<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 JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
Commission File Number 0-9160
INTEK DIVERSIFIED CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2450145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
970 West 190th Street, Suite 720
Torrance, California 90502
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (310) 366-7335
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 each of the issuer's classes of Common
Stock, $0.01 par value, as of August 14, 1996, is 11,150,594 shares.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEK DIVERSIFIED CORPORATION
(RoameR One, Inc. Prior to September 23, 1994 Reverse Merger)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Thousands, except share and per share amounts)
For the three and six month periods ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------
1996 1995 1996 1995
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales $ 48 $ 1,213 $ 544 $ 1,520
Cost of goods sold 146 1,121 591 1,399
---------- --------- ---------- ---------
Gross profit (loss) (98) 92 (47) 121
Operating expenses:
Site 236 121 606 199
Selling 90 9 207 14
Engineering 33 - 33 -
General administrative 955 690 1,463 1,382
---------- --------- ---------- ---------
Operating loss (1,412) (728) (2,356) (1,474)
Other income (expense):
(Loss) gain on sale of
assets held for sale (32) (188) (158) 1,152
Interest (97) (40) (117) (114)
Financing costs (254) (533) (333) (533)
Other - - 12 6
---------- --------- ---------- ---------
Net loss $ (1,795) $ (1,489) $ (2,952) $ (963)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net loss per share $ (0.16) $ (0.16) $ (0.27) $ (0.10)
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Weighted average number
of shares outstanding 11,090,553 9,069,227 10,982,767 8,993,238
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
2
<PAGE>
INTEK DIVERSIFIED CORPORATION
(RoameR One, Inc. Prior to September 23, 1994 Reverse Merger)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Thousands, except share and per share amounts)
For the period from inception (February 4, 1994) through June 30, 1996
Inception
(February 4, 1994)
Through June 30, 1996
----------------------
Net sales $ 4,420
Cost of goods sold 4,137
---------
Gross profit 283
Operating expenses:
Site 1,161
Selling 390
Engineering 33
General administrative 5,185
---------
Operating loss (6,486)
Other income (expense):
(Loss) gain on sale of
assets held for sale 1,045
Interest (367)
Financing costs (968)
Other 48
---------
Net loss $(6,728)
---------
---------
Net loss per share $(0.84)
---------
---------
Weighted average number
of shares outstanding 7,999,412
---------
---------
The accompanying notes are an integral part of these consolidated statements
3
<PAGE>
INTEK DIVERSIFIED CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(Thousands)
ASSETS
June 30, 1996 (Unaudited) and December 31, 1995
UNAUDITED
June 30 December 31
1996 1995
-------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 782 $ 678
Accounts receivable, net
of allowance for
doubtful accounts of $61
in 1996 and $60 in 1995 454 1,199
Restricted cash 966 -
Note receivable, current
portion 135 54
Inventories of equipment 2,992 1,248
Advances for mobile equipment
inventory 1,796 -
Prepaid expenses and
other current assets 383 77
Assets held for sale 1,555 1,555
-------- --------
Total current assets 9,063 4,811
-------- --------
PROPERTY AND EQUIPMENT, AT COST 7,860 7,535
Less-accumulated depreciation (63) (37)
-------- --------
7,797 7,498
OTHER ASSETS:
Note receivable 70 100
Deferred financing costs 236 -
Investment in joint venture 125 125
-------- --------
TOTAL ASSETS $ 17,291 $ 12,534
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated balance sheets
4
<PAGE>
INTEK DIVERSIFIED CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 1996 (Unaudited) and December 31, 1995
UNAUDITED
June 30 December 31
1996 1995
-------- ---------
CURRENT LIABILITIES:
Accounts payable $ 151 $ 301
Accrued liabilities 621 870
Related party payable 32 2,452
Notes payable 2,500 -
Letter of credit liability 917 -
Licensee deposits 366 344
-------- --------
Total current liabilities 4,587 3,967
-------- --------
NOTES PAYABLE - CONVERTIBLE 5,000 -
-------- --------
DEFERRED INCOME TAXES 633 633
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value
Authorized - 20,000,000 shares
Issued - 11,590,860 in 1996,
11,086,215 in 1995 116 111
Capital in excess of par value 14,453 12,369
Treasury stock, at cost-465,582
shares in 1996 and 1995 (770) (770)
Deficit accumulated during the
development stage (6,728) (3,776)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 7,071 7,934
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 17,291 $ 12,534
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated balance sheets
5
<PAGE>
INTEK DIVERSIFIED CORPORATION
(RoameR One, Inc. Prior to September 23, 1994 Reverse Merger)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Thousands)
For the three and six month periods ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ -----------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net loss $ (1,795) $ (1,489) $ (2,952) $ (963)
--------- --------- --------- -------
Adjustments to reconcile
net loss to net cash
used in operating activities:
Amortization of financing costs 258 533 333 533
Depreciation and amortization 14 5 26 38
Loss (gain) on sale of
assets held for sale - 188 - (1,152)
Changes in assets and
liabilities:
Decrease (increase) in:
Accounts receivable 430 413 745 535
Restricted cash (966) - (966) -
Notes receivable (64) 10 (51) 25
Inventories (1,890) (1,583) (1,744) (1,614)
Advances for mobile equipment
inventory (1,796) - (1,796) -
Prepaid expenses and
other current assets (54) 171 (147) 388
Increase (decrease) in:
Accounts payable (450) (455) (150) (359)
Licensee deposits (53) 125 22 122
Accrued liabilities 153 (583) (249) (462)
--------- --------- --------- -------
Total Adjustments (4,418) (1,176) (3,977) (1,946)
--------- --------- --------- -------
Net cash used in operating
activities (6,213) (2,665) (6,929) (2,909)
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Cash Flows From Investing
Activities:
Capital expenditures (149) 1,938 (326) 1,105
Proceeds, net of note receivable,
from sale of assets held
for sale - 687 - 3,373
Investment in joint venture - (125) - (125)
Change in working capital
of discontinued operations - 302 - 189
--------- --------- --------- -------
Net cash provided by (used in)
investing activities (149) 2,802 (326) 4,542
Cash Flows From Financing
Activities:
Issuance of common stock 432 - 1,639 -
Loan proceeds 5,000 - 7,500 -
Letter of credit liability 917 - 917 -
Principal payments
on borrowings - (900) - (900)
Deferred financing costs (277) - (277) -
Related party borrowings (441) (1,120) (2,420) (1,121)
--------- --------- --------- -------
Net cash provided by
financing activities 5,631 (2,020) 7,359 (2,021)
--------- --------- --------- -------
Net increase (decrease)
in cash and cash equivalents (731) (1,883) 104 (388)
Cash and cash equivalents
at beginning of period 1,513 3,052 678 1,557
--------- --------- --------- -------
Cash and cash equivalents
at end of period $ 782 $ 1,169 $ 782 $ 1,169
--------- --------- --------- -------
--------- --------- --------- -------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 0 $ 37 $ 0 $ 112
Cash paid for income taxes $ 7 $ 3 $ 7 $ 3
Non-cash transactions (see Note 3a)
</TABLE>
The accompanying notes are an integral part of these consolidated statements
7
<PAGE>
INTEK DIVERSIFIED CORPORATION
(RoameR One, Inc. Prior to September 23, 1994 Reverse Merger)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Thousands)
For the period from inception (February 4, 1994) through June 30, 1996
Inception
(February 4, 1994)
Through June 30, 1996
---------------------
Cash Flows From
Operating Activities:
Net loss $ (6,729)
-----------
Adjustments to reconcile
net loss to net cash
used in operating activities:
Amortization of financing costs 968
Management fees 425
Depreciation and amortization 88
Loss (gain) on sale of
assets held for sale (1,203)
Changes in assets and
liabilities:
Decrease (increase) in:
Accounts receivable 254
Restricted cash (965)
Notes receivable 16
Inventories (2,992)
Advances for mobile equipment
inventory (1,796)
Prepaid expenses and
other current assets (107)
Increase (decrease) in:
Accounts payable (215)
Licensee deposits 366
Accrued liabilities 484
Deferred income taxes (90)
-----------
Total Adjustments (4,767)
-----------
- -----------
Net cash used in operating
activities (11,496)
8
<PAGE>
Cash Flows From Investing
Activities:
Capital expenditures (3,861)
Equity acquired in reverse
merger 3,228
Net change in assets
acquired in reverse merger (3,739)
Proceeds, net of note receivable,
from sale of assets held
for sale 3,869
Investment in joint venture (125)
Change in working capital
of discontinued operations (40)
-------------
Net cash provided by (used in)
investing activities (668)
Cash Flows From Financing
Activities:
Issuance of common stock 2,984
Loan proceeds 10,000
Letter of credit liability 917
Principal payments
on borrowings (1,392)
Deferred financing costs (278)
Related party borrowings 34
-------------
Net cash provided by
financing activities 12,265
-------------
Net increase (decrease)
in cash and cash equivalents 101
Cash and cash equivalents
at beginning of period 427
Cash and equivalents
acquired in reverse merger 254
-------------
Cash and cash equivalents
at end of period $ 782
-------------
-------------
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 227
Cash paid for income taxes $ 12
Non-cash transactions (see Note 3a)
The accompanying notes are an integral part of these consolidated statements
9
<PAGE>
INTEK DIVERSIFIED CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(1) PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by INTEK Diversified Corporation (the "Company" or "INTEK"),
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, and the Company believes that the disclosures are adequate
to not make the information presented misleading. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
The information furnished herein reflects all adjustments which are, in
the opinion of management, necessary to a fair presentation of the condensed
consolidated financial statements for the interim periods presented taken as
a whole. These adjustments are of a normal and recurring nature. The results
of the interim periods are not necessarily indicative of results to be
expected for the entire year.
This quarterly report on Form 10-Q includes forward looking statements
concerning the Company that include certain risks and uncertainties. The
forward looking statements are made pursuant to the "safe harbor" provisions
of the "Private Securities Litigation Reform Act of 1995." There are many
factors that could cause the events in such forward looking statements to
not occur. See the Company's latest annual report on Form 10-K for a
discussion of these factors.
(2) BUSINESS AND SIGNIFICANT RISKS
a. DEVELOPMENT STAGE ENTERPRISE
INTEK was incorporated in 1969 and had been primarily engaged in the
business of molding, fabricating and selling plastic products through its
wholly owned subsidiary, Olympic Plastics Corporation ("Olympic Plastics").
On September 23, 1994, a newly formed, wholly owned subsidiary of INTEK,
Romnet, Inc., a Delaware corporation, acquired all of the issued and
outstanding stock of Simrom, Inc. ("Simrom"), an Ohio corporation in exchange
for 6,000,000 shares of common stock of the Company ("Company Common Stock").
Effective September 23, 1994, Simrom merged with Romnet, Inc. (the "Merger").
After the Merger, the surviving corporation changed its name to Roamer One,
Inc. ("Roamer One"). The Company refocused its resources to the development
of the RoameR One business, the telecommunications industry and discontinued
and divested the operations of Olympic Plastics. Since the former
shareholders of Simrom retained more than a 50 percent controlling interest
in INTEK, the Merger was treated as a reverse merger for accounting purposes.
After the Merger, RoameR One's principal assets were certain rights relating
to licenses granted by the Federal Communications Commission ("FCC") for the
220 MHz to 222 MHz narrowband spectrum ("220 MHz"). Pursuant to the Merger,
RoameR One's net deficit equity of $338,637 was transferred to INTEK. Pro
forma combined operating results of the merged companies are not presented
since INTEK's former business is treated as if it were a divested operation.
10
<PAGE>
The Company is engaged in a development stage enterprise of developing,
constructing, and managing 220 MHz Specialized Mobile Radio ("SMR") systems
in the United States ("U.S.") utilizing certain rights and benefits afforded
it by licensees in the newly allocated 220 MHz.
RoameR One contracted with certain holders of 220 MHz licenses according
to the following classifications: Category I, Category II, or Category III
Agreements. Under Category I Agreements, each of the licensees (which are, in
some instances, directors of the Company) have entered into a management
agreement which permits RoameR One to retain 100% of the subscriber revenues
until such time as $200,000 is earned from system operation, after which time
the licensee receives 10% of the gross subscriber revenues. Each licensee
under a Category I Agreement also has entered into an option agreement (the
"Option Agreement") granting RoameR One the exclusive right to purchase the
constructed 220 MHz SMR system, together with the 220 MHz license, for a
nominal sum. Under the Option Agreement, RoameR One is required to fund all
capital costs and operating expenses. The option may be exercised by RoameR
One at any time after construction by RoameR One of the 220 MHz SMR system is
completed. As of June 30, 1996, RoameR One had 228 Category I Agreements, of
which 73 were constructed.
Under Category II Agreements, each of the licensees has entered into a
management agreement which permits RoameR One to earn and retain, depending
on the licensee, 30% to 60% of the gross subscriber revenues. Each of the
licensees also has entered into an Option Agreement, however, in most cases,
the option may be exercised only after 18 months to 48 months (depending on
the licensee) after the construction of the 220 MHz SMR system by RoameR One.
RoameR One is required to finance the building of the 220 MHz SMR system and
contribute operating capital until such time as the system is profitable. The
purchase price of the 220 MHz SMR system, together with the 220 MHz license,
is computed using a multiple of earnings at the time of purchase. As of June
30, 1996, RoameR One had 33 Category II Agreements, of which 27 were
constructed.
Under Category III Agreements, each of the licensees has entered into
a management agreement providing that RoameR One will manage the 220 MHz SMR
system for a fee based (depending on the licensee) varying from 20% to 40% of
revenues. Under a Category III Agreement, RoameR One has no option to
purchase such 220 MHz SMR system but does have a right of first refusal to
purchase the system in the event an acceptable offer to buy such system is
submitted to the licensee by a third party and the Company is able to match
such offer. The Company anticipates that it will not be able to purchase all
such systems. The licensees under Category III Agreements are obligated to
provide the funds for the system construction and operating costs. As of June
30, 1996, RoameR One had 153 Category III Agreements, of which 72 were
constructed.
While the Company has management agreements for 172 constructed 220 MHz SMR
systems, the number of subscribers to the service is insignificant and the
Company's marketing strategy has just begun to be implemented. The focus of the
Company has been directed to the construction of as many systems as possible by
the FCC's deadline date. On January 26, 1996, the FCC adopted a Second Report
and Order in PR Docket No. 89-552 and GN Docket No. 93-252 that extended the
11
<PAGE>
construction deadline to March 11, 1996 for all non-nationwide 220 MHz
licensees that elected to construct base stations at currently authorized
locations, and at least until August 15, 1996 for all licensees granted
authority to modify licenses to relocate base stations. The August deadline
is applicable only to licensees who filed with the FCC (a) on or before March
11, 1996, a Letter of Intention to modify the location of the base station,
and (b) on or before May 1, 1996, a valid application to modify the
authorization by relocating the stations to a different location. A total of
129 modification applications were filed by or on behalf of licensees under
management by RoameR One. For sites constructed by RoameR One to date, 6
modification applications are currently pending before the FCC. Action by the
FCC on these applications is expected shortly. There can be no assurance the
FCC will act favorably on the applications or that the FCC's decision will
not result in reductions in coverage, increased site rental, further site
relocation costs, or other adverse effects. In the event that a modification
application is denied, the license for the system may become subject to
automatic cancellation.
The Company will have until at least August 15, 1996 (with the
possibility of extensions depending on the date modifications are granted) to
construct each system for which a modification is obtained from the FCC.
There are no assurances that the Company will be successful in gaining a
grant of site modification on behalf of all licenses for which an application
is made. The Company will continue to assess site locations, market
indicators and its financial resources in deciding whether to construct a
system. No assurances can be made that the Company will be able to complete
the construction of all systems for which a modification is granted by the
end of the extended construction period or that it will have the financial
resources to do so.
Systems that have been completed are being used for testing of the
Company's billing system software, signal coverage, and system performance.
Limited subscriber loading began in selected markets during the first quarter
of 1996 to test the system. As a result of the testing, certain problems were
identified such as white noise and interference from other radio
transmissions. A solution to these problems appears to have been developed
and RoameR One is currently retrofitting its repeater sites so that such
sites can be operated in a commercially viable fashion. No assurances can be
made that RoameR One will complete all of the sites which are currently
subject to its management agreements or that it will obtain subscribers for
completed sites. No significant revenues are expected to be generated from
the operation of these systems prior to the fourth quarter of 1996.
The Company has management agreements for 413 licenses. Of the 166
systems it has constructed as of June 30, 1996, the Company has management
agreements for 138 systems. The remaining 28 systems were constructed for,
and sold to third parties. The Company has not entered into management
agreements for these systems at this time. No assurance can be made that the
Company will enter into such management agreements. The Company also has
management agreements for 34 systems that were constructed by third parties.
Of the 138 systems constructed by the Company for which it has management
agreements, 6 licenses are subject to approval by the FCC for modification to
the site locations. In the absence of such approval, the Company would lose
all rights and privileges afforded under the management agreements.
12
<PAGE>
b. REGULATION BY FCC
The construction, licensing, operation, sale, management, ownership, and
acquisition of 220 MHz licenses are activities regulated by the FCC. The
Company's actions with respect to 220 MHz SMR systems which it owns or
manages may be delayed by the time required to obtain FCC approval or consent
for certain actions, or such approval or consent may be denied or withheld.
FCC requirements also may impose certain costs or requirements upon the
Company which it would not bear in the absence of regulation.
Because RoameR One's business is regulated by the FCC, its business
affairs (and those of its actual and potential competitors) are always
subject to changes in FCC rules and policies. Such changes can increase the
level of competition, the cost of regulatory compliance, the methods in which
the Company manages the 220 MHz SMR systems, the difficulty in obtaining or
keeping licenses, standards for products and services or other facets of the
Company's regulatory environment. Further, each FCC proceeding which might
affect the Company is subject to reconsideration, appellate review, and FCC
modification from time-to-time.
The FCC requires that licensees maintain de jure and de facto control of
their radio systems at all times. This requirement is applicable to the 220
MHz licenses which the Company seeks to manage or acquire. A licensee's
failure to maintain control can result in an FCC investigation or hearing,
imposition of monetary forfeitures, or revocation of a license. Pursuant to
certain guidelines, the FCC will review the specific facts of a particular
situation on a case-by-case basis to determine if a licensee has given
control to a manager, either under the terms of the agreement or as a result
of the course of dealing between the licensee and the manager. No assurances
can be given that the Company's management agreements or course of conduct in
acquiring rights to or managing the 220 MHz systems will be found to comply
with such FCC requirements. No assurance can be given that the Company's
Management Agreements or course of conduct in acquiring rights to or managing
the 220 MHz systems will be found to comply with such FCC requirements.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. CASH FLOW STATEMENT
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The following summarizes the supplemental disclosure of non-cash
investing and financing activities:
On September 23, 1994, the Company exchanged 6,000,000 shares of Company
Common Stock for 100 percent of the common stock of Simrom, Inc. in the
Merger which was accounted for as a reverse merger (See Item 1. Footnote 1 --
"Presentation."). Accordingly, the assets and liabilities of INTEK at
September 23, 1994 are assumed to have been acquired by RoameR One.
13
<PAGE>
On November 22, 1994, the Company issued 100,000 shares of Company
Common Stock in exchange for certain management services valued at $425,000
(equating to $4.25 per share), which was the approximate fair market value of
Company Common Stock at the date of issuance.
In November, 1994, the Company obtained a $2,500,000 loan ("Quest Loan")
from Quest Capital Corporation ("Quest"), formerly known as Noramco Mining
Corporation, to fund the initial costs of implementing RoameR One's
construction program. During the second quarter of 1995, the Company reduced
the principal balance to $1,600,000 and on December 29, 1995 the Company
issued 336,842 shares (at a value of $4.75 per share) of Company Common Stock
to Quest as payment in full of the principal then due.
During 1995, the Company exchanged 162,000 shares of Company Common Stock
for certain loan extension fees valued at $635,000 (equating to $3.92 per
share) and 937,042 shares of Company Common Stock for equipment purchased
from Linear Modulation Technology Limited ("LMT"), a wholly owned indirect
subsidiary of Securicor plc, valued at $4,000,000 (equating to $4.27 per
share). The values attributed to such Company Common Stock were the
approximate fair market values of Company Common Stock on the dates of issuance.
On February 29, 1996, the Company raised $2,500,000 through the issuance
of a Senior Secured Debenture (the "Debenture") to MeesPierson ICS Limited, a
UK limited liability company ("MeesPierson"). INTEK also issued 50,000 shares
of Company Common Stock under Regulation S of the Securities Act of 1933, as
amended (the "Securities Act"), to MeesPierson as a closing fee for its
investment banking services and an agency fee of $25,000 was paid to Octagon
Capital Canada Corporation. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations For the Six Month
Period Ended June 30, 1995 and For the Six Month Period Ended June 30, 1996
- -- Liquidity and Capital Resources."
b. REVENUE RECOGNITION
Revenue is recognized for sales of equipment when delivered. Subscriber
revenue derived from Category I and Category II Agreements is recognized at
the time subscribers are billed as a percentage of subscriber billings per
the terms of the management agreements. Management fees related to Category
III Agreements are recognized at the time subscribers are billed based upon a
percentage of subscriber revenues pursuant to the terms of the management
agreements.
c. CONCENTRATIONS OF RISK
Accounts receivable are unsecured and the Company is at risk to the
extent such accounts become uncollectible. As of June 30, 1996, one customer,
Voice Data Communications ("VDC") comprised 70% of the Company's accounts
receivable.
The Company's equipment sales are to customers located primarily in the
U.S. During the six months ended June 30, 1996, the Company had sales to one
customer (VDC) which represented approximately 99% of sales. During the six
months ended June 30, 1995, the same customer represented 89% of sales.
14
<PAGE>
The Company purchases a significant portion of its equipment from
Securicor Radiocoms Limited, a corporation formed under the laws of England
and Wales, and a wholly owned subsidiary of Securicor Communications. If this
supplier was not available, there could be a material adverse effect on the
Company's financial position and results of operations. See Item 1. Footnote
14 -- "Proposed Transaction."
(4) INVENTORIES
Inventories at June 30, 1996 and December 31, 1995 consist of the
following (in thousands):
1996 1995
---------- --------
Site installations $ 2,442 $ 549
Mobile radios 550 699
---------- --------
$ 2,992 $ 1,248
---------- --------
---------- --------
(5) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1996 and December 31, 1995 consists of
the following (in thousands):
1996 1995
---------- --------
Site equipment $ 7,560 $ 7,283
Furniture and fixtures 73 73
Computers 227 179
---------- --------
Total property and equipment, at cost 7,860 7,535
Less accumulated depreciation (63) (37)
---------- --------
Net property and equipment $ 7,797 $ 7,498
---------- --------
---------- --------
(6) DIRECTOR COMPENSATION
Members of the Board of Directors are compensated for services at the
rate of $4,000 per year plus $500 per meeting to a maximum of $10,000 per
director. For the six months ended June 30, 1996, the Company paid Directors
fees of $15,500 that were accrued as of December 31, 1995. The Company has
also paid $39,000 for 1996 annual fees plus meetings and has accrued $12,000
for unpaid directors fees.
15
<PAGE>
(7) STOCK OPTION PLAN
A summary of the Company's Stock Option Plans as of June 30, 1996 is as
follows:
OPTION PRICE
1988 Plan SHARES PER SHARE
- --------- -------- ------------
Shares granted:
January 1, 1987 155,000 $ 1.750
Shares terminated (97,500) 1.750
Shares exercised in 1995 (57,500)
---------
Shares under option 0
---------
1994 Stock Option Plan
- ----------------------
Shares granted:
September 23, 1994 50,000 $ 2.750
September 23, 1994 330,000 3.750
December 20, 1995 72,000 5.875
Shares exercised in 1995 (40,000)
Shares exercised in 1996 (162,000)
---------
Shares under option 250,000
---------
1994 Directors' Stock Option Plan
- ---------------------------------
Shares granted:
September 23, 1994 120,000 $ 3.75
Shares exercised in 1996 (55,000)
---------
Shares under option 65,000
---------
Total shares under option 315,000
---------
---------
As of June 30, 1996, options available for future grant were as follows:
1988 Plan 442,500
1994 Stock Option Plan 148,000
1994 Directors Plan 180,000
---------
770,500
---------
---------
(8) DIRECTORS AND OFFICERS OF INTEK--Certain Relationships and Related
Transactions
Pursuant to a management agreement dated September 23, 1994, the Company
paid an annual management fee of $200,000 to Peter Paul Corporation, Inc., an
16
<PAGE>
affiliate of Anglo York Industries, Inc., a stockholder of the Company. Peter
Paul Corporation, Inc., made the services of Mr. Vincent Paul, Vice Chairman
of the Board of Directors, available to the Company without additional
compensation. The management agreement terminated on January 31, 1996 upon
the death of Mr. Paul. For the six months ended June 30, 1996 and 1995, the
Company paid management fees of $16,667 and $50,000 respectively to Peter
Paul Corporation, Inc.
In November 1994, the Company borrowed $2,500,000 bearing 12% interest
from Quest. The Quest Loan was secured by a first mortgage on the land and
building owned by Olympic Plastics (the "Property") and a guaranty by SCL.
Quest was issued a total of 262,000 shares of Company Common Stock as a loan
commitment fee and compensation for two extensions of the maturity date.
During the second quarter of 1995, the Company reduced the principal balance
to $1,600,000 and on December 29, 1995 the Company issued an additional
336,842 shares of Company Common Stock to Quest as payment in full of the
principal then due.
Pursuant to an oral consulting agreement between Roamer One Holdings,
Inc. ("Roamer One Holdings") and the Company, the Company paid $10,000 per
month to Roamer One Holdings and Roamer One Holdings made available the
services of Nicholas Wilson, Chairman of the Board of the Company, to the
Company. Roamer One Holdings is a major stockholder of the Company. This
arrangement was terminated on June 30, 1995. The Company entered into a
Consulting Agreement with Mr. Wilson on July 1, 1995. The consulting period
is 3 years commencing on July 1, 1995 and terminating June 30, 1998. Total
annual compensation is $120,000, paid in monthly installments of $10,000. Mr.
Wilson is not entitled to participate in any retirement, bonus, insurance or
other employee benefit plan maintained by the Company for the benefit of its
employees. For each of the six months ended June 30, 1996 and 1995, the
Company incurred and paid $60,000 to Mr. Wilson pursuant to this agreement.
In addition, the Company paid $30,000 to Mr. Wilson that had been accrued as
of December 31, 1994.
Pursuant to an oral management agreement between Simmonds Capital Limited
("SCL") and the Company, the Company pays SCL $10,000 per month and SCL makes
available the services of John Simmonds, Chairman of the Board of the
Company, Harry Dunstan, President of the Company, and Peter Heinke, Chief
Financial Officer of the Company, to the Company. SCL is a major stockholder
of the Company. For each of the six months ended June 30, 1996 and 1995, the
Company incurred and paid $60,000 to SCL pursuant to this agreement. The
Company is also reimbursing SCL for the services of Mr. Heinke and Mr. Chris
Green, an SCL employee, related to the Proposed Transaction (see Item 1.
Footnote 14 -- "Proposed Transaction") at the hourly rate of $75.00. These
services were not contemplated in the original management agreement. In
addition, the Company paid $30,000 to SCL that had been accrued as of
December 31, 1994.
Pursuant to an oral consulting agreement between Simmonds Mercantile and
Management Inc. ("SMM"), a company controlled by SCL, the Company pays SMM
$8,000 per month for consulting services. For the six months ended June 30,
1996, the Company incurred and paid $48,000 to SMM. The Company did not pay
SMM any fees for the six months ended June 30, 1995.
On April 18, 1995, RoameR One entered into a Memorandum of Understanding
with Midland International Corporation ("MIC"), a Delaware corporation and a
17
<PAGE>
wholly owned subsidiary of SCL, Inc., a Delaware corporation, and a wholly
owned subsidiary of SCL. The Memorandum of Understanding granted MIC
exclusive sales and distribution rights for all RoameR One private branded
220 MHz radio product in the U.S. MIC will be paid a commission on sales of
such radios.
Pursuant to a Financing Agreement and related agreements between the
Company, RoameR One, SCL and Securicor LMT ("LMT"), an affiliate of Securicor
International Limited, a stockholder of the Company, LMT delivered in 1995
approximately $4,000,000 worth of base station equipment and mobile radios in
exchange for 937,042 shares of the Company Common Stock to Securicor
International Limited. Pursuant to the Financing Agreement, such shares were
issued at a share price of $4.26875. The Financing Agreement calls for RoameR
One to purchase approximately $7.9 Million of equipment. As of June 30, 1996,
RoameR One had purchased $7.0 million. On May 7, 1996, the Company wired
approximately $2 million to LMT for purchases of additional repeater systems
for installation prior to August 15, 1996 and for mobile radios to be used on
the systems.
The Company and SCL have an arrangement whereby RoameR One purchases
equipment and installation services from SCL. During the six months ended
June 30, 1996, RoameR One purchased $554,000 of radio equipment and
installation services from SCL. Previous accounts payable for equipment
totaled $2,422,000. RoameR One made payments to SCL totaling $2,913,000
leaving a balance of $63,000 as of June 30, 1996.
Kohrman Jackson & Krantz, a Cleveland, Ohio, law firm of which Steven L.
Wasserman is a partner, performs legal services for the Company and its
subsidiaries. Mr. Wasserman is a member of the Company's Board of Directors
and is the Secretary. Mr. Wasserman receives $1,000 a month as compensation
for his services as the Secretary of the Company. The law firm received fees
of $136,000 during the first six months of 1996 and $43,000 during the first
six months of 1995 from INTEK.
On February 29, 1996, the Company borrowed $2.5 million through the
issuance of the Debenture to MeesPierson. The Debenture is due on August 31,
1996 and bears interest at a rate based on the Bank of America Prime Rate.
The loan is secured by a perfected lien on the Property and the equipment
related to 15 Category I licenses and an unperfected lien on all of the
assets of the Company. A closing fee was paid to MeesPierson of 50,000 shares
of the Company Common Stock and an agency fee of $25,000 cash was paid to
Octagon Capital Canada Corporation. At June 30, 1996, Octagon Investments,
Ltd., an affiliate of Octagon Capital Canada Corporation, beneficially owned
6.2% of Company Common Stock. MeesPierson has made a written offer to extend
the maturity date of the Debenture to October 31, 1996 upon payment of 25,000
shares of Company Common Stock to MeesPierson and 5,000 shares to Octagon
Capital Canada Corporation. Under the terms of the written offer, 10,000
shares would be rebated to the Company if the Debenture is paid by September
14, 1996. The Company has not yet accepted this offer which expires August
26, 1996. Such offer is contingent upon the Company being able to issue such
shares of Company Common Stock to Octagon Capital Canada Corporation pursuant
to Regulation S under the Securities Act. No assurance can be made that the
Company will be able to satisfy this condition precedent. Final documentation
reflecting such written offer will be prepared if the Company accepts such
offer. If the Company defaults on the payment of the Debenture, MeesPierson
could commence foreclosure proceedings under its security agreements on its
collateral, including the Property and the equipment on 15 Category I
licenses. See Item 2. -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
18
<PAGE>
Six Month Period Ended June 30, 1995 and for the Six Month Period Ended June
30, 1996 -- Liquidity and Capital Resources."
The Company believes that the terms of the transactions and the
agreements described above are on terms at least as favorable as those which
it could otherwise have obtained from unrelated parties. On-going and future
transactions with related parties will be (1) on terms at least as favorable
as those which the Company would be able to obtain from unrelated parties;
(2) for bona fide business purposes; and (3) approved by a majority of the
disinterested and non-employee directors.
(9) INVESTMENT IN JOINT VENTURE
In May 1995, INTEK contributed $125,000 for a one-third ownership
interest Brook SIG Corp. which was subsequently acquired in a stock
transaction by Ventel, Inc., a publicly traded company in Canada. Ventel is
in the business of providing financing to various 220 MHz SMR management
companies in the U.S. SCL was also a one-third owner of Brook SIG Corp. and
is an investor in Ventel. INTEK and SCL entered into separate management
services agreements with Ventel to provide certain management services and
technical expertise for the development and implementation of Ventel's
ongoing business strategy. Messrs. Wilson and Simmonds, directors of the
Company, are directors of Ventel and Mr. Simmonds is President of Ventel. To
date, INTEK has received 2,666,667 shares of the common stock of Ventel which
represents 9.3 % of the outstanding shares at June 30, 1996. Of these shares,
80% or 2,133,334 are held in escrow and will be automatically released from
escrow at the rate of one-third on September 20, 1996, one-third on September
20, 1997 and the balance on September 20, 1998. The receipt of shares of
common stock of Ventel has not been accounted for in these financial
statements due to the market volatility and the lack of historical operating
results which make it impractical to value accurately the stock at this time.
(10) COMMITMENTS
As of June 30, 1996, RoameR One had negotiated 175 site leases to permit
installation, operation, and maintenance of transmission/reception equipment
facilities in connection with the 220 MHz SMR systems. These leases generally
have a five-year term, with three consecutive five-year extension periods
upon the mutual agreement of the parties. As of June 30, 1996, RoameR One has
entered into 74 site leases relating to Category I Licensees; 29 site leases
relating to Category II Licensees; and arranged for its Category III
licensees to enter into 72 site leases. As of June 30, 1996, RoameR One had
paid $782,000, before reimbursements, in site lease fees pertaining to 1996.
As of June 31, 1996, total future minimum lease payments for the Category I
and Category II site leases, which are contractual obligations of RoameR One,
are as follows:
19
<PAGE>
1996 $448,869
1997 842,238
1998 754,473
1999 711,916
2000 352,078
Thereafter -
----------
$3,109,574
----------
----------
(11) MAJOR CUSTOMERS
RoameR One has commenced construction and management of 220 MHz SMR
systems pursuant to management agreements. Of these management agreements,
257 obligate the licensee to provide the funds for system construction and
operating costs. During the six month period ended 1996 and 1995, billing for
site equipment, construction and installation accounted for 100% of
consolidated net sales. As of June 30, 1996, a total of 66 systems have been
constructed for one customer, VDC. During the first six months of 1996, a
total of 6 systems have been delivered and invoiced to VDC at a gross profit
of $31,630.
(12) ASSETS HELD FOR SALE
As of June 30, 1995, the Company completed four sales totaling $4,022,407
for equipment and inventory owned by Olympic Plastics. The Company received
cash of $3,576,235 and notes in the original aggregate principal amount of
$446,172 bearing interest at the rate of ten percent (10%) per annum with
monthly principal and interest payments and a maturity date of July, 1998.
As of June 30, 1996, $140,753 remains outstanding on one remaining note.
On March 22, 1996, the Company executed a Purchase Agreement and escrow
was opened for sale of the land and building owned by Olympic Plastics (the
"Property"). The sale price is $2,200,000. The Property has a book value of
$1,555,000. The Property is encumbered by a deed of trust in favor of
MeesPierson in the amount of $2,500,000. Escrow is scheduled to close on or
before September 30, 1996, subject to the buyer's ability to obtain financing
which is conditioned upon the delivery of a satisfactory environmental
report. See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Six Month Period Ended June 30,
1996 and for the Six Month Period Ended June 30, 1995 -- Liquidity and
Capital Resources."
(13) SALE OF SECURITIES
On December 4, 1995, the Company sold 170,000 shares of Company Common
Stock together with a warrant under Regulation S of the Securities Act. The
sale generated $1,020,000. The warrant was exercised on February 29, 1996 for
36,645 shares at a price of $0.01 per share.
20
<PAGE>
On January 12, 1996, the Company sold 201,000 shares of Company Common
Stock under Regulation S of the Securities Act. The sale generated $849,342.
On February 29, 1996, the Company borrowed $2.5 million through the
issuance of the Debenture to MeesPierson. See Item 2. Footnote 8 --
"Directors and Officers of INTEK -- Certain Relationships and Related
Transactions."
On April 26, 1996, the Company sold a series of 6.5% Notes (with attached
warrants) (the "Notes") to qualified off-shore purchasers through Global
Emerging Markets/Northeast Securities, Inc. ("GEM") pursuant to Regulation S
under the Securities Act. Net proceeds to the Company, after fees and
brokerage commissions, were $4,750,000. The Notes mature on April 25, 1999
and bear interest at the rate of 6.5% per annum. All accrued interest is due
and payable at the time the Notes mature or upon exercise of the warrants.
The warrants (pursuant to which the principal amounts of the Notes will be
converted into shares of Company Common Stock) become exercisable by the
holders on July 26, 1996. The Company has the right, which may be exercised
in whole or in part on or after April 26, 1997, to require the holders to
exercise the warrants. The warrants are exercisable at discounts (ranging
from 0% to 25%) from the market price of Company Common Stock on the exercise
date. On July 26, 1996, one holder partially exercised a warrant to convert
$100,000 of principal under the Notes into Company Common Stock at a discount
of 17% below market price for Company Common Stock. The Company issued 25,316
shares of Company Common Stock to such holder.
(14) PROPOSED TRANSACTION
On June 18, 1996, INTEK, SCL and Securicor Communications Limited
("Securicor Communications"), a subsidiary of Securicor plc, executed
definitive agreements to combine certain of their respective wireless
communication businesses and related technology (the "Proposed Transaction").
The Proposed Transaction will combine INTEK's RoameR One air time services
business with the U.S. land mobile radio business ("U.S. LMR Distribution
Business") of MIC, a wholly-owned subsidiary of SCL, and the narrowband
wireless technology and manufacturing operations of Securicor Radiocoms
Limited ("SRL"), a wholly-owned subsidiary of Securicor Communications. If
the Proposed Transaction is consummated, INTEK will become an integrated
wireless company providing air time services and product distribution and
manufacturing for the Land Mobile Radio market. The Proposed Transaction is
subject to customary closing conditions, including the receipt of regulatory
and third party approvals and consents and the approval of INTEK's
stockholders. The parties expect the Proposed Transaction to close during the
fourth quarter of 1996.
Under the terms of the Proposed Transaction, INTEK will acquire the U.S.
LMR Distribution Business in exchange for approximately 2,500,000
shares of Company Common Stock and will acquire all of the shares of SRL in
exchange for 25,000,000 shares of Company Common Stock. The U.S. LMR
Distribution Business includes a license to use the "Midland" trademark in
connection with the sale and distribution of hand mobile radio products
(other than consumer products) in the U.S. The Company also will purchase
certain assets and assume certain liabilities from MIC relating to MIC's
business. SRL includes the Linear Modulation radio technology, a
manufacturing facility in Bath, England,
21
<PAGE>
a network of wireless dealers and resellers in the United Kingdom, a SMR
network in England, a wireless systems integration business, and all of
Securicor's convertible preferred shares in E.F. Johnson, a manufacturer of
wireless communications equipment located in Waseca, Minnesota. Securicor
Communications also will provide a $15 million subordinated line of credit to
the Company upon the consummation of the Proposed Transaction. Since the
$15 million line is subordinated and unsecured, the combined companies may
have the ability to obtain financing with asset based lenders against the
unencumbered receivables, inventories and fixed assets of the businesses.
However, while this possibility exists, there can be no assurances that
financing against these assets will be obtained.
If the Proposed Transaction is not consummated, the Company will need to
raise additional capital to continue to fund operating expenses until such
time as it is generating cash from its operations. No assurance can be made
that such efforts to raise capital would be successful.
(15) ADVANCES FOR MOBILE EQUIPMENT INVENTORY
In anticipation of the Proposed Transaction, INTEK formed a wholly-owned
subsidiary, Midland USA, Inc. ("Midland USA"). To ensure that the Company,
upon the consummation of the Proposed Transaction, had product to sell in the
U.S. LMR Distribution Business, Midland USA wired money deposits and posted
letters of credit in the aggregate amount of $1,796,000 to key vendors of MIC
to ensure future product purchases of mobile equipment which as a general
rule have order lead times of several months. This advance is for specific
inventory subject to future delivery to the custody of INTEK.
INTEK expects to refinance this advance with funds available under the
$15 million subordinated line of credit agreement discussed in Note 14. The
availability of funds under this line of credit is contingent upon the
consummation of the Proposed Transaction. There can be no assurance that this
Proposed Transaction will be completed or that the funds will be available
to refinance the advance.
In the event that the Proposed Transaction (or a component of the
Proposed Transaction) is not consummated or is not consummated prior to the
time such product (i.e., product for which Midland USA has placed deposits or
has paid) is delivered and INTEK is unable to direct MIC's vendors to ship the
product to INTEK's storage facilities to ensure that INTEK's interest in such
product is protected from claims by MIC's secured and unsecured creditors,
INTEK will be required to seek reimbursement from MIC. No assurance can be
made that the Company will be successful in collecting such amounts from MIC,
in convincing MIC's vendors to ship such product to the Company or in
protecting such product from claims by MIC's secured and unsecured creditors.
While SCL has indemnified the Company against all costs relating to such
expenditures, no assurance can be made that the Company will be successful in
collecting such amounts from SCL or that SCL has the ability to fund such
amounts.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND FOR THE SIX MONTH
PERIOD ENDED JUNE 30, 1995
The following discussion and analysis sets forth certain factors which
produced changes in the Company's results of operations during the six months
ended June 30, 1996 and as compared with the same period in 1995 as indicated
in the Company's consolidated financial statements.
1996 RESULTS OF OPERATIONS
NET SALES. As of June 30, 1996, the Company completed construction
of 100 systems subject to Option Agreements, 38 systems subject to management
agreements and 28 systems pursuant to a supply agreement for a total of 166
systems. This is an increase of 94 systems over 72 systems constructed as of
June 30, 1995. During the six months ended June 30, 1996, billings to
licensees for site equipment, construction and installation resulted in
equipment sales of $388,000 and sales of mobile radios to distributors of
$156,000 for a total of $544,000. Site equipment sales for the six months
ended June 30, 1995 were $1,520,000 and there were no sales of mobile radios.
Systems that have been completed are being used for testing of the Company's
billing system software, signal coverage, and system performance. Limited
subscriber loading began in selected markets during the first quarter of 1996
to test the system. As a result of the testing, certain problems were
identified such as white noise and interference from other radio
transmissions. A solution to these problems appears to have been developed
and RoameR One is currently retrofitting its repeater sites so that such
sites can operate in a commercially viable fashion. No significant revenues
are expected to be generated from the operation of these systems prior to the
fourth quarter of 1996.
COST OF GOODS. Cost of goods sold as a percentage of net equipment
sales was 108.6% for the first half of 1996. Since the Company elected to
standardize on Securicor repeater equipment, it had incompatible equipment
from other vendors in inventory. During the first half of 1996, some
equipment was sold to third parties at a loss of $110,000. Excluding the loss
from this disposal, the cost of sales was 88.4%, which was an improvement
over 92.0% for the first half of 1995.
SITE EXPENSES. Site expenses are primarily tower lease, telephone
(for modem access), and insurance. For the first half of 1996, site expenses
were $606,000, up from $199,000 in 1995. The increased expenses were required
to support the additional 94 systems that were constructed after June 30,
1995.
SELLING EXPENSES. Selling expenses are primarily salaries, travel
and preparation of promotional material. The selling expenses for the first
half of 1996 were $207,000, an increase of $193,000 over the same period last
year due to the creation of a sales organization and the addition of sales
staff.
ENGINEERING EXPENSES. Engineering expenses are primarily consulting
fees, travel and equipment rental required to optimize and support the repeater
sites. The engineering expenses for the first half of 1996 were $33,000. No
23
<PAGE>
expenses were incurred in this category in 1995 as all engineering functions
were performed by SCL.
GENERAL ADMINISTRATIVE EXPENSES. General administrative expenses
are primarily salaries, merger expenses, consulting and management fees,
legal and audit costs to support the management of the systems, together with
the efforts to raise capital. These expenses were $1,463,000 during the first
six months of 1996, an increase of $81,000 compared to the first half of
1995. The increase was due to the legal and audit costs relating to the
Proposed Transaction and the previously announced but terminated transaction
with SCL.
OPERATING PROFIT (LOSS). For the six months ended June 30, 1996,
the operating loss was $2,356,000, up from $1,474,000 for the same period in
1995. This was due to the cost of the infrastructure to manage the licenses
and sell services to subscribers and the costs of preparing for the Proposed
Transaction.
GAIN ON SALE OF ASSETS HELD FOR SALE. During the six months ended
June 30, 1996, the Company incurred a cost of $158,000 to upgrade the
Property in preparation for its sale. During the six months ended June 30,
1995, the Company realized a gain of $1,152,000 from the sale of the
productive equipment and remaining inventory of Olympic Plastics.
INTEREST EXPENSE. Interest expense, included in other income
(expense), was $117,000 for the first half of 1996, up from $114,000 during
the first half of 1995. 1996 interest expense was accrued on the Debenture
and the Notes. 1995 interest expense related primarily to the Quest Loan.
NET LOSS. The net loss was $2,952,000 for the first half of 1996,
compared to a loss of $963,000 for the same period in 1995. Excluding the
gain on sale of assets of $1,152,000, the loss for 1995 would have been
$2,115,000.
1995 RESULTS OF OPERATIONS
NET SALES. As of June 30, 1995, the Company completed construction
of 72 systems pursuant to its management agreements. During the six months
ended June 30, 1995, billing to licensees for site equipment, construction
and installation resulted in equipment sales of $1,520,000.
COST OF GOODS. Cost of goods sold as a percentage of net equipment
sales was 92.0% in 1995.
SITE EXPENSES. Site expenses are primarily tower lease, telephone
(for modem access), and insurance. For the first half of 1995, site expenses
were $199,000.
SELLING EXPENSES. Selling expenses of $14,000 for the first half of
1995 were for advertising and promotion.
GENERAL ADMINISTRATIVE EXPENSES. General administrative expenses
are primarily salaries, consulting and management fees, legal and audit and
merger
24
<PAGE>
expenses. General administrative expenses for the first half of 1995 were
$1,382,000.
INTEREST EXPENSE. Interest expense, included in other income
(expense), was $114,000 in 1995.
OPERATING PROFIT (LOSS). THE OPERATING loss in 1995 was $963,000.
Excluding the gain on sale of assets of $1,152,000 the loss for 1995 would
have been $2,115,000
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash historically since the Merger
has been selling shares of Company Common Stock, borrowing against the
Company's assets, selling the assets relating to the Plastics Business and
obtaining vendor financing. In the first half of 1996, the Company used
$6,214,000 in cash for operating activities to pay employees, vendors, site
expenses and $326,000 for capital expenditures. Through its financing
activities, the Company raised approximately $10,056,000 in gross proceeds
from which $2,419,000 was used to repay related party borrowings. Cash for
the six months increased $104,000 over the year-end balance. During the
second quarter, INTEK arranged through Midland USA to wire cash deposits and
post letters of credit in the aggregate amount of $1,796,000 to key vendors
of Midland to ensure future product purchase orders. See Item 1. Footnote 15
"Midland USA, Inc." Also, during the second quarter, the Company paid
$2,051,000 to LMT for equipment that has been ordered and assembled, but not
installed, as of June 30, pursuant to the Financing Agreement with LMT
related to the buildout of RoameR One 220 MHz SMR systems. See Item 1. Footnote
8 "Directors and Officers of INTEK--Certain Relationships and Related
Transactions" and Footnote 13 -- "Sale of Securities."
The Company has invested a significant portion of its capital in the
equipment necessary to build out those sites for which it holds an option to
purchase. In addition, Midland USA has made expenditures in the amounts of
$1,796,000 for future product purchases of mobile equipment (see Item 1,
Footnote 15 -- "Midland USA"). Further, on August 31, 1996 (or October 31,
1996 if INTEK accepts the written offer to extend the term of the Debenture
by MeesPierson) the Debenture is due. As a result, the Company is facing a
serious cash flow problem. The Company is pursuing other lending sources and
a sale of uninstalled equipment systems to remedy its cash flow needs.
Significant amounts of capital will be required to complete the build-out of
the 220 MHz SMR systems and to fund the administrative costs of the Company
prior to its generation of recurrent revenues on a consistent basis. No
assurance can be made that such capital will be raised. The requirement for
future working capital will be driven and be highly dependent on the rate of
loading subscribers (with mobile radios) onto the RoameR 220 MHz SMR systems.
Therefore, any delay on the timing of loading subscribers will place a
working capital burden on the Company. No assurance can be made that the
Company will be successful in raising such additional amounts of capital.
BORROWINGS. On February 29, 1996, the Company raised $2,500,000
through the issuance of a Debenture to MeesPierson. See Item 1. Footnote 8
- -- "Directors and Officers of INTEK -- Certain Relationships and Related
Transactions."
On April 26, 1996, the Company sold a series of 6.5% Notes (with
attached warrants). See Item I. Footnote 13 -- "Sale of Securities."
SALES OF ASSETS. The Company is pursuing the sale of the Property.
See Item I. Footnote 12 -- "Assets Held for Sale." If the Company is successful
in selling the Property (which Property is encumbered by a lien in favor of
MeesPierson in the amount of $2,500,000), the Debenture to MeesPierson will be
repaid, in part, with all the proceeds of such sale. The Company will have to
fund any shortfall with working capital. If the Company is not successful in
selling the Property, the Company will have to seek other sources of capital to
repay MeesPierson. See Item 1. Footnote 8 -- "Directors and Officers of INTEK
- -- Certain Relationships and Related Transactions." No assurance can be made
that the Property will be sold or
25
<PAGE>
that the Company will be able to raise additional sources of capital to pay
the Debenture when it becomes due.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings. None
Item 2. Changes In Securities. None
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. None
b. Reports on Form 8-K
The Registrant filed a report on Form 8-K on May 9, 1996, announcing the
sale of Notes (with attached warrants) to six purchasers at an aggregate
purchase price of $4,750,000 net to INTEK. The report was filed pursuant to
Item 5 of Form 8-K.
The Registrant filed a report on Form 8-K on June 18, 1996, announcing
the execution of two definitive agreements relating to the Proposed
Transaction. The report was filed pursuant to Item 5 of Form 8-K.
26
<PAGE>
INTEK DIVERSIFIED CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
June 30, 1996
SIGNATURE
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: August 14, 1996
INTEK DIVERSIFIED CORPORATION
By: /s/ Peter A. Heinke
---------------------------------------
Peter A. Heinke
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
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