,719
Accounts receivable, net of allowance for doubtful accounts of $342 at
March 31, 1999 and $993 at September 30, 1998 4,270 3,870
Inventories 20,444 17,677
Deposits 73 1,750
Amounts due from related parties 246 396
Prepaid expenses and other current assets 2,001 1,796
----------------- --------------
Total current assets: 29,345 31,208
----------------- --------------
PROPERTY AND EQUIPMENT, NET 23,584 23,569
OTHER ASSETS:
Note receivable 142 580
Intangible assets, net 27,219 20,961
Inventory-long term 3,549 3,189
Other 695 607
----------------- --------------
Total other assets 31,605 25,337
----------------- --------------
TOTAL ASSETS $ 84,534 $ 80,114
----------------- --------------
----------------- --------------
CURRENT LIABILITIES:
Accounts payable $ 6,866 $ 7,062
Amounts due to related parties 3,979 2,499
Accrued liabilities 5,097 7,420
Notes payable-third party 7,444 3,299
Notes payable-related party 17,500 -
----------------- --------------
Total current liabilities 40,886 20,280
----------------- --------------
LONG TERM DEBT:
Notes payable - third party 547 2,038
Notes payable - related party 30,839 30,733
Other 56 65
----------------- --------------
Total long term debt 31,442 32,836
----------------- --------------
PREFERRED STOCK - Mandatorily Redeemable 36,774 35,452
----------------- --------------
COMMITMENTS AND CONTIGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value, 60,000,000 shares authorized 43,305,620 shares 433 433
issued at March 31, 1999 and September 30, 1998
Capital in excess of par value 107,321 108,471
Treasury stock, at cost, 1,002,582 shares at March 31, 1999 and September 30, (2,099) (2,099)
1998
Accumulated deficit (128,606) (113,618)
Accumulated other comprehensive income - currency translation adjustment (1,617) (1,641)
----------------- --------------
Total shareholders' equity (deficit) (24,568) (8,454)
----------------- --------------
84,534 80,114
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
3
<PAGE>
INTEK GLOBAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($'S IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (15,036) $ (14,277)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,806 2,948
Interest added to principal 2,170
Stock option expense 317 --
Changes in operating assets and liabilities:
Accounts receivable and amounts due from related parties (249) 2,994
Deposits 1,677 --
Inventories (3,097) 700
Income taxes receivable from related parties -- 261
Prepaid expenses and other current assets (208) (376)
Accounts payable and amounts due to related parties 1,101 (161)
Accrued liabilities (2,242) 1,709
Accrued liabilities to related parties -- 304
Deferred income -- (724)
Other (447) (57)
--------------- ----------------
Net cash used in operating activities (15,378) (4,509)
--------------- ----------------
Cash Flows From Investing Activities:
Proceeds from sale of marketable securities -- 7,458
Expenditures for property and equipment, net (2,192) (3,453)
Expenditures for FCC licenses (7,017) (5,707)
Collection of note receivable 440 116
Other 438 (222)
--------------- -- ----------------
Net cash used in investing activities (8,331) (1,808)
--------------- -- ----------------
Cash Flows From Financing Activities:
Net change in bank overdraft 3,083 893
Proceeds from short term debt 1,633 2,915
Proceeds from long term debt -- 1,656
Proceeds from notes payable-related party 17,186 2,000
Repayment on long and short term debt (1,993) -
Purchase of treasury stock -- (1,329)
Other 309 (277)
--------------- ----------------
Net cash provided by financing activities 20,219 5,858
--------------- ----------------
Effect of foreign exchange rates on cash 82 18
--------------- ----------------
Net decrease in cash and cash equivalents (3,408) (441)
Cash and cash equivalents at beginning of period 5,719 1,909
Cash and cash equivalents at end of period $ 2,311 $ 1,468
--------------- ----------------
--------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 210 $ 60
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's management believes that fair value of all financial
instruments approximates carrying value. The Company is exposed to foreign
currency exchange risk related to 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 counter party 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 the total amount of the foreign
currency forward contracts do not exceed the firm purchase commitments subject
to 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
commitments as of March 31, 1999 follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
(Y'S AND $'S IN THOUSANDS):
---------------------------------
<S> <C>
Firm foreign purchase commitments Y 144,345
Outstanding hedge contracts 20,000
---------------------------------
Unhedged position Y 124,345
---------------------------------
---------------------------------
Unhedged position $ 1,058
---------------------------------
---------------------------------
Outstanding hedge contracts at contract rate $ 172
Outstanding hedge contracts at fair value $ 170
(based upon market prices at balance sheet date)
</TABLE>
(3) INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30
1999 1998
---- ----
<S> <C> <C>
Inventories consist of the following (in thousands): (UNAUDITED)
Raw materials $ 5,820 $ 6,077
Work in progress 2,995 2,681
Finished goods 15,178 12,108
--------------- -----------------
Subtotal 23,993 20,866
Inventory not likely to be used or sold within one year (3,549) (3,189)
--------------- -----------------
Total current inventories $ 20,444 $ 17,677
--------------- -----------------
--------------- -----------------
</TABLE>
5
<PAGE>
(4) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the ESTIMATED
following (in thousands): USEFUL LIVES
MARCH 31, 1999 SEPTEMBER 30, 1998
(UNAUDITED)
<S> <C> <C> <C>
Land $ 401 $ 423
Buildings 11 to 50 2,908 2,735
Site equipment 10 16,294 15,893
Production & test equipment 3 to 10 4,088 4,077
Furniture, fixtures and computers 3 to 10 3,275 3,190
Equipment held for rental 3 to 5 3,645 2,451
------------------- ---------------------
Total property and equipment, at cost 30,611 28,769
Less accumulated depreciation (7,027) (5,200)
Net property and equipment $ 23,584 $ 23,569
------------------- ---------------------
------------------- ---------------------
</TABLE>
(5) INTANGIBLE AND LONG LIVED ASSETS
INTANGIBLE ASSETS CONSISTS OF THE FOLLOWING
(IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Excess of cost over fair value of net assets acquired (goodwill):
Intek Global USA, Inc. $ 9,755 $ 9,755
Data Express 1,386 1,386
--------------- ---------------
11,141 11,141
FCC licenses acquired from third parties 18,351 11,333
Trademarks and patents 81 81
--------------- ---------------
Total intangibles 29,573 22,555
Less accumulated amortization (2,354) (1,594)
--------------- ---------------
Net intangibles $ 27,219 $ 20,961
-
--------------- ---------------
--------------- ---------------
</TABLE>
(6) SEGMENT REPORTING
During fiscal 1998, the Company restructured itself to integrate its
design, manufacturing, distribution and airtime operations. The Company operates
in one industry segment as defined by FAS No. 131, "Disclosures about Segments
of an Enterprise and related Information." The Company is a provider of
spectrum-efficient wireless communications technology, products and services.
This conclusion is based upon how the Company's chief operating decision makers
view the Company's operations and how decisions are made to invest resources and
to assess performance. Products include linear modulation ("LM") and non-LM
based radios, and products manufactured under contract for third parties.
Services include subscriber revenues, royalties, equipment rental, and
non-warranty repair. All prior year segment information has been restated to
reflect the current year's structure of the Company's internal organization. The
Company's geographic data from continuing operations for the six months ended
March 31, 1999 and 1998 are as follows ($'s in thousands):
<TABLE>
<CAPTION>
REVENUES
(UNAUDITED)
6 MONTHS ENDED MARCH 31
1999 1998
---- ----
<S> <C> <C>
Geographic Areas
United States $ 7,225 $ 6,294
Unaffiliated
To foreign affiliates 5,541 10,989
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Foreign
Europe (primarily United Kingdom)
To United States affiliates 3,154 1,616
Total sales between geographic areas (3,154) (1,616)
----------------- ---------------------
Consolidated Revenues $ 12,766 $ 17,283
----------------- ---------------------
----------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
LONG TERM ASSETS
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
1999 1999
---- ----
<S> <C> <C>
United States $ 51,096 $ 44,270
United Kingdom 4,093 4,636
----------------- ---------------------
Total consolidated long term assets $ 55,189 $ 8,906
----------------- ---------------------
----------------- ---------------------
</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
Form10-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 owner
ship 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 March 31, 1999, these costs remained unpaid by Intek Global.
SEL sells products to Securicor. In the first half of fiscal year 1999,
revenues from such sales were $1,025,000. Sales to Securicor during the first
half of fiscal year 1998 were $1,324,000.
DIRECTORS, OFFICERS AND AFFILIATED COMPANIES
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 $25,000
and $72,000 during the first half of fiscal 1999 and 1998, respectively. 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 $295,000 and
$91,000 during the first half of fiscal 1999 and 1998, respectively.
Mr. Kelly is a member of the Company's Board of Directors.
7
<PAGE>
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 half of fiscal 1999. No fees were paid to
Wareham Associates, Inc. during the first half of fiscal 1998.
In December 1998, 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 $12,000 per year
plus $1,000 per board meeting and $500 per committee meeting. Committee
chairpersons receive an additional $2,000 per year.
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 and directors 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
("December1997 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. The
December 1997 Facility contains a consolidated net worth covenant with which
Securicor waived compliance until April 2000. Absent such waiver, as of March
31, 1999, the Company would not be in compliance with such covenant. The amount
payable under the December 1997 Facility totaled $33.7 million at March 31,
1999,consisting of original principal borrowings of $29.5 million, capitalized
interest of approximately $1.2 million and accrued interest payable of
approximately $3.0 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 elected by Securicor, will be based on the market value of
Intek Global common stock over specified periods. At March 31, 1999, the amount
payable under the December 1998 Facility totaled $17.8 million, consisting of
original principal borrowings of $17.5 million and accrued interest payable of
approximately $0.3 million.
As a result of the above arrangements, as of March 31, 1999, related
party borrowings will be repaid as follows (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1999 $1,092
2000 17,840
2001 1,500
2002 7,500
2003 24,386
Thereafter --
$52,318
---------------
---------------
</TABLE>
During the first half of fiscal 1999 and 1998, interest expense for
related party borrowings totaled approximately $2,127,000, and $1,439,000,
respectively.
8
<PAGE>
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 March 31, 1999, there was
indebtedness outstanding of approximately $2.3 million and letter of credit
commitments of $1.0 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. The first installment of $1.5 million was paid in February 1999
consisting of principal in the amount of $1.3 million and accrued interest in
the amount of $0.2 million. As of March 31, 1999 the outstanding balance totaled
$1.3 million.
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 for
borrowings up to the agreement limit. Borrowings in excess of the agreement
limit are at 23%. The rate at March 31, 1999 was 6.5%. The Company uses the
overdraft Facility for borrowings for working capital. As of March 31,
1999,there was indebtedness of approximately $3.7 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 $367,000 at March 31, 1999.
As a result of the above agreements, as of March 31, 1999, third party
borrowings will be repaid as follows ($'s in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1999 $ 3,659
2000 3,952
2001 350
2002 83
2003 3
Thereafter --
------------
$ 8,047
------------
------------
</TABLE>
(9) COMMITMENTS
SITE LEASES
The Company has entered into 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 monthly 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 March 31, 1999, total future minimum lease payments are as follows ($'s in
thousands):
9
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1999 $1,777
2000 1,891
2001 1,174
2002 381
2003 162
Thereafter 237
------------------
$5,622
------------------
------------------
</TABLE>
PURCHASE COMMITMENTS
As of March 31, 1999, Intek Global USA had a purchase commitment with
its main supplier of radios to purchase approximately $1.4 million of inventory,
and a second commitment with another supplier of radios for contract
manufacturing totaling approximately $1.0 million.
(10) LEGAL PROCEEDINGS
A discussion of the Company's pending litigation is contained in its
quarterly report filed on Form 10-Q for the quarter ended December 31, 1998.
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 and six month
periods ended March 31, 1999 as compared with the same periods in the prior year
as indicated in the Company's consolidated financial statements. The following
should be read in conjunction with the consolidated financial statements and
related notes contained in Item 1 to this report and in conjunction with the
consolidated 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, including the uncertainty related to the Company's
ability to obtain additional financing. These forward-looking statements relate
to, among other things, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market and statements regarding the Company's mission and vision. The
Company's actual results, performance or achievements may differ significantly
from the results, performance, or achievements expressed or implied in such
forward-looking statements.
OVERVIEW
The Company's mission is to create and supply spectrum efficient
wireless technologies, products and services worldwide and to establish the
Company as a dominant player in the wireless communications business.
The Company provides two-way 220 MHz specialized mobile radio ("SMR")
services to its subscribers under the Roamer One-TM- brand name on systems
utilizing the Company's patented and proprietary linear modulation technology.
The Company is authorized to provide services across the U.S. and will install
sites relative to customer requirements. The Company's SMR sites, including four
major regional and national markets, are referred to herein as the Intek Global
USA Network. The Company has devoted, and expects to continue to devote,
substantial financial and management resources to the development of the Intek
Global USA Network. Additionally, the Company licenses LM Technology and has
developed, and continues to develop, new products utilizing LM Technology for
other frequency bands with a focus on the 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.
10
<PAGE>
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 Telecommunications 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 shared 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 build out of the Intek Global USA Network and the investment
required to build the Intek Global USA subscriber base continues to exceed
revenue. There can be no assurance that additional financing will be available
on reasonable terms or at all.
During the third quarter of fiscal 1998, the Company recorded a pre-tax
restructuring charge of $1,613,000, as a result of management's approval of
plans to consolidate and relocate certain administrative services functions
and to eliminate and deconstruct certain communications sites related to its
air time services product line. See Note 3 to the financial statements
included in the Company's Annual Report on Form 10-K for additional
discussions of the restructuring charge and the Cash Flow section of this
MD&A for a summary of activities relating to the resulting reserve.
During the fourth quarter of 1998, the Company determined that the
recovery of the carrying value of its goodwill related to the Radiocoms
Acquisitions was not recoverable. Accordingly the Company recorded a
non-cash charge of $34.4 million to write-off the goodwill. See Note 2 to
the financial statements included in the Company's Annual Report on Form 10-K
for additional discussion of the charge.
RESULTS OF OPERATIONS
The Company operates in a single industry segment: provision of
spectrum-efficient wireless communication technology, products and services.
Revenues are generated by product sales and the provision of services including
communications, technology, and non-warranty repair.
During the fourth quarter of fiscal 1998, Intek Global sold its
non-core, U.K.-based land mobile radio distribution and maintenance assets ("ESU
Assets") to Securicor Information Systems Limited ("SIS"), a subsidiary of
Securicor Communications Limited ("Securicor"). The three and six month periods
ended March 31, 1998 include the results of ESU, while the three and six month
periods ended March 31, 1999 do not include the results of ESU.
SIX MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO SIX MONTH PERIOD ENDED
MARCH 31, 1998
REVENUES
OVERVIEW
Total revenues decreased by $4,517,000 (26%) from $17,283,000 during
the first six months of fiscal 1998 to $12,766,000 during the first six months
of fiscal 1999. Total ESU sales during the first six months of fiscal 1998, were
$5,936,000. After adjusting for the impact of the ESU business, total revenues
increased by $1,419,000 (13% ) for the six month period. The increase was
primarily due to increased service revenues ($901,000) and contract
manufacturing ($454,000).
PRODUCT SALES
Product sales decreased by $2,712,000 (19%) from $14,055,000 to
$11,343,000 before accounting for the impact of the disposed ESU business. Sales
of site equipment and mobile radios for the first half of fiscal 1999 were
$7,347,000. Sales for the comparable period of fiscal 1998 were $10,513,000.
However, sales of radios for the first six months of fiscal 1998 included
revenues of $3,230,000 by ESU. Excluding sales by ESU, sales of radios for the
first six months of fiscal 1998 were $7,283,000. Compared to the first six
months of 1998, the sales of site equipment and mobile radios for the first six
months of fiscal 1999 increased by $64,000 or less than 1%. In addition
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to radios sold during the period, $1,194,000 of radios were capitalized as
subscribers have also been renting radios during the first six months of
fiscal 1999.
Contract manufacturing increased by $454,000 (13%) from $3,542,000
during the first six months of fiscal 1998 to $3,996,000 during the first six
months of fiscal 1999. The increase is primarily due to the increased capacity
created by the transition of inter-company production from the UK to third party
manufacturing in the United States.
In November 1998, Intek Global announced a strategic alliance with NRTC
to develop jointly 220 MHz narrow band 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. As of March 31, 1999, approximately $490,000
of revenues have been recognized relating to the master purchase order.
See "Liquidity and Capital Resources -- Future Capital Needs and Resources".
SERVICE INCOME
Service revenues decreased by $1,805,000 (56%) from $3,228,000 during
the first six months of fiscal 1998 to $1,423,000 during the first six months of
fiscal 1999 before accounting for the impact of the disposed ESU business. After
adjustment for the ESU disposition, service revenues increased by $901,000
(173%) in the first six months of fiscal 1999 versus the same period in
fiscal1998.
Subscriber revenues generated by Intek Global USA were $568,000 for the
first half of fiscal 1999, an increase of $388,000 compared to $180,000 for the
first half of fiscal 1998.
Other service income includes royalties, equipment rental and
non-warranty repair. These revenues for the first six months of fiscal 1999
were$855,000, compared to $2,757,000 for the first six months of fiscal 1998.
ESU accounted for $2,415,000 of the total other service income in fiscal 1998.
After adjusting for the impact of ESU, non-subscriber income increased $513,000
in fiscal 1999 primarily due to non-warranty repair income, equipment rental
revenues, and technology transfer fees.
COST OF GOODS AND SERVICES PROVIDED AND GROSS PROFIT MARGIN
OVERVIEW
On a consolidated basis, total cost of revenues decreased by $3,837,000
(or 27%) from $14,044,000 in the first half of fiscal 1998 to $10,207,000 in the
first half of fiscal 1999. Excluding ESU from the first six months of fiscal
1998, consolidated cost of revenues increased by $234,000 (2%) from $9,973,000
in fiscal 1998 to $10,207,000 in fiscal 1999.
Consolidated Gross Profit decreased by $680,000 (or 21%) from
$3,239,000 for the first half of fiscal 1998 to $2,559,000 for the first half of
fiscal 1999. After adjusting the first six months of fiscal 1998 for the effect
of the ESU disposition, total gross profit increased by $1,185,000 (86%) from
$1,374,000 in fiscal 1998 to $2,559,000 in fiscal 1999. The gross profit
increase is principally due to incremental subscriber ($388,000) and service
($513,000) revenues.
COST OF PRODUCT SALES
The cost of product sales for the first six months of fiscal 1999
decreased by $2,466,000 from $10,434,000 (74% of sales) in the first six months
of fiscal 1998, to $7,968,000 (70% of sales). ESU's cost of product sales were
$2,671,000 in fiscal year 1998. Excluding the impact of ESU, cost of sales and
gross profit margins were favorably impacted by improved results of the contract
manufacturing group in the UK, offset in part, by a decline in the profit margin
relating to product sales in the United States.
Product gross margin decreased during the first six months of fiscal
1999 by $246,000 from $3,621,000 (26% of sales) during the first six months of
fiscal 1998 to $3,375,000 (30% of sales). The product gross margin contribution
by ESU in the first half of fiscal year 1998 totaled $559,000 (17% of sales).
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COST OF SERVICE PROVIDED
The cost of service provided decreased by $1,371,000 from $3,610,000
during the first half of fiscal 1998 (112% revenues) to $2,239,000 during the
first half of fiscal 1999 (157% revenues). Service gross margin decreased by
$434,000 from a loss of $382,000 (12% revenues) to a loss of $816,000 (57%
revenues). The decline in service gross margins are attributable to the sale of
ESU which contributed $1,306,000 (48% revenues) during the first half of 1998.
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. Intek Global USA's cost of subscriber services
provided amounted to $2,239,000 during the first half of fiscal 1999, compared
to $2,356,000 during the first half of fiscal 1998.
OTHER OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses decreased by $1,101,000 (27%) from
$4,082,000 during the first half of fiscal 1998 (24% revenues) to
$2,981,000during the first half of fiscal 1999 (23% revenues). The decrease is
due to are direction 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 $1,089,000 (9% revenues) for the
first six months of fiscal 1999 were $76,000 lower than the first six months of
fiscal 1998 expenses of $1,165,000 (7% revenues).
GENERAL AND ADMINISTRATIVE
General and administrative expenses of $7,776,000 (61% revenues) for
the first half of fiscal 1999 were $172,000 lower than the expenses of
$7,948,000 (46% revenues) for the first half 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 decreased by $142,000 (5%) from
$2,948,000 during the first quarter of fiscal 1998 to $2,806,000 during the
first quarter of fiscal 1999.
STRATEGIC PLANNING CHARGES
Strategic planning charges of $336,000 represent the costs incurred by
the Company associated with the January 19, 1999 Securicor 13D filing and
consist of investment banker services and legal fees.
OPERATING LOSS
Intek Global's operating loss was $12,429,000 for the first six months
of fiscal 1999, compared to a loss of $12,904,000 for the first six months of
fiscal 1998. In the first six months of fiscal year 1998, ESU contributed
profits of $225,000. After adjusting for both the disposition of ESU and the
non-recurring strategic planning charges, the first six month fiscal 1999
operating loss is $1,036,000 (8%) better than the first six months of fiscal
1998.
INTEREST EXPENSE
Interest expense for the first six months of fiscal 1999 was $2,502,000
compared to $1,404,000 for the first six months of fiscal 1998. Of the total,
$375,000 related to borrowings from third parties and $2,127,000 related to
borrowings from Securicor.
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NET LOSS
The consolidated net loss after taxes for the first six months of fiscal 1999
was $15,036,000. The net loss for the first six months of fiscal 1998 was
$14,277,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash has been borrowings from
Securicor. On January 19, 1999, Securicor filed an amendment to its Schedule13-D
and disclosed that it was considering various alternatives relating to its
equity and debt investments in the Company, that it retained an investment
banker and that it would request due diligence information from the Company. The
Company formed a special committee to evaluate any proposals which may be
forthcoming and the special committee retained an investment advisor to assist
it.
CASH FLOWS
For the first six months of fiscal 1999, the Company used $15,378,000
in cash for operating activities, $2,192,000 was spent for capital expenditures
and $7,017,000 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 $21,902,000 in new debt, of which
$17,500,000 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. The Company also made the first of two installments on a
secured subordinated note related to the acquisition of Wireless Plus in the
amount of $1,500,000.
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 March 31, 1999, the amount payable under the December 1998 Facility
totaled $17.5 million.
During the third quarter of fiscal 1998, the Company recorded a pre-tax
restructuring charge of $1,613,000, as a result of management's approval of
plans to consolidate and relocate certain administrative services functions and
to eliminate and deconstruct certain communications site related to its air time
services product line. See Note 3 to the financial statements included in the
Company's Annual Report on Form 10-K for additional discussions of the
restructuring charge and the resulting restructuring reserve. Activities related
to the restructuring reserve are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Staff Office Lease Site Lease Equipment
Reductions Terminations Terminations Removal Total
------------- --------------- ---------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $653 $175 $423 $173 $1,424
Cash Payments (290) (48) (98) (24) (460)
------------- --------------- ---------------- --------------- ---------
Balance at December 31, 1998 $363 $127 $325 $149 $964
Cash payments (269) (26) (88) (18) (401)
------------- --------------- ---------------- --------------- ---------
Balance at March 31, 1999 $94 $(101) $237 $131 $563
------------- --------------- ---------------- --------------- ---------
------------- --------------- ---------------- --------------- ---------
</TABLE>
The remaining balance of the restructuring reserve at March 31, 1999,
is expected to be paid out by the end 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
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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. As of March 31, 1999, NRTC and its
Members have placed orders for approximately $5.0 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 resale's of the Contract
Products to their customers and may further elect to obtain the exclusive
right to such use in designated geographic areas for an annual royalty fee
ranging from $15,000 to $25,000, depending on the number of base stations
constructed. The Distribution Agreement permits NRTC and its Members to
purchase the Contract Products at the lowest rate quoted or charged by Intek
Global USA to any of its dealers or customers within the U.S. and also
provides for a 0.5% discount on future purchases of Contract Products, if the
amount of such purchases for the preceding year exceeds $10 million. In
addition, NRTC has earned an option to purchase up to 200,000 shares of the
Company's common stock and has been given conditional grants to purchase up
to 1,050,000 additional shares of the Company's common stock. The conditional
stock options will vest to NRTC, incrementally, based on the amount of
Contract Products purchased over the term of the Distribution Agreement. The
exercise price of stock options vested in the first two years is the lower of
(a) $3.00 per share or (b) the average closing price for the 20 trading days
immediately preceding the exercise date and the exercise price of options
vested after the first two years is the average closing price for the 20
trading days immediately preceding the exercise date.
Pursuant to the Distribution Agreement, NRTC LLC or its assignee has
the right until October 22, 1999 to purchase from the Company any Company Phase
I 220 MHz system and related assets that overlap eleven specified states for an
amount equal to the Company's capitalized investment in the system plus a
multiple of the monthly gross revenues from air subscription rights generated by
the system. In May 1999, the Company entered into an agreement with NRTC's
assignee for the sale of its Phase I assets in the State of Louisiana for a
purchase price of $877,000, and for the sale of its Phase II Economic Area
licenses in Louisiana for an additional $105,000. The sale is pending approval
by the FCC and is anticipated to close by the end of the third quarter of fiscal
1999. In addition, the Company is currently negotiating similar transactions
involving systems and licenses in four additional states.
The management of the Company believes that, with the $25 million
financing agreement entered into with Securicor on December 16, 1998, and
subject to the anticipated sales of systems and licenses to NRTC as outlined
above, the Company's current available capital should be sufficient to fund its
fiscal 1999 operations. However, if the Company's expectations on sales and
expenditures are not realized, or any other negative material event occurs, 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 six months 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.
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.
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DATED: July 29, 1999
INTEK GLOBAL CORPORATION
By: /s/ George A. Valenti
- - - - - - - - - - - - - - - -
George A. Valenti
Chief Financial Officer
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