SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1995
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 0-17581
GEOTEK COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 22-2358635
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
20 Craig Road, Montvale, New Jersey 07645
(Address of Principal Executive Office) (Zip Code)
(201) 930-9305
(Registrant's Telephone Number Including Area Code)
Indicate by check 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 12 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
---
COMMON STOCK OUTSTANDING AT APRIL 25, 1995 51,456,479 SHARES
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Note 1)
March 31, 1995 December 31,
(Unaudited) 1994
-------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 16,929 $ 27,531
Temporary investments 30,199 24,515
Accounts receivable, trade 12,356 11,371
Inventories 8,420 8,667
Prepaid expenses and other 7,776 7,468
-------- --------
Total current assets 75,680 79,552
Investments in affiliates 25,298 26,582
Property, plant and equipment, net 26,805 24,446
Intangible assets, net 46,460 46,099
Other assets 3,251 3,165
-------- --------
$177,494 $179,844
======== ========
See notes to consolidated financial statements.
2
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Note 1)
March 31, 1995 December 31,
(Unaudited) 1994
-------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 9,309 $ 12,490
Accrued expenses and other 12,620 12,315
Notes payable, banks and other 5,400 5,641
Current maturities, long-term debt 1,748 2,056
--------- ---------
Total current liabilities 29,077 32,502
--------- ---------
Long-term debt 39,090 29,396
Other noncurrent liabilities 206 198
Minority interest 448 392
Redeemable preferred stock 40,000 40,000
Commitments and Contingencies
Shareholders' equity:
Preferred stocks $.01 par value
Common stock, $.01 par value:
authorized 86,000,000; issued 51,423,000 and
50,869,000 respectively; outstanding
51,185,000 and 50,631,000, respectively 514 509
Capital in excess of par value 190,946 186,651
Foreign currency translation adjustment 1,506 767
Accumulated deficit (122,907) (109,185)
Treasury stock, at cost (1,386) (1,386)
--------- ---------
68,673 77,356
--------- ---------
$ 177,494 $ 179,844
========= =========
See notes to consolidated financial statements.
3
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
(Note 1)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenues:
Net product sales $ 12,277 $ 10,046
Service income 6,921 5,561
------------ ------------
Total revenues 19,198 15,607
------------ ------------
Costs and expenses:
Cost of goods sold 6,941 6,478
Cost of services 4,042 3,980
Research and development 8,585 4,510
Marketing 4,948 3,933
General and administrative 5,520 3,737
Amortization of intangibles 911 444
Equity in losses of investees 1,195 108
Interest expense (income), net and other 449 (488)
------------ ------------
Total Costs and expenses 32,591 22,702
------------ ------------
Loss from operations before taxes on income
and minority interest (13,393) (7,095)
Taxes on income (274)
Minority interest (55) (70)
------------ ------------
Net loss (13,722) (7,165)
------------ ------------
Preferred dividends (666) (494)
------------ ------------
Loss applicable to common stock $ (14,388) $ (7,659)
============ ============
Weighted average number of common shares outstanding 51,365,000 48,452,000
============ ============
Per common share:
Loss applicable to common shares $ (0.28) $ (0.16)
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the three months ended March 31, 1995
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Common Stock Capital in Currency
--------- --------- Excess of Translation Accumulated Treasury
Shares Amount Par Value Adjustment Deficit Stock
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 50,869 $ 509 $ 186,651 $ 767 $(109,185) $ (1,386)
Issuance of common stock and preferred stock:
Exercise of warrants and options 230 2 542
Issuance of shares in connection with
research and development project 250 2 2,029
Issuance of shares to Vanguard pursuant
to management consulting agreement 74 1 590
Issuance of warrants in connection with
notes payable 1,800
Preferred dividend (666)
Changes in currency 739
Net Loss (13,722)
--------- --------- --------- --------- --------- ---------
Balances, March 31, 1995 51,423 $ 514 $ 190,946 $ 1,506 $(122,907) $ (1,386)
========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GEOTEK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
(Note 1)
Three Months Ended
March 31,
---------------------
1995 1994
-------- --------
Cash flows from operating activities:
Net income (loss) $(13,722) $ (7,165)
Adjustments to reconcile net
income (loss) to net cash
used in operating activities:
Minority interest 56 70
Depreciation and amortization 1,915 1,440
Equity in net loss of investees 1,284 140
Non cash management consulting
expense 590 342
Issuance of shares in connection with
research and development project 2,029
Changes in operating assets and liabilities
(net of effects from acquisitions):
Accounts receivable (985) (620)
Inventories 247 (1,111)
Prepaid expenses and other assets (308) (2,707)
Accounts payable and accrued expenses (3,184) 2,220
Other (86) (8)
-------- --------
Net cash used in operating activities (12,164) (7,399)
-------- --------
Cash flows from investing activities:
Acquisition of licenses (900) (3,231)
Net (increase) decrease in temporary investments (5,684) 2,953
Acquisitions of property and equipment (3,000) (1,627)
Cash invested in acquisition
of subsidiaries, net -- (938)
Loans receivable and other (4,018)
-------- --------
Net cash provided by (used in)
investing activities $ (9,584) $ (6,861)
-------- --------
See notes to consolidated financial statements.
6
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in thousands)
(Unaudited)
(Note 1)
Three Months Ended
March 31,
-----------------------
1995 1994
--------- ---------
Cash flows from financing activities:
Net repayments under
line-of-credit agreements $ (242) $ (2,362)
Proceeds from issuance of senior secured
note and related warrants 36,000
Repayments of debt (25,000) (340)
Net proceeds from issuance of stock 29,250
Exercise of warrants and options 547 1,633
Payment of preferred dividends (666) (494)
Other 502 (524)
--------- ---------
Net cash provided by financing activities 11,141 27,163
--------- ---------
Effect of exchange rate changes on cash 5 23
--------- ---------
Increase (decrease) in cash and
equivalents (10,602) 12,926
Cash and equivalents, beginning of period 27,531 51,686
--------- ---------
Cash and equivalents, end of period $ 16,929 $ 64,612
========= =========
Supplemental cash flow information:
Interest paid $ 1,305 $ 48
Supplemental schedule of noncash
investing and financing activities:
Summary of acquired subsidiaries:
Fair value of assets acquired $ 937
Issuance of common stock to acquire
Bogen Inc. remaining minority interest $ 3,282
Conversion of Series A Preferred shares
to common shares $ 3
Management consulting fee paid in common stock $ 590
Issuance of shares in connection with research
and development project $ 2,029
See notes to consolidated financial statements.
7
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation:
The consolidated balance sheet of Geotek Communications, Inc. as of the end
of the 1994 fiscal year has been derived from the audited consolidated balance
sheet contained in the Company's Form 10-K and is presented for comparative
purposes. All other financial statements are unaudited. In the opinion of
management, all significant adjustments and normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made. The results of operations
for interim periods are not necessarily indicative of the operating results for
the full year. Certain 1994 amounts have been classified to conform with 1995
presentation.
Footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission. These condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Form 10-K for the most recent fiscal year.
Note 2. Long Term Debt:
In March 1995 the Company refinanced $25.0 million of Senior Secured Notes,
that were originally due in September 1995, with $36.0 million of newly issued
Senior Secured Notes (the "Replacement Notes"). At closing, the Company received
net proceeds of $11.0 million and issued warrants to the purchaser to acquire
700,000 of the Company's common shares at $8.125 per share. The warrants have
been valued at $1.8 million, which amount has been recorded as a discount on the
Replacement Notes. The Replacement Notes are payable in three equal installments
fifteen, twenty four and thirty six months after the closing. Interest at 14.75%
is payable quarterly through the term of the Notes. The Notes may be converted
into shares of the Company's common stock beginning six months after the closing
and ending 18 months after closing, subject to daily limits and certain other
restrictions, at 87.5% of the average trading price of the Company's common
stock on the respective conversion dates. Substantially all of the Company's
assets not previously pledged have been pledged to collateralize this debt.
Under terms of the Replacement Notes, the Company must maintain certain
financial ratios, needs permission of the holder of the Notes to enter certain
transactions and may be required to make prepayments under certain
circumstances. Certain penalties apply in the event the Replacement Notes are
prepaid.
8
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Commitments and Contingent Liabilities:
Government Participation in Research and Development Project The Chief
Scientist of the Israeli Ministry of Industry and Commerce (Chief Scientist) has
agreed to fund certain eligible expenditures related to the development of the
digital wireless communication system by PST. Funding received from the Chief
Scientist is repayable without interest only from revenues generated by PST from
the product being developed. Through March 31, 1995 cumulative participation
amounted to $6.8 million.
Manufacturing Commitments
The Company has contracted with Mitsubishi Consumer Electronics of America
to manufacture Commercial Subscriber Units on behalf of the Company. An initial
order has been placed for approximately $2.5 million.
In March 1995, the Company and Hughes Network Systems ("HNS"), a unit of GM
Hughes Electronics, announced that they are forming a strategic partnership to
develop a series of subscriber terminals and equipment based on the Company's
proprietary technology. Geotek has placed an initial order of $1.6 million for
units to be delivered beginning in the third quarter of 1995. Under the terms of
the agreement, HNS and the Company will share equally the cost of developing a
portable subscriber unit.
Guarantees of Debt of Equity Investees
The Company has guaranteed the repayment of certain debt of PBG, due in
1999, to the former owner of PBG, in the amount of DM 3.5 million plus interest
(approximately $2.6 million). A letter of credit has been issued as collateral
for this obligation.
The Company has guaranteed an obligation of approximately $3.8 million of
DBF pursuant to an equipment leasing arrangement. The other shareholder of DBF
guarantees an equal amount under this arrangement.
FCC Waiver
The Company has applied for and received a waiver by the FCC to construct
and activate certain systems it has acquired. In the event the Company fails to
construct or activate such systems in accordance with the dates set forth in the
waiver, the Company could lose the waiver and lose all of the frequencies
covered by such waiver to the extent the systems have not been constructed or
activated.
9
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capital Requirements
The Company is planning to raise capital before the end of 1995 to finance
its current operating plan. The Company's long term capital needs include the
planned rollout of the U.S. Network in 36 cities, the repayment of convertible
debt and redeemable preferred stock (if such are not converted into equity), to
finance it's international networks and to make acquisitions of businesses in
the field of telecommunications and of spectrum in the United States and
internationally. The Company is currently pursuing various alternatives for
raising capital including issuance of equity and debt securities as well as a
combination thereof and other sources.
Litigation
In June 1994 the Company filed a lawsuit against Harris Adacom Corporation
B.V. ("Harris"), a Dutch corporation, to enforce its rights under a loan
agreement between the parties. The Company is seeking repayment of a $3.5
million loan made to Harris in January 1994 in connection with a potential
purchase transaction between the Company and Adacom Technologies Ltd. ("ATL"),
an affiliate of Harris and an Israeli publicly traded company. The loan was
collateralized by stock owned by Harris in ATL. At the time of the loan, the
collateral had a market value in excess of $10 million and the total market
value of ATL was in excess of $100 million. The purchase transaction was not
consummated. In May 1994 the market value of ATL dropped dramatically and ATL
became insolvent, thereby reducing the value of the collateral to practically
zero. At or about the same time, creditors placed Harris into bankruptcy
proceedings in the Netherlands. The Company subsequently received limited
information relating to the recoverability of the loan, and Management does not
expect to recover the loan. The Company is aggressively pursuing its rights
under the loan in Dutch bankruptcy court and is awaiting additional information
on the assets and creditors of Harris. Based upon the information available, it
could not be determined the amount, if any, that will ultimately be recovered;
therefore, in 1994, the Company established a reserve against the full amount of
the loan.
In response to the Company's lawsuit, Harris and its subsidiaries filed a
lawsuit against the Company in the courts of the State of Israel, requesting a
declaratory judgment that the Company entered into a binding agreement for the
purchase by the Company of a significant interest in certain wireless
communication business assets owned by ATL and subsequently breached such
agreement. The plaintiffs in such action have stated an intention to file a
separate claim for monetary
10
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
damages and have estimated their losses to be several million dollars. The
Company believes none of plaintiffs' claims in such action have any merit and
are only an attempt to delay efforts to collect Harris's debt to the Company.
The Company intends to defend such action vigorously.
The Company is subject to various legal proceedings arising in the ordinary
course of business. In the opinion of management, all such matters are without
merit or are of such kind, or involve such amounts, as would not have a
significant adverse effect on the financial position results of operations or
cash flows of the Company, if disposed of unfavorably.
Note 4. Interest Expense, Net
Interest expense for the three months ended March 31, 1995 and 1994,
amounted to $1,504,000 and $130,000, respectively. Interest income for the three
months ended March 31, 1995 and 1994, amounted to $588,000 and $473,000
respectively. Interest paid to and received from related parties is not
significant.
Note 5. Certain Related Party Transactions
In connection with the issuance of common shares and options to Vanguard in
February 1994, the Company entered into a five-year management consulting
agreement with Vanguard, pursuant to which Vanguard will provide operational and
marketing support to the Company for an aggregate of 1.5 million shares of
common stock. Such management consulting agreement will terminate upon
Vanguard's failure to exercise any of the Vanguard Options. For the periods
ended March 31, 1995 and 1994, Vanguard earned approximately 74,000 and 30,000
shares, respectively, pursuant to this agreement. These shares have been
recorded at approximately $590,000 and $342,000, respectively, which amounts are
included in marketing expenses.
The Company incurred expenses of $75,000 in each of the periods ended March
31, 1995 and 1994, pursuant to its consulting agreement with the Soros Group,
who are the holders of the Company's Series H redeemable Preferred Shares and
Series I Preferred Shares.
11
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PST has entered into a subcontractor agreement with Rafael under which
Rafael will be paid approximately $14 million in connection with the development
of the digital wireless communications system to be deployed by the Company in
the US. Research and development expense for the periods ended March 31, 1995
and 1994, includes approximately $1.8 million and $2.7 million, respectively,
for research performed by Rafael under this agreement. PST has also entered into
agreements with Rafael under which Rafael will manufacture the infrastructure
equipment to be used by the Company in its US network. Through March 31, 1995
the Company had placed firm orders for equipment and engineering totaling $12.8
million and had made advance payments (recorded in other current assets) of $2.3
million to Rafael under these orders.
The Company issued 250,000 shares of common stock to Rafael Development
Corporation, the beneficial owner of 38% of PST, in connection with the
development of the digital wireless communications system. The shares have been
valued at $2.0 million, which amount has been recorded in 1995 as research and
development costs.
Note 6. Subsequent Events
In April 1995, the Company signed an agreement to transfer its interest in
Speech Design GmbH and Bogen Communications, Inc. to European Gateway
Acquisition Corporation ("EGAC") in exchange for $7 million in cash, $3 million
in convertible notes, approximately 65% of EGAC's common shares and warrants to
purchase 200,000 shares of EGAC common stock. Geotek will also be eligible to
receive additional consideration based on the future earnings of both companies
through July 1997. The transaction is subject to, among other things, regulatory
approvals and EGAC shareholder approval.
In March 1995 the controlling shareholder of the DBF Bundelfunk network
informed the Company that it intends to exercise its option to sell its interest
in DBF to the Company for DM 9.0 million (approximately $6.4 million).
Consummation of the transfer is subject to regulatory approval. The Company also
intends to seek regulatory approval for the transfer of the 51% of the PBG
network it does not already own. Upon receipt of such approval, the Company will
obtain control of these networks and will begin to consolidate their financial
statements, which are currently accounted for using the equity method.
12
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In April 1995 the Company completed the previously announced sale of $10.0
million of cumulative convertible preferred shares to the Company's partner in a
joint venture which is attempting to secure a license to provide wireless
services in Korea. The shares pay a dividend of 7% per annum for 5 years, carry
a conversion premium and can be redeemed by the Company in certain
circumstances.
In April 1995 the Company reached agreement to issue a total of $10.0
million of convertible preferred stock to Vanguard and a subsidiary of Toronto
Dominion Bank. The shares will pay a dividend of 7.5%, payable quarterly for up
to five years, carry a conversion premium and can be redeemed by the company in
certain circumstances. In connection with this transaction, the stock options
previously granted to Vanguard will be extended such that Vanguard, subject to
the transfer of options described below, will have the right to purchase 2
million Geotek common shares at $15 per share ("Series A Option"), and 2 million
additional shares at $16 per share ("Series B Option") until September 1, 1996.
The remaining option ("Series C Option") will be adjusted such that Vanguard
will have the right to purchase 3 million additional shares at $17 per share
until 12 months from the exercise of the Series B Option. Vanguard will
surrender its right to purchase an additional 3 million shares at $18 per share,
as granted in the original transaction. Additionally, as a part of this
investment, Vanguard will assign 50% of its Series A Options and 14% of its
Series B and Series C Options to Toronto Dominion. Closing of the transaction is
subject to execution of a definitive agreement.
13
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General
Over the past three years, the Company has aggressively restructured its
business operations to reflect its strategic focus on wireless communications.
To accomplish this, the Company has divested certain businesses and has
consummated various transactions to develop its wireless communications
business. Although Management believes its current strategy will have a positive
effect on the Company's results of operations in the long term, this strategy is
expected to have a substantial negative effect on the Company's results of
operations in the short term. The Company expects to incur substantial losses
for the foreseeable future, attributable in part to a high investment in
research and development related to its wireless communications activities as
well as operating, sales, marketing and general and administrative expenses
relating to the roll out of the Company's digital wireless network in the US.
The Company currently groups its operations primarily into two types of
activities: wireless communications and communications products. The Company's
wireless communications subsidiaries are engaged primarily in providing trunked
mobile radio services utilizing analog equipment, developing and selling
wireless data solutions, and developing a digital wireless communications system
to provide integrated wireless communications services. Later in 1995, the
Company plans to commence the rollout of its U.S. digital wireless network ("The
US Network") to provide itegrated voice and data solutions to businesses. The
Company's communications products subsidiaries are primarily engaged in the
development, manufacturing, and marketing of telephone and facsimile peripherals
and sound and communications equipment.
Summary of Operations
Consolidated revenues increased by 23% in the first quarter of 1995,
principally due to subscriber growth or the National Band Three Network and
higher revenues from the communications products segment.
Consolidated operating expenses increased by 32.8% in 1995, due to
increased research and development activities associated with the Company's
digital wireless communication system, costs related to the rollout of the US
Network and volume growth of the communications product segment.
Consolidated losses from continuing operations increased by $6.6 million to
$13.7 million.
14
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Continued
Wireless Communications Activities
Revenues from wireless communications activities increased by $1.4 million,
or 24.5%, to $7.2 million in 1995, primarily due to an 18% increase in the
number of subscribers (which totaled 49,600 at March 31, 1995) using the
Company's National Band Three ("NBTL") Network combined with a 7% appreciation
in the British pound versus the U.S. dollar. Average revenue per subscriber (in
British pounds) was unchanged from 1994 to 1995. The increase in the subscriber
count resulted from the continuation of the focused marketing effort that was
begun in 1994.
Operating expenses increased by $6.1 million or 48.3% in 1995. Expenses at
NBTL increased by $0.9 million in 1995, including $0.2 million related to
network operating costs to service the larger subscriber base and approximately
$0.7 million of additional marketing and general costs. Research and development
expenses (net of grants) related to the digital wireless system and subscriber
unit increased by $3.6 million or 84.3%. The Company expects significant
research and development expenses to continue in the future as enhancements are
made to the system. The Company expects to begin providing wireless service over
its proprietary network in the US in 1995 and accordingly has begun to put in
place its marketing, engineering, operations and administrative staff and
systems. Costs related to these activities totaled $4.1 million in 1995, an
increase of $1.9 million or 86.4% over 1994.
The Company's equity in the losses of less than 50% owned entities
increased to $1.2 million in 1995 from $0.1 million in 1994 due to the inclusion
of losses of $0.9 million from the investments in wireless networks in Germany.
The Company expects to acquire the remaining interests in these networks in
1995. These networks have only recently begun operations and subscriber revenues
do not cover operating expenses. It is expected that these networks will
continue to generate losses in the near future.
The wireless activities generated a loss before net interest expense and
amortization of $12.9 million in 1995 compared to a loss of $7.1 million in 1994
due to the factors discussed above. Included in the 1995 loss were $7.9 million
of research and development costs related to the digital wireless communications
system and $4.1 million of rollout costs related to the US network (including
approximately $0.6 million relating to shares of common stock issued to Vanguard
in consideration for management consulting services).
Communications Products Activities
Revenues from communications products activities in 1995 increased by $1.1
million, or 11% to $10.8 million. Sales at the Company's subsidiary Bogen
Communications ("Bogen") decreased by $0.4 million, due to lower sales from its
Office Automation line of products offset by higher sales of its traditional
line of products. Speech Design's 1995 sales (in U.S. dollars) increased by $1.5
million, or 100%. Approximately 50% of the U.S. dollar increase is attributable
to the appreciation of the German Mark against the dollar.
15
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Continued
Cost of goods sold in 1995, amounted to $6.2 million or 56.9% of sales
compared to $5.8 million or 60.0% of sales in 1994. This increase in gross
profit as a percentage of sales in 1995 reflects the change in Bogen's product
mix and consistently higher margins on Speech Design's products.
Marketing expenses in 1995 amounted to $2.3 million or 21.5% of sales,
compared to $2.3 million or 23.2% of sales in 1994. General and administrative
expenses in 1995 were $1.0 million or 9.6% of sales, compared to $0.7 million or
7.5% of sales in 1994. This increase of $0.3 million in general and
administrative expenses is directly related to the higher revenue levels at
Speech Design. Income before interest expense, amortization expense and minority
interest from the Company's Communications Products activities amounted to $0.7
million in 1995 compared to $0.5 million in 1994.
In April 1995, the Company signed an agreement in principle to transfer its
interest in Speech Design GmbH and Bogen Communications, Inc. to European
Gateway Acquisition Corporation ("EGAC") in exchange for $7.0 million in cash,
$3.0 million in convertible notes receivable, approximately 65% of EGAC common
shares and warrants to purchase 200,000 shares of EGAC common stock. The Company
will also be eligible to receive additional consideration based on the future
earnings of both companies through July 1997. The transaction is subject to,
among other things, regulatory approvals and EGAC shareholder approval.
Other Activities
The Company's other activities generated a profit before net interest
expense, amortization, and other charges of $0.1 million in 1995, compared to a
loss of $0.5 million in 1994. Revenues from these activities were $1.2 million
in 1995, compared to revenues of $0.1 million in 1994.
On a consolidated basis, interest expense increased in 1995 due to a higher
level of debt outstanding during the quarter. Interest income increased in 1995
due to higher rates earned on invested funds. Amortization expense increased
from $0.4 million in 1994 to $0.9 million in 1995 because of the Company's 1994
acquisitions.
16
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Continued
Liquidity and Capital Resources
The Company requires significant capital to implement its wireless
communications strategy. In order to effect its strategy, the Company increased
its debt borrowing and entered into a series of transactions, including the sale
of equity and debt, mainly to strategic partners. At March 31, 1995, the Company
had $47.1 million of cash, equivalents, and temporary investments.
The Company's short term cash needs are primarily related to the
development of the digital FHMA(tm) system which the Company's U.S network
intends to deploy starting later in 1995, and the cost of rolling out the U.S.
network. One of the advantages of the Company's FHMA(tm) system is its
modularity, which allows the Company to execute a flexible roll out plan
requiring a relatively low investment in infrastructure in a given geographical
area (compared to other wireless communications systems) which is sufficient to
provide commercial service. Additionally as the Company expects to serve
customers which require primarily local or regional coverage, management
believes therefore that the Company has additional flexibility in controlling
its resources by accelerating or slowing down the rate at which various cities
are rolled out without impacting the business results of its then operating city
or regional networks in a material way.
The Company estimates that a minimum average investment of approximately $5
million is required to roll out an average city. Additional expenditures will be
required later if and when increased subscriber capacity is needed. In addition,
the Company estimates that its 1995 cash needs associated with completing the
development of its first generation commercial grade FHMA(tm) system are
approximately $10 million. Nevertheless, the Company plans further improvements
to the FHMA(tm) system as well as other related research and development
projects which will require additional resources.
The Company is planning to raise capital before the end of 1995 to finance
its current operating plan. The Company's long term capital needs include the
planned rollout of the U.S. Network in 36 cities, the repayment of convertible
debt and redeemable preferred stock (if such are not converted into equity), to
finance it's international networks and to make acquisitions of businesses in
the field of telecommunications and of spectrum in the United States and
internationally. The Company is currently pursuing various alternatives for
raising capital including issuance of equity and debt securities as well as a
combination thereof and other sources.
The following discussion of liquidity and capital resources, among other
things, compares the Company's financial and cash position as of March 31, 1995,
to the Company's financial and cash position as of December 31, 1994.
17
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Continued
During the first quarter of 1995, cash, equivalents, and temporary
investments decreased by $4.9 million to $47.1 million, while working capital
decreased by $0.5 million to $46.6 million as of March 31, 1995.
Cash utilized in connection with continuing operating activities for the
quarter ended March 31, 1995, amounted to $12.2 million.
Cash outflows from investing activities, exclusive of an increase in
temporary investments of $5.7 million, were $3.9 million. The Company expended
$3.0 million on acquisitions of property and equipment and $.09 million on SMR
licenses in the United States.
The Company's financing activities provided cash of $11.4 million. In March
1995 the Company refinanced the $25.0 million of Senior Secured Notes, that were
originally due in September 1995, with $36.0 million of newly issued Senior
Secured Notes ("Replacement Notes"). At closing, the Company received net
proceeds of $11.0 million and issued warrants to the purchaser to acquire
700,000 of the Company's common shares at $8.125 per share. The Replacement
Notes are payable in three equal installments fifteen, twenty four and thirty
six months after the closing. Interest at 14.75% is payable quarterly through
the term of the Notes. The Notes may be converted into shares of the Company's
common stock beginning six months after the closing and ending 18 months after
closing, subject to daily limits and certain other restrictions, at 87.5% of the
average trading price of the Company's common stock on the respective conversion
dates. Substantially all of the Company's assets not previously pledged have
been pledged to collateralize this debt. Under terms of the Replacement Notes,
the Company must maintain certain financial ratios, needs permission of the
holder of the Notes to enter certain transactions and may be required to make
prepayments under certain circumstances. Certain penalties apply in the event
the Replacement Notes are prepaid.
The Company paid cash dividends totaling $0.7 million on its outstanding
preferred stocks. Proceeds from the exercise of warrants and options totaled
approximately $0.5 million in 1995.
In March 1995 the controlling shareholder of the DBF Bundelfunk network
informed the Company that it intends to exercise its option to sell its interest
in DBF to the Company for DM 9.0 million (approximately $6.4 million).
Consummation of the transfer is subject to regulatory approval. The Company also
intends to seek regulatory approval for the transfer of the 51% of the PBG
network it does not already own. Upon receipt of such approval, the Company will
own 100% of its German networks. In the near term these networks will require
additional funding as subscriber revenue does not cover operating costs and
capital needs. The Company is seeking outside sources of funding for the
networks.
18
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Continued
In April 1995 the Company completed the previously announced placement of
$10.0 million of cumulative convertible preferred shares. The shares pay a
dividend if 7% per annum for 5 years, carry a conversion premium and can be
redeemed by the company in certain circumstances.
In April 1995 the Company reached agreement to issue a total of $10.0
million of convertible preferred stock to Vanguard and a subsidiary of Toronto
Dominion Bank. The shares will pay a dividend of 7.5%, payable quarterly for up
to five years, carry a conversion premium and can be redeemed by the Company in
certain circumstances. In connection with this transaction the stock options
previously granted to Vanguard will be extended such that Vanguard will have the
right to purchase 2 million Geotek common shares at $15 per share ("Series A
Option"), and 2 million additional shares at $16 per share ("Series B Option")
until September 1, 1996. the remaining option ("Series C Option") will be
adjusted such that Vanguard will have the right to purchase 3 million additional
shares at $17 per share until 12 months from the exercise of the Series B
Option. Vanguard will surrender its right to purchase an additional 3 million
shares at $18 per share, as granted in the original transaction. Additionally,
as part of this investment, Vanguard will assign 50% of its Series A Option and
14% of its Series B and Series C Options to Toronto Dominion. Closing of the
transactions are subject to execution of definitive agreements.
The Company has placed an order with Rafael Armament Development Authority
of approximately $12.8 million for base stations to be used in its U.S. digital
wireless communications system, of which $2.3 million has been paid as of March
31, 1995.
19
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Part II. Other Information
Item 5. Exhibits and Reports on Form 8-K.
(a) Exhibits -- None
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company
during the first quarter of 1995:
(i) Current Report on Form 8-K filed February 27, 1995 reporting
the execution of an agreement in principle to acquire 120
channels of 900 MHz spectrum from Nextel Communications,
Inc. in exchange for certain 800 MHz spectrum and customers
owned by the Company.
20
<PAGE>
GEOTEK COMMUNICATIONS, INC.
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 thereunto duly authorized.
GEOTEK COMMUNICATIONS, INC.
/s/ Yoram Bibring
Date: May 15, 1995 ----------------------------------
Yoram Bibring
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
21
<PAGE>
GEOTEK COMMUNICATIONS, INC.
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 thereunto duly authorized.
GEOTEK COMMUNICATIONS, INC.
Date: May 15, 1995 ----------------------------------
Yoram Bibring
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
21
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