<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 SEPTEMBER 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 November 14, 1996, is 14,862,400 shares.
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEK DIVERSIFIED CORPORATION
(Midland USA, Inc. included from August 1, 1996 through September 30, 1996)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Thousands, except share and per share amounts)
For the three and nine month periods ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------
1996 1995 1996 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 1,915 $ 806 $ 2,459 $ 2,326
Cost of goods sold 1,400 682 1,991 2,081
---------- ---------- ---------- ---------
Gross profit 515 124 468 245
Operating expenses:
Site 138 199 744 398
Selling 406 100 613 114
Engineering 100 - 133 -
General administrative 1,379 643 2,416 2,025
Acquisition Expenses 566 138 992 138
---------- ---------- ---------- ---------
Operating loss (2,074) (956) (4,430) (2,430)
Other income (expense):
(Loss) gain on sale of
assets held for sale (43) 43 (201) 1,195
Interest (233) (56) (350) (170)
Financing costs (179) (51) (512) (584)
Other - 22 12 28
---------- ---------- ---------- ---------
Net loss $ (2,529) $ (998) $ (5,481) $ (1,961)
========== ========== ========== =========
Net loss per share $ (.22) $ (0.10) $ (0.49) $ (0.20)
========== ========== ========== =========
Weighted average number
of shares outstanding 11,437,050 10,056,834 11,135,300 9,351,944
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
2
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INTEK DIVERSIFIED CORPORATION
(Roamer One, Inc. Prior to September 23, 1994 Reverse Merger)
(Midland USA, Inc. included from August 1, 1996 through September 30, 1996)
(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 September 30, 1996
Inception
(February 4, 1994)
Through September 30, 1996
-------------------
Net sales $ 6,335
Cost of goods sold 5,537
---------
Gross profit 798
Operating expenses:
Site 1,299
Selling 796
Engineering 133
General administrative 5,961
Acquisition Expenses 1,169
---------
Operating loss (8,560)
Other income (expense):
(Loss) gain on sale of
assets held for sale 1,002
Interest (600)
Financing costs (1,147)
Other 48
---------
Net loss $ (9,257)
=========
Net loss per share $ (1.11)
=========
Weighted average number
of shares outstanding 8,325,792
=========
The accompanying notes are an integral part of these consolidated statements
3
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INTEK DIVERSIFIED CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(Thousands)
ASSETS
September 30, 1996 (Unaudited) and December 31, 1995
UNAUDITED
September 30 December 31
1996 1995
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 1,577 $ 678
Accounts receivable, net
of allowance for
doubtful accounts of $61
in 1996 and $60 in 1995 1,459 1,199
Restricted cash 127 -
Note receivable, current
portion 136 54
Inventories of equipment 5,062 1,248
Prepaid expenses and
other current assets 1,062 77
Assets held for sale 1,555 1,555
------- -------
Total current assets 10,978 4,811
------- -------
PROPERTY AND EQUIPMENT, AT COST 9,019 7,535
Less-accumulated depreciation (89) (37)
------- -------
8,930 7,498
OTHER ASSETS:
Note receivable 55 100
Trademark and goodwill 10,284 -
Deferred financing costs 215 -
Investment in joint venture 125 125
------- -------
TOTAL ASSETS $30,587 $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
September 30, 1996 (Unaudited) and December 31, 1995
UNAUDITED
September 30 December 31
1996 1995
-------- --------
CURRENT LIABILITIES:
Accounts payable $ 720 $ 301
Accrued liabilities 1,432 870
Related party payable 18 2,452
Notes payable 7,310 -
Letter of credit liability 99 -
Licensee deposits 285 344
------- -------
Total current liabilities 9,864 3,967
------- -------
NOTES PAYABLE 4,500 -
------- -------
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 142 111
Capital in excess of par value 25,476 12,369
Treasury stock, at cost-465,582
shares in 1996 and 1995 (770) (770)
Deficit accumulated during the
development stage (9,258) (3,776)
------- -------
TOTAL SHAREHOLDERS' EQUITY 15,590 7,934
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $30,587 $12,534
======= =======
The accompanying notes are an integral part of these consolidated balance sheets
5
<PAGE>
INTEK DIVERSIFIED CORPORATION
(Midland USA, Inc. included from August 1, 1996 through September 30, 1996)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Thousands)
For the three and nine month periods ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net loss $(2,529) $ (998) $(5,481) $(1,961)
------- ------- ------- -------
Adjustments to reconcile
net loss to net cash
used in operating activities:
Amortization of financing costs 254 51 587 584
Depreciation and amortization 142 10 168 48
Loss (gain) on sale of
assets held for sale - (43) - (1,195)
Changes in assets and
liabilities:
Decrease (increase) in:
Accounts receivable (1,005) (196) (260) 339
Restricted cash 839 - (127) -
Notes receivable 13 35 (38) 60
Deposits - (147) - (147)
Inventories (2,070) 776 (3,814) (838)
Advance for mobile equipment
inventory 1,796 - - -
Prepaid expenses and
other current assets (763) (113) (910) 275
Increase (decrease) in:
Accounts payable 570 88 420 (271)
Licensee deposits (81) 51 (59) 173
Accrued liabilities 809 858 560 396
Deferred income taxes - (90) - (90)
------- ------- ------- -------
Total Adjustments 504 1,280 (3,473) (666)
------- ------- ------- -------
Net cash used in operating
activities (2,025) 282 (8,954) (2,627)
</TABLE>
6
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<TABLE>
<S> <C> <C> <C> <C>
Cash Flows From Investing
Activities:
Capital expenditures (1,158) (2,741) (1,484) (1,636)
Proceeds, net of note receivable,
from sale of assets held
for sale - 483 - 3,856
Investment in joint venture - (11) - (136)
Change in working capital
of discontinued operations - (698) - (509)
------- ------- ------- -------
Net cash provided by (used in)
investing activities (1,158) (2,967) (1,484) 1,575
Cash Flows From Financing
Activities:
Issuance of common stock - 238 1,639 238
Loan proceeds 4,810 - 12,310 -
Letter of credit liability (818) - 99 -
Principal payments
on borrowings - - - (900)
Deferred financing costs - - (277) -
Related party borrowings (14) 2,022 (2,434) 901
------- ------- ------- -------
Net cash provided by
financing activities 3,978 2,260 11,337 239
------- ------- ------- -------
Net increase (decrease)
in cash and cash equivalents 795 (425) 899 (813)
Cash and cash equivalents
at beginning of period 782 1,169 678 1,557
Cash and equivalents
acquired in reverse merger - - - -
------- ------- ------- -------
Cash and cash equivalents
at end of period $ 1,577 $ 744 $ 1,577 $ 744
======= ======= ======= =======
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 132 $ 48 $ 132 $ 160
Cash paid for income taxes $ - $ 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)
(Midland USA, Inc. included from August 1, 1996 through September 30, 1996)
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Thousands)
For the period from inception (February 4, 1994) through September 30, 1996
<TABLE>
<CAPTION>
Inception
(February 4, 1994)
Through September 30, 1996
-------------------
<S> <C>
Cash Flows From
Operating Activities:
Net loss $ (9,258)
--------
Adjustments to reconcile
net loss to net cash
used in operating activities:
Amortization of financing costs 1,222
Management fees 425
Depreciation and amortization 230
Loss (gain) on sale of
assets held for sale (1,203)
Changes in assets and
liabilities:
Decrease (increase) in:
Accounts receivable (751)
Restricted cash (126)
Notes receivable 29
Inventories (5,062)
Prepaid expenses and
other current assets (870)
Increase (decrease) in:
Accounts payable 355
Licensee deposits 285
Accrued liabilities 1,293
Deferred income taxes (90)
--------
Total Adjustments (4,263)
--------
Net cash used in operating
activities (13,521)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Cash Flows From Investing
Activities:
Capital expenditures (5,019)
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 (1,826)
Cash Flows From Financing
Activities:
Issuance of common stock 2,984
Loan proceeds 14,810
Letter of credit liability 99
Principal payments
on borrowings (1,392)
Deferred financing costs (278)
Related party borrowings 20
--------
Net cash provided by
financing activities 16,243
--------
Net increase (decrease)
in cash and cash equivalents 896
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 $ 1,577
========
Supplemental disclosures of
cash flow information:
Cash paid for interest $ 359
Cash paid for income taxes $ 12
Non-cash transactions (see Note 3a)
</TABLE>
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
September 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.
(2) BUSINESS AND SIGNIFICANT ITEMS
On May 2, 1996, INTEK Diversified Corporation ("INTEK" or the "Company")
formed Midland USA, Inc.("MUSA"), a Delaware corporation and wholly-owned
subsidiary of INTEK. On September 20, 1996, INTEK, through MUSA, acquired
(the "Midland Transaction") from Midland International Corporation ("MIC"), a
wholly-owned subsidiary of Simmonds Capital Limited ("SCL"), its U.S. land
mobile radio ("LMR") distribution business (the "U.S. LMR Distribution
Business). The business consists of the import, distribution and value added
resale of two-way radio products for the U.S. professional LMR market. LMR
products are marketed for the commercial and professional LMR market in the
U.S. by MUSA through a national network of over 220 two-way radio dealers as
well as on a direct basis to larger accounts in the business and government
sectors.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
10
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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 February 29, 1996, the Company raised $2,500,000 through the issuance
of a Senior Secured Debenture to Mees Pierson ICS Limited, a UK limited
liability company ("Mees Pierson"). 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 Mees Pierson as a closing fee for its
investment banking services. The Debenture matured on August 31, 1996. In
exchange for an extension until the earlier of October 31, 1996 or the Sale
of the Property, INTEK paid to Mees Pierson accrued interest through August
1, 1996, issued 25,000 shares of Company Common Stock to Mees Pierson
pursuant to Regulation S under the Securities Act, and issued 5,000 shares of
Company Common Stock to Octagon Capital Canada Corporation for an agent's fee
pursuant to Regulation S under the Securities Act. In exchange for an
extension to extend the repayment date until January 31, 1997, INTEK will
issue Mees Pierson 10,000 shares of Company Common Stock (pursuant to
Regulation S under the Securities Act) and an additional 1,500 shares of
Company Common Stock (pursuant to Regulation S under the Securities Act) for
each business day after November 8, 1996 for which the Debenture and accrued
interest remains outstanding. See Item 2 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations For the Nine Month
Period Ended September 30, 1995 and For the Nine Month Period Ended September
30, 1996 -- Liquidity and Capital Resources.
In connection with the Company's sale of a series of 6.5% Notes in the
aggregate principal amount of $5,000,000 (the "Notes"), maturing April 25,
1999, as of November 5, 1996, holders of the Notes exercised warrants to
convert $4,800,000 of the Notes into Company Common Stock at an average
discount of 18% below market price.
On November 1, 1996, the Company sold a series of 6.5% Notes, with
attached warrants (the "New Notes") to two purchasers through Brown Simpson,
LLC pursuant to Regulation S under the Securities Act. Net proceeds to the
Company, after fees and brokers commissions, were $1,995,000. The New Notes
mature on October 31, 1999 and bear interest at the rate of 6.5% annum. All
accrued interest is due and payable at the time the New Notes mature upon the
exercise of the warrants. The warrants (pursuant to which the principal
amounts of the New Notes will be converted into shares of Company Common
Stock) become exercisable by the holder on December 31, 1996. The Company
has the right, which may be exercised in whole or in part on or after
October 31, 1997, to require the holder to
11
<PAGE>
exercise the warrants. The principal amount of the New Notes will be reduced
by an amount equal to the exercise price of the warrants multiplied by the
number of shares of Company Common Stock issued pursuant thereto. The
warrants are exercisable at discounts (ranging from 0%-29%) from the market
price of the Company Common Stock on the exercise date.
b. REVENUE RECOGNITION
For sales of mobile radio equipment, revenue is recognized when shipped.
For sales of repeater site equipment, revenue is recognized 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 per the terms of the
management agreements.
c. CONCENTRATIONS OF RISK
The Company purchases a significant portion of its repeater site
equipment and mobile radios from Securicor Radiocoms Limited ("Radiocoms"), a
wholly owned subsidiary of Securicor Communications Limited. MUSA purchases a
significant portion of its mobile radios and accessories from Hitachi Denshi
Limited. The Company believes that if either of these foreign suppliers were
no longer available, such event could have a severe impact on INTEK's
financial position or results of operations.
d. AMORTIZATION OF TRADEMARKS AND GOODWILL
On September 20, 1996, the Company acquired various rights, permits and
trademarks as part of the assets acquired from MIC. See Notes 2 and 9. These
intangible assets are amortized on a straight-line basis over their legal or
12
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estimated useful lives, whichever is shorter (generally not exceeding 15
years).
(4) INVENTORIES
Inventories at September 30, 1996 and December 31, 1995 consist of the
following (in thousands):
1996 1995
------ ------
Site equipment $1,842 $ 549
Mobile radios 3,220 699
------ ------
$5,062 $1,248
====== ======
(5) PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1996 and December 31, 1995
consists of the following (in thousands):
1996 1995
-------- --------
Site installations $8,326 $7,283
Production & test equipment 186 -
Furniture and fixtures 202 73
Computers 305 179
------ ------
Total property and equipment, at cost 9,019 7,535
Less accumulated depreciation (89) (37)
------ ------
Net property and equipment $8,930 $7,498
====== ======
(6) COMMITMENTS
As of September 30, 1996, Roamer One had negotiated 176 site leases to
permit installation, operation, and maintenance of transmission/reception
equipment facilities in connection with the 220MHz 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 September 30, 1996,
Roamer One has entered into 74 site leases relating to Category I Licensees;
30 site leases relating to Category II Licensees; and arranged for its
Category III licensees to enter into 72 site leases. As of September 30,
1996, Roamer One had
13
<PAGE>
paid $1,064,000, before reimbursements, in site lease fees pertaining to
1996. As of September 30, 1996, total future minimum lease payments for the
Category I and Category II site leases, which are contractual obligations of
Roamer One, together with building and auto leases, are as follows:
1996 326,735
1997 960,410
1998 815,534
1999 772,612
2000 367,252
Thereafter -
----------
$3,242,543
==========
(7) ASSETS HELD FOR SALE
The Company is pursuing the sale of the land and building owned by
Olympic Plastics Company, Inc. ("Olympic"), a wholly owned subsidiary of
INTEK (the "Property"). The Property has a net book value of $1,555,000. On
March 22, 1996 the Company executed the Property Purchase Agreement for the
sale of the Property at a sales price of $2,200,000 and escrow was opened. If
the Company is successful in selling the Property (which Property is
encumbered by a lien in favor of Mees Pierson in the amount of $2,500,000),
the Debenture to Mees Pierson will be repaid, in part, with the proceeds of
such sale. The Company will have to fund any shortfall with working capital
or borrow additional funds. The Property Purchase Agreement contemplated a
closing on the sale to occur on or before June 4, 1996. Because a number of
conditions had not been satisfied, such as the buyer's obtaining financing,
and delivery by the Company of a satisfactory environmental report to buyer's
lender, the closing has been delayed. No assurance can be given that the
conditions will be satisfied or that the Property will be sold or that
proceeds from the sale will be timely or sufficient to repay Mees Pierson on
or before January 31, 1997.
(8) SALE OF SECURITIES
On November 1, 1996, the Company sold the New Notes. Net proceeds to
the Company, after fees and brokers commissions, were $1,995,000. The New
Notes mature on October 31, 1999 and bear interest at the rate of 6.5% per
annum. All accrued interest is due and payable at the time the New Notes
mature or upon exercise of the warrants. The warrants (pursuant to which the
principal amounts of the New Notes will be converted into shares of Company
Common Stock) become exercisable by the holder on December 31, 1996. The
Company has the right, which
14
<PAGE>
may be exercised in whole or in part on or after October 31, 1997, to require
the holder to exercise the warrants. The principal amount of the New Notes
will be reduced by an amount equal to the exercise price of the warrants
multiplied by the number of shares of Company Common Stock issued pursuant
thereto. The warrants are exercisable at discounts (ranging from 0%-29%)
from the market price of Company Common Stock on the exercise date.
(9) PROPOSED COMBINATION
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. On September 20, 1996, the
Company, through MUSA, acquired the U.S. LMR Distribution Business and
Securicor Communications provided $4,274,775 of funding to MUSA under an
interim loan. 2,350,000 shares Company Common Stock (out of 2,500,000 shares
of the total stock consideration to be paid to MIC, subject to certain
adjustments, were placed into escrow pending the consummation of the
acquisition to acquire from Securicor Communications the common stock of
Radiocoms (the "Securicor Transaction") or if Securicor Communications and
INTEK, or their respective affiliates, enter into one or more transactions
within six months of the termination of the Securicor Transaction, which in
the aggregate, convey majority control of INTEK to Securicor Communications.
If the Proposed Combination is consummated, INTEK will become an
integrated wireless company providing air time services, product distribution
and manufacturing for the LMR market. The Proposed Combination is subject to
the satisfaction of a number of conditions including, without limitation,
stockholder approval and regulatory approval. The Notice of Annual Meeting
of Stockholders and the Proxy Statement for the December 3, 1996 meeting were
mailed to stockholders on November 8, 1996.
(10) SUBSEQUENT EVENTS
On November 1, 1996, INTEK entered into a Purchase and Sale Agreement
with Krystal Systems, Inc. ("Krystal"), whereby (a) Krystal ordered 16 base
station
15
<PAGE>
220 MHz repeater assemblies (at a cost to Krystal of approximately $1
million) from Roamer One which were manufactured by Radiocoms, (b) Krystal
agreed, at its sole expense, to engage Roamer One to build out 16 base
stations and (c) INTEK agreed to purchase Krystal systems, subject to certain
conditions (including, without limitation, completion of due diligence by
INTEK, receipt of all necessary consents and approvals of government bodies
and receipt by INTEK, on or before December 31, 1996, of $4,500,000 of
proceeds from the sale of Company Common Stock) for a purchase price of
$180,000 for each purchased Krystal system. Krystal has paid to INTEK
$500,000 of the $1,002,000 owed for the 220 MHz repeater assemblies.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995
The following discussion and analysis sets forth certain factors which
produced changes in the Company's results of operations during the nine
months ended September 30, 1996 and as compared with the same period in 1995
as indicated in the Company's consolidated financial statements.
As described in Footnotes 2 and 9, on September 20, 1996, the Company,
through MUSA, acquired the U.S. LMR Distribution Business. While the
transaction was consummated on September 20, 1996, all rights to sales
revenues and related costs, accounts receivable, and accounts payable were
effectively transferred as of August 1, 1996. Consequently, the following
Management Discussion and Analysis includes the results of the U.S. LMR
Distribution Business from August 1, 1996 through September 30, 1996. No
results of the U.S. LMR Distribution Business are included for the 1995
Results of Operations.
1996 RESULTS OF OPERATIONS
NET SALES. As of September 30, 1996, the Company completed
construction of 105 systems subject to Option Agreements, 48 systems subject
to Management Agreements and 27 systems pursuant to a supply agreement for a
total of 180 systems. This is an increase of 81 systems over the 99 systems
that were constructed as of September 30, 1995. During the nine months ended
September 30, 1996, billings to licensees for site equipment, construction
and installation resulted in consolidated equipment sales of $707,000, sales
of mobile radios of 1,690,000 and subscriber revenues of $5,000 and repair
income of $57,000 for a total of $2,459,000. Site equipment sales for the
nine months ended September 30, 1995 were $2,326,000 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 has been developed and
Roamer One is currently retrofitting its repeater sites so that they can
operate in a commercially viable fashion. No significant revenues have been
generated from the operation of these systems to date. Subscriber loading is
expected to commence during the fourth quarter of 1996.
Included in 1996 revenues are mobile radio sales by MUSA of
$1,513,000 for the two months ended September 30, 1996. These revenues
17
<PAGE>
represented an 11.8% improvement over the immediately preceding two-month
period, reflecting the improvement in inventory availability.
COST OF GOODS. Cost of goods sold for site equipment, construction
and installation as a percentage of net equipment sales was 98.9% for the
first nine months of 1996. While the Company has elected to standardize on
Securicor repeater equipment, it had incompatible equipment from other
vendors in inventory. During the nine months of 1996, this equipment was sold
to third parties at a loss of $110,000. Excluding the loss from this
disposal, the cost of sales was 83.4%, which was an improvement over 89.0%
for the first nine months of 1995.
For the period from August 1, 1996 to September 30, 1996, MUSA's
cost of sales accounted for 73.2% of sales. This represented a combination of
sales of inventory acquired from MIC that was priced at replacement cost
value, and new product purchases from primary overseas vendors. Since much of
the product is purchased in Japan, the steady trend of strengthening in the
U.S. Dollar against the Japanese Yen has improved gross margins and lowered
product costs.
SITE EXPENSES. Site expenses are primarily tower lease, telephone
(for modem access), and insurance. For the first nine months of 1996, site
expenses were $744,000, up from $398,000 in 1995. The increased expenses were
required to support the additional 60 systems that were constructed after
September 30, 1995.
SELLING EXPENSES. Selling expenses are primarily salaries, travel
and preparation of promotional material. The selling expenses for the nine
months of 1996 were $613,000, an increase of $499,000 over the same period
last year due to the creation of a Roamer One sales organization, a large
advertising mailing and the inclusion of two months of selling expenses
($268,000) for MUSA.
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 nine months of 1996
were $133,000. No expenses were incurred in this category in 1995 as all
engineering functions were performed by SCL.
GENERAL ADMINISTRATIVE EXPENSES. General administrative expenses
have historically been salaries, consulting and management fees, legal and
audit costs to support the management of the systems, together with the
efforts to raise capital. With the addition of MUSA, general administrative
expenses for 1996 include two months of warehouse and distribution
operations, amortization of $10.4 million value of trademark and goodwill,
product warranty expenses, and service contracts. General and administrative
expenses were
18
<PAGE>
$2,416,000 during the first nine months of 1996, an increase of $391,000
compared to the first nine months of 1995. $645,000 is attributable to two
months of operations for MUSA. The balance of general administrative expenses
excluding those relating to MUSA decreased $254,000 for the first nine months
of 1996 compared to the first nine months of 1995.
ACQUISITION EXPENSES. Acquisition expenses are legal and accounting
costs related to the proposed Securicor Transaction, the Midland Transaction
and the previously announced but terminated transaction with SCL. The
acquisition expenses for the nine month period ended September 30, 1996 were
$992,000, an increase of $854,000 over the same period last year.
OPERATING PROFIT (LOSS). For the nine months ended September 30,
1996, the operating loss was $4,430,000, up from $2,430,000 for the same
period in 1995. This was due to the cost of the infrastructure to manage the
licenses and sell services to subscribers, the addition of MUSA and the costs
of preparing for the acquisition of the U.S. LMR Distribution Business and
the Securicor Transaction.
GAIN ON SALE OF ASSETS HELD FOR SALE. During the nine months ended
September 30, 1996, the Company incurred a cost of $201,000 to clean up the
Property and maintain it in preparation for its sale. During the nine months
ended September 30, 1995, the Company realized a gain of $1,195,000 from the
sale of the productive equipment and remaining inventory of Olympic.
INTEREST EXPENSE. Interest expense, included in other income
(expense), was $350,000 for the first nine months of 1996, up from $114,000
during the first nine months of 1995. 1996 interest expense was accrued on
the Debenture and the Notes. 1995 interest expense related primarily to the
short-term promissory note from Quest Capital.
NET LOSS. The net loss was $5,366,000 for the first nine months of
1996, compared to a loss of $1,961,000 for the same period in 1995. Excluding
the gain on sale of assets of $1,152,000 the loss for 1995 would have been
$3,156,000.
1995 RESULTS OF OPERATIONS
NET SALES. As of September 30, 1995, the Company completed
construction of 99 systems pursuant to its Management Agreements. During the
nine months ended September 30, 1995, billing to licensees for site
equipment, construction and installation resulted in equipment sales of
$2,325,852,000.
COST OF GOODS. Cost of goods sold as a percentage of net equipment
sales was 89.5% in 1995.
SITE EXPENSES. Site expenses are primarily tower lease, telephone
(for modem access), and insurance. For the first nine months of 1995, site
expenses were $398,000.
19
<PAGE>
SELLING EXPENSES. Selling expenses of $114,000 for the first nine
months of 1995 were for salaries, advertising and promotion.
GENERAL ADMINISTRATIVE EXPENSES. General administrative expenses
are primarily salaries, consulting and management fees, legal and audit and
merger expenses. General administrative expenses for the first nine months of
1995 were $2,163,000.
INTEREST EXPENSE. Interest expense, included in other income
(expense), was $584,000 in 1995.
ACQUISITION EXPENSES. Acquisition expenses are legal and accounting
costs related to the previously announced but terminated transaction with
SCL. The acquisition expenses for the first nine months of 1995 were
$138,000.
OPERATING PROFIT (LOSS). THE OPERATING loss in 1995 was $1,961,000.
Excluding the gain on sale of assets of $1,152,000 the loss for 1995 would
have been $3,156,000
LIQUIDITY AND CAPITAL RESOURCES
Since September, 1994, the Company's primary source of cash
historically 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 nine months of 1996,
the Company used $9,105,000 in cash for operating activities to pay
employees, vendors, site expenses, acquisition expenses and $1,485,000 for
capital expenditures. The Company also invested $10,400,000 in patents and
goodwill associated with the Company's acquisition of the U.S. LMR
Distribution Business. Through its financing activities, the Company raised
approximately $11,337,000 in gross proceeds from which $2,434,000 was used to
repay related party borrowings. Cash for the nine months increased $899,000
over the year-end balance.
In connection with the acquisition of the U.S. LMR Distribution
Business, Securicor Communications agreed to extend to MUSA a line of credit
for an amount up to $15 million. Upon with the consummation of the Midland
Transaction, INTEK was paid $1,350,000 for certain of the product purchases
through a drawdown on the Interim Loan and received the remainder of such
advances for the product purchases on October 28, 1996 from available cash
from MUSA. As security for the Interim Loan, MUSA has pledged all of its
assets, and INTEK has pledged all its shares in MUSA, to Securicor
Communications. In accordance with the terms of the Loan Agreement, MUSA may
utilize the proceeds under the Interim Loan solely for the operation of the
U.S. LMR Distribution Business. Interest on the advances under the Interim
Loan accrues at the rate of eleven percent (11%) per annum. Under the terms
of the Interim Loan and the Company Loan Assumption Agreement dated September
19, 1996
20
<PAGE>
between INTEK, MUSA and Securicor Communications, INTEK has agreed to assume,
upon the consummation of the Securicor Transaction, the obligations
outstanding under the Interim Loan and such obligations shall become
unsecured obligations outstanding under the Delayed Drawdown Senior
Subordinated Loan. As of November 13, 1996, the amount outstanding under the
Interim Loan was $5,149,375. In addition, letter of credit guaranties for
three months of purchases have been provided in the amount of $4,892,554.
While the guarantees are not loans and do not accrue interest, such
guaranties do reduce the amount available under the Interim Loan.
In the event the Securicor Transaction is not consummated, MIC has an
option to acquire the U.S. LMR Distribution Business by acquiring stock of
MUSA in exchange for payment of all obligations outstanding under the Interim
Loan and 150,000 shares of Company Common Stock. The option may be exercised
for a limited period of time. In the event such option is not exercised,
MUSA may retain ownership of the U.S. LMR Distribution Business by the
repayment of all obligations outstanding under the Interim Loan by the
repayment date. In the event such repayment does not occur, Securicor
Communications may foreclose on all of the assets of MUSA and the stock of
MUSA held by INTEK. No assurance can be made that MUSA will have the funds
necessary to make such repayment.
On November 1, 1996, INTEK entered into the Krystal Agreement with
Krystal, whereby (a) Krystal ordered 16 base station 220 MHz repeater
assemblies (at a cost to Krystal of approximately $1 million) from Roamer One
which were manufactured by Radiocoms, (b) Krystal agreed, at its sole
expense, to engage Roamer One to build out 16 base stations and (c) INTEK
agreed to purchase 25 constructed Krystal systems, subject to certain
conditions (including, without limitation, completion of due diligence by
INTEK, receipt of all necessary consents and approvals of government bodies
and receipt by INTEK, on or before December 31, 1996, of $4,500,000 of
proceeds from the sale of Company Common Stock) for a purchase price of
$180,000 for each constructed Krystal system. Krystal has paid to INTEK
$500,000 of the $1,002,000 owed for the 220 MHz repeater assemblies.
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. Additional capital will be required to complete the building out
of the 220 MHz SMR Systems, to fund the administrative costs of the Company
prior to its generation of recurrent revenues on a consistent basis and to
purchase 25 constructed Krystal systems. The requirement for future working
capital will be driven and 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. The Company may raise, in the near
term, additional capital either through public offerings or a public offering
of its securities. Although the Company has been contacted recently with
respect to the potential purchase of Company Common Stock by new investors,
no assurance can be made that the Company will be successful in raising such
additional amounts of capital. In the Securicor Transaction is not
consummated, INTEK may experience difficulty in raising additional amounts of
capital.
BORROWINGS. On February 29, 1996, the Company raised $2,500,000 through
the issuance of a Debenture to Mees Pierson. The Debenture bears interest at
a rate based on the Bank of America Prime Rate. The Debenture is secured by
perfected liens on the Property and the equipment related to 15 Category I
licenses and by unperfected liens on all assets of the Company (excluding the
stock of MUSA and any assets of MUSA, including, without limitation, the U.S.
LMR Distribution Business). Mees Pierson has agreed to extend the repayment
date to January 31, 1997. In exchange for the extension, INTEK will issue
10,000 shares of Company Common Stock to Mees Pierson pursuant to Regulation
S under the Securities Act. In addition, INTEK will issue to Mees Pierson
1,500 shares of Company Common Stock (pursuant to Regulation S under the
Securities Act) for each business day after November 8, 1996 for which the
21
<PAGE>
Debenture and any accrued interest remains outstanding.
On April 26, 1996, the Company sold the Notes to purchasers through
Global Emerging Markets/Northeast Securities, Inc. pursuant to Regulation S
under the Securities Act. 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) became exercisable by the
holder 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 holder to exercise
the warrants. The warrants are exercisable at discounts (ranging from 0%-25%)
from the market price of Company Common Stock on the exercise date. As of
November 5, 1996, holders of the Notes exercised warrants to convert
$4,800,000 of the Notes into Company Common Stock at an average discount of
18% below market price.
On November 1, 1996, the Company sold a series of 6.5% Notes, with
attached warrants (the "New Notes") to two purchasers through Brown Simpson,
LLC pursuant to Regulation S under the Securities Act. Net proceeds to the
Company, after fees and brokers commissions, were $1,995,000. The New Notes
mature on October 31, 1999 and bear interest at the rate of 6.5% per annum.
All accrued interest is due and payable at the time the New Notes mature or
upon exercise of the warrants. The warrants (pursuant to which the principal
amounts of the New Notes will be converted into shares of Company Common
Stock) become exercisable by the holder on December 31, 1996. The Company has
the right, which may be exercised in whole or in part on or after October 31,
1997, to require the holder to exercise the warrants. The warrants are
exercisable at discounts (ranging from 0%-29%) from the market price of
Company Common Stock on the exercise date.
SALES OF ASSETS. The Company is pursuing the sale of the Property. The
Property has a net book value of $1,555,000. On March 22, 1996 the Company
executed the Property Purchase Agreement for the sale of the Property at a
sales price of $2,200,000 and escrow was opened. If the Company is successful
in selling the Property (which Property is encumbered by a lien in favor of
Mees Pierson in the amount of $2,500,000), the Debenture to Mees Pierson will
be repaid, in part, with the proceeds of such sale. The Company will have to
fund any shortfall with working capital or borrow additional funds. The
Property Purchase Agreement contemplated a closing on the sale to occur on or
before June 4, 1996. Because a number of conditions had not been satisfied,
such as the buyer's obtaining financing, and delivery by the Company of a
satisfactory environmental report to buyer's lender, the closing has
22
<PAGE>
been delayed. No assurance can be given that the conditions will be satisfied
or that the Property will be sold or that proceeds from the sale will be
timely or sufficient to repay Mees Pierson on or before January 31, 1997.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
Item 2. Changes In Securities.
On September 20, 1996, INTEK acquired the U.S. LMR Distribution
Business. The purchase price for the U.S. LMR Distribution Business included
up to 2.5 million shares of Company Common Stock, cash consideration in the
amount of $3,417,246 and the assumption of certain liabilities. At the
closing of the Midland Transaction, MIC was entitled to receive, and promptly
thereafter did receive, 150,000 shares of Company Common Stock. Shortly
after the closing of the Midland Transaction, 2.35 million shares of Company
Common Stock (the "Escrow Shares") were issued to the escrow agent pursuant
to the Escrow Agreement among INTEK, MIC and the escrow agent. In the event
the Securicor Transaction is consummated, or if Securicor Communications and
INTEK, or their respective affiliates, enter into one or more transactions
within six months of the termination of the Securicor Transaction, which, in
the aggregate, convey majority control of INTEK to Securicor Communications,
upon the closing of such transaction, MIC will be entitled to receive the
Escrow Shares, subject to pricing adjustments of a maximum of (a) a reduction
of up to 155,000 shares of Company Common Stock in the event that the U.S.
LMR Distribution Business experiences losses between the period of August 1,
1996 and the date the Securicor Transaction is consummated, and (b) up to
500,000 shares which will remain in escrow after title and voting rights have
been conveyed to MIC to indemnify the Company in the event that the Hitachi
Supply Agreement is terminated prior to, or the benefits thereof are not
otherwise provided to the Company through, May 12, 1997.
The Company issued the shares of Company Common Stock in reliance upon
Section 4(2) of the Securities Act. No underwriter was utilized. MIC is an
indirect subsidiary of SCL, a significant stockholder of INTEK. Certain
officers and directors of SCL and MIC are officers and directors of INTEK.
SCL is a public Ontario corporation. Thus, MIC had access to the same kind
of information as that which would be included in a Registration Statement
and is a sophisticated investor.
Item 3. Defaults Upon Securities. None
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information. None
Item 6. Exhibits and Reports on FORM 8-K.
a. Exhibits
b. Reports on Form 8-K
The Registrant filed a report on Form 8-K on September 20, 1996,
announcing the consummation of the acquisition of the U.S. LMR Distribution
Business of MIC, which consists of the sale and distribution of LMR products,
including two-way radios, parts and accessories bearing the Midland Trademark
and related contracts and goodwill of the business. The report was filed
pursuant to Item 2 of Form 8-K.
23
<PAGE>
INTEK DIVERSIFIED CORPORATION AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
September 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: November 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)
24
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