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 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 0-17581
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 OCTOBER 31, 1996: 59,659,509 SHARES
<PAGE>
GEOTEK COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I: Financial Information
Item 1: Financial Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II: Other Information
Item 6: Exhibits and Reports on Form 8-K
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain "forward-looking" statements. The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor with
respect to all of such forward-looking statements. Examples of forward-looking
statements contained herein include the Company's projections with respect to:
(a) the commercial implementation of its U.S. Network and the timing of the
roll-out of its U.S. Network; (b ) the Company's future financial results,
capital needs and sources of financing; and (c ) the effect of certain
legislation and governmental regulations on the Company. The Company's ability
to predict any such projected results or to predict the effect of any
legislation or other pending events on the Company's operating results is
inherently uncertain. Therefore, the Company wishes to caution each reader of
this report to carefully consider the specific factors discussed with such
forward-looking statements and contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1995 as such factors in some cases have
affected, and in the future (together with other factors) could affect, the
ability of the Company to achieve its projected results and may cause future
actual results to differ materially from those expressed herein.
2
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
(Note 1)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 78,273 $ 61,428
Temporary investments -- 7,945
Restricted cash 7,133 36,971
Accounts receivable trade, net 16,239 14,028
Inventories, primarily finished goods, net 24,332 10,483
Deposits for spectrum licenses 1,250 11,500
Prepaid expenses and other current assets 19,430 5,621
--------- ---------
Total current assets 146,657 147,976
Investments in affiliates 13,958 3,078
Property, plant and equipment, net 93,657 66,110
Intangible assets, net 105,988 68,181
Other assets 29,869 7,219
--------- ---------
$ 390,129 $ 292,564
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 22,348 $ 17,948
Accrued expenses and other current liabilities 38,543 23,005
Notes payable, banks and other 7,853 8,285
Current maturities, long-term debt 2,640 29,577
--------- ---------
Total current liabilities 71,384 78,815
--------- ---------
Long-term debt 188,352 95,875
Other noncurrent liabilities 36 1,217
Minority interest 623 395
Redeemable preferred stock 40,000 40,000
Commitments and Contingencies
Shareholders' equity:
Preferred stocks, $.01 par value 11 11
Common stock, $.01 par value:
authorized 135,000,000; issued 59,698,000 and
55,251,000 respectively; outstanding 59,466,000
and 55,013,000, respectively 597 553
Capital in excess of par value 379,901 272,456
Foreign currency translation adjustment (797) 1,012
Accumulated deficit (288,592) (196,384)
Treasury stock, at cost (1,386) (1,386)
--------- ---------
89,734 76,262
--------- ---------
$ 390,129 $ 292,564
========= =========
</TABLE>
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>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 43,398 $ 40,112 $ 15,170 $ 13,794
Service income 24,463 20,322 8,775 7,136
----------- ----------- ----------- -----------
Total revenues 67,861 60,434 23,945 20,930
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 30,344 23,992 10,411 8,736
Cost of services 25,192 12,938 9,589 5,334
Research and development 26,067 17,961 9,717 3,630
Marketing 24,604 18,702 8,654 7,320
General and administrative 28,435 19,820 11,026 8,978
Amortization of intangibles 4,000 3,101 1,482 1,219
Equity in losses of investees 1,169 3,854 149 1,776
Interest expense 23,870 10,257 8,547 6,674
Interest income (4,910) (2,784) (1,739) (1,473)
Other income (848) (1,491) (53) (540)
----------- ----------- ----------- -----------
Total costs and expenses 157,923 106,350 57,783 41,654
----------- ----------- ----------- -----------
Loss from operations before taxes
on income and minority interest (90,062) (45,916) (33,838) (20,725)
Taxes on income (1,918) (1,178) (538) (434)
Minority interest (228) (268) (125) (88)
----------- ----------- ----------- -----------
Net loss $ (92,208) $ (47,362) $ (34,501) $ (21,247)
----------- ----------- ----------- -----------
Preferred dividends (5,389) (2,837) (2,683) (1,231)
----------- ----------- ----------- -----------
Loss applicable to common stock $ (97,597) $ (50,199) $ (37,184) $ (22,478)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 57,779,000 51,523,000 59,209,000 51,670,000
=========== =========== =========== ===========
Per common share:
Net loss applicable to common shares $ (1.69) $ (0.97) $ (0.63) $ (0.43)
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the nine months ended September 30, 1996
(In Thousands)
(Unaudited)
(Note 1)
<TABLE>
<CAPTION>
Foreign
Capital in Currency
Preferred Stock Common Stock Excess of Translation Accumulated Treasury
Shares Amount Shares Amount Par Value Adjustment Deficit Stock
--------- ----- ------ ------ --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 1,063 $11 55,251 $553 $272,456 $1,012 $(196,384) $(1,386)
Issuance of common stock:
Exercise of warrants and
options 639 6 2,628
Issuance of shares to
Vanguard pursuant to
management consulting
agreement 198 2 2,073
Issuance of shares in
connection with
debt conversion 3,261 32 26,869
Issuance of shares in
connection with the
acquisition of SMR license 191 2 1,998
Issuance of shares for
preferred dividend 158 2 1,535
Issuance of Series N 55 53,350
Preferred Stock
Issuance of warrants in 13,400
connection with long-term
credit facility
Issuance of options in connection
with the organization of a joint
venture 2,236
Issuance of warrants in connection
with vendor credit facility 8,745
Preferred dividend (5,389)
Changes in currency (1,809)
Net Loss (92,208)
----- --- ------ ---- -------- ------ --------- -------
Balances, September 30, 1996 1,118 $11 59,698 $597 $379,901 $ (797) $(288,592) $(1,386)
===== === ====== ==== ======== ====== ========= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
(Note 1)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (92,208) $ (47,362)
Adjustments to reconcile net
loss to net cash
used in operating activities:
Minority interest 228 268
Depreciation and amortization 13,731 7,807
Post acquisition adjustment for utilization
of acquired net operating loss carry forward 1,336
Non cash acquisition of interest in a subsidiary
assigned to a research & development project 1,859
Non cash interest expense 15,839
Equity in net loss of investees 1,169 3,854
Non cash management consulting expense 2,075 1,874
Non cash transaction expense for BCI 740
Issuance of shares in connection with
research and development project 2,032
Changes in operating assets and liabilities:
Increase in accounts receivable (2,208) (3,088)
Increase in inventories (13,849) (1,404)
(Increase) decrease in prepaid expenses
and other current assets (6,696) 1,027
Increase in accounts payable
and accrued expenses 10,968 9,817
Other (614)
--------- ---------
Net cash used in operating activities (68,370) (24,435)
--------- ---------
Cash flows from investing activities:
Acquisition of spectrum licenses (29,738) (4,977)
Net decrease in temporary investments 7,945 24,515
Acquisitions of property and equipment (34,045) (18,127)
Cash invested in unconsolidated subsidiaries (9,953) (6,358)
Cash received from acquisition of subsidiary 263
Decrease (increase) in contract deposits - other current assets 684 (6,667)
Decrease (increase) in restricted cash 29,838 (45,263)
Loans receivable and other 1,358
Proceeds from sale of BCI 7,000
--------- ---------
Net cash used in investing activities (35,006) (48,519)
--------- ---------
</TABLE>
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)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net repayments under line-of-credit
agreements (232) (1,386)
Proceeds from issuance of convertible notes 75,000
Proceeds from issuance of senior secured
discount notes and related warrants 110,079
Proceeds from issuance of senior secured
notes and related warrants 36,000
Net proceeds from issuance of Preferred Stock 53,350 30,864
Deferred financing costs (2,250) (4,560)
Repayments of secured note (25,000)
Repayment of capital lease obligation (369)
Repayments of debt (860)
Exercise of warrants and options 2,559 728
Payment of preferred dividends (3,852) (1,606)
Financing costs (1,080)
Other (431)
-------- ---------
Net cash provided by financing activities 121,835 145,119
-------- ---------
Effect of exchange rate changes on cash (1,614) 1,130
-------- ---------
Increase in cash and cash equivalents 16,845 73,295
Cash and cash equivalents, beginning of period 61,428 27,531
-------- ---------
Cash and cash equivalents, end of period $ 78,273 $ 100,826
======== =========
Supplemental schedule of non cash investing and financing activities:
Summary of acquired subsidiaries:
Fair value of assets acquired in purchase transaction $ 134
Liabilities assumed in purchase transaction $ 255
Management consulting fee paid in common stock $ 2,075 $ 1,874
Issuance of shares in connection with research
and development project $ 2,032
Issuance of shares in connection with debt conversion $ 27,981
Issuance of shares in connection with acquisition
of SMR license $ 2,000
Issuance of shares for preferred dividend $ 1,537
Non cash transaction expense for BCI $ 740
Issuance of convertible notes for minority interest in
Geotek Technologies Israel, formerly PST $ 800
Issuance of note payable to acquire remaining
50% interest in MIS $ 2,000
</TABLE>
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. and
Subsidiaries (the "Company") as of December 31, 1995 has been derived from
the audited consolidated balance sheet contained in the Company's Form 10-K
and is presented for comparative purposes. In the opinion of management,
all significant adjustments including 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 1995 amounts have been
reclassified to conform with the 1996 presentation.
Footnote disclosures normally included in the annual 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 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, and previously filed 10-Q's.
The Company is planning to raise capital during the next twelve months to
continue financing its current operating plan. The failure to obtain such
financing will cause the Company to significantly alter its U.S. Network
roll-out plan and financing of its international digital wireless networks
(See "Liquidity and Capital Resources" section of Management's Discussion
and Analysis of Financial Conditions and Results of Operations).
Note 2 Long Term Debt:
In September 1996, the Company, through its wholly owned subsidiary Geotek
Financing Corporation ("GFC"), entered into a series of agreements with
Hughes Network Systems, Inc. ("HNS") under which HNS agreed to manufacture
at least 50% of certain components utilized by the Company in its 900 MHZ
infrastructure equipment and to provide the Company with up to $100 million
in vendor credit financing, subject to the satisfaction of certain
conditions. Under the terms of the vendor credit financing agreement, the
Company will finance 90% of its purchases of infrastructure related
equipment from HNS until June 1999. All borrowings made under the agreement
bear interest, payable quarterly, at a rate of 11% per annum until December
1999. Beginning December 1999, principal and interest are to be paid
semi-annually in equal installments over a five year period.
HNS will be granted a security interest in the components manufactured by
HNS as security for GFC's obligation under this credit facility. GFC has
also pledged to HNS a $24.5 million intercompany note of Geotek License
Holdings, Inc., a wholly owned subsidiary of GFC ("License Holdings"), and
the capital stock of License Holdings as security for these obligations.
License Holdings holds certain 900 MHZ licenses recently acquired by the
Company in the recently completed FCC auctions.
In connection with the above agreements, the Company issued HNS seven year
Warrants to purchase 2,500,000 shares of the Company's common stock. The
warrants allow HNS to purchase 1,000,000 shares at $8.625 per share,
1,000,000 shares at $10.78 per share, and 500,000 shares at $12.94 per
share. These warrants are exercisable at any time after September 27, 1997.
The warrants, which have been valued at approximately $8.7 million, were
recorded as other assets and are being amortized over the life of the
facility and the debt payback period, approximately seven years. Should the
Company not incur any indebtedness under the vendor credit agreement during
the life of the facility all unamortized amounts will be expensed.
Amortization for the three and nine months ended September 30, 1996 was not
material.
In July 1996, in a private transaction, the Company issued a Convertible
Promissory Note ("Promissory Note") in the amount of $800,000 due December
31, 1996 in exchange for shares, held by a minority shareholder in the
Company's subsidiary Geotek Technologies Israel ("GTI-Israel"), formerly
PST. The Promissory Note pays interest at a rate of 6% per annum until
conversion or until maturity and is convertible at the closing price of the
Company's Common Stock on the day preceding the holder's notice to convert.
In October 1996, the holder converted the Promissory Note and accrued
interest into approximately 102,000 shares of the Company's common stock.
8
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 Long Term Debt: continued
In April 1996, the Company and S-C Rig Investments - III, L.P. ("S-C Rig"),
a significant stockholder of the Company and an investment group affiliated
with George Soros, entered into a Senior Loan Agreement whereby S-C Rig
made a $40.0 million unsecured credit facility (the"S-C Rig Credit
Facility") available to the Company beginning June 1996. Under the terms of
the S-C Rig Credit Facility, all borrowings are required to be made within
two years from the establishment of the credit facility. The borrowings
accrue interest at a rate of 10% per annum payable semi-annually and will
mature four years from the date of the final borrowing thereunder. The
Company is obligated to pay S-C Rig a fee equal to 3% of each borrowing
under the S-C Rig Credit Facility at the time of such borrowing. Borrowings
under the S-C Rig Credit Facility will constitute senior indebtedness of
the Company. At September 30, 1996, there were no outstanding loans under
the S-C Rig Credit Facility.
In connection with the establishment of the credit facility, the Company
issued to S-C Rig a five year warrant to purchase approximately 4.2 million
shares of Common Stock (subject to adjustment in certain circumstances) at
an exercise price of $9.50 per share (subject to adjustment in certain
circumstances). This warrant is exercisable at any time during the warrant
period. The Warrants, which have been valued at $13.4 million, are recorded
in other assets and are being amortized over approximately five years.
In March 1996, the Company issued $75.0 million aggregate principal amount
of Senior Subordinated Convertible Notes due 2001 ("Convertible Notes").
Each Convertible Note is in the principal amount of $1,000, and beginning
on March 5, 1997 may be converted by the holders into shares of the
Company's common stock, par value $.01, at a conversion price equal to
$9.50 per share. Cash interest on the Convertible Notes accrues at a rate
of 12% per annum and is payable semi-annually on each February 15 and
August 15 commencing August 15, 1996. The Convertible Notes are unsecured
senior subordinated obligations of the Company. The Convertible Notes can
be converted at the option of the Company after 18 months if the closing
price of the Company's common stock for 20 of the 30 trading days and for
the five trading days before conversion is at least $15.20 per share.
The Company's Senior Convertible Notes due 1998 (the "Senior Convertible
Notes") were convertible into shares of the Company's Common Stock (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. During the nine months ended September 30, 1996, the remaining $27.9
million was converted into approximately 3,261,000 shares of common stock.
In connection with the conversion, the Company incurred approximately $1.0
million in financing costs which were offset against the conversion
proceeds.
In July 1995, the Company placed approximately $40.5 million in a
restricted cash account as collateral for the Company's obligation under
the Senior Convertible Notes. As the Senior Convertible Notes were
converted, a proportionate amount of the restricted cash becomes
unrestricted and as of September 30, 1996, $ 0.9 million of cash remains
restricted. This amount is included in the balance sheet of the Company, as
restricted cash, and satisfies the remaining interest on the converted
Senior Convertible Notes.
Note 3 Shareholders' Equity:
Vanguard Options
In September 1996, the Series A Options ("Vanguard Options") granted to
Vanguard Cellular Systems, Inc. ("Vanguard") and Toronto Dominion
Investments, Inc. ("TDI"), which entitled both Vanguard and TDI to purchase
1,000,000 shares of the Company's common stock at $15.00 per share,
expired. Under the terms of the Vanguard Options, the remaining options to
purchase 2,000,000 common shares at $16.00 per share and options to
purchase 3,000,000 common shares at $17.00 per share, of which Vanguard was
entitled to six sevenths and TDI was entitled to one seventh, terminated
with the expiration of the Series A Options. Additionally, the Company's
Management Consulting Contract with Vanguard was terminated (See Note 6).
9
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 Shareholders' Equity: continued
Preferred Stock
In June 1996, the Company sold 55,000 shares of Series N Cumulative
Convertible Preferred Stock ("Series N Stock") at an aggregate purchase
price of $55 million, to entities affiliated with the Charles R. Bronfman
Family Trust, the Kolber Trust, The Renaissance Fund and certain existing
shareholders of the Company. The Series N Stock pays dividends in Common
Stock at a rate of 10% per annum. Additionally, the Series N Stock is
immediately convertible into shares of the Company's Common Stock at $11.00
per share. In connection with this transaction, the Company issued five
year warrants to purchase approximately 1.65 million shares of the
Company's Common Stock at $11.00 per share. In addition, the Company
incurred financing fees equal to 3% of the aggregate purchase price, and
has recorded this as a reduction to the net proceeds of the issuance.
During the nine months ended September 30, 1996, the Company paid dividends
of approximately 158,000 shares of common stock with a value of
approximately $1.5 million.
Common Stock
In April 1996, the Company purchased 100% of the outstanding stock of
MacDermott Communications, Inc., a private company whose only asset was an
SMR License, for 190,988 shares of the Company's Common Stock. The value of
the Common Stock issued, was approximately $2.0 million. This amount has
been ascribed to an SMR License which is included in intangible assets and
will be amortized over twenty years.
Other Warrants and Options
In July 1996, in accordance with the terms of the Company's joint venture
agreement with Anam Industrial Co., Ltd. and other related agreements,
which required the Company to grant options to its joint venture partner
and other related parties upon receipt of a regional or national license in
Korea (see Note 4), the Company granted options to purchase a total of
800,000 shares of the Company's common stock at $10 per share. The Company
estimated the fair value of the options granted at approximately $2.2
million. The Company recorded this amount as an investment in Anam Telecom
and is amortizing this amount over a two year period.
Note 4 Acquisition and Formation of Joint Ventures:
In August 1996, the Company purchased the remaining 50% ownership interest
in software developer M.I.S. Information Systems Holdings Ltd. ("MIS")
effective July 1, 1996. MIS was formed in 1994 as a 50/50 joint venture
between the Company and Decision Systems Israel Ltd. The remaining 50%
interest was acquired for a $2 million promissory note which bears interest
at 8.25% per annum and is due July 1, 1998. The Company attributed the
excess of consideration paid over the fair value of net the assets
acquired, approximately $1.9 million, to an acquired research and
development project and expensed this amount at the time of the purchase as
the acquisition primarily related to ongoing software development projects.
In April 1996, the Company and RWE Telliance A.G. ("RWE") entered into a
letter of intent to merge their respective German mobile radio networks.
Under the terms of this letter of intent, each of RWE and the Company will
own 50% of the merged entity. There can be no assurances that the Company
and RWE will execute a formal agreement based on this letter of intent or
that the Company and RWE will receive approval from the appropriate
regulatory authority. The Company will continue to consolidate these
entities until such time the joint venture is consummated and control is
relinquished.
10
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 Acquisition and Formation of Joint Ventures: continued
In April 1996, Industry Canada, the Canadian agency responsible for
spectrum allocation, approved in principle an award of certain 900 MHZ
frequencies in Ontario, Quebec, British Columbia and Alberta to a joint
venture consisting of the Company, Cogeco Cable, Inc. ("Cogeco") and
Techcom, Inc., a Canadian SMR operator. These entities had entered into a
letter of intent to form such joint venture in Canada to launch mobile
wireless communications services based on the Company's proprietary
FHMA((TM)) technology. In July 1996, the Company announced that it had been
unable to reach a final agreement with Cogeco and that the Company is
actively negotiating with other potential Canadian partners to replace
Cogeco, so as to comply with Canadian foreign ownership and regulatory
requirements. There can be no assurance that the Company will be able to
identify such a partner or, if such a partner is identified, that an
agreement can be reached on terms favorable to the Company. Any failure on
the part of the Company to enter into such an arrangement could have a
material adverse effect on the Company's prospects in Canada.
In June 1996, the Korean Ministry of Information and Communications awarded
a consortium, Anam Telecom Co. Ltd. ("Anam Telecom") in which the Company
holds a 21% interest, a license to operate a nationwide trunked radio
system in Korea. Anam Telecom also includes approximately 53 Korean
companies, among them Anam Industrial Co. Ltd. (the Company's joint venture
partner in Korea), Hyundai Electronics, Korean Mobile Telecom, Ssangyong
Corporation and Korea Express. The license covers a geographic area with a
population of approximately 45 million people and is based on the
implementation of the Company's FHMA(TM) system on an 800 MHZ frequency.
The Company's FHMA(TM) system currently operates in the 900 MHZ frequency
band. Although the Company believes that it will successfully adapt its
FHMA(TM) system to the 800 MHZ frequency, such adaptation is subject to a
number of contingencies and the manufacture of certain equipment required
in connection therewith. There can be no assurance that the Company will be
able to successfully adapt its FHMA(TM) system to the 800 MHZ frequency on
a timely basis. Any failure on the part of the Company to successfully
adapt its FHMA(TM) technology pursuant to the terms of the Korean license
could have a material adverse effect on the Company's prospects in Korea.
In addition, the Company will provide FHMA(TM) related infrastructure
equipment and broad business and engineering support for the design,
implementation and operation of the network in Korea. Finally, the
development of a FHMA(TM) based digital system in Korea will be subject to
the same risks as the development of the Company's digital wireless system
in the United States.
In July 1996, the Company contributed approximately $9.6 million to Anam
Telecom on account of the Company's portion of the initial capitalization
of Anam Telecom. This amount has been included in investments in
affiliates.
Note 5 Commitments and Contingent Liabilities:
FCC Waiver
The Company was granted a waiver (the "Waiver") by the Federal
Communication Commission ("FCC") which permits it to construct and activate
certain systems on a delayed construction schedule. The Waiver is relevant
to the Company's designated frequency area ("DFA") licenses which were
acquired by the Company prior to the FCC's 900 MHZ specialized mobile radio
("SMR") spectrum auctions conducted during 1995 and 1996. For those
licenses acquired by the Company through the spectrum auctions, e.g. major
trading area ("MTA") licenses, and for previously acquired DFA licenses
authorized for overlapping frequencies with the Company's new MTA licenses,
the Waiver is inapplicable. Instead, construction requirements for these
MTA and DFA licenses will be satisfied if a portion of the market's
population is served after three years. The population coverage requirement
increases after five years.
11
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 Commitments and Contingent Liabilities: continued
Litigation
In June 1994, the Company filed a lawsuit against Harris Adacom Corporation
B.V. ("Harris"), a Dutch Corporation, to enforce the Company's right to
repayment of a $3.5 million loan made to Harris in January 1994. In or
about May 1994, creditors placed Harris into bankruptcy. 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 Adacom Technologies Ltd., ("ATL"), an affiliate of
Harris and an Israeli publicly traded company, and subsequently breached
such agreement. The plaintiffs in such action have stated an intention to
file a separate claim for monetary 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 other 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.
Note 6 Certain Other Related Party Transactions:
In connection with the expiration of the Vanguard Options in September
1996, the Company's five-year management consulting agreement with
Vanguard, pursuant to which Vanguard provided operational and marketing
support to the Company for an aggregate of 1.5 million shares of common
stock, was terminated. For each of the nine months ended September 30, 1996
and 1995, Vanguard earned approximately 198,000 and 224,000 shares,
respectively pursuant to this agreement. These shares have been recorded in
the nine months ended September 30, 1996 and 1995 at approximately $2.1
million and $1.9 million, respectively, which amounts have been included in
marketing expenses.
The Company incurred expenses of $225,000 in each of the nine month periods
ended September 30, 1996 and 1995, pursuant to its consulting agreement
with a company affiliated with George Soros. Entities affiliated with
George Soros also hold the Company's Series H Redeemable Preferred Shares,
Series I Convertible Preferred Shares, $5.0 million of the Company's Series
N Convertible Preferred Stock, 10% of the Company's Senior Secured Discount
Notes due 2005 and S-C Rig Credit Facility.
GTI-Israel, a subsidiary of the Company, has entered into a subcontractor
agreement with Rafael, a shareholder of the Company, under which Rafael
will partake in the enhancement and continued development of the digital
wireless communications system to be deployed by the Company in the United
States. Research and development expense for the nine months ended
September 30, 1996 and 1995, includes approximately $4.5 million and $4.2
million, respectively, for research performed by Rafael under this
agreement. GTI-Israel has also entered into agreements with Rafael under
which Rafael will manufacture the infrastructure equipment to be used by
the Company in its U.S. network. Through September 30, 1996 the Company had
placed firm orders for equipment totaling $41.6 million of which $28.7
million has been paid to Rafael to date.
In September, in connection with the HNS vendor credit facility, the
Company entered into an agreement with HNS whereby HNS will manufacture at
least 50% of certain components utilized by the Company in its 900 MHZ
infrastructure equipment. As part of this agreement, the Company made a 10%
or approximately $1 million advance to HNS for production. In connection
with the Company's portable subscriber unit manufacturing agreement with
HNS, the Company made advances of $7.5 million to HNS. The Company has
included all advances made to HNS in prepaid expenses and other current
assets.
12
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 Other Events:
In June 1996, the United Kingdom Department of Trade and Industry awarded
the Company's United Kingdom operating subsidiary a license to operate a
digital Public Access Mobile Radio ("PAMR") network in the United Kingdom.
Under the terms of the new digital license, the operating subsidiary will
receive up to two megahertz of spectrum in the 410-430 MHZ band for the
construction of a network based on the new Trans European Trunked Radio
("TETRA") standard. Currently, there are no TETRA systems available for
commercial application. While some potential vendors have indicated an
interest in supplying a TETRA-based system to the Company's United Kingdom
subsidiary, management of the Company cannot accurately estimate the
availability, quality and costs associated with the implementation of a
TETRA-based network. Management is continuing to work with potential
vendors and regulatory authorities in the United Kingdom regarding
implementation of such system. However, there can be no assurance that the
Company will be able to implement such a system or, if implemented, when
the Company will be in a position to roll-out a TETRA-based system.
Finally, the development of a TETRA-based system in the United Kingdom will
be subject to the same risks attendent to the development of the Company's
digital wireless system in the United States.
The Company expects that the digital network, when and if implemented by
the Company in the United Kingdom, will offer a full range of mobile voice
and data services, including telephony, digital dispatch, automatic vehicle
location and packet data The Company hopes to commence commercial
operations of such a digital network in 1998. The Company's United Kingdom
operating subsidiary already provides PAMR services to over 60,000 business
subscribers throughout the United Kingdom.
Note 8 Intangible Assets:
In July 1996, through the FCC's 900 MHZ Spectrum auctions, the Company
purchased 181 10-channel blocks in 42 regional service areas known as Major
Trading Areas at an aggregate cost of approximately $30.9 million of which
$8.0 million was on deposit with the FCC at December 31, 1995. The
remainder was paid with proceeds from the drawdown of one of the Company's
credit facilities (see Note 9) and existing cash resources.
Note 9 Subsequent Events
In October 1996, the Company borrowed $24.5 million under the Company's
line of credit agreement with HNS. Under the terms of the agreement, the
two year loan bears interest at 12%, payable semi annually and is
convertible by the holder at 90% of the average sale price of the Company's
common stock for the 10 days preceding conversion or the maximum conversion
price of $9.75.
13
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"):
In July and August 1995, the Company issued, in a private offering, $227.7
million aggregate principal amount at maturity of 15% Senior Secured
Discount Notes due July 15, 2005 ("the Notes"). Gross proceeds of the Notes
was approximately $110.0 million. The Notes were issued with 6,831,000
detachable warrants ("the Warrants"). Each Warrant entitles the holder to
purchase one share of Company common stock at an exercise price of $9.90
per share. The Warrants have been valued at approximately $32.1 million and
have been recorded as a discount on the Notes. The Notes accrue interest
until maturity at a rate of 15% per annum. Interest on the Notes will be
payable semi-annually, in cash, on July 15 and January 15, commencing
January 15, 2001.
In connection with the Note offering, PowerSpectrum, Inc. and its U.S.
domestic subsidiaries as well as MetroNet Systems, Inc. (collectively
referred to as the "Guarantor Subsidiaries") fully and unconditionally
guarantee such Notes jointly and severally. The Guarantor Subsidiaries are
wholly owned by the Company. In addition, the Notes are collateralized by a
pledge of the capital stock owned by the Company in National Band Three
Ltd., PowerSpectrum, Inc., MetroNet Systems, Inc., Geotek GmbH Holding
Corporation and BCI, the entity through which, effective August 1995, the
Company owns its interests in Bogen Communications, Inc. and Speech Design
GmbH.
The Guarantor Information of Geotek Communications, Inc. and Subsidiaries
has been presented on pages 15 through 20 in order to present the Guarantor
Subsidiaries pursuant to the Guarantor relationship. The Guarantor
Information is presented as management does not believe that separate
financial statements of the Guarantor Subsidiaries would be meaningful.
This Guarantor Information should be read in conjunction with the
Consolidated Financial Statements. The Notes include covenants that put
restrictions on the Company primarily related to making certain
investments, paying dividends, and incurring additional debt.
Basis of Presentation - To conform with the terms and conditions of the
Notes, the combining Guarantor Information of the Guarantor Subsidiaries
are presented on the following basis:
(1) Geotek Communications, Inc. -Investments in consolidated subsidiaries
(Parent Company) are accounted for by the Parent Company on
the cost basis for purposes of the Guarantor
Information. Operating results of
Subsidiaries are therefore not reflected in
the Parent's investment accounts or
earnings.
(2) Guarantor Subsidiaries -For purposes of the Guarantor Information,
Guarantor Subsidiaries includes all U.S.
wireless subsidiaries of PowerSpectrum, Inc.
("PSI") combined with MetroNet Systems, Inc.
and ANSA Communications, Inc., both direct
wholly owned subsidiaries of the Parent
Company. For purposes of the Guarantor
Information, PSI does not contain the
consolidated financial statements of GTI
-Israel, formerly PST, a subsidiary of PSI,
since GTI -Israel is not a Guarantor
Subsidiary. Such statements of GTI-Israel
are included with Non-Guarantor
Subsidiaries.
(3) Non-Guarantor Subsidiaries -This includes the Company's subsidiaries
that are not Guarantor Subsidiaries.
(4) Reclassification and -Certain reclassifications were made to
Eliminations conform all of the Guarantor Information to
the financial presentation of the Company's
consolidated financial statements. The
principal elimination entries eliminate
investments in subsidiaries and intercompany
balances and transactions.
14
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 Condensed Consolidating Financial Information
For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 1996
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
------------- ------------ ------------- ------------------ --------------
ASSETS (1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 72,765 $ 325 $ 5,183 $ 78,273
Restricted cash 5,492 1,641 7,133
Accounts receivable net 228 16,011 16,239
Inventories 13,231 11,101 24,332
Deposits for spectrum licenses 1,250 1,250
Prepaid expenses and other assets 1,179 12,128 6,123 19,430
--------- ---------- --------- --------- ---------
Total current assets 79,436 25,912 41,309 146,657
--------- ---------- --------- --------- ---------
Inter-company account 280,417 48,829 ($329,246)
Investments in affiliates 14,121 (163) 13,958
Property, plant and equipment, net 1,149 61,126 40,555 (9,173) 93,657
Intangible assets, net 12,614 22,311 71,063 105,988
Other assets 17,938 210 13,668 (1,947) 29,869
Investments in subsidiaries, at cost 92,457 (92,457)
--------- ---------- --------- --------- ---------
Total Assets $ 498,132 $ 158,388 $ 166,595 $(432,986) $ 390,129
========= ========== ========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 426 $ 12,884 $ 9,038 $ 22,348
Accrued expenses and other 5,734 11,244 21,565 38,543
Notes payable, banks and other 8,386 ($533) 7,853
Current maturities, long-term debt 882 1,303 455 2,640
--------- ---------- --------- --------- ---------
Total current liabilities 7,042 25,431 39,444 (533) 71,384
--------- ---------- --------- --------- ---------
Long-term debt 181,290 8,636 (1,574) 188,352
Intercompany accounts 227,627 101,619 (329,246)
Other non current liabilities (154) 1,604 (1,414) 36
Minority interest 623 623
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $.01 par value 11 11
Common stock, $.01 par value: 597 597
Capital in excess of par value 344,734 40,621 85,429 (90,883) 379,901
Foreign currency translation (797) (797)
adjustment
Accumulated deficit (74,002) (135,291) (69,963) (9,336) (288,592)
Treasury stock, at cost (1,386) (1,386)
--------- ---------- --------- --------- ---------
269,954 (94,670) 14,669 (100,219) 89,734
--------- ---------- --------- --------- ---------
$ 498,132 $ 158,388 $ 166,595 $(432,986) $ 390,129
========= ========== ========= ========= =========
</TABLE>
15
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 Condensed Consolidating Financial Information
For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
ASSETS (1) (2) (3) (4)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 53,128 $ 522 $ 7,778 $ 61,428
Temporary investments 7,945 7,945
Restricted cash 35,230 1,741 36,971
Accounts receivables trade, net 21 14,007 14,028
Inventories 1,328 9,155 10,483
Deposits for spectrum licenses 3,500 8,000 11,500
Prepaid expenses and other assets 1,051 317 4,253 5,621
--------- -------- --------- --------- ---------
Total current assets 100,854 10,188 36,934 147,976
Inter-company account 142,286 37,154 4,893 $(184,333)
Investments in affiliates 3,241 (163) 3,078
Property, plant and equipment, net 1,088 28,962 39,487 (3,427) 66,110
Intangible assets, net 12,313 19,171 36,697 68,181
Other assets 7,684 174 3,845 (4,484) 7,219
Investments in subsidiaries, at cost 90,427 (90,427)
--------- -------- --------- --------- ---------
$ 357,893 $ 95,649 $ 121,856 $(282,834) $ 292,564
========= ======== ========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 508 $2,447 $ 14,993 $ 17,948
Accrued expenses and other 1,250 5,835 15,920 23,005
Notes payable, banks and other 8,604 ($319) 8,285
Current maturities, long-term debt 28,913 664 29,577
--------- -------- --------- --------- ---------
Total current liabilities 30,671 8,282 40,181 (319) 78,815
--------- -------- --------- --------- ---------
Inter-company account 138,107 46,226 (184,333)
Long-term debt 86,090 2,003 12,356 (4,574) 95,875
Other non current liabilities (152) 2,533 (1,164) 1,217
Minority interest 395 395
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $.01 par value 11 11
Common stock, $.01 par value 553 553
Capital in excess of par value 245,234 40,621 75,455 (88,854) 272,456
Foreign currency translation adjustment 1,012 1,012
Accumulated deficit (43,128) (93,364) (56,302) (3,590) (196,384)
Treasury stock, at cost (1,386) (1,386)
--------- -------- --------- --------- ---------
201,284 (52,743) 20,165 (92,444) 76,262
--------- -------- --------- --------- ---------
$ 357,893 $ 95,649 $ 121,856 $(282,834) $ 292,564
========= ======== ========= ========= =========
</TABLE>
16
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 Condensed Consolidating Financial Information
for Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales $ 534 $ 66,828 $ (23,964) $ 43,398
Service income 166 24,297 24,463
-------- --------- --------- --------- ---------
Total revenues 700 91,125 (23,964) 67,861
-------- --------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 5,084 43,083 (17,823) 30,344
Cost of services 11,017 14,627 (452) 25,192
Research and development $ 1,859 8,138 16,137 (67) 26,067
Marketing 203 11,446 12,955 24,604
General and administrative 8,537 6,851 13,047 28,435
Amortization of intangibles 1,686 890 1,424 4,000
Equity in losses of investees 1,169 1,169
Interest expense 22,487 129 2,033 (779) 23,870
Interest income (4,943) (164) (582) 779 (4,910)
Other income (124) (766) (82) 124 (848)
-------- --------- --------- --------- ---------
Total costs and expenses 30,874 42,625 102,642 (18,218) 157,923
-------- --------- --------- --------- ---------
Loss from operations before
taxes on income and
minority interest (30,874) (41,925) (11,517) (5,746) (90,062)
Taxes on income (1,918) (1,918)
Minority interest (228) (228)
-------- --------- --------- --------- ---------
Net loss $(30,874) $ (41,925) $ (13,663) $ (5,746) $ (92,208)
======== ========= ========= ========= =========
</TABLE>
17
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 Condensed Consolidating Financial Information
for Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1995
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales $ 69 $ 45,095 $ (5,052) $ 40,112
Service income 1,615 18,707 20,322
---------- ---------- --------- ---------- ---------
Total revenues 1,684 63,802 (5,052) 60,434
---------- ---------- --------- ---------- ---------
Costs and expenses:
Cost of goods sold 53 27,651 (3,712) 23,992
Cost of services 2,619 10,319 12,938
Research and development $ 550 5,967 11,444 17,961
Marketing 225 5,635 12,842 18,702
General and administrative 1,766 8,129 9,925 19,820
Amortization of intangibles 562 793 1,746 3,101
Equity in losses of investees 986 2,868 3,854
Interest expense 9,358 215 1,544 (860) 10,257
Interest income (3,447) (52) (145) 860 (2,784)
Other income (1,402) (89) (1,491)
---------- ---------- --------- ---------- ---------
Total Costs and expenses 10,000 21,957 78,105 (3,712) 106,350
---------- ---------- --------- ---------- ---------
Loss from continuing operations
before Taxes on income and
minority interest (10,000) (20,273) (14,303) (1,340) (45,916)
Taxes on income (1,178) (1,178)
Minority interest (268) (268)
---------- ---------- --------- ---------- ---------
Net loss $ (10,000) $ (20,273) $ (15,749) $ (1,340) $ (47,362)
========== ========== ========= ========== =========
</TABLE>
18
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 Condensed Consolidating Financial Information
For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(30,874) $(41,925) $ (13,663) $ (5,746) $ (92,208)
Adjustment to reconcile net loss to net
cash used in operating activities:
Minority interest 228 228
Depreciation & amortization 1,746 4,057 8,256 (328) 13,731
Equity in net loss of investees 1,169 1,169
Non cash management consulting expense 2,075 2,075
Post acquisition adjustment for utilization
of acquired net operating loss carry forward 1,336 1,336
Non cash acquisition of interest in subsidiary
assigned to a research & development project 1,859 1,859
Non cash interest expense 15,839 15,839
Changes in operating assets and liabilities:
Accounts receivable (207) (2,001) (2,208)
Inventories (11,903) (1,946) (13,849)
Prepaid expenses (128) (4,061) (2,507) (6,696)
Accounts payable & accrued expenses 4,402 8,096 (1,530) 10,968
Other 75 (95) (594) (614)
-------- -------- --------- -------- ----------
Net cash used in operating activities (5,912) (43,963) (12,421) (6,074) (68,370)
-------- -------- --------- -------- ----------
Cash flows from investing activities:
Net decrease in temporary investments 7,945 7,945
Acquisition of spectrum licenses (29,738) (29,738)
Acquisitions of property & equipment (120) (31,263) (8,408) 5,746 (34,045)
Cash invested in unconsolidated
subsidiaries (9,953) (9,953)
Cash received from acquisition of subsidiary 263 263
Decrease contract deposits - other current assets 684 684
Decrease in restricted cash 29,838 29,838
-------- -------- --------- -------- ----------
Net cash provided by (used in) investing activities 27,710 (31,263) (37,199) 5,746 (35,006)
-------- -------- --------- -------- ----------
Cash flows from financing activities:
Net borrowings under
line of credit agreements (232) (232)
Proceeds from issuance of convertible notes 75,000 75,000
Deferred financing costs (2,250) (2,250)
Net proceeds from issuance of
Preferred stock 53,350 53,350
Repayments of debt (605) (255) (860)
Repayment of capital lease obligations (45) (324) (369)
Exercise of warrants & options 2,559 2,559
Payment of preferred dividends (3,852) (3,852)
Financing costs (1,080) (1,080)
Other (431) (431)
Capital contributed from parent (125,843) 75,634 49,881 328
-------- -------- --------- -------- ----------
Net cash (used in) provided by financing activities (2,161) 75,029 48,639 328 121,835
-------- -------- --------- -------- ----------
Effect of exchange rate changes on cash (1,614) (1,614)
Increase (decrease) in cash & cash equivalents 19,637 (197) (2,595) 16,845
Cash & cash equivalents, beginning of period 53,128 522 7,778 61,428
-------- -------- --------- -------- ----------
Cash & cash equivalents, end of period $ 72,765 $ 325 $ 5,183 -- $ 78,273
======== ======== ========= ======== ==========
</TABLE>
19
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 Condensed Consolidating Financial Information
For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1995
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm.,Inc.
Comm.,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
---------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (10,000) $(20,273) $ (15,749) $ (1,340) $(47,362)
Adjustment to reconcile net loss to net
cash used in operating activities:
Minority interest 268 268
Depreciation & amortization 588 1,634 5,585 7,807
Equity in net loss of investees 986 2,868 3,854
Non cash management consulting expense 1,874 1,874
Issuance of shares in connection with
research and development project 2,032 2,032
Non cash transaction expense for BCI 740 740
Changes in operating assets and liabilities
(net of effects from acquisitions):
Accounts receivable 6 (2,673) (421) (3,088)
Inventories (104) (4,049) 2,749 (1,404)
Prepaid expenses 516 (607) (3,091) 4,209 1,027
Accounts payable & accrued expenses 3,934 3,199 4,631 (1,947) 9,817
--------- -------- --------- -------- -------
Net cash (used in) operating activities (3,976) (12,239) (11,470) 3,250 (24,435)
--------- -------- --------- -------- -------
Cash flows from investing activities:
Acquisition of licenses (4,973) (4) (4,977)
Net decrease in temporary investments 24,515 24,515
Acquisitions of property & equipment (122) (11,617) (3,478) (2,910) (18,127)
Cash invested in acquisition of
subsidiaries, net (6,358) (6,358)
Contract deposits - other current assets (6,667) (6,667)
Restricted cash (45,263) (45,263)
Loans receivable and other (1,268) 1,835 3,413 (2,622) 1,358
Proceeds from sale to BCI 7,000 7,000
--------- -------- --------- -------- -------
Net cash (used in) investing activities (21,496) (21,422) (69) (5,532) (48,519)
--------- -------- --------- -------- -------
Cash flows from financing activities:
Net, (repayments) under
line of credit agreements (1,386) (1,386)
Proceeds from issuance of senior
secured bond & related warrants 110,079 110,079
Proceeds from issuance of senior
secured note & related warrants 36,000 36,000
Deferred financing costs (4,560) (4,560)
Repayments of debt (25,000) (25,000)
Net proceeds from issuance of
preferred stock 30,864 30,864
Exercise of warrants & options 728 728
Payment of preferred dividends (1,606) (1,606)
Capital contributed from parent (47,256) 34,048 10,926 2,282
--------- -------- --------- -------- -------
Net cash provided by (used in)
financing activities 99,249 34,048 9,540 2,282 145,119
--------- -------- --------- -------- -------
Effect of exchange rate changes on cash 1,130 1,130
Increase (decrease) in cash & cash equivalents 73,777 387 (869) 73,295
Cash & cash equivalents, beginning of period 21,222 418 5,891 27,531
--------- -------- --------- -------- -------
Cash & cash equivalents, end of period $ 94,999 $ 805 $ 5,022 -- $100,826
========= ======== ========= ======== =======
</TABLE>
20
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and the
notes thereto, included elsewhere in this report.
Results of Operations
General
Over the past four years, the Company has devoted and expects to continue
to devote substantial financial and management resources to the development and
deployment of a low cost, high quality integrated digital voice and data
wireless communications network in the United States ("U.S. Network"). The
Company, through its subsidiaries and joint ventures, intends to deploy similar
networks internationally. Although Management believes these activities will
have a positive effect on the Company's results of operations in the long term,
it 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
and have negative cash flow from operations for the foreseeable future,
attributable primarily to the operating, sales, marketing, general and
administrative expenses relating to the roll-out of U.S. Network as well as to a
high investment in research and development related to its wireless
communications activities. The Company may also expend significant resources in
pursuit of international opportunities. There can be no assurance that the
Company will operate at profitable levels, have positive cash flow from
operations, or continue to obtain financing to implement its operating plan.
The Company currently groups its operations primarily into three types of
activities: wireless communications, communications products and corporate. The
Company's wireless communications subsidiaries are currently engaged primarily
in providing trunked mobile radio services in the United Kingdom and Germany
utilizing analog equipment, developing and selling wireless data solutions,
implementing a digital wireless communications system for the United States that
will provide integrated wireless communications services, and implementing
digital wireless communications systems internationally.
The Company is presently in the process of rolling out its U.S. Network.
The Company started providing commercial services in Philadelphia, Washington,
DC, Baltimore, and New York during the first quarter of 1996, in Boston, Miami
and Dallas in the second quarter of 1996 and will be providing services in
Orlando during the fourth quarter 1996. The Company had announced its intention
to offer digital wireless communication services in over 35 markets in the
United States by the end of 1997. However, this roll-out schedule was based in
part on FCC-imposed network build-out requirements. In connection with the
Company's acquisition of MTA Licenses in the recent FCC actions, the Company
will be permitted additional time to complete the roll-out of its U.S. Network.
Accordingly, to better focus its financial and managerial resources, the Company
has revised its roll-out schedule and currently intends to roll-out its U.S.
Network in 15 additional markets in 1997, 8 additional markets in 1998, and the
remaining markets in 1999. The Company's roll-out schedule may be reviewed and
revised from time to time in light of changing conditions. The successful and
timely implementation of the U.S. Network will depend upon a number of factors,
including but not limited to, the timely and cost-effective manufacture,
construction and integration of the system infrastructure and software, the
acquisition and control of additionally radio spectrum, the procurement and
preparation of base station and remote sites, the receipt of all necessary
regulatory approvals, the establishment of effective sales and marketing
organizations and distribution channels and the acquisition of additional
financing. The failure or delay with respect to any of these items could
adversely affect the timing of the implementation of the U.S. Network in one or
more of the Company's target markets, which could have a material adverse effect
on the Company.
In April 1996, the Company and RWE Telliance A.G. ("RWE") entered into a
letter of intent to merge their respective German mobile radio networks. Under
the terms of this letter of intent, each of RWE and the Company will own 50% of
the merged entity. There can be no assurances that the Company and RWE will
execute a formal agreement based on this letter of intent or that the Company
and RWE will receive approval from the appropriate regulatory authority.
Also in April 1996, Industry Canada, the Canadian agency responsible for
spectrum allocation, approved in principle an award of certain 900 MHZ
frequencies in Ontario, Quebec, British Columbia and Alberta to a joint venture
consisting of the Company, Cogeco Cable, Inc. ("Cogeco") and Techcom, Inc., a
Canadian SMR operator. These entities had entered into a letter of intent to
form such joint venture in Canada to launch mobile wireless communications
services based on the Company's proprietary FHMA(TM) technology. In July 1996,
the Company announced that it had been unable to reach a final agreement with
Cogeco and that the Company is actively negotiating with other potential
Canadian partners to replace Cogeco, so as to comply with Canadian foreign
ownership and regulatory requirements. There can be no assurance that the
Company will be able to identify such a partner or, if such a partner is
identified, that an agreement can be reached on terms favorable to the Company.
Any failure on the part of the Company to enter into such an arrangement could
have a material adverse effect on the Company's prospects in Canada. Moreover,
even if the Company reaches an agreement with a Canadian partner, there can be
no assurances that the joint venture will be able to implement a FHMA(TM)
wireless communications network in Canada, which implementation shall be subject
to the same risk associated with the implementation of the Company's U.S.
Network.
21
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
In June 1996, the Korean Ministry of Information and Communications awarded
a consortium, Anam Telecom Co. Ltd. ("Anam Telecom") in which the Company holds
a 21% interest, a license to operate a nationwide trunked radio system in Korea.
Anam Telecom also includes approximately 53 Korean companies, among them Anam
Industrial Co. Ltd. (the Company's joint venture partner in Korea), Hyundai
Electronics, Korean Mobile Telecom, Ssangyong Corporation and Korea Express. The
license covers a geographic area with a population of approximately 45 million
people and is based on the implementation of the Company's FHMA(TM) system on an
800 MHZ frequency. The Company's FHMA(TM) system currently operates in the 900
MHZ frequency band. Although the Company believes that it will successfully
adapt its FHMA(TM) system to the 800 MHZ frequency, such adaptation is subject
to a number of contingencies and the manufacture of certain equipment required
in connection therewith. There can be no assurance that the Company will be able
to successfully adapt its FHMA(TM) system to the 800 MHZ frequency on a timely
basis. Any failure on the part of the Company to successfully adapt its FHMA(TM)
technology pursuant to the terms of the Korean license could have a material
adverse effect on the Company's prospects in Korea. In addition, the Company
will provide FHMA(TM) related infrastructure equipment and broad business and
engineering support for the design, implementation and operation of the network
in Korea. Finally, the development of a FHMA(TM) based digital system in Korea
will be subject to the same risks attendent to the development of the Company's
digital wireless system in the United States.
In June 1996, the United Kingdom Department of Trade and Industry awarded
the Company's United Kingdom operating subsidiary a license to operate a digital
Public Access Mobile Radio ("PAMR") network in the United Kingdom. Under the
terms of the new digital license, the operating subsidiary will receive up to
two megahertz of spectrum in the 410-430 MHZ band for the construction of a
network based on the new Trans European Trunked Radio ("TETRA") standard.
Currently, there are no TETRA systems available for commercial application.
While some potential vendors have indicated an interest in supplying a
TETRA-based system to National Band Three Ltd. (NB3), the Company's United
Kingdom subsidiary, management of the company and NB3 cannot accurately estimate
the availability, quality and costs associated with the implementation of a
TETRA-based network. Management is continuing to work with potential vendors and
regulatory authorities in the United Kingdom regarding implementation of such
system. However, there can be no assurance that NB3 will be able to implement
such a system or, if implemented, when NB3 will be in a position to roll-out a
TETRA-based system. Finally, the development of a TETRA-based system in the
United Kingdom will be subject to the same risks attendent to the development of
the Company's digital wireless system in the United States.
The Company expects that the digital network, when and if implemented by
the Company in the United Kingdom, will offer a full range of mobile voice and
data services, including telephony, digital dispatch, automatic vehicle location
and packet data. The Company hopes to commence commercial operations of such a
digital network in 1998. The Company's United Kingdom operating subsidiary
already provides PAMR services to over 60,000 business subscribers throughout
the United Kingdom.
The Company's communications products subsidiaries are primarily engaged in
the development, manufacturing, and marketing of telephone peripherals and sound
and communications equipment.
The Corporate Group includes the Company's Corporate headquarters and
Geotest, Inc. subsidiary.
Summary of Operations
The Summary of Operations provides an analysis of the three month and nine
month periods ended September 30, 1996, compared to the same periods in 1995.
For purposes of this discussion, year to date represents the nine month period
ended September 30.
Consolidated
Consolidated revenues increased by 14% in the third quarter of 1996 and by
12% year to date 1996, principally due to the inclusion of the German networks
whose operating results were consolidated by the Company beginning in July and
December 1995, as well as subscriber growth of the National Band Three Network
("NB3").
Consolidated operating expenses increased by 36% in the third quarter of
1996, and by 38% year to date, principally due to increased cost of service,
marketing, and general and administrative expenses related to the roll-out of
the U.S. Network.
22
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
On a consolidated basis, interest expense for the three and nine months
ended September 30, 1996 increased due to the 15% Senior Secured Discount Notes
issued in July 1995 and the Company's 12% Convertible Notes issued in March 1996
offset by capitalized interest on construction in progress of $1.1 million and
$2.9 million for the three and nine months ended September 30, 1996,
respectively. Interest income increased for the three and nine months ended
September 30, 1996 due to greater cash and cash equivalents which resulted from
the issuance of the Senior Secured Discount Notes, Convertible Notes, and Series
N Preferred Stock.
Consolidated losses from operations increased by $13.3 million for the
third quarter to $34.5 million and by $44.8 million to $92.2 million year to
date.
Wireless Communications Activities
The tables below set forth certain information with respect to the results
of the Company's Wireless Communications activities for the three months ended
September 30, 1996 and 1995. Other International Activities include the
Company's German Networks, international business development activities and
equity interests in its Korean Joint Ventures. Geotek Technologies column
includes Geotek Technologies Israel, Ltd., formerly PowerSpectrum Technology and
GMSI, Inc.
For the Three Months Ended September 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Other Int'l Geotek
U.S. Network NB3 Activities Technologies Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 198 $ 7,136 $ 1,162 $ 1,500 $ 9,996
Gross profit (4,471) 4,810 372 195 906
% of revenues 67% 32% 13% 9%
Research and Development 8,798 8,798
Marketing 4,129 1,474 107 369 6,079
General and Administrative 2,754 986 1,981 702 6,423
Equity in loss of less than 50%
owned entities 9 9
Other (income) expenses 20 (84) (64)
(Loss) income before interest,
taxes, amortization & depr. (11,374) 2,350 (1,641) (9,674) (20,339)
Amortization and depreciation 2,087 1,562 858 720 5,227
(Loss) income before interest
and taxes (13,461) 788 (2,499) (10,394) (25,566)
Net (loss) income ($13,550) $ 309 ($2,648) ($10,260) ($26,149)
Subscribers, end of period 1,100 62,300 15,000 78,400
</TABLE>
23
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
For the Three Months Ended September 30, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Other Int'l Geotek
U.S. Network NB3 Activities Technologies Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 545 $ 6,469 $ 300 $ 900 $ 8,214
Gross profit (885) 4,017 (469) 291 2,954
% of revenues (162%) 62% (156%) 32% 36%
Research and Development 3,088 3,088
Marketing 2,917 1,176 258 4,351
General and Administrative 1,382 810 356 1,024 3,572
Equity in loss of less than
50% owned entities 1,801 1,801
Other income (541) (541)
(Loss) income before interest,
taxes, amortization & depr. (4,643) 2,031 (2,626) (4,079) (9,317)
Amortization and depreciation 911 1,037 591 167 2,706
(Loss) income before interest
and taxes (5,554) 994 (3,217) (4,246) (12,023)
Net (loss) income ($5,391) $ 924 ($3,254) ($4,363) ($12,084)
Subscribers, end of period 54,700 9,500 64,200
</TABLE>
Revenues from wireless communications increased by $1.8 million or 22% for
the quarter ended September 30, 1996. This increase is primarily due to the
increase in the number of subscribers using the NB3 network (which totaled
approximately 62,300 and 54,700 at September 30, 1996 and 1995, respectively),
as well as, an increase in GMSI, Inc.'s revenue due to its contract related to
the Singapore taxi fleet. Average monthly revenue per subscriber on the NB3
network remained constant. Gross profit as a percent of revenues, for NB3,
increased as costs are primarily fixed thus, allowing subscriber growth to
increase the gross profit percentage. Negative gross profit for the U.S. Network
is a result of direct costs related to the roll-out which are currently not
covered by revenue. In 1995, the U.S. Network included the results of the
Company's MetroNet subsidiary. In November 1995, the assets of MetroNet,
primarily 800 MHZ licenses, were exchanged for 900 MHZ licenses.
Research and development expenses (net of government grants of $2.6 million
in 1995) related to the digital wireless system and subscriber unit were $8.8
million for the three months ended September 30, 1996 compared to $3.1 million
for the same period of 1995. The increase in the 1996 expense is primarily
attributable to costs related to the development of the U.S. Network's
commercial subscriber unit and enhancements to U.S. Network's FHMA(TM) system,
including system software. In addition, the Company expensed, at the time of
acquisition, the $1.9 million excess of the consideration given over the fair
value of the net assets received in the purchase of MIS Information Systems
Holdings Ltd. as the acquisition primarily related to ongoing software
development projects. The Company expects significant research and development
expenses to continue in the future in connection with enhancements to the
Company's FHMA(TM) system, development of a portable subscriber unit, and
development of international digital wireless systems.
The Company is beginning to offer wireless service over its proprietary
network in many markets in the United States and accordingly continues to
establish its marketing, engineering, operations and administrative staff and
systems. Marketing expenses increased by approximately $1.7 million or 40% due
to this marketing effort and increases in staff needed to execute the roll-out
of the U.S. wireless network. General and administrative expense increased $2.8
million or 80% due to an increase in U.S. Network administrative staff to
support the U.S. Network and growth in international business development
activities.
24
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
The Company's equity in losses of less than 50% owned entities for the
quarter ended September 30, 1995 relate to the Company's investments in the PBG
German network and for the Company's Korean Joint Ventures. The comparable loss
for the quarter ended September 30, 1996 is attributable to the Company's Korean
Joint Ventures. In July 1995 and December 1995, the Company acquired the
remaining shares of the DBF and PBG German networks, respectively, and began
consolidating these subsidiaries. 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 number of subscribers on these networks as of September 30, 1996 was
approximately 15,000. As discussed above, the Company has entered into a letter
of intent to merge these networks with RWE's network.
As discussed above, he Company's Korean Joint Ventures are in the process
of establishing a digital network in Korea. It is expected that these entities
will continue to generate substantial losses in the near future.
Wireless activities generated a loss before interest, taxes, amortization
and depreciation of $20.3 million for the quarter ended September 30, 1996
compared to $9.3 million in 1995. This increase is primarily due to costs
related to the roll-out of the digital wireless communication system for the
U.S. network.
The tables below set forth certain information with respect to the results
of the Company's Wireless Communications activities for the nine months ended
September 30, 1996 and 1995. Other International Activities includes the
Company's German Networks, international business development activities, and
its ownership interest in its Korean Joint Ventures. Geotek Technologies, Inc.
includes Geotek Technologies Israel, Ltd., formerly PowerSpectrum Technology and
GMSI, Inc.
For the Nine Months Ended September 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Other Int'l Geotek
U.S. Network NB3 Activities Technologies Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 370 $20,534 $ 3,046 $ 5,932 $29,882
Gross profit (12,750) 13,891 309 1,250 2,700
% of revenues 68% 10% 21% 9%
Research and Development 23,536 23,536
Marketing 11,648 4,054 511 1,004 17,217
General and Administrative 6,167 2,741 4,966 2,059 15,933
Equity in loss of less than
50% owned entities 1,029 1,029
Other income (765) (84) (849)
(Loss) income before interest,
taxes, amortization & depr. (29,671) 7,096 (6,113) (25,349) (54,166)
Amortization and depreciation 3,794 3,791 2,536 1,364 11,485
(Loss) income before interest
and taxes (33,594) 3,305 (8,649) (26,713) (65,651)
Net (loss) income ($33,306) $ 856 ($9,056) ($26,633) ($67,139)
Subscribers, end of period 1,100 62,300 15,000 78,400
</TABLE>
25
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
For the Nine Months Ended September 30, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Other Int'l Geotek
U.S. Network NB3 Activities Technologies Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,683 $18,334 $ 300 $ 3,038 $ 23,355
Gross profit (990) 11,273 (469) 833 10,647
% of revenues (59%) 61% (156%) 27% 46%
Research and Development 16,253 16,253
Marketing 5,860 3,766 813 10,439
General and Administrative 7,460 2,425 356 1,296 11,537
Equity in loss of less than
50% owned entities 3,703 3,703
Other income (1,401) (89) (1,490)
(Loss) income before interest,
taxes, amortization & depr. (12,909) 5,171 (4,528) (17,529) (29,795)
Amortization and depreciation 1,671 3,088 1,189 405 6,353
(Loss) income before interest
and taxes (14,580) 2,083 (5,717) (17,934) (36,148)
Net (loss) income ($14,278) $ 1,867 ($5,754) ($18,164) ($36,329)
Subscribers, end of period 54,700 9,500 64,200
</TABLE>
Revenues from wireless communications increased by $6.5 million or 28% for
the nine months ended September 30, 1996. This increase is primarily due to the
inclusion of the German networks on a consolidated basis in 1996, the increase
in the number of subscribers using the NB3 network as well as, an increase in
GMSI, Inc.'s revenue due to its contract related to the Singapore taxi fleet.
Average monthly revenue per subscriber on the NB3 network remained constant.
Gross profit as a percent of revenues, for NB3, increased as costs are primarily
fixed thus, allowing subscriber growth to increase the gross profit percentage.
Negative gross profit for the U.S. Network is a result of direct costs related
to the roll-out which are currently not covered by revenue. In 1995, the U.S.
Network included the results of the Company's MetroNet subsidiary. In November
1995, the assets of MetroNet, primarily 800 MHZ licenses, were exchanged for 900
MHZ licenses.
Research and development expenses (net of government grants of $0.3 million
and $2.6 million in 1996 and 1995, respectively) related to the digital wireless
system and subscriber unit were $23.5 million for the nine months ended
September 30, 1996 compared to $16.2 million for the same period of 1995. The
1995 expenses included approximately $2.0 million for shares issued in
connection with a research and development project. The increase in the 1996
expense is primarily attributable to costs related to the development of the
U.S. Network's commercial subscriber unit and enhancements to the U.S. Network's
FHMA(TM) system, including system software. In addition, the Company expensed
the $1.9 million excess of the consideration paid over the fair value of the net
assets received in the purchase of MIS Information Systems Holdings Ltd. as the
acquisition primarily related to ongoing software development projects.
Marketing expenses increased by approximately $6.8 million or 65% due to
the marketing effort and increase in staff needed to execute the roll-out of the
U.S. wireless network. General and administrative expense increased due to an
increase in administrative staff to support the U.S. Network and the Company's
international business development activities.
The Company's equity in losses of less than 50% owned entities for the nine
months ended September 30, 1995 is attributable to the Company's investment in
the PBG and DBF German networks and the Company's Korean Joint Ventures. The
comparable loss for 1996 is attributable to the Company's Korean Joint Ventures.
In July 1995 and December 1995, the Company acquired the remaining shares of the
DBF and PBG German networks, respectively, and began consolidating these
subsidiaries.
Wireless activities generated a loss before interest, taxes, amortization
and depreciation of $54.2 million for the nine months ended September 30, 1996
compared to $29.8 million in 1995. This increase is primarily due to costs
related to the commencement of the roll-out of the digital wireless
communication system for the U.S. Network and the inclusion of the German
networks on a consolidated basis in 1996.
26
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued Communications Products Activities
The table below sets forth certain information with respect to the results
of operations of Bogen Communications International ("BCI"), as consolidated by
the Company, for the three months and nine months ended September 30, 1996 and
1995.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $12,388 $ 11,689 $34,078 $ 34,150
Gross profit 5,858 4,428 15,450 14,251
% of revenue 47% 38% 45% 42%
Research and Development 808 492 2,150 1,593
Marketing 2,393 2,678 6,586 7,447
General and Administration 1,104 2,543 3,029 4,253
Other expenses 5
Income (loss) before interest, tax, minority
interest, amortization & depreciation 1,553 (1,290) 3,685 958
Amortization & depreciation 400 259 975 1,019
Interest expense, tax & minority interest 361 692 1,294 2,044
Net income (loss) $792 $ (2,241) $ 1,416 ($2,105)
</TABLE>
Revenues from communications products activities increased by $0.7 million,
or 6% to $12.4 million for the quarter ended September 30, 1996 and were
relatively constant year to date. The increase in third quarter sales is
primarily due to a $1.2 million increase in the core product line offset by a
decrease in the office automation ("OAS") product line sales of $0.5 million,
which product line was phased out beginning December 1995. The year to date
increase in BCI's core product sales of $2.2 million was offset by the decrease
in year to date OAS product line sales.
Gross profit as a percentage of revenues increased from 38% to 47% in the
third quarter of 1996 compared to the same period in 1995 and from 42% to 45%
year to date. The increase resulted primarily from the decrease in sales of OAS
products which have lower profit margins than BCI's core products.
The decrease in marketing expenses for the three and nine months ended
September 30, 1996 compared to the same periods of 1995 is due to the reduction
of marketing and payroll expenses related to the OAS product line.
General and administration expense for the three and nine months ended
September 30, 1995 contained costs related to the Company's sale of Bogen
Communications and Speech Design subsidiaries to BCI.
Corporate Group
The Corporate Group generated losses before net interest expense,
amortization, depreciation, and other charges of $2.1 million and $6.8 million
for the third quarter and year to date 1996 compared to losses of $1.7 million
and $1.8 million for the same periods in 1995. These increases are primarily due
to approximately $4.8 million of expenses associated with the Company's
investing and financing activities as well as the expansion of the Corporate
headquarters which began during the third Quarter of 1995. Revenues from
corporate group subsidiaries were $1.6 million and $3.9 million for the third
quarter and year to date 1996, respectively compared to revenues of $1.0 million
and $2.9 million for the same periods in 1995.
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 convertible notes and convertible preferred stock during the nine months
ended September 30, 1996. At September 30, 1996, the Company had $78.3 million
of cash and cash equivalents as well as $64.5 million available under line of
credit facilities of which $24.5 million was drawn down in October 1996.
27
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
The Company's short term cash needs are attributable primarily to capital
expenditures, marketing expenses and research and development costs associated
with the implementation and deployment of its digital FHMA(TM) networks. 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) in order to provide initial commercial service.
Additionally, the Company is rolling out its U.S. Network market by market and
is targeting customers which require primarily local or regional coverage.
Management believes that this modularity and its local deployment provides the
Company flexibility in controlling its resources by accelerating or slowing down
the rate at which the U.S. Network is rolled out in various markets without
materially impacting the business results, or cash flow of its then operating
city or regional networks.
The Company estimates that a minimum average investment of approximately $7
million is required to roll-out its U.S. network in an average target market.
Additional expenditures will be required later in a given market if and when
increased subscriber capacity or coverage is needed. In addition, the Company
estimates that it will continue its present level of research and development
expenses during the next 12 months in connection primarily with enhancements to
the system and other related projects.
The Company is planning to raise capital during the next 12 months to
continue financing its current operating plan. The Company's long term capital
needs relate to the planned roll-out of the U.S. Network in over 35 cities, the
repayment of convertible debt and redeemable preferred stock (if such are not
converted into equity), the repayment of the Company's vendor credit and Senior
Secured Discount Notes due 2005, the financing of international digital wireless
networks, and the acquisition 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. There can be no assurance that the Company will be able to obtain any
such financing on acceptable terms, or at all. The failure to obtain such
financing will cause the Company to significantly alter its U.S. Network rollout
plan and financing its international digital wireless networks.
The following discussion of liquidity and capital resources, among other
things, compares the Company's financial and cash position as of September 30,
1996, to the Company's financial and cash position as of December 31, 1995.
During the first nine months of 1996, cash and cash equivalents increased
by $16.8 million to $78.3 million, while working capital increased by $6.1
million to $75.3 million as of September 30, 1996.
Operating Activities
Cash utilized in connection with operating activities, net of the effect of
the changes in operating assets and liabilities of $12.4 million, for the nine
months ended September 30, 1996, amounted to $56.0 million. The change in
operating assets and liabilities primarily relate to the purchase of and
advances made to suppliers for subscriber unit inventory for the Company's U.S.
Network.
Investing Activities
Cash outflows from investing activities, exclusive of decrease in temporary
investments of $7.9 million and the decrease in restricted cash of $29.8
million, were $72.8 million. The Company expended $34.0 million to acquire
equipment during the first three quarters of 1996.
During the nine months ended September 30, 1996, the Company expended $29.7
million for spectrum licenses. In July 1996, through the Federal Communication
Commission's (the "FCC") 900 MHZ Spectrum auctions, the Company purchased 181
10-channel blocks in 42 regional service areas known as Major Trading Areas at
an aggregate cost of approximately $30.9 million. At December 31, 1995, the
Company had $8.0 million on deposit with the FCC. The remainder was paid in 1996
with existing cash resources.
In July 1996, the Company contributed approximately $9.6 million to Anam
Telecom on account of the Company's portion of the initial capitalization of
Anam Telecom.
28
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
In August 1996, the Company purchased the remaining 50% ownership interest
in software developer M.I.S. Information Systems Ltd. ("MIS") effective July 1,
1996. MIS was formed in 1994 as a 50/50 joint venture between the Company and
Decision Systems Israel Ltd. The remaining 50% interest was acquired for a $2
million promissory note which bears interest at 8.25% per annum and is due July
1, 1998. The Company attributed the excess of consideration paid over the fair
value of net the assets acquired, approximately $1.9 million, to an incomplete
research and development project and expensed at the time of the purchase as the
acquisition primarily related to ongoing software development projects.
Financing Activities
In March 1996, the Company issued $75.0 million aggregate principal amount
of Senior Subordinated Convertible Notes due 2001 ("Convertible Notes"). Each
Convertible Note is in the principal amount of $1,000, and beginning on March 5,
1997 may be converted by the holders into shares of the Company's common stock,
par value $.01, at a conversion price equal to $9.50 per share. Cash interest on
the Convertible Notes accrues at a rate of 12% per annum and is payable
semi-annually on each February 15 and August 15 commencing August 15, 1996. The
Convertible Notes are unsecured senior subordinated obligations of the Company.
The Convertible Notes can be converted at the option of the Company after 18
months if the closing price of the Company's common stock for 20 of the 30
trading days and for the five trading days before conversion is at least $15.20
per share.
In April, 1996, the Company and S-C Rig Investments - III, L.P. ("S-C
Rig"), a significant stockholder of the Company, which is affiliated with George
Soros, entered into an agreement whereby S-C Rig made a $40.0 million unsecured
credit facility the ("S-C Rig Credit Facility") available to the Company
beginning June 1996. Under the terms of the S-C Rig Credit Facility, all
borrowings are required to be made prior to April 5, 1998. All borrowings under
the S-C Rig Credit Facility will accrue interest at a rate of 10% per annum and
will mature four years from the date of the final borrowing thereunder. The
Company will be obligated to pay S-C Rig a fee equal to 3% of each borrowing
under the credit facility at the time of such borrowing. Borrowings under the
S-C Rig Credit Facility will constitute senior indebtedness of the Company. At
September 30, 1996, there were no outstanding loans under the S-C Rig Credit
Facility.
In connection with the establishment of the S-C Rig Credit Facility, the
Company issued to S-C Rig a five-year warrant to purchase approximately 4.2
million shares of Common Stock at an exercise price of $9.50 per share (subject
to adjustment in certain circumstances). This warrant is exercisable at any
time.
In June 1996, the Company sold 55,000 shares of Series N Cumulative
Convertible Preferred Stock ("Series N Stock") at an aggregate purchase price of
$55 million, to entities affiliated with the Charles R. Bronfman Family Trust,
the Kolber Trust, the Renaissance Fund, and certain existing shareholders of the
Company. The Series N Stock pays dividends in Common Stock at a rate of 10% per
annum. Additionally, the Series N Stock is immediately convertible into shares
of the Company's Common Stock at $11.00 per share. In connection with this
transaction, the Company issued five year warrants to purchase approximately
1.65 million shares of the Company's Common Stock at $11.00 per share. In
addition, the Company incurred financing fees equal to 3% of the aggregate
purchase price and has recorded this amount as a reduction to the net proceeds
of the issuance.
In September 1996, the Company through its wholly-owned subsidiary, Geotek
Financing Corporation ("GFC"), entered into a series of agreements with Hughes
Network Systems, Inc. ("HNS") under which HNS agreed to manufacture at least 50%
of certain components utilized by the Company in its 900 MHZ infrastructure
equipment and to provide the Company with up to $100 million in vendor credit
financing, subject to the satisfaction of certain conditions. Under the terms of
the vendor credit financing agreement, the Company will finance 90% of its
purchases of infrastructure related equipment from HNS until June 1999. All
borrowings made under the agreement bear interest, payable quarterly, at a rate
of 11% per annum until December 1999. Beginning December 1999, principal and
interest are to be repaid semi-annually in equal installments over a five year
period.
In connection with the above agreement, the Company issued HNS seven year
Warrants to purchase 2,500,000 shares of the Company's common stock. The
warrants allow HNS to purchase 1,000,000 shares at $8.625 Per share, 1,000,000
shares at $10.78 per share, and 500,000 shares at $12.94 per share. These
warrants are exercisable at any time after September 27, 1997. The warrants,
which have been valued at approximately $8.7 million, were recorded as other
assets and are being amortized over a the life of the facility and debt payback
period.
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GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS: Continued
In October 1996, the Company borrowed $24.5 million under the Company's
line of credit agreement with HNS. Under the terms of the agreement, the two
year loan bears interest at 12%, payable semi annually and is convertible by the
holder at 90% of the average sale price of the Company's common stock for the 10
days preceding conversion or the maximum conversion price of $9.75.
The Company paid cash dividends totaling approximately $3.8 million on its
outstanding preferred stocks during the first three quarters of 1996. Proceeds
from the exercise of warrants and options totaled approximately $2.6 million in
the first three quarters of 1996.
The Company anticipates that it will need approximately $250 million of
additional financing to implement its U.S. Network in all of its target markets.
Although the Company believes that the marcrocellular architecture of its
FHMA(TM) network will permit the Company to control its cash expenditures to a
limited extent by focusing its activities in certain markets while reducing or
delaying its activities in other markets, the failure by the Company to obtain
necessary financing on a timely basis may prevent the Company from expanding
coverage, adding subscribers or offering additional services in some or all of
its U.S. markets and forego certain international opportunities.
The Company's need for additional financing will increase if the Company
experiences delays in the commercial implementation of its U.S. Network (which
have occurred in the past), cost overruns or unanticipated cash needs. The
Company also expects to need substantial additional financing to fund its
international operations and opportunities.
The Company is considering a number of alternatives to raise additional
financing including, but not limited to, public or private equity or debt
financing, bank loans, strategic partners, joint ventures, vendor financing,
leasing arrangements or a combination of these sources. The documents governing
the Company's outstanding indebtedness impose certain significant operating and
financial restrictions on the Company, which limit, among other things, the
Company's ability to incur indebtedness, make prepayments of certain
indebtedness, pay dividends, make investments, and engage in mergers and
acquisitions. There can be no assurance that the Company will be able to obtain
additional financing on a timely basis or on acceptable terms.
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GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 10 - Amended and Restated Borrower Pledge Agreement,
dated September 27, 1996, by and among Geotek
Financing Corporation, Geotek Communications, Inc.
and Hughes Network Systems, Inc.
12 - Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company during the
second quarter of 1996.
(I) Current report on Form 8-K filed August 29, 1996 reporting the
extension to the date in which Vanguard Cellular Systems, Inc.
("Vanguard") and Toronto Dominion Investment, Inc. ("TDI") may
exercise their respective Series A Options from September 1,
1996 until September 16, 1996.
(II) Current report on Form 8-K filed September 17, 1996 reporting
the expiration of the Series A Options granted to Vanguard
Cellular Systems, Inc. ("Vanguard") and the termination of the
Series A Options granted to Toronto Dominion Investments, Inc.
("TDI"). In addition, the management consulting agreement
between the Company and Vanguard was terminated as a result of
the options expiring.
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GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GEOTEK COMMUNICATIONS, INC.
Date: November 14, 1996 /s/ Michael R. Mc Coy
----------------------
Michael R. Mc Coy
Sr. Vice President and
Chief Financial Officer
Date: November 14, 1996 /s/ Michael H. Carus
---------------------
Michael H. Carus
Chief Accounting Officer and
Corporate Controller
32
[EXECUTION COPY]
AMENDED AND RESTATED BORROWER PLEDGE AGREEMENT
THIS AMENDED AND RESTATED BORROWER PLEDGE AGREEMENT (this "Agreement") is
made and entered into as of September 27, 1996 by GEOTEK FINANCING CORPORATION,
a Delaware corporation, having its principal office at c/o Geotek
Communications, Inc., 20 Craig Road, Montvale, NJ 07645 (the "Pledgor"), in
favor of HUGHES NETWORK SYSTEMS, INC., a Delaware corporation, having an office
at 10450 Pacific Center Court, San Diego, CA 92121 ("HNS"), for itself and as
collateral agent for the benefit of the Lenders (as defined below) (in such
capacity, the "Collateral Agent") and AMENDS AND RESTATES IN FULL the Borrower
Pledge Agreement dated as of December 21, 1995, among the Pledgor and HNS, as
lender (HNS, together with its successors and assigns, referred to collectively
as the "Loan Agreement Lenders") (the "Original Pledge Agreement").
W I T N E S S E T H:
WHEREAS, the Pledgor, Geotek Communications, Inc., as guarantor (the
"Guarantor") and HNS (HNS, together with its successors and assigns and the
other Lenders described in the Financing Agreement referred to collectively as
the "Financing Agreement Lenders" and, together with the Loan Agreement Lenders,
referred to collectively as the "Lenders") have entered into a Vendor Credit
Financing Agreement of even date herewith (as amended or otherwise modified from
time to time, the "Financing Agreement") pursuant to which the Financing
Agreement Lenders have agreed to make Advances (as defined therein) to the
Pledgor as evidenced by the Notes (as defined therein). Capitalized terms used
herein and not otherwise defined herein shall have the meanings given to such
terms in the Financing Agreement;
WHEREAS, pursuant to the Original Pledge Agreement, the Pledgor pledged to
the Loan Agreement Lenders all of the Pledgor's right, title and interest in and
to the outstanding shares of stock set forth on Schedule I hereto (the "Pledged
Shares") and those certain inter-company promissory notes in favor of the
Pledgor set forth on Schedule II hereto (the "Pledged Notes" and, together with
the Pledged Shares, the "Pledged Securities") as collateral for all obligations
of the Pledgor (the "Loan Agreement Obligations") under that certain Loan
Agreement, dated as of December 21, 199(5) (the "Loan Agreement"), among the
Pledgor, the Guarantor and HNS, as evidenced by the promissory notes executed
and delivered to any Loan Agreement Lender by the Pledgor in connection with the
Loan Agreement (the "Loan Agreement Notes" and, together with the Notes, the
"Secured Notes");
WHEREAS, the Financing Agreement Lenders have required, as a
condition to their entering into the Financing Agreement, that the Pledgor grant
to the Collateral Agent, for its benefit and the ratable benefit of the
Financing Agreement Lenders, a security interest in the Pledged Securities to
secure the Obligations, such security interest to be shared equally and ratably
with the Loan Agreement Lenders; and
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WHEREAS, the Loan Agreement Lenders are willing to share their security
interest in the Pledged Securities equally and ratably with the Financing
Agreement Lenders.
AGREEMENT
NOW THEREFORE, in consideration of the premises and in order to induce the
Financing Agreement Lenders to make the Advances under the Financing Agreement
and the Loan Agreement Lenders to make the loans under the Loan Agreement, the
Pledgor hereby agrees with the Collateral Agent as follows:
SECTION 1. PLEDGE. The Pledgor hereby pledges to the Collateral Agent, for
its benefit and the ratable benefit of the Lenders, and grants to the Collateral
Agent, for its benefit and the ratable benefit of the Lenders, a continuing
first priority perfected security interest in, the following (the "Pledged
Collateral"):
(a) the Pledged Shares and the certificates representing the Pledged
Shares, and all products and proceeds of any of the Pledged Shares
including, without limitation, all dividends, cash, instruments,
subscriptions, warrants and any other rights and options and other property
from time to time received, receivable or otherwise distributed in respect
of or in exchange for any or all of the Pledged Shares; and
(b) all additional shares of stock of, or equity interests in,
Holdings from time to time acquired by the Pledgor in any manner, and the
certificates representing such additional shares (any such additional
shares shall constitute part of the Pledged Shares under and as defined in
this Agreement), and all products and proceeds of any of such additional
Pledged Shares, including, without limitation, all dividends, cash,
instruments, subscriptions, warrants and any other rights and options and
other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such additional
Pledged Shares; and
(c) the Pledged Notes and the instruments representing the Pledged
Notes, and all products and proceeds of the Pledged Notes, including,
without limitation, all interest and principal payments, instruments, and
other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for the Pledged Notes; and
(d) all additional promissory notes of Holdings from time to time held
by the Pledgor in any manner, and the instruments representing such
additional promissory notes (any such additional promissory notes shall
constitute part of the Pledged Notes under and as defined in this
Agreement) and all products and proceeds of any such additional promissory
notes, including, without limitation, all interest and principal payments,
instruments, and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any such additional
promissory notes; and
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(e) all other claims of any kind or nature and any instruments,
certificates, chattel paper or other writings evidencing such claims,
whether in contract or tort and whether arising by operation of law,
consensual agreement or otherwise, at any time acquired by the Pledgor
against any Subsidiary of the Pledgor.
SECTION 2. SECURITY FOR SECURED OBLIGATIONS. This Agreement secures the
payment of all of the Obligations and the Loan Agreement Obligations
(collectively, the "Secured Obligations"), whether for principal, interest,
fees, expenses or otherwise, and all obligations of the Pledgor now or hereafter
existing under this Agreement (including, without limitation, all expenses as
set forth under Section 16 hereof), any of the Loan Documents (as defined by the
Loan Agreement, the "Loan Documents") or any of the Financing Documents (the
Secured Obligations and all such obligations of the Pledgor now or hereafter
existing under this Agreement being referred to herein as the "Liabilities").
SECTION 3. DELIVERY OF PLEDGED COLLATERAL. All certificates or instruments
representing or evidencing the Pledged Collateral shall be delivered to and held
by the Collateral Agent, for its benefit and the ratable benefit of the Lenders,
pursuant hereto and shall be in suitable form for transfer by delivery, or shall
be accompanied by duly executed instruments of transfer or assignment in blank,
all in form and substance satisfactory to the Collateral Agent.
SECTION 4. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and
warrants as follows:
(a) The Pledged Shares have been duly authorized and validly issued
and are fully paid and non-assessable. The Pledged Notes have been duly
authorized and executed by Holdings and constitute the legal, valid and
binding obligations of Holdings.
(b) The Pledgor is the legal and beneficial owner of the Pledged
Collateral, free and clear of any Lien on the Pledged Collateral, except as
expressly permitted in the Loan Agreement and the Financing Agreement.
(c) (i) Upon the delivery to the Collateral Agent of the Pledged
Collateral, the pledge of the Pledged Collateral pursuant to this Agreement
creates in favor of the Collateral Agent, for its benefit and the ratable
benefit of the Lenders, a valid and perfected first priority security
interest in such Pledged Collateral securing the payment of the Liabilities
and (ii) the valid and perfected first priority status of the pledge by the
Pledgor of the Pledged Collateral pursuant to the Original Pledge Agreement
shall continue uninterrupted and unaffected.
(d) Except as otherwise provided in Sections 14 and 15 hereof and
except for those obtained prior to the date hereof, no authorization,
approval, or other action by, and no notice to or filing with, any
governmental authority or regulatory body is required either (i) for the
pledge by the Pledgor of the Pledged Collateral pursuant to this Agreement
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or for the execution, delivery or performance of this Agreement by the
Pledgor or (ii) for the exercise by the Collateral Agent, for its benefit
and the ratable benefit of the Lenders, of the voting or other rights
provided for in this Agreement or the remedies in respect of the Pledged
Collateral pursuant to this Agreement.
(e) The Pledgor has full power and authority to enter into this
Agreement and has the right to vote, pledge and grant a security interest
in the Pledged Shares and to pledge and grant a security interest in the
Pledged Notes as provided by this Agreement.
(f) This Agreement has been duly authorized, executed and delivered by
the Pledgor and constitutes a legal, valid and binding obligation of the
Pledgor, enforceable against the Pledgor in accordance with its terms,
except as such enforceability may be limited by the effect of any
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws affecting creditors' rights generally or
general principles of equity (whether considered at law or in equity).
(g) The Pledged Shares constitute, as of the date hereof, all of the
outstanding shares of Capital Stock and voting securities of Holdings
beneficially owned by the Pledgor.
(h) The Pledged Notes listed on Schedule II hereto constitute the only
promissory notes of Holdings in favor of the Pledgor as of the date hereof.
(i) Except for the Pledged Securities, there are no other instruments,
certificates, securities or other writings, or any chattel paper,
evidencing or representing any interest in or claim against Holdings or any
subsidiary of Holdings, other than the guarantee given by Holdings pursuant
to the 1995 Indenture, as permitted by the Loan Agreement.
SECTION 5. FURTHER ASSISTANCE. The Pledgor agrees that at any time and from
time to time, at the expense of the Pledgor, the Pledgor will promptly execute
and deliver, or cause to be executed and delivered, all stock powers, note
powers, proxies, assignments, instruments and documents and take all further
action, that is reasonably necessary, at the Collateral Agent's request, in
order to perfect any security interest granted or purported to be granted hereby
or to enable the Collateral Agent, for its benefit and the ratable benefit of
the Lenders, to exercise and enforce its rights and remedies hereunder with
respect to any Pledged Collateral and to carry out the provisions and purposes
hereof.
SECTION 6. VOTING RIGHTS; DIVIDENDS; ETC.
(a) Notwithstanding the pledge of the Pledged Shares set forth in
Section 1 hereof, so long as no Default as defined in the Loan Agreement (a
"Loan Agreement Default") or Default as defined in the Financing Agreement
(a "Financing Agreement Default" and, any Financing Agreement Default or
Loan Agreement Default being referred to collectively herein as a
"Default") shall have occurred and be continuing, the Pledgor shall be
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entitled to exercise any and all voting and other consensual rights
pertaining to the Pledged Shares or any part thereof for any purpose not
inconsistent with the terms of this Agreement, any of the Loan Documents or
any of the Financing Documents; provided, however, that the Pledgor shall
not exercise or shall refrain from exercising any such right if such action
would have a material adverse effect on the value of the Pledged Collateral
to the Lenders or any part thereof or be inconsistent with or violate any
provisions of this Agreement, any of the Loan Documents or any of the
Financing Documents.
(b) Notwithstanding the pledge of the Pledged Notes set forth in
Section 1 hereof, so long as no Default shall have occurred and be
continuing, the Pledgor shall be entitled to receive all cash payments of
interest and principal paid from time to time with respect to the Pledged
Notes.
(c) Notwithstanding the pledge of the Pledged Shares set forth in
Section 1 hereof, so long as no Default shall have occurred and be
continuing, the Pledgor shall be entitled to receive all cash dividends
paid from time to time in respect of the Pledged Shares.
(d) Any and all (i) dividends or other distributions and interest or
principal paid or payable in the form of instruments and other property
(other than cash interest and principal payments permitted under Section
6(b) hereof and cash dividends permitted under Section 6(c) hereof)
received, receivable or otherwise distributed in respect of, or in exchange
for, any Pledged Collateral, (ii) dividends and other distributions paid or
payable in cash received, receivable or otherwise distributed in respect of
any Pledged Shares in connection with a partial or total liquidation or
dissolution or in connection with a reduction of capital, capital surplus
or paid-in-surplus, and (iii) cash paid, payable or otherwise distributed
in redemption of, or in exchange for, any Pledged Shares, shall in each
case be delivered forthwith to the Collateral Agent to hold, for its
benefit and the ratable benefit of the Lenders, as Pledged Collateral and
shall, if received by the Pledgor, be received in trust for the Collateral
Agent, for its benefit and the ratable benefit of the Lenders, be
segregated from the other property or funds of the Pledgor, and be
forthwith delivered to the Collateral Agent as Pledged Collateral in the
same form as so received (with any necessary endorsement).
(e) The Collateral Agent shall execute and deliver (or cause to be
executed and delivered) to the Pledgor all such proxies and other
instruments as the Pledgor may reasonably request for the purpose of
enabling the Pledgor to exercise the voting and other rights which it is
entitled to exercise pursuant to Section 6(a) above and to receive
dividends and distributions pursuant to Sections 6(b) and 6(c) above.
(f) All dividends or other distributions and all interest and
principal payments which are received by the Pledgor contrary to the
provisions of this Section 6 shall be received in trust for the Collateral
Agent, for its benefit and the ratable benefit of the Lenders, shall be
segregated from other funds of the Pledgor and shall be forthwith paid over
to the Collateral Agent as Pledged Collateral in the same form as so
received (with any necessary endorsement).
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(g) Upon the occurrence and during the continuance of a Default, all
rights of the Pledgor to exercise the voting and other consensual rights
which it would otherwise be entitled to exercise pursuant to Section 6(a)
shall cease, and all such rights shall become vested in the Collateral
Agent, for its benefit and the ratable benefit of the Lenders, which shall
thereupon have the sole right to exercise such voting and other consensual
rights.
(h) Upon the occurrence and during the continuance of a Default, all
cash payments of interest and principal with respect to the Pledged Notes
and all cash dividends or other distributions payable in respect of the
Pledged Shares shall be paid directly to the Collateral Agent and, if
received by the Pledgor, shall be received in trust for the Collateral
Agent, for its benefit and the ratable benefit of the Lenders, shall be
segregated from other funds of the Pledgor, and shall be forthwith paid
over to the Collateral Agent as Pledged Collateral in the same form as so
received (with any necessary endorsement) and the Pledgor's right to
receive such cash payments pursuant to Sections 6(b) and 6(c) hereof shall
immediately cease.
SECTION 7. TRANSFERS AND OTHER LIENS; ADDITIONAL SHARES.
(a) The Pledgor agrees that it will not (i) sell or otherwise dispose
of, or grant any option with respect to, any of the Pledged Collateral
without the prior written consent of the Collateral Agent, (ii) create or
permit to exist any Lien upon or with respect to any of the Pledged
Collateral, except for the security interest granted under this Agreement
or (iii) enter into any agreement or understanding that purports to or may
restrict or inhibit the Collateral Agent's rights or remedies hereunder,
including, without limitation, the Collateral Agent's right to sell or
otherwise dispose of the Pledged Collateral.
(b) The Pledgor agrees that it will pledge and deliver to the
Collateral Agent hereunder, immediately upon its acquisition (directly or
indirectly) thereof, any and all additional shares of stock, notes or other
securities of Holdings of which the Pledgor may become the beneficial owner
after the date hereof.
SECTION 8. COLLATERAL AGENT APPOINTED ATTORNEY-IN-FACT. The Pledgor hereby
appoints the Collateral Agent the Pledgor's attorney-in-fact, with full
authority in the place and stead of the Pledgor and in the name of the Pledgor
or otherwise, from time to time in the Collateral Agent's discretion to take any
action and to execute any instrument which the Collateral Agent may deem
necessary or advisable to further perfect and protect the security interest
granted hereby, including, without limitation, to receive, endorse and collect
all instruments made payable to the Pledgor representing any dividend, interest
or principal payment or other distribution in respect of the Pledged Collateral
or any part thereof and to give full discharge for the same. This power of
attorney is coupled with an interest and is irrevocable by the Pledgor. The
Pledgor hereby ratifies all that the Collateral Agent shall lawfully do or cause
to be done by virtue of this Section 8.
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SECTION 9. COLLATERAL AGENT MAY PERFORM. If the Pledgor fails to perform
any agreement contained herein, the Collateral Agent may itself perform, or
cause performance of, such agreement, and the reasonable expenses of the
Collateral Agent incurred in connection therewith shall be payable by the
Pledgor under Section 16 hereof.
SECTION 10. NO ASSUMPTION OF DUTIES; REASONABLE CARE. The rights and powers
granted to the Collateral Agent hereunder are being granted in order to preserve
and protect the Collateral Agent's security interest in and to the Pledged
Collateral granted hereby and shall not be interpreted to, and shall not, impose
any duties on the Collateral Agent or any of the Lenders to the Pledgor in
connection therewith. The Collateral Agent shall be deemed to have exercised
reasonable care in the custody and preservation of the Pledged Collateral in its
possession if the Pledged Collateral is accorded treatment substantially equal
to that which the Collateral Agent accords its own property, it being understood
that the Collateral Agent shall not have any responsibility for (i) ascertaining
or taking action with respect to calls, conversions, exchanges, maturities,
tenders or other matters relative to any Pledged Collateral, whether or not the
Collateral Agent or any of the Lenders has or is deemed to have knowledge of
such matters, or (ii) taking any necessary steps to preserve rights against any
parties with respect to any Pledged Collateral.
SECTION 11. SUBSEQUENT CHANGES AFFECTING PLEDGED COLLATERAL. The Pledgor
represents to the Collateral Agent that the Pledgor has made its own
arrangements for keeping informed of changes or potential changes affecting the
Pledged Collateral (including, but not limited to, rights to convert, rights to
subscribe, payment of dividends, payments of interest and/or principal,
reorganization or other exchanges, tender offers and voting rights), and the
Pledgor agrees that the Collateral Agent and the Lenders shall have no
responsibility or liability for informing the Pledgor of any such changes or
potential changes or for taking any action or omitting to take any action with
respect thereto. The Pledgor covenants that it will not, without the prior
written consent of the Collateral Agent, sell or otherwise dispose of, or grant
any option with respect to, any of the Pledged Collateral or create or permit to
exist any Lien upon or with respect to any of the Pledged Collateral, except for
Permitted Liens (as defined in each of the Loan Agreement and the Financing
Agreement).
SECTION 12. REMEDIES UPON DEFAULT. If any Default shall have occurred and
be continuing, the Collateral Agent shall, in addition to all other rights given
by law or by this Agreement, any of the Loan Documents, any of the Financing
Documents, or otherwise, but subject to Sections 14 and 15 of this Agreement,
have all of the rights and remedies with respect to the Pledged Collateral of a
secured party under the Uniform Commercial Code in effect in the State of New
York at that time and the Collateral Agent (personally or through an agent) may,
without notice and at its option, transfer or register, and the Pledgor shall
register or cause to be registered upon request therefor by the Collateral
Agent, the Pledged Collateral or any part thereof on the books of Holdings into
the name of the Collateral Agent or the Collateral Agent's nominee(s),
indicating that such Pledged Collateral is subject to the security interest
hereunder. In addition, with respect to any Pledged Collateral which shall then
be in or shall thereafter come into the possession or custody of the Collateral
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Agent, the Collateral Agent (personally or through an agent) may sell or cause
the same to be sold at any broker's board or at any public or private sale, in
one or more sales or lots, at such price or prices as the Collateral Agent may
deem best, for cash or on credit or for future delivery, without assumption of
any credit risk, all in accordance with the terms and provisions of this
Agreement, the Loan Agreement and the Financing Agreement. The purchaser of any
or all Pledged Collateral so sold shall thereafter hold the same absolutely,
free from any claim, encumbrance or right of any kind whatsoever. Unless any of
the Pledged Collateral threatens to decline speedily in value or is or becomes
of a type sold on a recognized market, the Collateral Agent will give the
Pledgor reasonable notice of the time and place of any public sale thereof, or
of the time after which any private sale or other intended disposition is to be
made. Any sale of the Pledged Collateral conducted in conformity with reasonable
commercial practices of lenders in general disposing of property similar to the
Pledged Collateral shall be deemed to be commercially reasonable. Any
requirements of reasonable notice shall be met if such notice is mailed to the
Pledgor as provided in Section 19.1 below, at least fifteen (15) days before the
time of the sale or disposition. Any other requirement of notice, demand or
advertisement for sale is, to the extent permitted by law, waived. The
Collateral Agent may, for its benefit and the ratable benefit of the Lenders,
buy any of the Pledged Collateral at any public sale and, if permitted by
applicable law, at any private sale. All expenses (including court costs and
reasonable attorneys' fees, expenses and disbursements) of, or incident to, the
enforcement of any of the provisions hereof shall be recoverable from the
proceeds of the sale or other disposition of the Pledged Collateral.
In addition, upon the occurrence and during the continuance of a Default,
all rights of the Pledgor to exercise the voting and other rights which it would
otherwise be entitled to exercise shall cease, and all such rights shall
thereupon become vested in the Collateral Agent, for its benefit and the ratable
benefit of the Lenders, as provided in and subject to the terms of Section 6(g)
hereof.
SECTION 13. DISTRIBUTION OF PROCEEDS UPON DEFAULT. Upon the sale or other
disposition of any Pledged Collateral pursuant to Section 12 hereof, the
proceeds of such sale or other disposition shall be applied by the Collateral
Agent in the following order of priority:
(a) first, to the reasonable, out-of-pocket costs and expenses of the
Collateral Agent incurred in connection with the performance of its duties
under this Agreement;
(b) second, to the Lenders pro rata based on their respective
Outstanding Balance Shares (as defined below) until payment in full of all
Liabilities; and
(c) third, delivered to the Pledgor.
"Outstanding Balance Share" means a fraction (expressed as a percentage),
the numerator of which shall be the aggregate of the outstanding principal
amount of the Secured Notes held by such Lender and the denominator of which
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shall be the aggregate outstanding principal amount of all Secured Notes.
For the avoidance of doubt, none of the proceeds of such sale or other
disposition shall be distributed to the Lenders pursuant to Section 13(b) hereof
until the Collateral Agent has received full payment for all expenses incurred
by it in connection with the performance of its duties under this Agreement and
none of the proceeds of such sale or other disposition shall be distributed to
the Pledgor under Section 13(c) hereof until all of the Liabilities have been
paid in full.
SECTION 14. REGISTRATION RIGHTS; PRIVATE SALES.
(a) If the Collateral Agent shall, for its benefit and the ratable
benefit of the Lenders, determine to exercise its right to sell any or all
of the Pledged Shares pursuant to Section 12 hereof, and if in the opinion
of the Collateral Agent it is necessary or advisable to have the Pledged
Shares, or that portion thereof to be sold, registered under the provisions
of the Securities Act, the Pledgor will use its commercially reasonable
efforts to cause Holdings to (1) execute and deliver, and cause the
directors and officers of Holdings to execute and deliver, all such
instruments and documents, and do or cause to be done all such other acts
as may be, in the opinion of the Collateral Agent, necessary or advisable
to register the Pledged Shares, or that portion thereof to be sold, under
the provisions of the Securities Act, (2) to use its commercially
reasonable efforts to cause the registration statement relating thereto to
become effective and to remain effective for a period of one year from the
date of the first public offering of the Pledged Shares, or that portion
thereof to be sold, and (3) to make all amendments thereto and/or to the
related prospectus which, in the opinion of the Collateral Agent, are
necessary or advisable, all in conformity with the requirements of the
Securities Act and the rules and regulations of the Commission applicable
thereto. The Pledgor agrees to use its commercially reasonable efforts to
cause Holdings to comply with the provisions of the securities or "Blue
Sky" laws of any and all jurisdictions which the Collateral Agent shall
designate and to make available to the Collateral Agent and its security
holders, as soon as practicable, an earnings statement (which need not be
audited) which will satisfy the provisions of Section 11(a) of the
Securities Act.
(b) The Pledgor recognizes that the Collateral Agent may be unable to
effect a public sale of any or all the Pledged Shares, by reason of certain
prohibitions contained in the Securities Act and applicable state
securities laws or otherwise, and may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers which will be
obliged to agree, among other things, to acquire such securities for their
own account for investment and not with a view to the distribution or
resale thereof. The Pledgor acknowledges and agrees that any such private
sale may result in prices and other terms less favorable than if such sale
were a public sale and, notwithstanding such circumstances, agrees that any
such private sale shall be deemed to have been made in a commercially
reasonable manner. The Collateral Agent shall be under no obligation to
delay a sale of any of the Pledged Shares for the period of time necessary
to permit Holdings to register such securities for public sale under the
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Securities Act, or under applicable state securities laws, even if Holdings
would agree to do so.
(c) The Pledgor further agrees to use its commercially reasonable
efforts to do or cause to be done all such other acts as may be necessary
to make such sale or sales of all or any portion of the Pledged Shares
pursuant to this Section valid and binding and in compliance with any and
all other applicable requirements of law. The Pledgor further agrees that a
breach of any of the covenants contained in this Section will cause
irreparable injury to the Lenders, that the Lenders have no adequate remedy
at law in respect of such breach and, as a consequence, that each and every
covenant contained in this Section shall be specifically enforceable
against the Pledgor, and the Pledgor hereby waives and agrees not to assert
any defenses against an action for specific performance of such covenants
except for a defense that no Default has occurred.
SECTION 15. FCC MATTERS.
(a) If a Default shall have occurred and be continuing, the Pledgor
shall take any action which the Collateral Agent may request in the
exercise of its rights and remedies under this Agreement to transfer and
assign to the Collateral Agent, or to such one or more third parties as the
Collateral Agent may designate, or to a combination of the foregoing, the
Pledged Collateral. To enforce the provisions of this Section 15, the
Collateral Agent is hereby empowered to seek from the FCC an involuntary
transfer of control of Holdings for the purpose of seeking a bona fide
purchaser to whom control will ultimately be transferred. If a Default
shall have occurred and be continuing, the Pledgor hereby agrees to
authorize such an involuntary transfer of control upon the request of the
Collateral Agent. Upon the occurrence and continuation of a Default, the
Pledgor shall use its commercially reasonable efforts to assist in
obtaining approval of the FCC, if required, for any action or transactions
contemplated by this Agreement, including, without limitation, the
preparation, execution and filing with the FCC of the Pledgor's portion of
any application or applications for consent to transfer of control
necessary or appropriate under the FCC's rules and regulations for approval
of the transfer or assignment of any portion of the Pledged Collateral.
(b) The Pledgor acknowledges that FCC authorization for the transfer
of control of the licenses of Holdings and its Subsidiaries is integral to
the Lenders' realization of the value of the Pledged Collateral, that there
is no remedy at law for failure by the Pledgor to comply with the
provisions of this Section 15 and that such failure would not be adequately
compensable in damages, and therefore agrees that the agreements of the
Pledgor contained in this Section 15 may be specifically enforced.
(c) Notwithstanding anything to the contrary contained in this
Agreement, the Collateral Agent shall not, without first obtaining approval
of the FCC, take any action pursuant to this Agreement which would
constitute or result in any change of control of Holdings or any of its
Subsidiaries if such change in control would require, under then existing
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law (including the written rules and regulations of the FCC), the prior
approval of the FCC.
(d) Upon the occurrence and during the continuance of a Default and
subject to the other provisions of Sections 12 and 14, the Pledgor consents
to the transfer of control or assignment of the Pledged Collateral to a
receiver, trustee, transferee, or similar official or to any purchaser of
the Pledged Collateral pursuant to any public or private sale, judicial
sale, foreclosure or exercise of other remedies available to the Collateral
Agent, for its benefit and the ratable benefit of the Lenders, under this
Agreement and as permitted by applicable law.
(e) Notwithstanding anything to the contrary contained in this
Agreement, prior to the occurrence of a Default and compliance with all
applicable laws by the Collateral Agent, this Agreement and the
transactions contemplated hereby do not, will not, and are not intended to,
constitute, create or have the effect of constituting or creating, directly
or indirectly, actual or practical ownership of the Pledgor, Holdings or
any of their respective Subsidiaries by the Collateral Agent or the Lenders
or control, affirmative or negative, direct or indirect, of the Pledgor,
Holdings or any of their respective Subsidiaries, over the management or
any other aspect of the operations of the Pledgor, Holdings or any of their
respective Subsidiaries, which ownership and control remain exclusively and
at all times in the Pledgor, Holdings and their respective Subsidiaries, as
the case may be.
SECTION 16. EXPENSES. The Pledgor will, upon demand, pay to the Collateral
Agent the amount of any and all reasonable expenses, including, without
limitation, the reasonable fees, expenses and disbursements of its counsel
(including allocated costs of inside counsel), of any investment banking firm,
business broker or other selling agent and of any other experts and agents
retained by the Collateral Agent, which the Collateral Agent may incur in
connection with (i) the administration of this Agreement, (ii) the custody or
preservation of, or the sale of, collection from, or other realization upon, any
of the Pledged Collateral, (iii) the exercise or enforcement of any of the
rights of the Collateral Agent hereunder or (iv) the failure by the Pledgor to
perform or observe any of the provisions hereof. All expenses incurred in
connection therewith shall be for the sole account of the Pledgor, and shall
constitute part of the Liabilities secured hereby.
SECTION 17. SECURITY INTEREST ABSOLUTE. All rights of the Collateral Agent
and security interests hereunder, and all obligations of the Pledgor hereunder,
shall be absolute and unconditional irrespective of, and unaffected by:
(a) any lack of validity or enforceability of any Loan Document;
(b) any lack of validity or enforceability of any Financing Document;
(c) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Liabilities, or any other amendment or
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waiver of or any consent to any departure from any Loan Document or any
Financing Document;
(d) any exchange, surrender, release or non-perfection of any other
collateral, or any release or amendment or waiver of or consent to
departure from any guaranty, for all or any of the Liabilities; or
(e) any other circumstance which might otherwise constitute a defense
available to, or a discharge of, the Pledgor in respect of the Liabilities
or of this Agreement.
SECTION 18. THE COLLATERAL AGENT AS THE LENDERS' CONTRACTUAL
REPRESENTATIVE.
SECTION 18.1 Appointment of Collateral Agent. Each Lender hereby designates
HNS as Collateral Agent to act as herein specified. Each Lender hereby
irrevocably authorizes the Collateral Agent to take such action on its behalf
under the provisions of this Agreement and any other instruments and agreements
referred to herein and to exercise such powers and to perform such duties
hereunder and thereunder as are specifically delegated to or required of the
Collateral Agent by the terms hereof and thereof and such other powers as are
reasonably incidental thereto. The Collateral Agent shall hold all Pledged
Collateral and proceeds for the benefit of itself and the Lenders to be
distributed as provided herein. The Collateral Agent may perform any of its
duties hereunder by or through its agents or employees.
SECTION 18.2 Nature of Duties of Collateral Agent. The Collateral Agent
shall have no duties or responsibilities except those expressly set forth in
this Agreement. Neither the Collateral Agent nor any of its officers, directors,
employees or agents shall be liable to the Lenders for any action taken or
omitted by it as such hereunder or in connection herewith, unless caused by its
or their gross negligence or willful misconduct. The duties of the Collateral
Agent shall be mechanical and administrative in nature, and the Collateral Agent
shall not have by reason of this Agreement a fiduciary relationship in respect
of any Lender.
SECTION 18.3 Lack of Reliance on Collateral Agent. The Collateral Agent
shall not be required to make any inquiry concerning either the performance or
observance of any of the terms, provisions or conditions of this Agreement, the
Financing Agreement, the Loan Agreement or the Secured Notes or the existence or
possible existence of any Default, unless any Lender specifically requests the
Collateral Agent to do so in writing.
SECTION 18.4 Certain Rights of the Collateral Agent. The Collateral Agent
shall have the right to request instructions from the Directing Lenders (as
defined below) at any time. If the Collateral Agent shall request instructions
from the Directing Lenders with respect to any act or action (including the
failure to act) in connection with this Agreement, the Collateral Agent shall be
entitled to refrain from such act or taking such action unless and until the
Collateral Agent shall have received instructions from the Directing Lenders,
and the Collateral Agent shall not incur liability to any Person by reason of so
refraining. Without limiting the foregoing, no Lender shall have any right of
action whatsoever against the Collateral Agent as a result of the Collateral
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Agent acting or refraining from acting hereunder in accordance with the
instructions of the Directing Lenders. The "Directing Lenders" means such
Lenders that hold Secured Notes that have an aggregate maximum face principal
amount greater than fifty percent (50%) of the aggregate of the maximum face
principal amount of all of the Secured Notes then outstanding.
SECTION 18.5 Reliance by Collateral Agent. The Collateral Agent shall be
entitled to rely, and shall be fully protected in relying, upon any note,
writing, resolution, notice, statement, certificate, telex, teletype or
telecopier message, cablegram, radiogram, order or other documentary,
teletransmission or telephone message believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person. The Collateral Agent
may consult with legal counsel (including counsel for the Pledgor with respect
to matters concerning the Pledgor), independent public accountants and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken by it in good faith in accordance with the advice of such counsel,
accountants or experts.
SECTION 18.6 Indemnification of Collateral Agent. To the extent the
Collateral Agent is not reimbursed and indemnified by the Pledgor, each Lender
will reimburse and indemnify the Collateral Agent for and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses (including counsel fees and disbursements) or disbursements of
any kind or nature whatsoever which may be imposed on, incurred by or asserted
against the Collateral Agent in performing its duties hereunder, in any way
relating to or arising out of this Agreement, provided that no Lender shall be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements resulting
from the Collateral Agent's gross negligence or willful misconduct.
SECTION 18.7 The Collateral Agent in its Individual Capacity. With respect
to its obligation as a Lender under this Agreement, the Collateral Agent shall
have the same rights and powers hereunder as any other Lender and may exercise
the same as though it was not performing the duties specified herein; and the
term "Lenders" or any similar term shall, unless the context clearly otherwise
indicates, include the Collateral Agent in its individual capacity as a Lender.
The Lenders acknowledge that HNS is the seller of the Base Station Equipment to
the Pledgor and has engaged in certain other business transactions with the
Pledgor and other Geotek Affiliates (as defined in the Manufacturing Agreement)
and agree that the Collateral Agent may lend money to, acquire equity interests
in, and generally engage in any kind of financial advisory or other business
with the Pledgor or any Geotek Affiliate as if it were not performing the duties
specified herein, and may accept fees and other consideration from the Pledgor
for services in connection with this Agreement and otherwise without having to
account for the same to the Lenders.
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SECTION 18.8 Successor Collateral Agent.
(a) The Collateral Agent may, upon five (5) Business Days' notice to
the Lenders and the Pledgor, resign at any time (effective upon the
appointment of a successor collateral agent pursuant to the provisions of
this Section 18.8) by giving written notice thereof to the Lenders and the
Pledgor. Upon any such resignation, the Directing Lenders shall have the
right, upon five (5) days' notice and approval by the Pledgor (which
approval shall not be unreasonably withheld), to appoint a successor
collateral agent. If no successor collateral agent (i) shall have been so
appointed by the Directing Lenders, and (ii) shall have accepted such
appointment, within thirty (30) days after the Collateral Agent's giving of
notice of resignation, then, upon five (5) days' notice, the Collateral
Agent may, on behalf of the Lenders, appoint a successor collateral agent.
(b) Upon the acceptance of any appointment as collateral agent
hereunder by a successor collateral agent, such successor collateral agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the Collateral Agent, all references in this
Agreement to "Collateral Agent" shall refer to such successor collateral
agent and the Collateral Agent shall be discharged from its duties and
obligations under this Agreement. After the Collateral Agent's resignation
hereunder as collateral agent, the provisions of Section 18 shall continue
to inure to its benefit as to any actions taken or omitted to be taken by
it while it was Collateral Agent under this Agreement.
(c) In the event of a material breach by the Collateral Agent of its
duties hereunder, the Collateral Agent may be removed by the Directing
Lenders for cause and the provisions of this Section 18.8 shall apply to
the appointment of a successor collateral agent.
SECTION 18.9 Collateral Matters.
(a) The Collateral Agent is hereby authorized on behalf of all of the
Lenders, without the necessity of any notice to or further consent from any
Lender, from time to time prior to a Default, to take any action with
respect to any Pledged Collateral which may be necessary to perfect and
maintain perfected the security interest in and Liens upon the Pledged
Collateral.
(b) The Lenders hereby authorize the Collateral Agent, and the
Collateral Agent shall, release any Lien granted to or held by the
Collateral Agent upon any Pledged Collateral (i) upon the payment and
satisfaction of all of the Liabilities or (ii) if approved, authorized or
ratified in writing by the Directing Lenders. Upon request by the
Collateral Agent at any time, the Lenders will confirm in writing the
Collateral Agent's authority to release particular types or items of
Pledged Collateral pursuant to this Section 18.9.
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(c) Upon any sale and transfer of Pledged Collateral which is
expressly permitted pursuant to the terms of the Financing Agreement, the
Loan Agreement or this Agreement or consented to in writing by the
Directing Lenders, and upon at least five (5) Business Days' prior written
request by the Pledgor, the Collateral Agent shall (and is hereby
irrevocably authorized by the Lenders to) execute such documents as may be
necessary to evidence the release of the Liens granted to the Collateral
Agent for its benefit and the benefit of the Lenders herein or pursuant
hereto upon the Pledged Collateral that was sold or transferred; provided
that (i) the Collateral Agent shall not be required to execute any such
document on terms which, in the Collateral Agent's opinion, would expose
the Collateral Agent or the Lenders to liability or create any obligation
or entail any consequence other than the release of such Liens without
recourse or warranty and (ii) such release shall not in any manner
discharge, affect or impair the Liabilities or any Liens upon all interests
retained by the Pledgor, including (without limitation) the proceeds of the
sale, all of which shall continue to constitute part of the Pledged
Collateral. In the event of any sale or transfer of Pledged Collateral, or
any foreclosure with respect to any of the Pledged Collateral, the
Collateral Agent shall be authorized to deduct all of the expenses
reasonably incurred by the Collateral Agent from the proceeds of any such
sale, transfer or foreclosure.
(d) The Collateral Agent shall have no obligation whatsoever to the
Lenders or to any other Person to assure that the Pledged Collateral exists
or is owned by the Pledgor or is cared for, protected or insured or that
the Liens granted to the Collateral Agent herein or pursuant hereto have
been properly or sufficiently or lawfully created, perfected, protected or
enforced or are entitled to any particular priority, or to exercise or to
continue exercising at all or in any manner or under any duty of care,
disclosure or fidelity any of the rights, authorities and powers granted or
available to the Collateral Agent in this Section 18.9, it being understood
and agreed that in respect of the Pledged Collateral, or any act, omission
or event related thereto, the Collateral Agent may act in any manner it may
deem appropriate, in its sole discretion, given the Collateral Agent's own
interest in the Pledged Collateral as one of the Lenders and that the
Collateral Agent shall have no duty or liability whatsoever to the Lenders,
except for its gross negligence or willful misconduct.
SECTION 18.10 Actions with Respect to Defaults. The Collateral Agent shall
take such action with respect to a Default as shall be directed by the Directing
Lenders; provided that until the Collateral Agent shall have received such
directions, the Collateral Agent may (but shall not be obligated to) take such
action, or refrain from taking such action, with respect to such Default as it
shall deem advisable and in the best interests of the Lenders.
Any amendment or waiver of any provision of this Agreement and any consent
to any departure by the Pledgor from any provision of this Agreement shall be
effected by the Collateral Agent pursuant to Section 19.4 hereof and only upon
the written authorization of the Directing Lenders.
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SECTION 18.11 Delivery of Information. The Collateral Agent shall not be
required to deliver to any Lender originals or copies of any documents,
instruments, notices, communications or other information received by the
Collateral Agent from the Pledgor, the Directing Lenders, any Lender or any
other Person under or in connection with this Agreement except (i) as
specifically provided in this Agreement and (ii) as specifically requested from
time to time in writing by any Lender with respect to a specific document,
instrument, notice or other written communication received by and in the
possession of the Collateral Agent at the time of receipt of such request and
then only in accordance with such specific request.
SECTION 19. MISCELLANEOUS PROVISIONS.
SECTION 19.1 Notices. All notices, approvals, consents or other
communications required or desired to be given hereunder shall be in the form
and manner, and delivered to each of the parties hereto at their respective
addresses, set forth in Article X of the Financing Agreement or Article XI of
the Loan Agreement, as applicable.
SECTION 19.2 Headings. Section headings in this Agreement are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of this Agreement.
SECTION 19.3 Severability. Any provision in any Loan Document or in any
Financing Document that is held to be inoperative, unenforceable, or invalid in
any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable,
or invalid without affecting the remaining provisions in that jurisdiction or
the operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of this Agreement are declared to
be severable.
SECTION 19.4 Amendments, Waivers and Consents. No delay or omission of the
Collateral Agent to exercise any right under this Agreement shall impair such
right or be construed to be a waiver of any Default or an acquiescence therein.
Any single or partial exercise of any such right shall not preclude other or
further exercise thereof or the exercise of any other right and no waiver,
amendment or other variation of the terms, conditions or provisions of this
Agreement whatsoever shall be valid unless in writing signed by the Collateral
Agent, and then only to the extent in such writing specifically set forth. All
remedies contained in this Agreement or by law afforded shall be cumulative and
all shall be available to the Collateral Agent, for its benefit and the ratable
benefit of the Lenders, until the Liabilities have been paid in full.
SECTION 19.5 Interpretation of Agreement. Time is of the essence in each
provision of this Agreement of which time is an element. All terms not defined
herein or in the Financing Agreement shall have the meaning set forth in the
applicable Uniform Commercial Code, except where the context otherwise requires.
To the extent a term or provision of this Agreement conflicts with the Loan
Agreement or the Financing Agreement and is not dealt with herein with more
specificity, the Loan Agreement or the Financing Agreement, as applicable, shall
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control with respect to the subject matter of such term or provision. Acceptance
of or acquiescence in a course of performance rendered under this Agreement
shall not be relevant in determining the meaning of this Agreement even though
the accepting or acquiescing party had knowledge of the nature of the
performance and opportunity for objection.
SECTION 19.6 Continuing Security Interest; Transfer of Secured Notes. This
Agreement shall create a continuing security interest in the Pledged Collateral
and shall (i) remain in full force and effect until payment in full of the
Liabilities, (ii) be binding upon the Pledgor, its successors and assigns, and
(iii) inure to the benefit of the Collateral Agent, the Lenders and their
respective successors, transferees and assigns. Without limiting the generality
of clause (iii), above, any Lender may, except as limited by the express terms
of the Loan Agreement, the Financing Agreement or the Secured Notes, assign or
otherwise transfer, in whole or in part, any Secured Note held by it to any
other Person, and such other Person shall thereupon become vested with all the
benefits in respect thereof granted to such Lender herein or otherwise.
SECTION 19.7 Reinstatement. To the extent permitted by law, this Agreement
shall continue to be effective or be reinstated, as the case may be, if at any
time any amount received by the Collateral Agent or any Lender in respect of the
Liabilities is rescinded or must otherwise be restored or returned by such
Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Pledgor or upon the appointment of any receiver,
intervenor, conservator, trustee or similar official for the Pledgor or any
substantial part of its assets, or otherwise, all as though such payments had
not been made.
SECTION 19.8 Survival of Provisions. All representations, warranties and
covenants of the Pledgor contained herein shall survive the execution and
delivery of this Agreement, and shall terminate only upon the full and final
payment and performance by the Pledgor of the Liabilities secured hereby.
SECTION 19.9 Waivers. The Pledgor waives presentment and demand for payment
of any of the Liabilities, protest and notice of dishonor or default with
respect to any of the Liabilities, and all other notices to which the Pledgor
might otherwise be entitled, except as otherwise expressly provided in this
Agreement, the Loan Agreement or the Financing Agreement, as applicable.
SECTION 19.10 Authority of the Collateral Agent; Indemnification. The
Collateral Agent shall, for the benefit of the Lenders, have and be entitled to
exercise all powers hereunder which are specifically granted to the Collateral
Agent by the terms hereof, together with such powers as are reasonably incident
thereto. The Collateral Agent may perform any of its duties hereunder or in
connection with the Pledged Collateral by or through agents or employees and
shall be entitled to retain counsel and to act in reliance upon the advice of
counsel concerning all such matters. Neither the Collateral Agent nor any
Lender, nor any director, officer, employee, attorney or agent of the Collateral
Agent or any Lender shall be liable to the Pledgor for any action taken or
omitted to be taken by it or them hereunder, except for its or their own gross
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negligence or willful misconduct, nor shall the Collateral Agent or any of the
Lenders be responsible for the validity, effectiveness or sufficiency of this
Agreement or of any document or security furnished pursuant hereto. The
Collateral Agent and its directors, officers, employees, attorneys and agents
shall be entitled to rely on any communication, instrument or document
reasonably believed by it or them to be genuine and correct and to have been
signed or sent by the proper Person or Persons. The Pledgor agrees to indemnify
and hold harmless the Collateral Agent and its officers, directors, employees
and agents from and against any and all costs, expenses (including reasonable
fees, expenses and disbursements of attorneys and paralegals), claims and
liabilities incurred by the Collateral Agent (in its capacity as Collateral
Agent) or such officers, directors, employees and agents (in each case in their
capacity as such) as a result of the Pledgor's actions, breach or assertion of a
defense under this Agreement, any of the Loan Documents or any of the Financing
Documents, unless such claim or liability shall be due to willful misconduct or
gross negligence on the part of the Collateral Agent or such Person, as
applicable.
SECTION 19.11 Release; Termination of Agreement. Subject to the provisions
of Section 19.7 hereof, this Agreement shall terminate upon full and final
payment and performance of all the Liabilities. At such time, the Collateral
Agent shall, at the request and expense of the Pledgor, promptly reassign and
redeliver to the Pledgor all of the Pledged Collateral hereunder which has not
been sold, disposed of, retained or applied by the Collateral Agent, for its
benefit and the benefit of the Lenders, in accordance with the terms hereof.
Such reassignment and redelivery shall be without warranty by or recourse to the
Collateral Agent or any of the Lenders, except as to the absence of any prior
assignments by the Collateral Agent of its interest in the Pledged Collateral,
and shall be at the expense of the Pledgor.
SECTION 19.12 INTERRELATIONSHIP WITH ORIGINAL PLEDGE AGREEMENT. As stated
in the preamble hereof, this Agreement is intended to amend and restate the
provisions of the Original Pledge Agreement and, except as expressly modified
herein, (a) all of the terms and provisions of the Original Pledge Agreement
shall continue to apply for the period prior to the date hereof and (b) the
pledge by the Pledgor of the Pledged Collateral (pursuant to and as defined in
the Original Pledge Agreement) shall continue uninterrupted notwithstanding this
amendment and restatement of the Original Pledge Agreement. All references in
the Loan Agreement, the other Loan Documents, the Financing Agreement or the
other Financing Documents to the "Pledge Agreement" shall be deemed to include
references to this Agreement. As of the date hereof, all of the covenants set
forth in the Original Pledge Agreement are of no further force and effect, it
being understood that all obligations of the Pledgor with respect to the Pledged
Collateral (as defined in the Original Pledge Agreement) shall be governed by
this Agreement from and after the date hereof. For the avoidance of doubt, this
Agreement has been executed in renewal, amendment, restatement and modification,
but not in extinguishment of, the Original Pledge Agreement.
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SECTION 19.13 SUBMISSION TO JURISDICTION; WAIVERS. THE PLEDGOR HEREBY
IRREVOCABLY AND UNCONDITIONALLY:
(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT
IN RESPECT HEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF
THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE
SOUTHERN DISTRICT OF NEW YORK AND APPELLATE COURTS FROM ANY THEREOF;
(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH
COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE
OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR
PROCEEDING WAS BROUGHT IN AN INCONVENIENT FORUM AND AGREES NOT TO PLEAD OR CLAIM
THE SAME;
(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE
EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO THE PLEDGOR AT ITS
ADDRESS SET FORTH BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE COLLATERAL AGENT
SHALL HAVE BEEN NOTIFIED PURSUANT HERETO;
(d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE
COLLATERAL AGENT OR ANY OF THE LENDERS TO COMMENCE LEGAL PROCEEDINGS AGAINST THE
PLEDGOR OR ITS PROPERTY IN ANY OTHER JURISDICTION;
(e) WAIVES ALL RIGHTS OF NOTICE AND HEARING OF ANY KIND PRIOR TO THE
EXERCISE BY THE COLLATERAL AGENT OR ANY OF THE LENDERS OF THEIR RIGHTS FROM AND
AFTER AN EVENT OF DEFAULT TO REPOSSESS THE COLLATERAL WITH JUDICIAL PROCESS OR
TO REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL. THE PLEDGOR WAIVES THE POSTING
OF ANY BOND OTHERWISE REQUIRED OF THE COLLATERAL AGENT OR ANY OF THE LENDERS IN
CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO OBTAIN POSSESSION OF,
REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL, TO ENFORCE ANY JUDGMENT OR OTHER
SECURITY FOR THE LIABILITIES, TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER
ENTERED IN FAVOR OF SUCH PARTY OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY
RESTRAINING ORDER OR PRELIMINARY OR PERMANENT INJUNCTION, THIS AGREEMENT, OR ANY
OTHER AGREEMENT OR DOCUMENT BETWEEN THE PLEDGOR AND ANY SUCH PARTY.
19
<PAGE>
(f) WAIVES THE RIGHT TO ASSERT ANY SETOFF, COUNTERCLAIM OR CROSS-CLAIM IN
RESPECT OF, AND ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT TO, SUCH
ACTION OR PROCEEDING; AND
(g) WAIVES DUE DILIGENCE, DEMAND, PRESENTMENT AND PROTEST AND ANY NOTICES
THEREOF AS WELL AS NOTICE OF NONPAYMENT.
SECTION 19.14 JURY TRIAL. THE PLEDGOR, THE COLLATERAL AGENT AND THE LENDERS
EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 19.15 GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT
OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS (AND NOT THE LAW OF
CONFLICTS) OF THE STATE OF NEW YORK.
SECTION 19.16 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
either of the parties hereto may execute this Agreement by signing any such
counterpart.
[SIGNATURE PAGE FOLLOWS]
20
<PAGE>
IN WITNESS WHEREOF, the Pledgor and the Collateral Agent have each caused
this Agreement to be duly executed and delivered as of the date first above
written.
PLEDGOR:
GEOTEK FINANCING CORPORATION,
a Delaware corporation
By: /s/ Michael McCoy
--------------------------------------
Name: Michael McCoy
Title: Chief Financial Officer
COLLATERAL AGENT:
HUGHES NETWORK SYSTEMS, INC.,
as Collateral Agent
By:
--------------------------------------
Name:
Title:
With respect to Section 18 only:
LENDER
HUGHES NETWORK SYSTEMS, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, the Pledgor and the Collateral Agent have each caused
this Agreement to be duly executed and delivered as of the date first above
written.
PLEDGOR:
GEOTEK FINANCING CORPORATION,
a Delaware corporation
By:
--------------------------------------
Name:
Title:
COLLATERAL AGENT:
HUGHES NETWORK SYSTEMS, INC.,
as Collateral Agent
By: /s/ S. P. Carriar
--------------------------------------
Name: S. P. Carriar
Title: V.P. & Secretary
With respect to Section 18 only:
LENDER
HUGHES NETWORK SYSTEMS, INC.
By: /s/ PRADEEP KAUL
--------------------------------------
Name: PRADEEP KAUL
Title: Exec. V.P.
<PAGE>
Schedule I
PLEDGED SHARES
Number of Pledged Share Certificate Percentage of
Issuer Shares Numbers Outstanding
- ------ ----------------- ----------------- -------------
Geotel License
Holdings, Inc. 100 1 100%
<PAGE>
Schedule II
PLEDGED NOTES
Obligor Description of Note Principle Amount of Note
- ------- ------------------- ------------------------
Geotel License Promissory Note dated $24,500,000
Holdings, Inc. September 27, 1996
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Earnings include income before income taxes plus fixed charges less capitalized
interest. Fixed charges include interest and one-third of rent expense
(representing the estimated interest component of operating leases). The dollar
amount of the deficiency in earnings to fixed charges was $95.4 million for the
nine months ended September 30, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 78,273
<SECURITIES> 0
<RECEIVABLES> 16,239
<ALLOWANCES> 0
<INVENTORY> 24,332
<CURRENT-ASSETS> 146,657
<PP&E> 135,860
<DEPRECIATION> 42,203
<TOTAL-ASSETS> 390,129
<CURRENT-LIABILITIES> 71,384
<BONDS> 188,352
40,000
11
<COMMON> 597
<OTHER-SE> 89,126
<TOTAL-LIABILITY-AND-EQUITY> 290,129
<SALES> 67,861
<TOTAL-REVENUES> 67,861
<CGS> 55,536
<TOTAL-COSTS> 84,275
<OTHER-EXPENSES> (848)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,870
<INCOME-PRETAX> (90,290)
<INCOME-TAX> 1,918
<INCOME-CONTINUING> (92,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (92,208)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
