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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission file number 0-17581
GEOTEK COMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2358635
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(State of Incorporation) (I.R.S. Employer Identification No.)
102 Chestnut Ridge Road, Montvale, New Jersey 07645
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 930-9305
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or amendment
to this Form 10-K. [X]
Based on the average price bid for the Registrant's Common Stock as of
March 24, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of such date was approximately $280,303,000.
As of March 24, 1997, the number of outstanding shares of the Registrant's
Common Stock was approximately 60,132,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference information from the
Registrant's Proxy Statement to be filed in connection with its 1996 Annual
Meeting of Stockholders.
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GEOTEK COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. BUSINESS ........................................................ 2
Item 2. PROPERTIES.......................................................20
Item 3. LEGAL PROCEEDINGS................................................21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............22
Item A. EXECUTIVE OFFICERS...............................................23
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................................25
Item 6. SELECTED FINANCIAL DATA..........................................26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................40
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................41
PART III
ITEMS 10, 11, 12 AND 13 (EXCEPT FOR THE INFORMATION REGARDING
EXECUTIVE OFFICERS CALLED FOR BY ITEM 10, WHICH IS INCLUDED IN PART I
HEREOF AS ITEM A) ARE INCORPORATED BY REFERENCE FROM THE COMPANY'S
DEFINITIVE PROXY STATEMENT FOR ITS 1996 ANNUAL MEETING OF
STOCKHOLDERS.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.....................................................41
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 procurement of radio spectrum and
transmission sites; (c ) the Company's future financial results, capital needs
and sources of financing; (d) the Company's propects in foreign countries; and
(e) 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 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 actual
results to differ materially from those expressed herein.
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PART I
Item 1. BUSINESS
Overview of the Company
Geotek Communications, Inc. (the "Company") is an international provider of
wireless communications systems and services. In the United States, the Company
currently offers its competitively priced, high quality integrated digital voice
and data wireless communications services to small and medium size businesses
with a mobile workforce, in Baltimore, Boston, Dallas, Miami, New York, Orlando,
Philadelphia and Washington, D.C. The Company intends to expand its digital
voice and data wireless communications network services to an additional 39
cities throughout the United States by the end of 1999. In the United Kingdom,
the Company operates an analog network and has been awarded a national digital
license. In Germany, the Company owns a 50% interest in an entity which operates
analog networks and has been awarded digital licenses. In Korea, the Company
owns a significant equity interest in an entity that has been awarded a digital
license and will sell its proprietary wireless infrastructure equipment to this
entity and other Korean entities. The Company owns a digital license, on a
contingent basis, in Canada, whereby the Company expects to provide its FHMA(R)
infrastructure equipment. The Company also develops, produces and sells
telephone and telecommunications peripherals and sound and communications
equipment through its two-thirds ownership of Bogen Communications
International, Inc. and its subsidiaries. The Company is incorporated under the
laws of the State of Delaware. Its principal executive offices are located at
102 Chestnut Ridge Road, Montvale, NJ 07645 and its telephone number is (201)
930-9305.
U.S. Wireless Network
The Company is targeting its services to small-to-medium-sized business
users in up to 47 of the largest metropolitan markets throughout the United
States. The Company has developed an integrated digital voice and data wireless
communications network where services are currently available in an integrated
package and through a single subscriber unit operated by each mobile user. The
Company believes that its ability to offer a wide variety of digital voice and
data communications services through a single subscriber unit designed
specifically for mobile business users with one monthly service fee will
differentiate it from other wireless providers. Digital wireless subscribers
will be able to select the combination of those communications services that
meet their specific needs. The Company also plans for its digital wireless
network to offer services that will enable businesses to quickly and easily
custom configure their mobile workforce into discrete units, allowing members in
each unit to communicate among themselves in a private network, and to select
specific voice and data communications services for each unit. The Company also
offers prepackaged software designed to meet the specific needs of the users.
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Additionally, the Company's wireless data system used to provide data
services to customers is based on IP (Internet Protocol) technology, the same
protocols used by the Internet. The use of this industry standard protocol
facilitates the development of applications that will function with the
Company's digital wireless system. Applications developed for other existing and
emerging wireless systems also based on wireless IP can readily function on the
Company's system with little or no modifications to the original program.
Current Services
Mobile Telephony. The Company offers standard, cellular-like telephony service,
which includes key telephone features such as speed dialing, last number redial,
history of previously dialed numbers and dual tone multi-frequency capabilities
during active telephone calls. This service is designed specifically for mobile
fleets and enables the business owner to control telephony use by its drivers.
Group Dispatch. The Company offers traditional two-way communication voice
dispatch services which allow customers to communicate with a group of mobile
users within a subfleet or with the entire fleet.
Automatic Vehicle Location. This service allows the Company's customers to
locate, on a personal computer with PC dispatch, their fleet vehicles at any
time. The system utilizes detailed electronic maps and global satellite
positioning receivers to plot the location of vehicles, and is accurate to
within 100 yards. The Company believes that automatic vehicle location improves
fleet efficiency by enabling managers to monitor vehicle progress, assign jobs
and allocate resources.
Mobile Messaging. Mobile messaging is a sophisticated two-way program that
allows business users, through a personal computer with PC dispatch, to send and
receive full size messages to and from mobile workers. To confirm receipt of the
messages, the worker can easily respond to such messages by choosing from a list
of responses. Other features include the ability to send standard messages to
mobile workers, store messages in memory for recall at any time, resend
unreceived messages automatically until they are received, and time and date
stamp messages for an accurate communications history.
Mobile Manifest. This service includes Windows-based software that enables
dispatchers, utilizing a standard personal computer, to organize mobile workers'
daily schedules, assign jobs, track fleet progress and identify problems at any
time during the day. Drivers benefit from receiving detailed job instructions
which can include contact name, directions, and special instructions. The
Company believes this service will enable businesses to better allocate their
resources and improve productivity.
Voice Manager. Voice manager is a Windows-based software which allows the user
to communicate instantly with fleet vehicles individually or in groups, receive
incoming dispatches and information, and keep track of communications. Voice
manager logs all incoming and outgoing voice communications and generates
reports that allow the user to track usage and voice communication.
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Software Development Kit: The Software Development Kit (SDK) provides third
party developers with the information and tools needed to quickly adapt their
software to the Company's system.
Planned Services
The Company is developing additional mobile voice and data services and
expects to continue to devote significant resources towards the development of
new services and the enhancement of existing services. Services that the Company
expects to offer during 1997 or thereafter include the following:
One-to-One Voice Dispatch. One-to-One Voice Dispatch will permit private
one-to-one, half duplex conversations between a fleet dispatcher and a mobile
user, or between two mobile users in a fleet, over a virtual private network.
This service will permit dispatch conversations between individuals without
disturbing the entire fleet.
Point of Sale Authorization. Point of Sale Authorization will allow the mobile
user to receive immediate authorization for credit card sales through the
Company's mobile workstation.
Private Telephony. Private Telephony will permit private one-to-one, full duplex
conversations between a fleet dispatcher and a mobile user, or between two
mobile users in a fleet, over a virtual private network. This service will
permit full two-way conversations either through the handset of the subscriber
unit or in a hands-free mode, without the push-to-talk limitations imposed by
traditional dispatch equipment.
Advanced Fleet Management. Advanced fleet management will permit businesses to
configure their mobile workforce into a number or combination of subfleets. The
service will permit private communications between any number of subscribers in
a subfleet and will allow a subscriber to belong to multiple subfleets. It will
also permit a business to provide different subfleets with different
communications capabilities, depending on the particular needs of the subfleet.
For example, delivery personnel may be provided only with the ability to receive
short data messages and to acknowledge that a delivery has been completed, while
sales and management personnel may be provided advanced telephony services and
access to the Company's central computer system and to public communications
networks. Businesses will be able to establish and modify subfleet
configurations and subfleet service capabilities from their corporate
headquarters through software to be provided by the Company.
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Ready-to-Run Software Applications. The Company believes that certain businesses
require specific software applications in order to utilize wireless
communications capabilities effectively. Such applications may include the
ability to transmit customer orders to the home office or to verify inventory
status or obtain credit card authorization from the field. The Company intends
to develop new ready-to-run, applications-based software programs for a variety
of industries that interface with the Company's integrated voice and data
communications systems. The Company, through GMSI, Inc. (a 76% owned
subsidiary), intends to design customized software for large fleet applications
if such services are requested.
Other Services. Because the Company's current marketing strategy emphasizes its
recently developed data capabilities, the Company will seek to further
distinguish itself in this area by enhancing its current data offerings and by
developing additional complementary service offerings.
The Company's current and proposed digital wireless services involve a complex
integration of sophisticated voice and data applications that utilize
newly-developed hardware and specialized software products. The implementation
of the U.S. digital wireless network has raised a number of technical
challenges, and the Company anticipates that additional technical challenges may
arise from time to time as the Company continues to make hardware and software
modifications and adds subscribers to the network. The initial introduction of
the U.S. digital wireless network was limited to voice services. Commencing in
October 1996, the Company added certain data services and plans to add
additional data services in 1997. The integration of voice and data services has
presented various technical issues, primarily involving software, which have
adversely affected performance of the U.S. wireless system and delayed the
scheduled implementation of the U.S. network in new markets and the loading of
subscribers in the Company's existing markets. The introduction of additional
services is expected to require further hardware and software modifications in
order to integrate such services with the existing digital wireless services,
which may present new technical issues. There can be no assurance that the
Company will be able to develop or modify hardware or software to integrate
successfully the planned voice and data applications, or to resolve other
technical difficulties that may arise, on a timely or cost effective basis. The
inability to resolve such problems could result in further delays in the
implementation of the U.S. Network and adversely affect the Company's ability to
add subscribers.
The U.S. Network Roll-out
As of December 31, 1996, the Company offered commercial services to 1,600
subscribers in Baltimore, Boston, Dallas, Miami, New York, Orlando, Philadelphia
and Washington, D.C. The Company initially planned to complete the roll-out of
its U.S. Network by the end of 1997 due in part to requirements imposed by the
Federal Communications Commission ("FCC"). In connection with the Company's
acquisition of Major Trading Area ("MTA") licenses in the recent FCC auctions,
the Company will be permitted additional time to complete the roll-out of its
U.S. Network. In order to better focus its financial and managerial resources,
the Company has revised its roll-out schedule and currently expects to roll-out
networks in additional U.S. cities in accordance with the following schedule:
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1996 1997 1998 1999
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Baltimore* Atlanta El Paso Birmingham
Boston* Chicago+ Hartford Buffalo
Dallas* Cincinnati St. Louis Charlotte
Miami* Denver Columbus
New York* Detroit Greensboro
Orlando* Houston+ Kansas City
Philadelphia* Indianapolis Knoxville
Washington, D.C.* Jacksonville Little Rock
Milwaukee Louisville
Minneapolis Memphis
New Orleans Nashville
Phoenix+ Norfolk
Pittsburgh Oklahoma City
Portland Richmond
San Antonio+ Rochester
San Francisco+ Salt Lake City
Seattle Spokane
Tampa+ Tulsa
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* Operating Commercially
+ Build-Out in Progress
Markets are listed in alphabetical order and not in the order that services are
expected to be initiated.
The Company may revise the current schedule based on the availability of
financial resources, the availability of infrastructure equipment and the
ability to secure and build out sites in a timely manner and the Company's
success in its existing commercial markets.
The key stages to the network roll-out
Propagation. Propagation analysis involves the identification, through software
programs and engineering analyses, of the optimal areas in a target market for
the placement of the base station and remote sites. The Company has remote
sites. The Company has markets.
Procurement of Site Leases and Permits. The Company must procure leases and
permits for the sites at which the digital wireless infrastructure base stations
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and remote sites are to be located. The Company has engaged multiple site
leasing organizations to assist the Company in identifying potential site
leases, negotiating leases and acquiring required local approvals. The
acquisition of leases and required permits is typically a two-to-six-month
process, although delays may occur from time to time. To date, the Company has
entered into leases and received the necessary permits to install and operate
its base stations in 14 of its target markets and is in the process of
identifying sites in 5 additional markets. As the Company increases its coverage
area in each of its target markets (including the markets where it currently
provides service), it will need to procure additional site leases.
Build-out. Preparation of each base station, which includes ventilation and air
conditioning, grounding and equipment installation, testing and optimization,
averages ten to twelve weeks. The Company has entered into an agreement with IBM
to manage the preparation and construction of each of its base stations and
remote sites. The Company has completed the initial build-out of its U. S.
wireless network in 8 markets and is currently building out 6 additional
markets, including Chicago, Phoenix, Houston, Tampa, San Antonio and San
Francisco. As the Company adds subscribers and increases its coverage area in
markets, it may be required to increase the number of remote sites in such
market.
Spectrum Acquisition. The Company controls 900 MHz frequencies with
approximately 2,170 channels in its U.S. target markets. These channels will be
sufficient to initiate digital wireless services in all of the Company's target
markets. The Company recently acquired MTA licenses in many of its target
markets through the recently completed FCC auctions.
There are only a limited number of existing communications towers capable
of providing the Company with sufficient coverage for its radio transmissions
and supporting its transmission equipment. If the Company cannot obtain leases
for existing towers, it may be required to purchase sites, obtain necessary
permits and build such towers, which could take up to one year for each tower.
If the Company is required to build new towers, the implementation of the
Company's U.S. wireless network in one or more of its target U.S. markets could
be delayed.
Furthermore, each of the Company's United States target markets could
present unique technical issues due to differences in geography and topography.
These factors have caused technical issues in certain of the Company's existing
markets (including the New York City metropolitan area) and could adversely
affect the introduction of services in other markets. Technical difficulties in
the operation and performance of the U.S. wireless network also may be
experienced as additional subscribers are added in a particular market or as the
coverage area in any market is increased. There can be no assurance that the
Company will be able to develop or modify hardware or software to integrate
successfully the planned voice and data applications, or to resolve other
technical difficulties that may arise, on a timely or cost-effective basis. The
inability to resolve such problems could result in further delays in the
implementation of the U.S. Network and adversely affect the Company's ability to
add subscribers.
Furthermore, the implementation of the U.S. wireless network in all of the
Company's target markets will require substantial additional funding. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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Configuration of the Geotek Network Service Area
The Company's digital wireless network employs a macrocellular architecture
consisting of a relatively small number of high power transmission with a
transmitter capable of covering an area of approximately 25 miles in diameter.
The macrocells are configured to form a digital wireless network in a given
market. A base station containing the central computer system and switching
equipment is located at or near one of the transmission sites in each market.
Areas of high use or poor transmission quality are served by a simple antenna
relay and related equipment that improves signal quality to that area. The
system's use of a relatively small number of high power sites and its ability to
reuse frequencies enables the Company to divide each cell coverage area into
several sectors. In contrast, many other wireless service providers, including
conventional cellular system and enhanced specialized mobile radio ("ESMR")
operators, are required to build multiple overlapping "cells," sometimes dozens
in a market, each with its own low power transmission station. The Company
believes its use of a relatively small number of high power transmission sites
enables it to reduce the infrastructure cost required to service a market
relative to the multicell approach employed by other wireless service providers.
The Company also believes that its system design allows it to initiate service
in a given market at a lower cost and achieve profitability with fewer
subscribers than other digital wireless communications providers. Further, the
Company's ability to reuse frequencies enables it to increase, at a relatively
low cost, the capacity of its networks, as such capacity is needed by further
dividing a coverage area into sectors or adding additional sites. The Company
also believes that its networks will be less expensive to operate than other
multicell systems because, among other things, the networks require less
equipment, which results in lower costs for transmission lines and site leases.
Need for Additional Spectrum
The Company will require additional spectrum to add capacity and enhanced
services in certain of its existing markets as well as its planned markets in
the U.S. Accordingly, the Company has entered into certain agreements that
entitle the Company to acquire additional spectrum, subject to receipt of
regulatory approval. Although the Company believes that such approval will be
received prior to its expected introduction of services in each such market,
there can be no assurance that such approvals will be received on a timely
basis, if at all. The failure by the Company to obtain any such approvals could
delay the introduction of services in a particular market or limit the Company's
ability to add subscribers or provide certain services in such market. The
Company may eventually need additional spectrum, beyond what it is already under
agreement to acquire. It is possible, because spectrum is a finite resource,
that the Company may be limited in the future in the spectrum it is able to
acquire to suit its growing needs. In such an event, the Company's limited
access to spectrum could inhibit the Company's growth and ability to expand its
service capacity.
The Company currently holds 128 licenses that authorize operation in
Designated Filing Areas ("DFAs") in U.S. urban markets. In order to acquire
sufficient spectrum to initiate service in certain markets and to add additional
capacity in other markets, the Company participated in the 1996 auction
conducted by the FCC for 900 MHz specialized mobile radio ("SMR") spectrum and
acquired 181 10-channel blocks in 42 regional service areas in the U.S. known as
MTAs. MTA licenses authorize an expanded coverage area with non-site specific
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licensing and extended construction periods. Where MTA licenses overlap channels
and coverage area with a DFA license, the MTA licensee must insure
non-interference to the DFA licensee. Where the MTA licensee itself holds the
overlapped DFA license, the DFA license may be canceled or subsumed into the MTA
license. The combined license is then regulated under MTA rules. Of the
Company's 181 MTA licenses, 173 are unencumbered by a DFA, other than those DFA
licenses presently held or controlled by the Company. In eight MTAs, however,
the frequency block acquired by the Company is encumbered by a third party
existing licensee. In these cases, the Company will seek to acquire access to
the encumbered spectrum through cooperative or management agreements or may seek
to acquire the license from the incumbent licensee. In all but 29 of the
Company's 128 DFA licenses, the Company was able to secure surrounding MTA
licenses during the auction. These 29 DFA licenses must operate within a third
party's MTA service area, although the MTA licensee must afford interference
protection to the Company. For all but seven of the 29, the Company: was able to
acquire the MTA license from the successful bidder and therefore will remain as
the incumbent; sold the license to the MTA licensee; or, "swapped" the license
with another licensee. There can be no assurance that the Company will be
successful in acquiring desired licenses or gaining access to encumbered
spectrum, or that any licenses currently owned or acquired by the Company in the
future will be renewed. In addition, for those DFA licenses where the Company
does not hold the surrounding MTA license, the company must construct the system
no later than June 27, 1997, the date upon which the Company's waiver, granted
by the FCC in June 1993 (the "Waiver") which permitted extended construction
periods for the Company's DFA licenses, expires. In the event that the Company
does not construct these DFA licenses by June 1997, obtain surrounding MTA
licenses for any DFA licenses which remain unconstructed at such time, or obtain
relief from the Waiver, such unconstructed licenses will be canceled by the FCC,
thereby reducing the Company's available spectrum. Currently, any cancellation
may hinder the Company's opportunity for commercial roll-out in Charlotte,
Nashville and Greensboro. The failure of the Company to obtain or retain
sufficient radio spectrum on commercially acceptable terms or to renew existing
or future licenses could adversely affect the Company's business.
Technology
The U.S. digital wireless network is based on the Company's proprietary
frequency hopping FHMA(R) system. The FHMA(R) system integrates Time Division
Multiple Access (TDMA), a standard digital transmission technique currently
utilized by digital cellular systems, with spatial sectorization, frequency
hopping, error correction coding and voice multiplexing. The Company believes
that the combination of these techniques permits it to very significantly
increase the capacity of its radio spectrum over that of traditional analog SMR
capacity and improve the quality and security of wireless communications over
current analog systems.
TDMA allows each channel to carry several transmission signals at one time.
FHMA(R) system employs "three slot" TDMA, which permits three transmission
signals to be carried on each channel. The use of digital technology results in
secure communications, an important attribute to many business users. In
addition, FHMA(R) system utilizes a technique known as frequency hopping to
offer a secure robust signal and to break down a transmission signal into many
small components. Each component "hops" from frequency to frequency within a
predetermined sequence and different frequency hopping sequence sets are used in
adjacent areas to minimize interference. Advanced error correction coding is
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used to restore transmitted signals in the event of interference. The
combination of these techniques allows for the reuse of the same frequencies in
adjacent sectors if desirable
Rafael Armanent Development Authority, a division of the Israeli Ministry
of Defense ("Rafael"), is sub-contracted for manufacturing and enhancing the
base station and remote sites. The Company procures all other components
utilized in connection with its digital wireless system from third parties. A
number of these firms are located in Israel, the United Kingdom and the United
States. These firms include Digital Voice Systems, Inc. (vocoder), Tadiran
Limited (switches), Orckit Communications Ltd. (system software design) and
Analog Devices Inc. (ASIC chip set for the mobile subscriber unit). Mitsubishi
Consumer Electronics of America ("MCEA") and Farbell Electronics manufacture
large screen vehicle-mounted subscriber units and Hughes Network Systems ("HNS")
manufactures small screen vehicle-mounted subscriber units and is developing a
portable unit.
Currently, Rafael is the Company's only manufacturer of base station
equipment. In September 1996, the Company and a wholly-owned subsidiary of the
Company, Geotek Finance Corporation ("GFC"), entered into an agreement with HNS,
pursuant to which HNS agreed to manufacture certain of the components required
for the construction of 900 MHz FHMA(R) base station equipment in order to
expand the Company's manufacturing supply sources. In addition, HNS is providing
up to $100 million of financing (the last $50.0 million of which is subject to
the satisfaction by the Company of certain operating criteria) for up to 90% of
the purchase price of equipment scheduled for delivery by HNS to the Company
prior to June 30, 1999. HNS has not previously manufactured FHMA(R) system
equipment and its ability to do so is subject to a number of factors including
its ability to successfully coordinate the transformation of the FHMA(R) system
manufacturing specifications into full scale production capacity. If HNS is
unable to manufacture and deliver equipment in accordance with its agreement
with the Company and GFC, the Company would be required to continue to rely on
Rafael as its sole manufacturer of base station equipment until such time, if
any, as the Company secured an alternative source.
The Company is dependent upon a relatively small number of manufacturers
for its products. Rafael currently is manufacturing the base station equipment
for the U.S. wireless network on a schedule that is intended to enable the
Company to meet its projected roll-out. Other third parties, including MCEA,
HNS, and Farbell currently are manufacturing subscriber units and certain other
components of the system hardware for the U.S. wireless network on a schedule to
meet anticipated subscriber demand. There can be no assurance that such third
parties will deliver such equipment on a timely basis. Although the Company
believes that it can obtain all components necessary to build the digital
wireless system from other sources, it may encounter delays in the event of a
component shortage due to the time needed to identify alternative sources and
manufacture substitute components. Failure to obtain hardware components on a
timely basis or at satisfactory prices could result in delays or cost overruns
in the implementation of the U.S. digital wireless system.
The Company has an agreement with IBM to manage the construction of the
U.S. wireless network base station and remote sector sites. The Company also has
engaged, and intends to engage, other third party contractors to manage all or
certain aspects of such construction or installation in certain of its U.S.
target markets. A failure by IBM or such other contractors to manage properly
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the preparation and construction of the Company's base station and remote sector
sites could delay the implementation of the U.S. wireless network and adversely
affect the Company's business.
The Company anticipates that, in order to meet the needs of its expanding
international and equipment sales activities, it will be required to establish
and maintain additional manufacturing, distribution and licensing arrangements
with other third party providers. The Company is currently exploring various
alternatives to meet these needs, however, there can be no assurance that the
Company will be able to identify or maintain relationships with such providers.
Hardware
The basic customer hardware utilized to operate the Company's digital
wireless system consists of either two mobile workstations or a PC dispatching
station and a mobile workstation. The PC dispatching station is a personal
computer, together with specialized software, interface unit (DIU), the radio
transceiver, speaker and a microphone.
The Company offers two types of mobile workstations. The enhanced mobile
workstation supports telephony, dispatch and data application, and includes a
four-inch screen and prominently displayed keys. For users with a greater need
for voice services, the Company offers a small screen unit that is similar in
size to a mobile cellular telephone, which offers limited data applications
including automatic vehicle location. The Company's workstations are designed to
withstand significant vibrations often encountered with extended use in
commercial vehicles.
The Company is developing a full line of accessories for each of its
subscriber units, that will allow the use of a standard serial port to permit
the attachment of laptop computers, keyboards, printers, magnetic stripe
readers, barcode readers, and other intelligent devices.
Marketing and Distribution
The Company markets its products and services though a network of
independent dealers and distribution partners that have existing relationships
with a large number of its target customers. The Company utilizes dealers and
agents that sell private mobile radio ("PMR"), SMR, ESMR, cellular and paging
equipment and services to business users. The Company's strategy is to focus on
acquiring and maintaining several dealer relationships within each market. The
Company supports its dealers in each local market with Geotek employees that
consist of sales account managers in the sales and training area and technical
support staff for installation and technical information.
The Company has initiated marketing activities with selected value added
resellers ("VARS") and data equipment providers including IBM. Distributors like
VARS and IBM typically sell computing solutions to business customers. Many
office based mobile workers are seeking ways to conduct business remotely and
the Company believes its suite of wireless solutions can address specific needs.
The Company's agreement with IBM provides for the opportunity to present the IBM
solutions capabilities as a value added element of the Company's current
solutions. For customers seeking to integrate existing legacy office
applications with wireless networks, the Company believes that IBM can provide
additional value to the customer.
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The Company intends to pursue alliances, relationships, and additional
distribution development with additional VARS, data equipment, data services,
and data software companies. If consummated, the relationships could provide the
Company with access to both distribution capabilities as well as an established
customer base. The successful implementation of the Company's wireless networks
will depend, in part, on the Company's ability to develop, maintain, and grow
relationships with such parties. Delays in the implementation of the wireless
networks may adversely affect the Company's relationship with its dealers, VARS,
and distribution partners.
International Operations
United Kingdom.
National Band Three Ltd. ("NB3"), a wholly-owned subsidiary of the Company,
is the only national PAMR (SMR equivalent) service provider in the United
Kingdom and controls approximately 70% of the domestic market for SMR and data
services. As of December 31, 1996, NB3 provided service to approximately 62,600
subscribers.
NB3 targets its services to business users with mobile distribution or
service fleets. NB3's major customers include providers of domestic and
commercial maintenance services, haulers and couriers. The Company believes that
NB3 will benefit from increased marketing efforts aimed at increasing its
utilization by business users. The Company currently is focusing its marketing
efforts in the United Kingdom on emphasizing NB3's wide coverage area and voice
and data capabilities.
The NB3 network currently is an analog system that utilizes a series of
overlapping cells in conjunction with large switching centers. The NB3 network
currently consists of approximately 105 base stations and three switching
centers. NB3 will increase the capacity of its analog network ahead of customer
requirements and currently has plans to increase the capacity to approximately
75,000 subscribers from the current capacity of approximately 65,000.
NB3 intends to deploy a digital system to introduce new products expand
capacity, increase its target market and to further its competitive position. In
June 1996, the United Kingdom Department of Trade and Industry awarded NB3 a
license to operate a digital PAMR network in the United Kingdom. Under the terms
of the new digital license, NB3 will receive an initial allocation of two MHz of
spectrum in the 410-430 MHz band for the construction of a network based on the
new Trans European Trunked Radio ("TETRA") standard. The Company has recognized
that it will need some additional spectrum in the future to implement a digital
network and is discussing this with the regulatory authorities who have
indicated that they are prepared to support this requirement. Currently, there
are no TETRA systems available for commercial application, but potential vendors
have indicated an interest in supplying a TETRA-based system to NB3; however,
the Company cannot accurately estimate the availability, quality or 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 a digital system. There can be no
assurance that the Company will be able to develop and deploy a digital wireless
system in the United Kingdom. Additionally the development and deployment of a
digital wireless system in the United Kingdom will be subject to some of the
same risks attendant to the Company's digital wireless system in the United
States.
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Germany.
In November 1996, the Company entered into an agreement with RWE Telliance
A.G. ("RWE") to merged their respective German analog mobile radio networks upon
the approval of the German regulatory authority. In December 1996, the Company
and RWE received regulatory approval. Upon receipt of this regulatory approval,
the merger was effective and the Company received a 50% interest in the merged
entity, which is named Terrafon. As of December 31, 1996, Terrafon provided
wireless service, primarily analog dispatch to approximately 34,000 subscribers
in twelve of the fourteen major regions of Germany. Neither of the analog
systems operated by the Company or RWE are profitable. The Company expects that
the merged entity will seek to implement a digital system to add capacity and
products. The licenses awarded to the Company and RWE in Germany operate in the
410 MHz frequency band. These licenses are not limited to a specific technology.
It is possible that Terrafon will need to obtain additional frequencies to
implement its digital networks. At the time of formation of the joint venture,
the Company announced that the joint venture intentions to deploy an FHMA(R)
digital network. Subsequent to the formation of the joint venture, Terrafon
decided to implement an organized process to evaluate the various alternatives
for deploying a digital network. Terrafon expects to issue a request for
quotation to leading suppliers of telecommunication equipment including Geotek
Technologies, Inc. There can be no assurance that the Company will develop an
FHMA(R) system for the German 410 MHz band. Additionally, the development and
deployment of a digital wireless system in Germany will be subject to some of
the same risks attendant to the Company's digital wireless system in the United
States.
Korea.
In June 1996, the Korean Ministry of Information and Communications awarded,
Anam Telecom Company, 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 Company, Ltd., 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(R) system on an 800 MHz frequency band. The Company's
FHMA(R) system currently operates in the 900 MHz frequency band. In 1996, the
Company started a development of an 800 MHz system. Although the Company
believes that it will successfully adapt its FHMA(R) system to the 800 MHz
frequency band, such adaptation is subject to a number of contingencies and the
manufacture of certain required equipment. Additionally, the deployment of a
FHMA(R) system in Korea will be subject to the same risks attendant to the
Company's digital wireless system in the United States.
In 1996, the Company through its subsidiary Geotek Technologies, Inc.,
entered into contracts to provide Anam Telecom with the Company's proprietary
digital wireless infrastructure equipment and customer subscriber units. It is
anticipated that the equipment will be deployed in 1997. A test site has been
constructed in Korea and implementation of the network is expected to proceed
throughout 1997. Geotek Technologies Inc. plans to start delivering
infrastructure equipment and terminals to Anam Telecom during the second quarter
and fourth quarter of 1997, respectively. Anam Telecom plans to commence
commercial operations near the end of 1997.
In 1996, Geotek signed an equipment license and cooperation agreement with
Hyundai Electronics, Inc. ("HEI"), whereby HEI will supply the Company's FHMA(R)
related equipment to the Korean market. Subsequently, in 1997, HEI placed an $18
million FHMA(R) infrastructure equipment order with the Company and will in turn
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supply FHMA(R) system infrastructure and terminals for the Korean Regional
Trunked Radio ("RTRS") operators. The Korean Ministry of Information and
Communication issued five regional operating licenses in June 1996. The RTRS
operators selected FHMA(R) based system as their technology of choice and they
are currently in negotiations with HEI to supply the FHMA(R) system equipment.
It is expected that the equipment will be supplied and deployed in 1997 for
operation before the end of 1997.
Canada.
In March 1996, Industry Canada, the Canadian agency responsible for
spectrum allocation, approved in principle an award of certain 900 MHz
frequencies in the provinces of Alberta, British Columbia, Ontario and Quebec 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 the joint venture in Canada to launch mobile wireless
communications services based on the Company's proprietary FHMA(R) technology.
In July 1996, the Company announced that it had been unable to reach a final
agreement with Cogeco. In October 1996, Industry Canada granted the Company and
its remaining partner, Techcom, Inc., an extension to March 31, 1997 to find a
suitable replacement for Cogeco. The Company is actively negotiating with other
potential Canadian partners to replace Cogeco so that it can begin deployment of
an FHMA(R)-based network and comply with Canadian foreign ownership and
regulatory requirements. There can be no assurance that the Company will be able
to identify a joint venture partner or, if such a partner is identified, that an
agreement can be reached on terms acceptable to the Company. The Company has
until March 31, 1997 (absent an additional extension) to identify a Canadian
partner and file a site implementation plan with Industry Canada, or else the
Company may lose its Canadian licenses. The licenses have no termination date,
but are granted at the sole discretion of the agency. While the Company believes
that it will be able to retain the license until a satisfactory Canadian
controlled entity is formed, there is no assurance that the license will not be
lost.
Other Opportunities.
The Company intends to continue to seek opportunities to expand its
position internationally. This expansion may take the form of acquiring
ownership interests in trunked mobile radio licenses or the acquisition of SMR
operators, or such other international opportunities as management may determine
to be advantageous. The Company's ability to make investments is limited under
certain circumstances by the terms of certain of the Company's debt instruments
and existing capital resources.
Any failure on the part of the Company to successfully adapt its technology
to the frequency or standards required by its licenses in Canada, Korea, the
United Kingdom or Germany or to identify a joint venture partner in Canada could
have a material adverse effect on the Company's prospects in such jurisdictions.
Furthermore, the roll-out of products and services in each of these countries
will be subject to the same risks attendant to the development of the Company's
digital wireless system in the United States.
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In addition, because the Company currently sells its products and services
in various countries located outside the U.S., where the majority of its current
subscribers are located, a large portion of the Company's revenues are paid in
foreign currencies. Further, certain of the Company's products and components
are manufactured outside of the U.S., and its research and development
activities are dependent upon foreign providers. Accordingly, the Company is
subject to the risks inherent in conducting business across national boundaries,
including currency exchange rate fluctuations, international incidents, military
outbreaks, economic downturns, government instability, nationalization of
foreign assets, government protectionism and changes in governmental policy, any
of which could adversely affect the Company's business in one or more of its
international markets or in the U.S. In addition, the licensing and other
operational risks attendant upon commencing and maintaining wireless
communications networks in foreign countries are similar to those in the U.S.,
including availability of spectrum capacity and transmission sites, competition
and government regulation. Development of the Company's business in
international markets may impose a significant burden on the Company's
financial, managerial and personnel resources. There can be no assurance that
the Company will be successful in developing its business in any of these
markets or that any such expansion of the Company's business will be profitable.
GMSI
The Company owns a 76% interest in GMSI, Inc. ("GMSI"), a system integrator
for the transportation market which designs, manufactures, and sells fleet
management systems using mobile data software. GMSI is a leader in the market
for data dispatch systems used in large fleets for taxi, limousine, paratransit,
and public transportation. GMSI markets its products through a combination of
direct sales and value added resellers in North America, Asia, and Europe. A
proprietary software package, Wireless Network Interface ("WNI"), enables the
GMSI systems to work with a variety of wireless networks, including SMR, private
channel, and public wireless data systems. WNI also provides software developers
and VARS with the interface, reporting, and mobile data equipment performance
information. This adds value to the GMSI customer in providing a low risk
implementation of mobile data.
The GMSI systems are integrated to the customers office based dispatch
systems and host computer systems. In addition, GMSI provides a variety of
mobile data terminals, radio modems, installation services, and licenses 3rd
party software applications for use in fleet management.
Communications Products
Bogen Communications International, Inc.
The Company produces communications products through Bogen Corporation
("Bogen") and Speech Design GmbH ("Speech Design"), which are subsidiaries of
Bogen Communications International, Inc. ("BCI"). The Company owns approximately
64% of the issued and outstanding capital stock of BCI. Bogen is a 99% owned
subsidiary of BCI and Speech Design is a 68% owned subsidiary of BCI.
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Bogen. Bogen develops, produces and sells telephone and telecommunications
peripherals and sound and communications equipment through its wholly-owned
subsidiary, Bogen Communications, Inc. Since 1932, when originally founded,
Bogen has been involved in the communications industry, concentrating its
efforts on the development and sale of equipment for commercial, industrial,
professional and institutional markets and applications. Bogen's traditional
line of products includes audio amplifiers and related sound equipment for
professional, industrial and commercial system applications, such as telephone
paging, intercommunications and administrative communications systems for
schools, correctional facilities and other institutions.
Speech Design. Speech Design, located in Munich, Germany, develops, manufactures
and markets telephone peripheral hardware utilizing digital voice processing
technologies.
Competition
Competition in the wireless communications industry is intense and is
expected to increase. The Company faces significant competition in each of the
United States markets that it currently serves, and expects to face significant
competition in its planned United States markets. The Company competes with
established SMR, cellular, paging and public data service providers. The Company
expects competition from existing cellular as well as personal communications
services ("PCS") operators, which currently offer cellular-like telephony
services and have indicated the intention of offering data services in the near
future. In addition, internationally, the Company competes with manufacturers of
private mobile radio ("PMR") equipment, which target private network operators
and SMR customers. Many of the Company's competitors have substantially greater
technical, marketing, sales and distribution resources, access to capital, and
experience providing wireless communications services than the Company. In light
of the recent technological advancements in the industry, the Company may
encounter competition in the future from existing and/or emerging providers
utilizing new technology.
The Company's marketing strategy emphasizes information exchange though an
integrated package of voice, data services and Windows-based software
applications geared to small to medium size businesses that require simple all
in one solutions. The Company competes for subscribers primarily on the basis of
services offered, the technical quality of its system, capacity, coverage and
price. Many of the target customers for the Company's digital wireless service
currently use other wireless communications services. In order to compete
effectively, the Company must attract a portion of its target customers from
their existing providers. There can be no assurance that potential customers,
based on the foregoing factors or other factors, will perceive the Company's
services to be superior to those offered by other wireless communications
providers.
Based on its experience in its eight U.S. commercial markets, the Company
believes that there is adequate demand for its current and planned digital
wireless services. Nevertheless, since there currently is no integrated wireless
communications network commercially available that is comparable to the
Company's digital wireless network, the Company cannot predict the demand for
its services with any degree of certainty.
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The Company believes that the FCC licenses it currently holds will be
sufficient for its initial U.S. digital wireless network in its U.S. target
markets. If the Company seeks to enter additional markets or to expand capacity
or services beyond those currently planned, the Company may need additional
spectrum and transmission sites. In such event, the Company will compete with
other wireless communications providers and may not be able to obtain some or
all of the spectrum or sites necessary for such expansion. See "--Need for
Additional Spectrum"
Government and Industry Regulation
The construction, operation and acquisition of SMR systems in the United
States is regulated by the FCC under the Communications Act of 1934, as amended
(the "Communications Act"), pursuant to the FCC's rules and policies adopted
thereunder.
The FCC currently regulates two types of 900 MHz SMR licenses, which are
both authorized for ten channels of 12.5 kHz in width from base station to
mobile, of which the Company holds both types. The first type is the DFA
licenses which were issued by the FCC in the 1980's in 50 urban markets, on a
site-specific basis, with a construction deadline of one year. The Company holds
128 such DFA licenses. As a result of the Company's Waiver (See "Need for
Additional Spectrum"), which was granted in 1993, the Company was permitted an
extended construction period for its DFA licenses until June 1997 in which to
construct and implement the U.S. digital wireless network.
The second type of FCC 900 MHz SMR license is the MTA license, issued
pursuant to the FCC's 900 MHz SMR spectrum auctions, which were concluded in
1996. MTA licenses authorize much larger territory than DFA licenses in 51,
rather than 50, markets. The Company was able to secure 181 MTA licenses in 42
markets. MTA licenses are non-site-specific and have an extended construction
period of 3-5 years. Where the MTA licenses overlap coverage with a DFA license,
the MTA license must ensure non-interference protection for the incumbent DFA
licensee. Where the MTA licensee itself holds the incumbent DFA license, the DFA
license may be canceled or subsumed into the MTA license, thereby assuming the
regulatory build-out time frame advantages of an MTA license. (See "Need for
Additional Spectrum")
Most of the equipment utilizing the Company's technology that is used to
send signals must satisfy certain technical standards and receive FCC type
acceptance approval. In addition, the Company's equipment must comply with the
FCC's radio frequency ("RF") guidelines. Although the Company's base stations
and current subscriber units have received such type acceptance approval from
the FCC, there can be no assurance that future generations of subscriber units
or other equipment will meet such standards.
Under the Communications Act, SMR system providers were traditionally
regulated as private carriers and, therefore, were subject to less regulation by
both the FCC and individual states than were common carriers such as cellular
telephone companies. However, the FCC has initiated and is likely to continue to
initiate regulatory proceedings with wide-ranging implications for the wireless
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telecommunications industry. Most of the rule makings were initiated in response
to congressional amendments to the Communications Act, as directed by the
Omnibus Budget Reconciliation Act of 1993 (the "Budget Act"). The Budget Act
reconfigured the wireless marketplace to include a category of Commercial Mobile
Radio Service (CMRS) providers which included all wireless carriers who offer
wireless services, interconnected to the public switched network to a
substantial portion of the public, for profit. In 1996, President Clinton signed
into law the Telecommunications Act of 1996 (the "Telecommunications Act") which
imposes sweeping reform of telecommunications policy. Although the majority of
the Telecommunications Act's measures will directly impact large common
carriers, cable and broadcast operators, and Internet service providers, many of
the Telecommunications Act's provisions will have an effect upon the wireless
marketplace, and upon the Company.
Under the Budget Act and Regulations which have been promulgated
thereunder, the Company is now required to provide services on a
"non-discriminatory basis" and on terms that are not "unjust and unreasonable,"
as such terms are defined in the Communications Act. As a practical matter,
"non-discriminatory basis" means that the Company cannot tailor certain service
packages and price offerings to individual customers that are not generally
available to similarly situated parties. In addition, the Company must now limit
its foreign investors to 25% or less.
Under past proceedings, the FCC determined that Local Exchange Telephone
Companies (LECs) must offer interconnection to CMRS providers on reasonable
terms and conditions, and under the principle of mutual compensation. The FCC
declined to impose direct interconnection obligations for CMRS-to-CMRS
transmissions. Although it is not yet final, the FCC may enforce specific limits
with respect to prices, terms, and conditions of interconnection arrangements
for LEC-CMRS interconnection, to ensure that CMRS providers are granted equal
competitive footing with more established LEC service providers.
In a separate proceeding, the FCC amended its rules to permit broadband and
narrowband CMRS providers to offer wireless local loop and related services.
Specifically, the FCC adopted a definition of "wireless local loop" that is
sufficiently broad to allow the provision, by CMRS providers such as the
Company, of certain fixed services. The definition of "wireless local loop" is
"the path between the subscriber and the first point of switching or aggregation
of traffic." Such an expansion in available service offerings could be
beneficial to the Company.
The FCC is also considering the adoption of rules that would require CMRS
providers to offer enhanced emergency calling ("911") access and features to
mobile radio callers in three phases within five years after adoption of the
rules. The FCC's current proposal, which is still pending with respect to the
Company's obligations, would require CMRS providers to ensure such features as
calling party automatic number identification ("ANI"); 911 availability from any
service initialized mobile radio handset; 911 access for speech and
hearing-impaired callers; and call-back capability.
In a similar proceeding, the FCC is considering: whether the Company should
be required to permit "roaming" access to its system, where technically
feasible, to customers of other service providers: whether the Company should be
required to permit the resale of its services by other service providers; and,
whether the Company's equipment must ensure the "number portability" of its
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customers which would entail the incorporation of a 15-digit dialing pattern
which would identify the mobile phone number world-wide. The applicability of
these four proceedings -- "E911", "roaming", resale", and "number portability" -
to the Company depends upon the FCC's definition of "covered SMR" and whether
the Company falls within that definition. The FCC's determination in this
proceedings remains pending. Although the FCC's decision can not be predicted,
in the event that the Company must comply with any four of these proceedings,
such requirements would require additional development effort and expenditure by
the Company.
Other Regulatory Matters
On October 25, 1996, the President signed into law the Communications
Assistance for Law Enforcement Act ("CALEA") which requires communications
carriers to allow law enforcement the ability to "monitor" calls on their
wireless systems. CALEA requires compliance with FBI Assistance Capability
Requirements within four years of the signing of CALEA into law. Although it is
not yet certain, it is likely that the Company, along with other SMR operators,
may be waived from complying with CALEA.
Patents and Technology Rights
GTI-Israel has filed several patent applications in Israel and intends to
file patent applications in other countries including the United States. In
addition, GTI-Israel has an exclusive royalty free right to utilize the
technology covered by a U.S. patent issued to Rafael.
In addition to those patent applications filed by GTI-Israel, the Company
also has filed patent applications in Israel and the United States based on
technology developed by the Company. As of December 31, 1996, no patents had
been issued to the Company or GTI-Israel and there can be no assurance that a
patent will be issued from any pending or future patent applications or that if
any are issued that any of them will have any commercial significance. The
Company is aware of certain patents and patent applications held or filed by
others which generally relate to the subject matter of the Company's activities.
The Company believes that none of such patents or applications is likely to have
a material adverse effect on the ability of the Company to utilize any
technology currently intended to be utilized by the Company.
The Company protects its proprietary information by way of confidentiality
and non-disclosure agreements with employees and third parties who may have
access to such information. The Company continually reviews its technology
developments in order to file patent applications and has filed patent
applications with respect to certain aspects of its FHMA(R) technology and
GEONETTM in Israel and the United States and expects to file additional patent
applications in Israel and the United States. Generally, the Company intends to
file all patent applications in the United States and Israel and in such other
countries as it deems appropriate. There can be no assurance that such
applications will be granted. There can be no assurance that any patents issued
will afford meaningful protection against competitors with similar technology or
that any patents issued will not be challenged by third parties. There also can
be no assurance that others will not independently develop similar technologies,
duplicate the Company's technologies or design around the patented aspects of
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any technologies developed by the Company. Many patents and patent applications
have been filed by third parties with respect to wireless communications
technology. The Company does not believe that its technology infringes on the
patent rights of third parties. However, there can be no assurance that certain
aspects of the Company's technology will not be challenged by the holders of
such patents or that the Company will not be required to license or otherwise
acquire from third parties the right to use certain technology. The failure to
overcome such challenges or obtain such licenses or rights could have a material
adverse effect on the Company's operations.
The Company owns several trademarks, including GEONETTM and FHMA(R), in the
United States and certain other countries.
The Company's Research and Development expense related to the digital
wireless communication system totaled $34.0 million in 1996 compared to $33.0
million in 1995 and $17.0 million in 1994.
Employees
As of December 31, 1996, the Company had approximately 800 full-time
employees, of which approximately 650 were engaged in its wireless
communications businesses and approximately 150 of which were engaged in its
communications products businesses. The Company considers its relationship with
its employees to be good.
As of December 31, 1996, approximately 40 employees of Rafael and other
subcontractors were engaged on a full-time basis in the production, development
and enhancements of the Company's FHMA(R) digital system. Rafael's employees are
represented by a labor union, and, from time to time, there have been labor
disputes between Rafael and its employees, which have resulted in slow-downs. To
date, these slow-downs have not had a material effect on the Company's business.
There can be no assurance, however, that any future disputes will not adversely
affect Rafael's ability to deliver equipment to the Company, which could delay
the implementation of digital wireless services.
Financial Information
Financial Information about the Company's industry segments and the
Company's foreign and domestic operations is disclosed in the notes to the
Company's Consolidated Financial Statements. See "Item 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA."
Item 2. PROPERTIES
In February 1997, the Company's principal place of business was moved to
102 Chestnut Ridge Road, Montvale, New Jersey. The Company rents, from an
unaffiliated third party, approximately 50,000 square feet of office space for
approximately $1.2 million per year, plus taxes and utilities. The lease expires
February 2007. The Company's Montvale facility functions both as its corporate
headquarters and the general offices of the Company's U.S. wireless operation.
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Bogen subleases its facilities, located at 50 Spring Street, Ramsey, New
Jersey from an unaffiliated third party. The sublease expires on December 31,
2000 and requires rental payments at a rate of approximately $700,000 per year
for the remainder of the term.
NB3 leases its principal place of business in Chelmsford, England, pursuant
to a lease, from an unaffiliated third party, that expires in September 1999.
The Company has an option to extend the lease for four successive five-year
periods. Annual rental payments during the initial term of the lease are
$310,000. Rental payments pursuant to each of the options are to be negotiated
prior to the start of each five-year period. NB3 leases sites for its base
stations from different parties under leases with various terms, amounts and
conditions.
Speech Design leases its facilities in Munich, Germany pursuant to a lease,
with an unaffiliated third party, which expires in 2005. Annual rental payments
are approximately $240,000.
GMSI leases its facilities in Ontario, Canada pursuant to a lease , with an
unaffiliated third party, that expires in April 2005. Annual base rental
payments over the remainder of the lease are approximately $140,000.
In connection with the roll-out of the U.S. network, the Company expects to
lease office space in each of the target markets in which it intends to provide
wireless digital service. In addition to office space, the Company must secure
leases for its transmission equipment at suitable locations in each of these
cities. As of December 31, 1996, the Company had leased office space and
transmission sites in 9 and 14, respectively, of its target markets. The
aggregate annual rental payments pursuant to these leases are approximately $2.1
million.
Item 3. LEGAL PROCEEDINGS
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 develops and utilizes technology for substantially all of the
services and products it offers and intends to offer and has, from time to time,
been the subject of infringement claims related thereto. It is often difficult
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to predict the outcome of such litigation and the amount of damages that may be
awarded. The Company does not believe that any pending or threatened litigation
related to the Company's technology or use thereof will have a material adverse
effect on its business.
The Company also is, from time to time, a party to litigation, which may or
may not be covered by insurance, arising in the ordinary course of business. The
Company does not believe that results of such litigation, even if the outcome
were unfavorable to the Company, would have a material adverse effect on its
business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholder's during
the fourth quarter of 1996.
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Item A. EXECUTIVE OFFICERS
As of the date hereof, the executive officers of the Company are:
Name Age Position
---- --- --------
Yaron I. Eitan 40 Chairman of the Board, Chief Executive Officer
and Director
Jonathan C. Crane 47 President, Chief Operating Officer and Director
George Calhoun 44 Vice Chairman of Strategy and Technology and
Director
Yoram Bibring 39 President and Chief Executive Officer - Geotek
International Networks, Inc.
Michael McCoy 44 President and Chief Executive Officer - Geotek
U.S. Network
John Egidio 48 Executive Vice President, Corporate Operations
William A. Opet 39 Senior Vice President, Business Development
Michael H. Carus 31 Vice President, Acting Chief Financial Officer,
Chief Accounting Officer & Corporate Controller
Robert Vecsler 32 General Counsel and Secretary
Mr. Eitan has served as Chief Executive Officer and a director of the
Company since March 1989 and as Chairman of the Board since October 1996. From
March 1989 until October 1996, Mr. Eitan also served as President of the
Company. Mr. Eitan is also Chairman of the Board of Bogen and a director of
Geotek Technologies Israel Ltd. ("GTIL"), formerly PST, GMSI and NB3,
subsidiaries of the Company.
Mr. Crane joined the Company as President & Chief Executive Officer -
Geotek U.S. Network in October 1995, a position he held until October 1996, when
he became the President and Chief Operating Officer of the Company. Mr. Crane
has served as a Director of the Company since June 1996. Prior to joining
Geotek, from January 1994 through January 1995, Mr. Crane was President & Chief
Executive Officer of LightStream Corporation, a start-up ATM switch company. In
January 1995, LightStream was purchased. From May 1985 through January 1994, Mr.
Crane served in various executive capacities at MCI Telecommunications, where he
most recently served as Executive Vice President Multinational Accounts.
Mr. Calhoun was appointed a director of the Company in July 1993, when he
became President of the Company's wireless communications group. In October
1996, he was appointed the Vice Chairman of Strategy & Technology of the
Company. Mr. Calhoun joined the Company in June 1992 as President, Chief
Operating Officer and a director of GTIL. He is also a director of NB3. Mr.
Calhoun previously served in various positions with InterDigital Communications
Corporation (formerly International Mobile Machines Corporation), a corporation
co-founded by Mr. Calhoun and engaged in the development of digital radio
technology, most recently as General Manager of the Intellectual Property
Licensing Division, which position he held until June 1992.
23
<PAGE>
Mr. Bibring joined the Company as Chief Financial Officer in February 1990,
a position he held until September 1995. He served as Executive Vice President
and Chief Operating Officer of the Company from June 1993 until March 1996, when
he was appointed President and Chief Executive Officer - International Networks
Division of the Company. He is also a director of Bogen. He served as Vice
President of Aryt Optronics Industries, Ltd. from December 1990 to April 1991.
From November 1986 to January 1990, Mr. Bibring was a Senior Auditor at Shachak
& Company, a public accounting firm in Israel.
Mr. McCoy was appointed President and Chief Executive Officer of Geotek's
U.S Network in February 1997. Mr. McCoy served as Senior Vice President and
Chief Financial Officer of the Company from September 1995 through February
1997. From November 1994 through September 1995, Mr. McCoy was the Company's
Vice President of the North East Region. Prior to joining the Company, from
September 1992 through November 1994, Mr. McCoy was President of Greenlake
Associates, Inc. a high technology consulting company. From November 1988
through September 1992, Mr. McCoy was a member of the Office of the Chairman and
Senior Vice President of Business Development for LCI International, Inc., a
facilities based long distance telecommunications company.
Mr. Egidio became Senior Vice President of the Company in October 1993 and
has served as Executive Vice President-Corporate Operations since February 1997.
From December 1991 to November 1992, he was President and Chief Executive
Officer of Metagram America, Inc., a company engaged in the provision of
alphanumeric messaging services. From February 1985 to April 1990, Mr. Egidio
was President and Chief Executive Officer of MobileMedia Communications, Inc.
(formerly Metromedia Paging), a subsidiary of Southwestern Bell engaged in
wireless communications.
Mr. Opet joined the Company in April 1994 and has been Senior Vice
President of Business Development since February 1996. Prior to this appointment
he served as Vice President of Marketing and Senior Vice President, Marketing
and Sales. From June 1990 to March 1994, he served as Vice President of
Marketing for LIN Broadcasting ("LIN"), a 52% owned subsidiary of McCaw
Cellular, where he worked extensively on the introduction of digital cellular
systems. From May 1986 to June 1990, Mr. Opet was Vice President of Marketing
and Sales for LIN's Philadelphia cellular operations.
Mr. Carus was appointed Acting Chief Financial Officer of the Company in
February 1997. Mr. Carus has served as Chief Accounting Officer and Corporate
Controller of the Company since June 1995. Mr. Carus is a Certified Public
Accountant and, from August 1988 to June 1995, was, most recently, a Business
Assurance Manager in the communications team at Coopers & Lybrand L.L.P., a
public accounting firm.
Mr. Vecsler has served as General Counsel and Secretary of the Company
since March 1996. From May 1995 through March 1996, he served as Corporate
Counsel for the Company. Prior to joining the Company, from August 1994 until
April 1995, Mr. Vecsler served as Assistant General Counsel at Enviro Source,
Inc. From April 1993 until July 1994, he served as Counsel to Fletcher Asset
Management, Inc. Mr. Vecsler practiced law at Kelly, Drye & Warren from
September 1988 until March 1993.
24
<PAGE>
PART II
Item 5. MARKET PRICE FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock currently trades on the NASDAQ National Market
under the symbol "GOTK" and on the Pacific Stock Exchange under the symbol
"GEO".
The following tables set forth, for the quarters indicated, the high and
low sales prices for the Company's Common Stock as reported on the NASDAQ
National Market:
Year Ended December 31, 1996 High Low
First Quarter . . . . . . . . . . . . . . 12 6 5/16
Second Quarter. . . . . . . . . . . . . . 14 7/8 9 3/4
Third Quarter . . . . . . . . . . . . . . 13 3/4 8
Fourth Quarter . . . . . . . . . . . . . . 9 1/8 5 7/16
Year Ended December 31, 1995 High Low
First Quarter . . . . . . . . . . . . . . 9 3/8 6 3/4
Second Quarter. . . . . . . . . . . . . . 9 7/8 7 1/8
Third Quarter . . . . . . . . . . . . . . 10 7 1/2
Fourth Quarter . . . . . . . . . . . . . . 9 1/4 5 1/2
As of March 24, 1997, there were 1,302 record holders of the Common Stock.
The Company has not declared or paid any cash dividends on the Common Stock
since commencing operations and is restricted from paying any dividends on the
Common Stock due to debt covenant restrictions. At present, the Company is
obligated to pay, for a five-year period following the issuance of its Series H
preferred stock, cumulative dividends of $2,000,000 per year on the Series H
preferred stock, in cash, and, for a five-year period following the issuance of
its Series I preferred stock and Series K preferred stock, respectively,
cumulative dividends equaling $700,000 per year on the Series I preferred stock
and $700,000 per year on the Series K preferred stock, in cash or shares of
Common Stock of the Company, before any cash dividends may be paid on the Common
Stock. In addition, the Company is presently obligated to pay cumulative annual
dividends of $750,000 per year on its Series L preferred stock, in cash or
additional shares of Series L preferred stock, cumulative annual dividends of
$988,125 per year on its Series M preferred stock, and annual cumulative
dividends equaling $5,000,000 on the Series N preferred stock in Common Stock,
and annual dividends of $5,000,000 and $2,500,000 on the Series O and P
preferred stock, respectively, in cash or Common Stock in cash or shares of
Common Stock, before any cash dividends may be paid on the Common Stock. At
present, the Company is current in payment of all required dividends on its
outstanding preferred stock.
On December 31, 1996, the Company sold to a limited number of accredited
investors(the "Series O Investors") 1,000 shares of the Company's Series O
Convertible Preferred Stock (the "Series O Preferred Stock") and warrants (the
"Warrants") to purchase 1,700,000 shares of the Company's common stock, $.01 par
value per share ("Common Stock"), for an aggregate purchase price of
$50,000,000. Each share of Series O Preferred Stock has a stated value of
$50,000.
The offer and sale to the Series O Investors of the Series O Preferred Stock
was made in reliance upon the provisions of Section 4(2) of the Securities Act
of 1933, as amended. In connection with the sale of Series O Preferred Stock,
each Series O Investor represented to the Company that it was purchasing the
Series O Preferred Stock for its own account and not with an intent towards the
distribution thereof.
Commencing April 1, 1997, each share of Series O Preferred Stock is
convertible by the holder thereof into such number of shares of Common Stock as
is obtained by dividing (x) the $50,000 stated value thereof plus all accrued
and unpaid dividends through the date of conversion by (y) the lowest daily
volume-weighted average price of the Company's Common Stock during the four(4)
business days immediately preceding conversion multiplied by the Conversion
Factor (as defined below); provided however, that holders of Series O Preferred
Stock may only convert up to a maximum of (i) 20% of such shares prior to June
29, 1997, (ii) 50% of such shares prior to December 31, 1997, (iii) 80% of such
shares prior to June 29, 1998 and (iv) 100% of such shares thereafter. The
Conversion Factor begins at 100% and becomes 95%, 90% and 88% on each of June
29, 1997, December 31, 1997 and June 29, 1998. In the event that the market
price for a share of Common Stock remains below $6.00 per share for five(5)
consecutive trading days, the Company may restrict holders from converting any
shares of Series O Preferred Stock while such market price remains below $6.00:
provided however, that the aggregate number of days subject to all such
conversion restiction periods may not exceed sixty (60).
The Warrants are exercisable at any time before June 30, 2000 to purchase
shares of Common Stock at an exercise price of $9.2625 per share (subject to
adjustment in certain circumstances).
25
<PAGE>
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Year ended December 31, 1996 1995 1994 1993(1) 1992(1)
- ------------------------------- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales $92,794 $80,279 $72,991 $48,971 $28,546
Net loss from continuing operations (138,222) (87,199) (42,405) (50,441) (2,381)
Net loss per common share from continuing
operations (2.51) (1.75) (0.90) (1.43) (0.21)
As of December 31, 1996 1995 1994 1993(1) 1992(1)
- ------------------ ---- ---- ---- ------- -------
Total Assets $430,122 $292,564 $179,844 $135,644 $39,366
Long-term debt (net of current portion) and
redeemable preferred stock 255,430 135,875 69,396 44,926 3,824
Shareholders= equity 95,044 76,262 77,356 69,244 24,432
</TABLE>
(1) Historical numbers were restated for the acquisition in January 1994,
through a merger, of 100% of Metro Net Systems Inc. The merger was accounted for
as a pooling of interests.
The Company did not pay a cash dividend on the Common Stock during any
period indicated.
The difference in financial results among the years is influenced by the
following acquisitions and dispositions. In 1992 PowerSpectrum, Inc. was formed,
the defense segment was discontinued and an additional 4% of Bogen was acquired.
In 1993 NB3, Speech Design, GMSI and the remaining interest in PowerSpectrum,
Inc. were acquired and Oram Electric Industries, Ltd., Oram Power Supplies 1990,
Ltd. and Geopower were sold. In 1994, 49% interests in PBG and DBF and an 8%
interest in Bogen were acquired. In 1995, the Company sold its interests in
Speech Design and Bogen to BCI in exchange for, among other things, a 64%
interest in BCI, the remaining interests in PBG and DBF were acquired and the
Company increased its interest in GTIL from 56% to 94%. In 1996, the operating
assets of the Company's German Networks were contributed to a joint venture, the
Company acquired the remaining 50% interest in MIS, and the Company formed a
joint venture in Korea, Anam Telecom and increased its interest is GTIL from 94%
to 97%. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
26
<PAGE>
Item 7. 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 the U.S. Network as well as
to a high investment in research and development related to its wireless
communications activities. The Company may also continue to 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 continue to implement its
operating plan.
The Company currently groups its operations primarily into two types of
activities: wireless communications and communications products. 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, New York, Boston, Miami, Dallas and Orlando during 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
auctions, 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 18 additional markets in 1997, three 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 acquisition
of additional financing; the timely and cost-effective manufacture, construction
and integration of the system infrastructure and software; the acquisition and
control of additional radio spectrum; the procurement and preparation of base
station and remote sites; the receipt of all necessary regulatory approvals;
and, the establishment of effective sales and marketing organizations and
distribution channels. 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.
27
<PAGE>
In March 1996, Industry Canada, the Canadian agency responsible for spectrum
allocation, approved in principle an award of certain 900 MHz frequencies in the
provinces of Alberta, British Columbia, Ontario and Quebec 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 the joint venture in Canada to launch mobile wireless communications
services based on the Company's proprietary FHMA(R) technology. In July 1996,
the Company announced that it had been unable to reach a final agreement with
Cogeco. In October 1996, Industry Canada granted the Company and its remaining
partner, Techcom, Inc., an extension to March 31, 1997 to find a suitable
replacement for Cogeco. The Company is actively negotiating with other potential
Canadian partners to replace Cogeco so that it can begin deployment of an
FHMA(R)-based network and comply with Canadian foreign ownership and regulatory
requirements. There can be no assurance that the Company will be able to
identify a joint venture partner or, if such a partner is identified, that an
agreement can be reached on terms acceptable to the Company. The Company has
until March 31, 1997 (absent an additional extension) to identify a Canadian
partner and file a site implementation plan with Industry Canada, or else the
Company may lose its Canadian licenses. The licenses have no termination date,
but are granted at the sole discretion of the agency. While the Company believes
that it will be able to retain the license until a satisfactory Canadian
controlled entity is formed, there is no assurance that the license will not be
lost. 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(R) 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.
In June 1996, the Korean Ministry of Information and Communications awarded 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 is
also held by 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(R) system on an 800 MHz
frequency. The Company's FHMA(R) system currently operates in the 900 MHz
frequency band. Although the Company believes its 800 MHz development program
will result in successfully adapting its FHMA(R) 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(R)
system to the 800 MHz frequency on a timely basis. Any failure on the part of
the Company to successfully adapt its FHMA(R) 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(R) related
infrastructure equipment and broad business and engineering support for the
design, implementation and operation of the network in Korea. Finally, the
development and deployment of a FHMA(R) based digital system in Korea will be
subject to the same risks attendent to the development and deployment 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, National Band Three
Ltd. ("NB3"), received an initial allocation of 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. The Company has recognized that it
will need some additional spectrum in the future and is discussing this with the
regulatory authorities who have indicated that they are prepared to support the
request. 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 NB3, 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
28
<PAGE>
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 analog PAMR services to over 62,000 business subscribers
throughout the United Kingdom.
In November 1996, the Company entered into a partnership agreement with RWE
Telliance A.G. ("RWE") to merge their respective German mobile radio networks
upon the approval of the appropriate regulatory authority in Germany. Under the
terms of the agreement, each of the Company and RWE owns 50% of the merged
entity. In December 1996, the Company and RWE received approval from the
appropriate authority and completed the merger. Thus, the Company deconsolidated
its German entity and began to account for its investment under the equity
method of accounting for uncontrolled subsidiaries.
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 the
Geotest, Inc. subsidiary, in which the Company reached a definitive agreement to
sell at the end of 1996.
Summary of Operations
1996 Compared to 1995
Consolidated revenues increased by 16% in 1996 principally due to
subscriber growth on the Company's National Band Three Ltd. ("NB3") network in
the United Kingdom, the inclusion of the Company's German Networks on a
consolidated basis in 1996, and higher revenues from the communications product
segment.
Consolidated operating expenses increased by 32% in 1996, due to: increased
research and development activities associated with the enhancement of the
Company's digital wireless network and development of customer subscriber units;
increase in general and administration expenses to support the U.S. Network
roll-out and international activities; and, increased marketing expenses
associated with the roll-out of the U.S. Network.
Consolidated losses increased by $51.0 million to $138.2 million in 1996.
On a consolidated basis, interest expense increased in 1996 due to: the
July 1995 issuance of the 15% Senior Secured Discount Notes ("Discount Notes");
and the related accretion of the value of the warrants issued in connection with
the Discount Notes; and, the March 1996 issuance of the 12% Senior Subordinated
Convertible Notes ("Convertible Notes"). Interest income increased in 1996 due
to a higher level of cash and cash equivalents held during the year.
29
<PAGE>
1995 Compared to 1994
Consolidated revenues increased by 10% in 1995, principally due to
subscriber growth of on NB3's network.
Consolidated operating expenses increased by 40.2% in 1995, principally due
to increased research and development activities associated with the Company's
digital wireless network and costs related to the roll-out of the U.S. digital
wireless network.
Consolidated losses increased by $44.8 million to $87.2 million in 1995.
On a consolidated basis, interest expense increased in 1995 principally due
to the July 1995 issuance of the Discount Notes. Interest income increased in
1995 due to greater cash and cash equivalents which resulted from the issuance
of the Discount Notes. Amortization expense increased from $2.8 million in 1994
to $4.2 million in 1995 due to the increase in goodwill as a result of the
Company's acquisitions of the German Networks.
Wireless Communications Activities
The tables below set forth certain information with respect to the results
of operations of the Company's Wireless Communications Activities for the years
ended December 31, 1996, 1995, and 1994. Other International Activities include
the Company's German Networks, international business development activities and
equity interests in its Korean Joint Ventures. The Geotek Technologies column
includes Geotek Technologies Israel, Ltd., formerly PowerSpectrum Technology,
the Company's equipment and research and development operation, and GMSI, Inc.
For the Year Ended December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek
Network NB3 Activities Technologies Total
------- --- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues $847 $28,410 $4,382 $8,984 $42,623
Gross profit (18,141) 17,860 (1,260) 1,590 49
% of revenues 63% (29%) 18%
Research and Development 267 33,987 34,254
Marketing 21,580 5,366 627 1,354 28,927
General and Administrative 10,183 4,046 8,170 3,099 25,498
Equity in losses of less than
50%-owned entities (96) (96)
Other (income) expense (635) (458) (1,093)
(Loss) income before
interest and
amortization & depr. (49,536) 8,448 (9,503) (36,850) (87,441)
Amortization and
depreciation 5,285 4,708 5,524 2,312 17,829
(Loss) income before
interest (54,821) 3,740 (15,027) (39,162) (105,270)
Net (loss) income ($54,471) $2,552 ($15,569) ($39,086) ($106,574)
Subscribers 1,600 62,600 17,000* 81,200
</TABLE>
* Represents the Company's proportionate share of the 34,000 subscribers
utilizing the networks of the German joint venture.
30
<PAGE>
For the Year Ended December 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek
Network NB3 Activities Technologies Total
------- --- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues $2,102 $24,985 $707 $5,192 $32,986
Gross profit (3,201) 15,514 (1,364) 1,407 12,356
% of revenues (152%) 62% (193%) 27% 37%
Research and Development 33,014 33,014
Marketing 9,813 5,585 457 1,093 16,948
General and Administrative 10,080 3,507 469 2,569 16,625
Equity in losses of less than
50%-owned entities 4,971 4,971
Other income (2,121) (116) (124) (2,361)
(Loss) income before
interest and
amortization & depr. (20,973) 6,538 (7,137) (35,269) (56,841)
Amortization and
depreciation 1,739 4,136 1,656 681 8,212
(Loss) income before
interest (22,712) 2,402 (8,793) (35,950) (65,053)
Net (loss) income ($22,338) $1,194 ($8,935) ($35,931) ($66,010)
Subscribers 57,400 11,800 69,200
</TABLE>
For the Year Ended December 31, 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek
Network NB3 Activities Technologies Total
------- --- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues $2,405 $19,771 $3,493 $25,669
Gross profit 1,063 10,520 383 11,966
% of revenues 44% 53% 11% 47%
Research and Development 16,910 16,910
Marketing 3,547 4,455 872 8,874
General and Administrative 11,285 2,909 391 14,585
Equity in losses of less than
50%-owned entities $2,379 2,379
Other income (445) (52) (497)
(Loss) income before
interest and
amortization & depr. (13,324) 3,208 (2,379) (17,790) (30,285)
Amortization and
depreciation 972 3,960 504 448 5,884
(Loss) income before
interest (14,296) (752) (2,883) (18,238) (36,169)
Net (loss) income ($13,660) ($1,045) ($2,883) ($18,242) ($35,830)
Subscribers 47,700 5,200 52,900
</TABLE>
31
<PAGE>
1996 Compared to 1995
Revenues from wireless communications increased by $9.7 million or 29% for
the year ended December 31, 1996. This increase is primarily due to the
inclusion of the German networks on a consolidated basis in 1996 (until the
merger with RWE in December 1996), the increase in the number of subscribers
using the NB3 network as well as, an increase in Geotek Technologies' revenues
for GMSI, Inc.'s contract related to the Singapore taxi fleet. The increase in
negative gross profit for the U.S. Network is primarily the result of increased
direct costs related to the roll-out, the cost of which are currently not
covered by revenues and the write-down of pre-production inventory to the lower
of cost or market. In 1995, the U.S. Network included the results of the
Company's MetroNet subsidiary. In November 1995, the Company exchanged the
assets of MetroNet, primarily 800 MHz licenses, with Nextel Communications Inc.
for certain 900 MHz licenses.
Research and development expenses (net of government grants of $0.3 million
and $5.9 million in 1996 and 1995, respectively) related to the digital wireless
system and subscriber unit were $34.3 million for the year ended December 31,
1996 compared to $33.0 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 the Company's
proprietary digital wireless 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 in process. The Company expects significant research and
development expenses to continue in the future in connection with enhancements
made to the system and subscriber unit.
The Company is presently in the process of rolling out its wireless service
over its proprietary digital wireless network in the United States, and
accordingly, continues to put in place its marketing, engineering, operations
and administrative staff and systems. Marketing expenses increased by
approximately $12.0 million or 71% due to the U.S. Network marketing programs
and increase in staff needed to execute the roll-out of the U.S. Network in the
initial 1996 markets. General and administrative expense increased $8.9 million
or 53% due to an increase in administrative staff needed to support the
beginning of the U.S. Network roll-out and the Company's expanding international
business development activities.
The Company's equity in losses of less than 50% owned entities for the year
ended December 31, 1995 is attributable to the results of the Company's German
networks and Korean joint ventures. The comparable loss for 1996 is attributable
solely to the Company's Korean joint ventures which is presented net of a $1.4
million reimbursement received by the Company from Anam Telecom for expenses
incurred by the Company on behalf of its Korean joint venture in connection with
the trunked radio system license process. As discussed above, the 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. In July 1995 and December 1995, the Company acquired
the remaining shares of the Company's German networks and began consolidating
these subsidiaries. As discussed previously, in December 1996, the Company
merged its German networks with RWE's network in Germany. At December 31, 1996,
the merged entity has approximately 34,000 subscribers of which the Company's
ownership interest is approximately 17,000.
Wireless activities generated a loss before interest, taxes, amortization
and depreciation of $87.4 million for the year ended December 31, 1996 compared
to $56.8 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.
32
<PAGE>
1995 Compared to 1994
Revenues from wireless communications increased by $7.3 million or 29% for
the year ended December 31, 1995. This increase is primarily due to the increase
in the number of subscribers using the NB3 network (which totaled approximately
57,400 and 47,700 at December 31, 1995 and 1994, respectively) as well as, the
inclusion of the DBF and PBG German Networks on the consolidated basis since
July 1995 and December 1995, respectively, amounting to $0.7 million. Average
revenue per subscriber on the NB3 network remained constant. Gross profit as a
percent of revenues increased as NB3's costs are primarily fixed thus, allowing
subscriber growth to increase the gross profit percentage.
Research and development expenses (net of government grants) related to the
digital wireless system and subscriber unit were $33.0 million for the year
ended December 31, 1995. In 1995, the Company continued to receive grants from
the Chief Scientist of the Ministry of Commerce and Industry of the Israeli
Government ("Chief Scientist"). Such grants, which are recorded as a reduction
of research and development expenses, totaled $5.9 million in 1995 ($4.1 million
in 1994). Included in 1995 research and development expenses is a $5.6 million
expense related to scope changes in the development of the digital wireless
system. Additionally, research and development expense includes a $6.0 million
charge related to payments for the development of the portable subscriber unit.
Also included in research and development expense in 1995 is $2.0 million
relating to shares of common stock issued to Rafael Development Corporation in
consideration for a research and development project.
Marketing expenses increased by approximately $8.1 million or 90% due to
the commencement of the marketing effort in the U.S. and increase in staff
needed to execute the roll-out of the U.S. network as well as volume growth in
the German and NB3 networks. General and administrative expenses increased $2.2
million due to an increase in administrative staff to support the U.S. network
as well as volume growth in the German and NB3 networks .
For Wireless Communications Activities, equity in losses of less than 50%
owned entities increased to $4.9 for the year ended December 31, 1995 from $2.3
million in 1994. The 1995 loss relates to the Company's investment in its German
networks prior to the acquisitions of the remaining shares of these two networks
in July and December 1995 and the Company's Korean joint ventures. The Company
began to fully consolidate the German entities subsequent to the date of the
acquisitions of the remaining interests. The 1994 loss relates to both of the
German networks for six months. The number of subscribers on these networks as
of December 31, 1995 was approximately 11,800. As discussed above, in December
1996, the Company merged its German networks with RWE's German network and
formed a joint venture in which the Company owns a 50% interest.
Wireless activities generated a loss before net interest expense,
amortization and depreciation of $56.8 million for the year ended December 31,
1995 compared to $30.2 million in 1994. This increase is primarily due to the
increased research and development expense as well as costs related to the
commencement of the roll-out of the digital wireless communication system for
the U.S. network .
33
<PAGE>
Communications Products Activities
In August 1995, the Company transferred its interests in Speech Design GmbH
and Bogen Communications, Inc. (the "Operating Companies") to Bogen
Communications International ("BCI") formerly, European Gateway Acquisition
Corporation, in exchange for $7.0 million in cash, $3.0 million in convertible
notes receivable, approximately 64% of BCI common shares and warrants to
purchase 200,000 shares of BCI common stock at $5.50 per share. Effective
January 1, 1996, the $3.0 million convertible notes were reduced and
restructured to a $0.5 million non-convertible note due July 1997. The Company
will also be eligible to receive additional consideration if the future earnings
of the Operating Companies, through July 1997, attain certain levels. The
Company controls and consolidates this entity.
The table below sets forth certain information with respect to the results
of operations of BCI as consolidated by the Company for the years ended December
31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
(Dollars in Thousands)
December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $46,268 $44,518 $46,074
Gross profit 21,264 17,180 16,428
% of revenue 46% 39% 36%
Research and Development 2,892 2,307 2,116
Marketing 8,956 9,960 8,913
General and Administration 4,426 5,962 3,342
Other income (236)
Income before interest, tax, minority interest,
amortization & depreciation 4,990 (813) 2,057
Amortization & depreciation 1,398 1,242 1,181
Interest expense, tax & minority interest 1,493 2,069 1,245
Net income (loss) $2,099 $(4,124) $(369)
</TABLE>
1996 Compared to 1995
Revenues from communications products activities increased by $1.8 million,
or 4% to $46.3 million for the year ended December 31, 1996. The increase in
BCI's revenues is due to an increase in sales of all product lines offset by a
decline in the Office Automation ("OAS") product line, which was phased out
beginning in December 1995.
Gross profit as a percentage of revenues increased from 39% to 46% in 1996.
The increase is mainly due to charges of $2.2 million in 1995 to reduce certain
inventory to estimated market value and an increase in 1996 in the sales price
of most of the Company's domestic products. Excluding the impact of the OAS
product line, the Company's gross profit was 44% in 1995.
The decrease in marketing expenses for the year ended December 31, 1996
compared to 1995 is due to the reduction of marketing and payroll expenses
related to the OAS product line which, in 1995, included an intense marketing
effort prior to management's decision to phase out the product line.
General and administration expense for the year ended December 31, 1995
contained costs related to the Company's sale of Bogen Communications and Speech
Design subsidiaries to BCI.
34
<PAGE>
1995 Compared to 1994
Revenues from communications products activities for 1995 decreased by $1.6
million, or 3% to $44.5 million. The overall decrease in revenues is due to a
decrease in the Office Automation System ("OAS") product line revenues of $7.8
million, offset by an increase in the core product line revenues by $6.2
million. In December 1995, due to continued losses, the management of Bogen
decided to phase out the OAS product line.
Gross profit for 1995 increased $0.8 million and was equal to 39% of
revenues, compared to 36% of revenues in 1994. The increase was entirely
attributable to the core product line, in which the gross profit margin
increased to 45% in 1995, from 40% in 1994, due primarily to change in product
mix and higher average core sales prices. This was offset by the recording of a
$1.5 million reserve for certain inventory in the OAS product line based on
lower of cost or market.
The increase in marketing expense of $1.1 million is due to marketing
programs initiated by Bogen to stimulate sales in the OAS product line as well
as, growth in the core product line.
The increase in general and administration expenses of $2.6 million is due
primarily to costs to execute the aforementioned BCI transaction.
Corporate Group
The Corporate Group includes the Company's Corporate headquarters and
Geotest, Inc. subsidiary, which in accordance with a December 1996 definative
agreement, was sold by the Company. The Company's Corporate Group generated a
loss before net interest expense, amortization, depreciation and other charges
of $9.1 million and $5.6 million in 1996 and 1995, respectively. The increase in
the Company's 1996 general and administrative expenses was due to costs
associated the Company's investing and financing activities as well as the
expansion of the corporate group. Revenues from corporate group subsidiary were
$3.9 million in 1996, compared to revenues of $2.8 million in 1995.
The Company's Corporate Group generated a loss before net interest expense,
amortization, depreciation and other charges of $5.6 million for 1995 and 1994.
Although the loss was stable, the Company's 1995 general and administrative
expenses increased due to costs associated with the expansion of the corporate
group. This increase was offset by the 1994 reserve against a loan receivable.
Revenues from corporate group subsidiary were $2.8 million in 1995, compared to
revenues of $1.2 million in 1994.
Liquidity and Capital Resources
The Company requires significant additional 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 year ended December 31, 1996. At December 31, 1996, the Company had $103.6
million of cash and cash equivalents as well as $40.0 million available under a
line of credit facility. Also, as further discussed later in this section , the
Company has a $100.0 million vendor credit agreement with HNS for the purchase
of infrastructure equipment and in January 1997, the Company received $25.0
million from the sale of its Series P Convertible Preferred Stock to investors
affiliated with George Soros.
35
<PAGE>
The Company's short term cash needs are attributable primarily to capital
expenditures, marketing and general and administrative expenses and research and
development costs associated with the implementation and deployment of its
digital FHMA(R) networks. One of the advantages of the Company's FHMA(R) 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 financial
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 flows, of its then operating city network.
The Company estimates that a minimum average initial capital 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 currently 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 and use existing line of credit
facilities 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 40 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 roll-out plan; financing its
international digital wireless networks and joint ventures; and, defer certain
discretionary expenditures.
The following discussion of liquidity and capital resources, among other
things, compares the Company's financial and cash position as of December 31,
1996, to the Company's financial and cash position as of December 31, 1995.
During 1996, cash and cash equivalents increased by $42.2 million to $103.6
million, while working capital increased by $32.6 million to $101.8 million as
of December 31, 1996.
Operating Activities
Cash utilized in connection with operating activities, for the year ended
December 31, 1996, amounted to $88.3 million. This included changes in operating
assets and liabilities of $7.2 million. This change was primarily related to an
increase in inventory of $23.6 million, advances made to suppliers for
subscriber unit production of $11.5 million, offset by an increase in accounts
payable and accrued expenses of $32.5 million attributable to an increase in
activity due to the roll-out of the U. S. Network and approximately $9.5 million
in advances received from Anam Telecom for infrastructure and subscriber units.
36
<PAGE>
Investing Activities
Cash outflows from investing activities was $62.9 million. This was
inclusive of a decrease in temporary investments of $7.9 million and the
decrease in restricted cash of $27.6 million. The Company expended $50.0 million
to acquire equipment during 1996 and capitalized $7.1 million in interest on
construction in progress and FCC licenses.
During the year ended December 31, 1996, the Company expended $30.2 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 which was applied to the
purchase price in 1996. The remainder was paid in 1996 with the proceeds from
the Company's $24.5 million loan agreement with HNS as more fully discussed
later in financing activities.
In July 1996, the Company contributed approximately $7.7 million to Anam
Telecom on account of the Company's portion of the initial capitalization of
Anam Telecom and $1.8 million to the Korean Ministry of Information for the
Company's portion of Anam Telecom's nationwide license in Korea. In November
1996, Anam Telecom reimbursed the Company $1.4 million in expenses previously
incurred by the Company in connection with the Korean license bid activity.
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 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 process.
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
37
<PAGE>
December 31, 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, the last $50 million of which is 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, are being amortized over
the life of the facility and the related debt payback period.
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 quarterly and is convertible by the holder,
beginning 181 days after draw down, at the lower of 90% of the average sale
price of the Company's common stock for the 10 days preceding conversion or
$9.75. The loan proceeds were used to finance the cost of licenses acquired in
the FCC auction.
In December 1996, the Company sold 1,000 shares of its Series O Convertible
Preferred Stock ("Series O Stock") to a group of investors for an aggregate
purchase price of $50 million. The Series O Stock pays dividends in either
shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per
annum after a dividend payment failure). Additionally, commencing April 1, 1997,
each share of Series O Stock is convertible by the holder into the number of
shares of the Company's Common Stock as obtained by dividing the $50,000 stated
value per share plus any accrued or unpaid dividends at the date of conversion,
by the lowest daily volume weighted average price of the Company's Common Stock
during the four trading days immediately preceding conversion multiplied by the
conversion factor (the conversion factor begins at 100% and becomes 95%, 90% and
88% on June 29, 1997, December 31, 1997, and June 29, 1998, respectively).
However, the holder can only convert up to a maximum of 20% prior to June 30,
1997, an additional 30% prior to December 31, 1997 an additional 30% prior to
38
<PAGE>
June 29, 1998 and the remaining balance thereafter. In connection with this
transaction, the Company issued warrants to purchase 1.7 million shares of the
Company's Common Stock at $9.2625 per share (subject to adjustment in certain
circumstances). The warrants are exercisable at any time, and from time to time,
before June 30, 2000.
In January 1997, the Company sold to entities affiliated with George Soros,
500 shares of its Series P Convertible Preferred Stock ("Series P Stock") for an
aggregate purchase price of $25 million. The Series P Stock contains terms which
are substantially similar to those related to the Series O Stock. In connection
with this transaction, the Company issued warrants to purchase 850,000 shares of
the Company's Common Stock at $9.2625 per share (subject to adjustment in
certain circumstances). The warrants are exercisable at any time, and from time
to time, before June 30, 2000.
The Company paid cash dividends totaling approximately $5.1 million on its
outstanding preferred stocks during 1996. Proceeds from the exercise of warrants
and options totaled approximately $2.6 million in 1996.
Based on the Company's current business plan, the Company estimates that it
will need approximately $250 million of additional financing through 1999 to
implement its U.S. Network in all of its target markets. The amount of
additional financing will increase if the Company experiences delays in the
commercial implementation of its U.S. Network (which have occurred in the past),
including loading subscribers on the U.S. Network, cost overruns or
unanticipated cash needs. The Company also expects to need substantial
additional financing to fund the deployment of NB3's digital wireless network
and its other international operations and opportunities. Although the Company
believes that the marcrocellular architecture of its FHMA(R) 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 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.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standard Board issued statement
No.128 "Earnings Per Share" which is applicable for financial statements issued
after December 15, 1996. The adoption of this standard will have no impact on
the Company as the Company is in a loss position and only needs to present basic
earnings per share as the inclusion of common stock equivalents or convertible
securities has an antidilutive effect on the calculation of earnings per share.
39
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Financial Statements:
Geotek Communications, Inc. and Subsidiaries
Reports of Independent Accountants F-1 - F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1995, 1994 and 1993 F-5 - F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-41
Separate Company Financial Statements for Subsidiaries whose
Capital Stock is Pledged as Collateral.
National Band Three, Ltd. F-42 - F-61
Bogen Communications International, Inc and Subsidiaries F-62 - F-84
40
<PAGE>
[COOPERS & LYBRAND L.L.P. LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Geotek Communications, Inc.:
We have audited the consolidated financial statements and the consolidated
financial statement schedule of Geotek Communications, Inc. and Subsidiaries as
listed in Item 14(a)(1) and (2) of this Form 10-K. The consolidated financial
statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the consolidated
financial statement schedule based on our audits. We did not audit the financial
statements of Geotek Technologies Israel Ltd., formerly PowerSpectrum
Technologies, Ltd., a consolidated research and development entity, which
statements reflect losses from operations of approximately 13%, 22%, and 26% of
the corresponding consolidated totals in 1996, 1995 and 1994, respectively.
These statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Geotek
Technologies Israel Ltd. for 1996, 1995, and 1994, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits, and
the report of other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above presently fairly, in all
material respects, the consolidated financial position of Geotek Communications,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of its operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, based on our audits and the
report of other auditors, the consolidated financial statement schedule referred
to above, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
March 31, 1997
F-1
<PAGE>
[SHACHAK PEER REZNICK & CO. LETTERHEAD]
AUDITORS' REPORT TO THE SHAREHOLDERS OF
To the shareholders of GEOTEK TECHNOLOGIES ISRAEL (1992) LTD.
We have audited the accompanying balance sheets of GEOTEK TECHNOLOGIES ISRAEL
(1992) LTD. (f/k/a Powerspectrum Technology Ltd.) (Hereinafter - "the Company")
as of December 31, 1996 and 1995, and the statements of operation, changes in
shareholders' equity and cash flows for the years ended December 31, 1996, 1995
and 1994. These financial statements are the responsibility of the Company's
Board of Directors and management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, including those prescribed under the Israeli Auditors' Regulations
(Auditor's Mode of Performance), 1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether caused by an error in the
financial statements or by an irregularity therein. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by the Company's Board of Directors and
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a fair basis for our opinion.
The financial statements referred to above have been prepared on the basis of
historical cost, restated for the general purchasing power of the Israeli
currency, in conformity with statements of the Institute of Certified Public
Accountants in Israel. Condensed financial statement in nominal values, are
presented in Note 20.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1995 and the results of its operations, changes in shareholders' equity
and its cash flows for the years ended December 31, 1996, 1995 and 1994, in
conformity with generally accepted accounting principles in Israel which are
essentially identical in all material matters to the accounting principles
generally accepted in the US.
Without qualifying our opinion, we draw attention to Note 1B as to the Company's
dependence upon further funding by shareholders or others.
Pursuant to Section 211 of the Companies Ordinance (New Version) 1983, we state
that we have obtained all the information and explanations we required and that
our opinion on the above mentioned financial statements is given according to
the best of our information and the explanations received by us and as shown by
the books of the Company.
SHACHAK PEER REZNICK & CO.
Certified Public Accountants (Israel)
Tel Aviv, Israel
March 26, 1997
F-2
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
(Dollars in thousands, except per share data)
ASSETS 1996 1995
---- ----
Current assets:
Cash and cash equivalents ............................ $ 103,605 $ 61,428
Temporary investments ................................ 7,945
Restricted cash ...................................... 9,418 36,971
Accounts receivables trade, net of allowance
for doubtful accounts of $1,346 in 1996
and $1,487 in 1995 ................................. 15,435 14,028
Inventories, net ..................................... 28,150 10,483
Deposits for spectrum licenses ....................... 11,500
Prepaid expenses and other current assets ............ 23,384 5,621
--------- ---------
Total current assets ............................... 179,992 147,976
Investments in affiliates ............................ 36,972 3,078
Property, plant and equipment, net ................... 93,581 66,110
Intangible assets, net ............................... 91,508 68,181
Other assets, principally debt issuance costs ........ 28,069 7,219
--------- ---------
$ 430,122 $ 292,564
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade ............................. $ 20,587 $ 17,948
Accrued expenses and other ........................... 49,279 23,005
Notes payable, banks and other ....................... 8,075 8,285
Current maturities, long-term debt ................... 261 29,577
--------- ---------
Total current liabilities .......................... 78,202 78,815
--------- ---------
Long-term debt ....................................... 215,430 95,875
Other non current liabilities ........................ 1,008 1,217
Minority interest .................................... 438 395
Redeemable preferred stock ........................... 40,000 40,000
Commitments and contingent liabilities
Shareholders' equity:
Preferred stocks, $.01 par value: .................. 11 11
Common stock, $.01 par value:
Authorized 135,000,000 and 99,000,000,
respectively, issued 60,026,000 and 55,251,000
shares respectively, outstanding 59,788,000
and 55,013,000 shares, respectively ........... 600 553
Capital in excess of par value ..................... 429,483 272,456
Foreign currency translation adjustment ............ 942 1,012
Accumulated deficit ................................ (334,606) (196,384)
Treasury stock, at cost (238,000 common shares) .... (1,386) (1,386)
--------- ---------
95,044 76,262
--------- ---------
$ 430,122 $ 292,564
========= =========
See notes to consolidated financial statements.
F-3
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net product sales ....................... $ 58,868 $ 52,613 $ 48,370
Service income .......................... 33,926 27,666 24,621
------------ ------------ ------------
Total revenues .......................... 92,794 80,279 72,991
------------ ------------ ------------
Costs and expenses:
Cost of goods sold ...................... 41,034 32,380 31,174
Cost of services ........................ 40,057 20,391 16,578
Research and development ................ 37,528 35,580 19,477
Marketing ............................... 38,684 28,024 18,291
General and administrative .............. 44,838 30,827 19,850
Interest expense ........................ 30,477 16,714 3,101
Interest income ......................... (5,834) (5,148) (2,761)
Amortization of intangibles ............. 4,166 4,162 2,772
Equity in losses of investees ........... 79 4,895 3,056
Other (income) expenses ................. (1,953) (2,597) 3,027
------------ ------------ ------------
Total costs and expenses ................ 229,076 165,228 114,565
------------ ------------ ------------
Loss from operations before taxes
on income and minority interest ..... (136,282) (84,949) (41,574)
Taxes on income ......................... (1,603) (2,222) (660)
Minority interest ....................... (337) (28) (171)
------------ ------------ ------------
Net Loss ................................ (138,222) (87,199) (42,405)
Preferred dividends ..................... (8,058) (4,132) (2,066)
------------ ------------ ------------
Net loss applicable to common stock ..... $ (146,280) $ (91,331) $ (44,471)
============ ============ ============
Weighted average number of common
shares outstanding ................... 58,305,000 52,329,000 49,687,000
============ ============ ============
Per common share:
Net loss applicable to common shares $(2.51) $(1.75) $(0.90)
====== ====== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
as of and for the years ended December 31, 1996, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
Foreign
Preferred Stock Common Stock Capital in Currency
---------------- -------------- Excess of Translation Accumulated Treasury
Shares Amount Shares Amount Par Value Adjustment Deficit Stock
------ ------ ------ ------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 345 $3 45,989 $460 $137,151 $(204) $(66,780) $(1,386)
Issuance of common stock and warrants:
Exercise of warrants and options 1,394 14 3,833
Conversion of Series A preferred stock (345) (3) 345 3
Acquisition of minority interest in Bogen 233 2 3,439
Sale to Vanguard pursuant to
stock purchase agreement 2,500 25 29,225
Issuance of shares to Vanguard pursuant to
management consulting agreement 258 3 2,514
Acquisition of additional interest in GMSI 150 2 1,630
Issuance of warrants in connection with note
payable 925
Issuance of Series I Preferred Stock 10,000
Preferred dividends (2,066)
Changes in currency translation adjustment 971
Net Loss (42,405)
----- --- ------ ---- -------- ------ --------- -------
Balance, January 1, 1995 0 $0 50,869 $509 $186,651 $767 $(109,185) $(1,386)
Issuance of common stock and warrants:
Exercise of warrants and options 466 5 1,158
Shares issued for acquisition of minority
interest in Geotek Technologies Israel,
formerly PST 1,800 18 8,550
Issuance of shares to RDC 338 3 2,997
Issuance of shares to Vanguard pursuant to
management consulting agreement 300 3 2,436
Issuance of shares in connection with
research and development project 250 3 2,029
Issuance of shares in connection with debt
conversion 1,228 12 8,008
Issuance of warrants in connection
with note payable 1,800
Issuance of warrants in connection with
bonds payable 32,107
Issuance of Series K Preferred Stock 10,000
Issuance of Series L Preferred Stock 1,062 $11 9,692
Issuance of Series M Preferred Stock 1 11,160
Preferred dividends (4,132)
Changes in currency translation adjustment 245
Net Loss (87,199)
----- --- ------ ---- -------- ------ --------- -------
Balance, December 31, 1995 1,063 $11 55,251 $553 $272,456 $1,012 $(196,384) $(1,386)
===== === ====== ==== ======== ====== ========== =======
See notes to consolidated financial statements
</TABLE>
F-5
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, Continued
as of and for the years ended December 31, 1996, 1995 and 1994
(in Thousands)
<TABLE>
<CAPTION>
Foreign
Preferred Stock Common Stock Capital in Currency
---------------- -------------- Excess of Translation Accumulated Treasury
Shares Amount Shares Amount Par Value Adjustment Deficit Stock
------ ------ ------ ------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,063 $11 55,251 $553 $272,456 $1,012 $(196,384) $(1,386)
Issuance of common stock and warrants:
Exercise of warrants and options 644 6 2,662
Issuance of shares to Vanguard pursuant to
management consulting agreement 199 2 2,059
Issuance of shares in connection with
the acquisition of SMR License 191 2 1,998
Issuance of shares in connection with senior
note conversion 3,261 32 26,869
Issuance of shares in connection with note
conversion 102 1 849
Issuance of shares for preferred dividend 353 4 2,917
Issuance of warrants in connection with
long-term credit facility 13,400
Issuance of warrants in connection with
vendor credit facility 8,745
Issuance of warrants in connection with
organization of a joint venture 2,236
Issuance of Series N Preferred Stock 55 53,350
Conversion of Series N Preferred Stock 25 0 0
Issuance of Series O Preferred Stock 1 50,000
Preferred dividends (8,058)
Changes in currency translation adjustment (70)
Net Loss (138,222)
----- --- ------ ---- -------- ------ --------- -------
Balance, December 31, 1996 1,119 $11 60,026 $600 $429,483 $ 942 $(334,606) $(1,386)
===== === ====== ==== ======== ====== ========== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ....................................................... $(138,222) $(87,199) $(42,405)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest .......................................... 43 28 171
Depreciation and amortization .............................. 20,068 10,124 7,438
Provisions for inventory reserve for lower of cost or market 5,483 1,586 1,195
Post acquisition adjustment for utilization of acquired
net operating loss carryforwards ....................... 357 950 573
Non cash interest expense .................................. 26,595 11,901 391
Non cash license income .................................... (279) (658)
Gain on sale of property, plant and equipment .............. (93)
Non cash acquisition of minority interest of a subsidiary,
assigned to a research and development project ......... 1,861
Reserve for impairment of loan ............................. 3,500
Deferred taxes ............................................. 614
Equity in losses of investees .............................. 79 4,895 3,056
Issuance of stock for management consulting fee ............ 2,061 2,439 2,517
Issuance of shares in connection with
research and development project ....................... 2,032
Non cash related party compensation expense ................ 100 90
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ............. (4,184) (1,945) 876
Increase in inventories ................................ (23,570) (3,398) (3,061)
(Increase) decrease in prepaid expenses and other assets (12,019) 3,102 (5,312)
Increase in accounts payable and accrued expenses ...... 32,547 13,182 6,900
Other, net.............................................. 216 1,400 84
--------- -------- --------
Net cash used in operating activities .............................. (88,250) (41,564) (24,077)
--------- -------- --------
Cash flows from investing activities:
Acquisition of, and deposits for, spectrum licenses ............ (30,192) (13,149) (12,963)
Net decrease (increase) in temporary investments ............... 7,945 14,015 (14,087)
Non cash transaction expense for BCI ........................... 740
Change in restricted cash ...................................... 27,553 (34,416) (2,555)
Proceeds from sale of interests in Bogen & Speech Design ....... 7,000
Contract deposits -other current assets ........................ (2,261) (1,227)
Acquisitions of property, plant and equipment .................. (50,046) (33,853) (10,458)
Capitalized interest on construction in progress &
pre-commercial spectrum licenses ........................... (7,168) (487)
Proceeds from sale of property, plant and equipment ............ 106 250
Cash used in acquisition of subsidiaries or joint ventures
contributed to, net ........................................ (8,798) (9,732) (25,842)
Loan to Harris Adacom B.V ...................................... (3,500)
Other, net...................................................... (48) 2,106 ___
--------- -------- --------
Net cash used in investing activities .............................. (62,909) (68,753) (69,405)
--------- -------- --------
See notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements 24 (1,000) 2,390
Proceeds from debt and warrants 2,674
Repayments of debt (2,038) (2,311) (1,507)
Proceeds from issuance of convertible notes 75,000
Proceeds from drawdown of credit agreement 24,500
Proceeds from issuance of common stock 3,000
Proceeds from issuances of convertible preferred stock 103,350 30,863 10,000
Deferred financing costs (3,300) (4,692)
Financing costs (1,080)
Proceeds from issuance of senior secured note & related warrants 36,000 25,000
Repayments of secured note (25,000)
Proceeds from issuance of senior secured notes & related warrants 110,079
Proceeds from issuance of stock and warrants to Vanguard 29,250
Proceeds from exercise of warrants and options 2,568 1,073 3,848
Payments for preferred dividends (5,138) (4,132) (2,066)
Repayment of capital lease obligations (498) (617)
Other, net 149 (289)
-------- ------- --------
Net cash provided by financing activities 193,537 143,263 69,300
-------- ------- --------
Effect of exchange rate changes on cash (201) 951 27
Increase (decrease) in cash and cash equivalents 42,177 33,897 (24,155)
Cash and cash equivalents, beginning of year 61,428 27,531 51,686
-------- ------- --------
Cash and cash equivalents, end of year $103,605 $61,428 $ 27,531
======== ======= ========
Supplemental cash flow information:
Interest paid $7,511 $5,923 $3,142
Income taxes paid 2,440
Supplemental schedule of noncash investing and financing activities:
Summary of acquired subsidiaries:
Assets acquired in purchase transactions 133 14,840
Liabilities assumed in purchase transactions 257 13,466 2,066
Summary of contribution to joint venture:
Assets contributed 10,298
Liabilities contributed 7,703
Acquisition of additional interest in GMSI 1,631
Bogen, Inc. minority interest 3,441
Management consulting fees paid in common stock 2,061 2,439 2,517
Issuance of Common shares in connection with research &
development project 2,032
Non cash transaction expense for BCI 740
Issuance of common shares in connection with senior note conversion 27,981 8,020
Conversion of debenture by-related party into shares of subsidiary 812
Issuance of common shares for acquisition of minority interest
in Geotek Technologies Israel Ltd ("GTI-Israel"), formally PST 8,568
Acquisition of assets under capital lease 986
Issuance of convertible note for minority interest in GTI-Israel 800
Issuance of common shares in connection with acquisition of SMR License 2,000
Issuance of common shares for preferred dividends 2,920
Issuance of note payable to acquire remaining 50% interest in MIS 2,000
See notes to consolidated financial statements.
</TABLE>
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies:
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Geotek Communications, Inc. ("the
Company") include all wholly-owned, majority-owned and controlled
subsidiaries. The Company accounts for 20%-50% owned entities by the equity
method. All significant intercompany accounts and transactions have been
eliminated. Certain amounts in the 1995 and 1994 financial statements and
notes have been reclassified to conform to the 1996 presentation.
The Company's existing cash resources as of December 31, 1996 and expected
cash flow from operations will be insufficient to fund the full
implementation of the Company's current operating plan for the roll-out of
the U.S. digital wireless network, international expansion and
infrastructure equipment sales. The Company is in the commercialization
stages of its domestic networks and, as a result, has not yet generated
positive cash flow. The Company is planning to raise capital during 1997 and
plans to use existing line of credit facilities to continue to finance its
current operating plans which includes significantly increasing the number
of subscribers on the U.S. Network during 1997, the buildout of the U.S.
Network infrastructure as well as the related sales of its products. The
failure to obtain such financing will cause the Company to significantly
alter its current U.S. Network roll-out plan as well as its plans for
expansion of its international digital wireless networks. Altering the U.S.
Network roll-out plan will not impair the productivity of the Company's
active markets due to the benefits of the macrocellular architecture that
the Company's infrastructure is based on. The Company believes that its
ability to delay expenditures relating to the U.S. Network roll-out and
international expansion, or to defer discretionary spending, will ensure
that the Company has sufficient liquidity to operate throughout 1997.
The Company's current and proposed digital wireless services involve a
complex integration of sophisticated voice and data applications that
utilize newly-developed hardware and specialized software products. The
implementation of the U.S. digital wireless network has raised a number of
technical challenges. The integration of voice and data services has
presented various technical issues, primarily involving software, which have
adversely affected performance of the U.S. wireless system and delayed
scheduled implementation of the U.S. network in new markets and the loading
of subscribers in the Company's existing markets. The introduction of
additional services and the loading of additional subscribers is expected to
require further hardware and software modifications in order to integrate
such services with the existing digital wireless services, which may present
new technical issues.
Furthermore, each of the Company's United States target markets could
present unique technical issues due to differences in geography and
topography. These factors have caused technical issues in certain of the
Company's existing markets (including the New York City metropolitan area)
and could adversely affect the introduction of services in other markets.
Technical difficulties in the operation and performance of the U.S wireless
network also may be experienced as additional subscribers are added in a
particular market or as the coverage area in any market is increased. There
can be no assurance that the Company will be able to develop or modify
hardware or software to integrate successfully the planned voice and data
applications, or to resolve other technical difficulties that may arise, on
a timely or cost-effective basis. This could result in further delays in the
implementation of the U.S. Network and adversely affect the Company's
ability to add subscribers.
The Company may eventually need additional spectrum, beyond what it is
already under agreement to acquire. It is possible, because spectrum is a
finite resource, that the Company may be limited in the future in the
spectrum it is able to acquire to suit its growing needs, In such an event,
the Company's limited access to spectrum could inhibit the Company's growth
and ability to expand its service capacity.
The Company is dependent upon a relatively small number of manufacturers for
its products. Rafael currently is manufacturing the base station equipment
for the U.S. wireless network on a schedule that is intended to enable the
Company to meet its projected roll-out. Other third parties, including
Mitsubishi Consumer Electronics of America ("MCEA"), Hughes Network Systems,
Inc. ("HNS"), and Farbell Electronics currently are manufacturing subscriber
units and certain other components of the system hardware for the U.S.
wireless network on a schedule to meet anticipated subscriber demand. There
can be no assurance that such third parties will deliver such equipment on a
timely basis. Although the Company believes that it can obtain all
components necessary to build the digital wireless system from other
sources, it may encounter delays in the event of a component shortage due to
the time needed to identify alternative sources and manufacture substitute
components. Failure to obtain hardware components on a timely basis or at
satisfactory prices could result in delays or cost overruns in the
implementation of the U.S. digital wireless system.
Many of the target customers for digital wireless service currently use
other wireless communications services. In order to be successful, the
Company will need to migrate a portion of its target customers from their
existing wireless service providers to those provided by the Company over
its digital wireless network. The Company's ability to migrate its target
customers over to its services will be highly dependent on the perceived
utility of the Company's services to its target customers as compared to the
services currently utilized by such customers. Because there currently is no
integrated wireless communications network commercially available that is
comparable to the digital wireless network to be offered by the Company, the
extent of the demand for the Company's wireless communications services
cannot be predicted with any degree of certainty. The demand for the
Company's digital wireless communications services also could be affected by
other matters beyond its control, such as the future cost of subscriber
equipment, technolocy changes and enhancements, marketing and pricing
strategies of domestic and international competitors and general economic
conditions.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and revenues and expenses during the period reported.
Actual results could differ from those estimates. Estimates are used for,
among other things, allowance for doubtful accounts, inventory reserve for
the lower of cost or market, product warranty reserves, depreciation and
amortization and the estimated lives of assets, including intangibles.
Revenue Recognition
Commercial manufacturing product revenues for the Company's Bogen
Communications International subsidiary ("BCI"), net of expected sales
returns, are recognized upon shipment. Revenues for the Company's GMSI, Inc.
subsidiary relating to contracts for the sale of wireless dispatch products
are recognized using the percentage of completion method. Revenues for
service income are recognized when services are provided. Deferred revenues
are recognized when the customer is billed in advance and is recorded in
income in the period to which the advance billing relates. Revenues for the
Company's Geotek Technologies, Inc. subsidiary relating to the sale of
digital wireless networks and related customer equipment are recognized upon
customer acceptance.
Inventories
Inventories, which include handsets and telephone peripherals, are stated at
the lower of cost (first-in, first-out method) or market.
Cash Equivalents
Cash equivalents are highly liquid debt instruments purchased with an
original maturity of three months or less, and are considered to be cash
equivalents for cash flow reporting purposes.
Temporary Investments
Management determines the appropriate classification of its investments in
debt securities with maturities of more than three months at the time of
purchase and evaluates such determination at each balance sheet date. Debt
securities for which the Company has the intent and ability to hold to
maturity are classified as held to maturity securities and reported at
amortized cost. At December 31, 1996 and 1995, the Company did not have any
investments in equity or debt securities that qualified as trading or
available for sale.
Concentration of Credit Risk and Off-Balance-Sheet Risks
The Company provides mobile radio services to commercial customers in the
United States, the United Kingdom and Germany and designs, manufactures and
distributes electronic communications equipment for commercial customers,
under contractual arrangements. The Company performs ongoing credit
evaluations of its commercial customers and generally does not require
collateral. The Company maintains reserves for potential losses from these
contractual arrangements. Credit risk with respect to accounts receivable is
limited due to the large number of customers and their industry and
geographic dispersion. The Company's Israeli subsidiaries are prohibited
from making certain payments, including loans, to entities outside of Israel
without the Bank of Israel's approval. The subsidiaries are permitted,
however, to distribute dividends, reimburse expenses and make other specific
payments.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Property, plant and
equipment acquired through acquisition is recorded at the fair value at the
date of acquisition. Depreciation and amortization are provided principally
by the straight-line method over the estimated useful lives of the related
assets which range between 3 and 10 years. Gains or losses arising from
dispositions are recorded in operations.
Interests costs incurred on borrowings during the construction phase of the
network infrastructure buildout for each market (until the assets are
substantially complete and ready for use) are capitalized and depreciated
over the service life of the equipment. Interest capitalized amounted to
$2.6 million and $0.5 million in 1996 and 1995, respectively.
Intangible Assets
The excess of cost over the fair value of net assets acquired is amortized
on a straight-line basis over twenty to forty years. At each balance sheet
date management assesses whether there has been an other than temporary
impairment in the value of goodwill by comparing anticipated undiscounted
future cash flows from operating activities with the carrying value of
goodwill. The factors considered by management in performing this assessment
include current operating results, trends and prospects as well as the
effects of obsolescence, demand, competition and other economic factors.
FCC and other private radio licenses are recorded at cost and are amortized
over twenty years. Interest costs incurred on borrowings during the period
during which certain FCC Licenses being readied for use is capitalized and
amortized over the life of the license once the market to which the license
pertains becomes commercial. Interest capitalized amounted to $3.9 million
in 1996.
Foreign Currency Translation
For international operations, assets and liabilities are translated at
year-end exchange rates and income statement items are translated at average
exchange rates for the period. Resulting translation adjustments are
recorded as a separate component of shareholders' equity.
Research and Development
Research and Development expenditures are expensed as incurred. All expenses
relating to research and development ventures are recorded, net of grants,
as research and development expense. Grants are recorded once the Company
receives approval reflecting the fact that all terms and conditions relating
to the expenditures have been met.
Taxes on Income
The Company provides for deferred taxes on the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion of the
deferred tax asset will not be realized.
The Company does not provide for taxes which would be payable if
undistributed earnings of its foreign subsidiaries were remitted because the
Company considers these earnings to be permanently invested in these
operations.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Common Share
Net loss per common share is computed by dividing the net loss, after
preferred stock dividend requirements, by the weighted average number of
common shares outstanding during the year. Common stock equivalents are
excluded since the effect would be anti-dilutive.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" which is effective for fiscal years
beginning after December 31, 1995. The Company adopted this standard in
1996; the impact was immaterial.
2. Acquired and Disposed of Operations:
Wireless Networks in Germany
In November 1996, the Company entered into a partnership agreement with RWE
Telliance A.G. ("RWE") to merge their respective German mobile radio
networks upon the approval of the appropriate regulatory authority in
Germany. Under the terms of the agreement, each of the Company and RWE owns
50% of the merged entity. In December 1996, the Company and RWE received
approval from the appropriate authority to complete the merger. The Company
no longer controls its German networks and, therefore has deconsolidated
these networks as of December 31, 1996 and accounts for the merged German
entity under the equity method of accounting. The Company's investment in
the merged entity is $23 million (see Note 5) at December 31, 1996 which
includes $20.0 million of goodwill which is being amortized over
approximately 18 years.
Communication Products
In August 1995, the Company transferred its interest in Speech Design GmbH
and Bogen Communications, Inc. to Bogen Communications International ("BCI")
(formerly, European Gateway Acquisition Corporation) in exchange for $7.0
million in cash, $3.0 million in convertible notes, approximately 64% of
BCI's common shares and warrants to purchase 200,000 shares of BCI common
stock. Effective January 1, 1996, the $3.0 million convertible notes were
reduced and restructured to a $0.5 million non-convertible promissory note
due July 1997. In connection with this restructuring, the Company was
granted an option to purchase up to $3.0 million of the common stock of BCI
at up to a 35% discount. This option expires on October 31, 1997. The BCI
warrant holders hold approximately 3,800,000 warrants to purchase one share
of BCI common stock for between $5.00 and $5.50. These warrants are callable
upon the occurrence of certain events.
Other Acquisitions
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 Company recorded this amount as additional goodwill in GTI-Israel
and is amortizing it over 20 years. 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. As of December 31, 1996, the Company owns 97% of
GTI-Israel.
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 process.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Temporary Investments:
Temporary Investments include $7.9 million of U.S. Government Agency
securities at December 31, 1995. The amortized cost of marketable securities
at December 31, 1995 approximates fair market value. All marketable debt
securities are classified as held to maturity at December 31, 1995, and
mature within one year.
4. Inventories:
Inventories at December 31, 1996 and 1995 consist of the following (in
thousands):
1996 1995
------- -------
Raw materials .................................... $ 3,760 $ 3,520
Work-in-process .................................. 2,068 2,344
Finished goods ................................... 28,601 7,477
------- -------
34,429 13,341
Reserve for lower of cost or market .............. 6,279 2,858
------- -------
$28,150 $10,483
======= =======
5. Investments in Affiliates:
In June 1996, the Korean Ministry of Information and Communications awarded
a consortium, Anam Telecommunications Co. Ltd. ("Anam Telecom") in which the
Company holds a 21% interest, in 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.
In July 1996, the Company contributed $7.7 million to Anam Telecom
representing the Company's portion of the initial capitalization of Anam
Telecom. Additionally, the Company paid the Korean Ministry of Information
and Communications $1.8 million representing the Company's portion of the
fee for the Korean nationwide license. Interest costs incurred by the
Company during the development period prior to Anam Telecom commencing
commercial service are capitalized. The amount capitalized in 1996 was
approximately $0.6 million. The Company intends to amortize, over 20 years,
the cost of the nationwide license and related interest capitalized upon
commencement of commercial service. These amounts have been included in
investments in affiliates
As part of the joint venture agreement, in 1996, upon obtaining a national
license in Korea, the Company granted the joint venture partner and other
related parties options to purchase 800,000 shares of the Company's common
stock for $10.00 per share. The Company estimated the fair value of the
options granted at approximately $2.2 million. The Company recorded this
amount as an additional investment in Anam Telecom and is amortizing this
amount over a two year period.
In September 1996, the Company entered into an agreement with Anam Telecom
whereby the Company will provide Anam Telecom $14.8 million of 800 MHz
infrastructure equipment. Additionally, the Company entered into a separate
agreement to sell customer subscriber units to Anam Telecom. In connection
with these agreements the Company received advance payments of approximately
$9.5 million which is included in accrued liabilities.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company contributed the net operating assets of their two
wireless networks in Germany to a joint venture with RWE as described in
Note 2. As of December 31, 1996, the carrying value of the Company's equity
based investment in the new joint venture was approximately $23.0 million.
The Company's investment exceeds its share of the underlying net assets of
the joint venture by approximately $20.0 million which is being amortized
over approximately 18 years.
The Company acquired, in August 1993, a 25% equity interest in Cumulous
Communications Company ("Cumulous") for aggregate consideration of $1.5
million. Cumulous is a provider of SMR services in the San Joaquin Valley of
California. The Company's investment exceeds its share of the underlying net
assets of Cumulous by approximately $940,000 which amount is being amortized
over 20 years. The carrying value of this investment as of December 31, 1996
and 1995 was $1.1 million and $1.3 million, respectively.
The gross revenues and net loss from operations for affiliated companies
accounted for under the equity method were $3.1 million and $5.2 million,
respectively, for the year ended December 31, 1995. The entities that were
accounted for under the equity method in 1995 were consolidated by the
Company for the majority of 1996. The entities, which were accounted for on
the equity method in 1996, only commenced operations in 1996, therefore,
revenues were not material. Net loss from operations was approximately $0.9
million in 1996. The unaudited current assets, non-current assets, current
liabilities, and non-current liabilities for such entities were $41.5
million, $31.1 million, $21.9 million and $6.0 million, respectively, as of
December 31, 1996. All such amounts were not material in 1995.
6. Property, Plant and Equipment:
Property, plant and equipment consists of the following at December 31, 1996
and 1995 (in thousands):
1996 1995
-------- -------
Property, Plant and Equipment
Machinery and equipment ...................... $104,242 $58,058
Furniture and fixtures ....................... 4,487 7,481
Leasehold improvements ....................... 993 896
Construction in progress ..................... 25,133 25,846
-------- -------
134,855 92,281
Capital Leases
Equipment .................................... 978 5,364
Construction in progress ..................... 938
-------- -------
978 6,302
-------- -------
135,833 98,583
Less accumulated depreciation
Property, plant and equipment ................ 42,217 30,838
Capital Leases ............................... 35 1,635
-------- -------
42,252 32,473
-------- -------
$ 93,581 $66,110
======== =======
Depreciation expense was $15,902, $5,962 and $4,666 in 1996, 1995 and 1994,
respectively. The decrease in assets under capital lease resulted from the
deconsolidation of the Company's German networks.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Intangible Assets:
Intangible Assets consists of the following at December 31, 1996 and 1995
(in thousands):
1996 1995
---- ----
Excess of cost over fair value
of net assets acquired $22,989 $ 44,847
FCC and other private mobile radio licenses
acquired and related intangibles 75,595 29,143
Other 840 741
-------- --------
99,424 74,731
Less accumulated amortization 7,916 6,550
-------- --------
$ 91,508 $ 68,181
======== ========
The decrease in the excess of cost over fair value of net assets acquired in
1996 is primarily attributable to the contribution of the net operating
assets of the Company's previously consolidated German networks into the
Company's joint venture with RWE (see Note 2) which effective December 1996,
is accounted for under the equity method and therefore, the excess cost over
fair value of net assets acquired is recorded in an investment in
affiliates.
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. The
remaining $11.7 million increase in FCC and other private mobile radio
licenses acquired is attributable to the purchase of several 900 MHz
Licenses throughout the United States.
In November 1995, the Company exchanged all of MetroNet's 800 MHz radio
channels for the 900 MHz radio channels in seven major U.S. markets
previously held by Nextel Communications Inc. The exchange of licenses was
accounted for as a non-monetary transaction and no gain or loss was
recognized on the transaction.
8. Notes Payable:
Notes Payable consists of the following at December 31, 1996 and 1995 (in
thousands):
1996 1995
---- ----
$10.0 million line of credit, bank (a) $ 1,545 $ 3,670
Line of credit, bank (b) 1,830 627
Line of credit, bank interest payable at 5.5% to 6.5% 478 647
Line of credit, bank interest payable at 4.4% 975
Line of credit, bank (c ) 3,247 3,341
------- -------
$ 8,075 $ 8,285
======= =======
Prime rate at December 31 8.25% 8.50%
Weighted average interest rate 6.02% 8.16%
(a) This line of credit for the Company's BCI subsidiary is for up to $10.0
million, bears interest at prime plus 2.0% to 2.75% in 1996 and 1995,
and is subject to available collateral (80% of BCI's accounts receivable
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 50% of BCI's finished goods inventory). Substantially all the assets
of a subsidiary are pledged as collateral for the line, which also bears
interest based on loan balance, has a two year term, and is guaranteed
by the Company. As of December 31, 1996, the available line based on
available collateral was $3.6 million and the unutilized amount
available under the line was $2.1 million.
In February 1997, the Company's subsidiary refinanced this line of
credit. The new line of credit is for up to $7.0 million and bears
interest at a rate of prime plus 0.75%. This line is subject to
available collateral of 85% of BCI's accounts receivable and 50% of
BCI's finished goods inventory and 35% of BCI's raw materials inventory.
Additionally, this new line of credit is not guaranteed by the Company.
(b) The maximum amount available under this line of credit at December 31,
1996 is $2.6 million, including amounts outstanding under the long term
portion. Interest rates vary between 4.4% and 7.25% depending on the
length of time the funds will be used. As of December 31, 1996 the
unutilized amount available under this line of credit was $0.8 million.
(c ) This line of credit for $3.5 million is collateralized by $3.5 million
restricted cash and was repaid by the Company in January 1997.
9. Long-term Debt:
Long-term Debt consists of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Senior secured discount notes, due July 15, 2005, interest
at 15% due semi-annually beginning January 15, 2001 (a) $ 109,466 $ 87,841
Senior secured convertible notes, due in various installments at
14.75%, interest due quarterly (b) 26,631
Senior subordinated convertible notes, due February 2001
at 12% , interest due semi-annually February 15 and August 15 (c) 75,000
Notes payable due in various installments
through 1999, interest between 10% and 15% (d) 155 2,003
Convertible note due October 2, 1998, interest at 12% due quarterly (e) 24,500
Debenture, interest at 5% due in quarterly payments,
principal due March 31, 1998 1,460 1,466
Note payable, due July 1, 1998 interest at 8.25% payable at maturity. 2,000
Note payable due April 30, 1999, bearing interest at 8% 2,273 2,436
Notes payable, other, due in various installments beginning in
1997, bearing interest at rates ranging between 7.5% and 12% 375 382
Subordinated notes payable, interest at prime and 9%, due in 1996 109
Obligations under capital lease (f) 462 4,584
--------- --------
215,691 125,452
Less, current portion 261 29,577
--------- --------
$ 215,430 $ 95,875
========= ========
</TABLE>
(a) In July 1995, the Company issued, in a private offering, $207.0 million
aggregate principal amount at maturity of 15% Senior Secured Discount Notes
due July 15, 2005 ("the Discount Notes"). Gross proceeds of the Discount
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes were approximately $100.0 million. The Discount Notes were issued
with 6,210,000 detachable warrants ("the Warrants"). Each Warrant entitles
the holder to purchase one share of the Company's common stock at an
exercise price of $9.90 per share. The Warrants, which were valued at $29.2
million, were recorded as a reduction of the Discount Notes and are being
accreted over the ten year life of the Discount Notes.
The Discount Notes accrue interest until maturity at a rate of 15% per
annum. Interest on the Discount Notes will be payable semi-annually, in
cash, on July 15 and January 15, commencing January 15, 2001. The Discount
Notes are collateralized by a pledge of substantially all subsidiary
capital stock owned by the Company. Additionally, the Discount Notes are
fully and unconditionally guaranteed, jointly and severally on a senior
basis, by certain subsidiaries of the Company. The Discount Notes include
covenants that put restrictions on the Company, the most restrictive of
which are primarily related to making certain investments in assets other
than telecommunication assets, incurring additional debt and paying
dividends on common shares.
In August, in connection with the Discount Notes, investors affiliated with
George Soros purchased approximately $21.0 million principal amount of
additional units consisting of 15% Senior Secured Discount Notes due 2005
and 621,000 ten year warrants to purchase shares of Company common stock at
$9.90 per share. The warrants, which were valued at $2.9 million, were
recorded as a reduction on the Discount Notes and are being accredited over
the ten year life of the Discount Notes. Gross proceeds to the Company were
approximately $10.0 million, bringing total gross proceeds from the
issuance of the Discount Notes to approximately $110.0 million. The Company
recorded in other assets approximately $4.3 million of deferred financing
costs relating to this transaction which are being amortized, using the
interest method, over the ten year life of the Discount Notes. Accumulated
amortization as of December 31, 1996 was approximately $0.6 million.
In November 1995, the Company registered the Discount Notes and the
Warrants through an exchange offer under the Securities Act of 1933, as
amended.
(b) In March 1995, the Company refinanced $25.0 million of Senior Notes, that
were originally due in September 1995, with $36.0 million of newly issued
Senior Secured Notes (the "Senior Convertible Notes"). At closing, the
Company received net proceeds of $11.0 million and issued warrants to the
purchaser to acquire 700,000 of the Company's common shares at $8.125 per
share. The warrants were valued at $1.8 million, which amount was recorded
as a discount on the Senior Convertible Notes. In accordance with the
Senior Convertible Note agreement, the Senior Convertible Notes were
converted 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. As of
December 31, 1996, $36 million was converted into 4,489,000 shares of
common stock (as of December 31, 1995, $8 million was converted into
1,228,000 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.
Concurrently with the issuance of the Discount Notes (see a above), the
Company's indebtedness under the $36 million Senior Convertible Notes was
restructured in accordance with the terms thereof by the grant to the
lenders of a security interest in a restricted cash account holding
approximately $40.5 million. As the Senior Convertible Notes were
converted, a proportionate amount of the restricted cash became
unrestricted. As of December 31, 1996, no cash was restricted.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) 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 has reserved 7,894,737 shares of the Company's $ .01 per value
Common Stock which are issuable upon conversion of the Convertible Notes.
In connection with the issuance of the Convertible Notes, the Company
incurred approximately $2.3 million in financing costs which have been
recorded in other assets and are being amortized over the five year term of
the Convertible Notes. Accumulated amortization as of December 31, 1996 was
approximately $0.4 million.
(d) These notes were assumed in connection with the purchase of certain SMR
licenses in various cities in the US. Certain analog SMR equipment as well
as revenues generated by the systems is pledged as collateral for the
notes.
(e) In December 1995, the Company and Hughes Network Systems ("HNS"), a unit of
GM Hughes Electronics, the Company's strategic partner in the development
of the Company's portable subscriber unit, entered into an agreement
whereby HNS extended the Company a two year, $24.5 million line of credit
for the Company to acquire additional 900 MHz spectrum in the United
States. In October 1996, the Company borrowed $24.5 million under the line
of credit agreement. Under the terms of the agreement, the two year loan
bears interest at 12%, payable quarterly and is convertible by the holder,
beginning 181 days after drawdown, at the lower of 90% of the average sale
price of the Company's common stock for the 10 days preceding conversion or
$9.75. In connection with this agreement, the Company has reserved
3,888,889 shares of the Company's $.01 per value Common Stock which are
issuable upon conversion of the note.
(f) In connection with the deconsolidation of the Company's German networks,
assets under capital lease and related obligation were contributed to the
Company's joint venture.
Available Credit Facilities
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, the last $50 million of which is 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 all
of the 900 MHz licenses acquired by the Company in the recently completed FCC
auctions for approximately $30.9 million.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the above agreements, the Company issued HNS seven year
warrants ("HNS Warrants") to purchase 2,500,000 shares of the Company's common
stock. The HNS 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, and from time to time, after
September 27, 1997. The Company intends to draw down on the credit facility and
as such, the HNS 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 decide not to incur any indebtedness under the vendor credit agreement,
all unamortized amounts will be expensed. Accumulated amortization as of
December 31, 1996 was approximately $0.3 million.
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 December 31, 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 ("S-C Rig 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 S-C Rig Warrant, which has been valued at $13.4 million, is recorded
in other assets and is being amortized over the terms of the underlying credit
facility, approximately five years. Accumulated amortization as December 31,
1996 was approximately $2.1 million.
Minimum annual principal repayments of long-term debt, assuming no conversions,
and capital lease obligations (which are not material), during the next five
years and thereafter, are as follows:
Year In Thousands
---- ------------
1997 $261
1998 28,329
1999 129
2000 2,273
2001 75,000
Thereafter 227,938
---------
Total $ 333,930
=========
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes:
The source of loss before provision for income taxes for the years ended
December 31, 1996, 1995, and 1994 is as follows (dollars in thousands):
1996 1995 1994
---- ---- ====
United States ($98,251) ($66,012) ($26,248)
Foreign (38,368) (18,965) (15,497)
-------- -------- --------
Loss before income taxes ($136,619) ($84,977) ($41,745)
========== ========= =========
The provision for income taxes, solely attributable to foreign taxes, consists
of the following for the years ended December 31, 1996, 1995 and 1994 (dollars
in thousands):
1996 1995 1994
---- ---- ----
Current foreign $989 $2,222 $660
Deferred foreign 614
------ ------ ----
Total provision for taxes $1,603 $2,222 $660
====== ====== ====
Included in the current foreign tax provision in 1996, 1995, and 1994 is
$357,000, $950,000, and $573,000, respectively related to the utilization of
pre-acquisition net operating losses of two subsidiaries which had full
valuation allowances established at the time of the respective acquisitions by
the Company and have been recorded as reductions to intangible assets. The
Company has not provided deferred U.S. income taxes which would be payable if
the undistributed earnings of its foreign subsidiaries, which totaled $5.5
million and $2.4 million at December 31, 1996 and 1995, respectively, were
remitted because the Company considers these earnings to be permanently
reinvested in these operations.
As of December 31, 1996 and 1995, temporary differences and carryforwards that
give rise to deferred tax assets and liabilities are as follows (dollars in
thousands):
1996 1995
---- ----
Current deferred tax assets:
Allowances for bad debt $ 498 $ 163
Inventory reserve 592 1,185
Net operating loss carryforwards 72
Valuation allowance (926) (1,348)
-------- --------
Total current deferred tax assets $ 236 $ 0
======== ========
Long-term deferred tax assets:
Net operating loss carryforwards $ 85,745 $ 48,300
Other 10,860 3,202
Valuation allowances (96,605) (51,502)
-------- --------
Total long-term deferred tax assets $ 0 $ 0
======== ========
Long-term deferred tax liabilities $ 850 $ 0
-------- --------
Net long-term deferred tax liabilities $ 850 $ 0
======== ========
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company has established a valuation allowance substantially offsetting the
tax benefit of current and long term deferred tax assets as it is more likely
than not that the tax benefit will not be realized. The Company has domestic net
operating loss carryforwards ("NOL") for tax purposes of approximately $163.4
million and $95.3 million as of December 31, 1996 and 1995, respectively, which
expire between the years 2001 through 2011. Additionally, the Company has
foreign NOL carryforwards for tax purposes of approximately $35.9 million and
$18.8 million in 1996 and 1995, respectively. The NOL's are subject to certain
limitations on their utilization and as a result of various changes in control
which have occurred.
11. Commitments and Contingent Liabilities:
Operating
The Company leases facilities under noncancellable operating leases, some of
which include escalation clauses. Future minimum rental commitments under
noncancellable operating leases as of December 31, 1996 are as follows:
Year In Thousands
---- ------------
1997 $ 11,452
1998 10,443
1999 9,829
2000 8,665
2001 3,493
Thereafter 9,625
--------
$ 53,507
========
Rent expense was $8.9 million, $7.4 million, and $6.4 million in 1996, 1995 and
1994, respectively.
Government Participation in Research and Development Project
The Chief Scientist of the Israeli Ministry of Industry and Commerce ("Chief
Scientist") has agreed to fund certain eligible expenditures related to the
development of the digital wireless communication system by GTI-Israel. Funding
received from the Chief Scientist is repayable without interest based on 3% of
revenues generated by the product being developed by GTI-Israel up to the total
grant received. Such participation amounted to $0.3 million, $5.9 million, and
$4.1 million for 1996, 1995 and 1994, respectively, and has been reported in the
statement of operations as a reduction of research and development expenses. The
Company has not recorded any additional amounts in the current year to reflect
potential grants that may be received in 1997 relating to 1996 expenditures as
these expenditures had not been approved by the Chief Scientist as of December
31, 1996.
Manufacturing Commitments
In 1994, the Company contracted with Mitsubishi Consumer Electronics of America
to manufacture commercial subscriber terminals and units on behalf of the
Company.
In September 1996, 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 through June 1999. As part of this agreement, the Company made a 10%
or approximately $1 million advance to HNS for production.
In March 1995, the Company and HNS formed a strategic partnership to develop a
portable subscriber unit. Under the terms of the agreement, HNS and the Company
will share equally in the cost of developing the portable subscriber unit.
During 1995, the Company expensed approximately $6.0 million paid to HNS under
the terms of this development contract. During 1996 the Company made advances on
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
account of production of $11.5 million to HNS. The Company has included all
advances made to HNS in prepaid expenses and other current assets.
In 1996, the Company entered into a manufacturing agreement with Farbell
Electronics ("Farbell"), whereby Farbell will produce 20,000 subscriber
terminals for the Company's digital wireless system. At December 31, 1996, the
Company placed $2.2 million into a restricted cash account to fund these
purchases.
In 1996, the Company entered into an agreement with Anam Telecom (see Note 5)
whereby the Company will provide the Company's digital wireless system
infrastructure equipment and subscriber units to Anam Telecom. In connection
with these agreements, the Company received advance payments of approximately
$9.5 million which is included in accrued expenses as of December 31, 1996.
Guarantees of Debt of a Subsidiary
The Company has guaranteed the repayment of certain indebtedness of its German
subsidiary, due in 1999, to its former owners, in the amount of DM 3.5 million
plus interest (approximately $2.3 million). The Company has guaranteed the loan
and has placed $2.4 million into a restricted cash account as collateral for
this obligation. Additionally, the Company has guaranteed the line of credit of
its German subsidiary in the amount of DM 5.0 million (approximately $3.2
million) and has placed DM 5.0 million (approximately $3.2 million) into a
restricted cash account as collateral for this line of credit.
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, which expires in June 1997, 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.
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.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Redeemable Preferred Stock:
In December 1993, the Company issued to investors affiliated with George Soros,
a related party, 444,445 shares of Series H Cumulative Redeemable Convertible
Preferred Stock at a price of $90 per share. The shares bear a dividend for five
years, at a rate of five percent per year, payable quarterly. The shares are
redeemable, at stated value, on October 31, 2000 only if the Company's common
stock has not closed at an average price of $18 for any 20 consecutive trading
days after the third anniversary of the date of issuance of the preferred
shares. In the event that the shares are redeemed, the Company may elect to pay
the redemption price in shares of its common stock, provided that the common
shares will have an aggregate market value equal to 150% of the redemption value
of the Series H shares being redeemed. The shares are convertible into common
shares at any time at a ratio (adjusted for splits) of ten common shares for
each preferred share. The Company has reserved 4,444,450 shares of its $.01 par
value Common Stock issuable upon conversion of the Series H Stock. The holders
of the Series H shares are entitled to vote on all matters voted on by common
shareholders as if the Series H shares were converted to common stock. The
Company has paid cash dividends of $2.0 million in each of the years ended
December 31, 1996 and 1995.
13. Shareholders' Equity:
Preferred Stocks
On December 31, 1996, the Company sold 1,000 shares of its Series O Convertible
Preferred Stock ("Series O Stock") to a group of investors for an aggregate
purchase price of $50 million. The Series O Stock pays dividends in either
shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per
annum after a dividend payment failure) at the option of the Company.
Additionally, commencing April 1, 1997, each share of Series O Stock is
convertible by the holder into the number of shares of the Company's Common
Stock as obtained by dividing the $50,000 stated value per share plus any
accrued or unpaid dividends at the date of conversion, by the lowest daily
volume weighted averaged price of the Company's Common Stock during the four
trading days immediately preceding conversion multiplied by the conversion
factor (the conversion factor begins at 100% and becomes 95%, 90% and 88% on
June 29, 1997, December 31, 1997, and June 29, 1998, respectively). However, the
holder can only convert up to a maximum of 20% prior to June 30, 1997, an
additional 30% prior to December 31, 1997 an additional 30% prior to June 29,
1998 and the remainder thereafter. In connection with this transaction, the
Company issued warrants to purchase 1.7 million shares of the Company's Common
Stock at $9.2625 per share (subject to adjustment in certain circumstances). The
warrants are exercisable at any time, and from time to time, before June 30,
2000.
Pursuant to a registration rights agreement, in February 1997, the Company filed
a registration statement under the Securities Act of 1993, as amended, with
regard to the resale of shares of Common Stock issuable (i) for dividends; (ii)
upon conversion of Series O Stock; and, (iii) upon the exercise of the warrants.
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. The
Company has reserved 6,650,000 shares of its $.01 par value Common Stock
issuable upon conversion of the Series N Stock and upon exercise of the
warrants. In addition, the Company incurred financing fees equal to 3% of the
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate purchase price, and has recorded this as a reduction to the net
proceeds of the issuance. During 1996, the Company paid dividends of
approximately 353,000 shares of common stock with a value of approximately $2.9
million.
In November 1996, a holder of the Company's Series N Stock converted 275 shares
into 25,000 shares of the Company's Common Stock.
In May 1995, the Company sold 531,463 shares of its Series L Cumulative
Convertible Preferred Stock ("Series L Stock"), to Toronto Dominion Investments,
Inc. ("TDI") for an aggregate purchase price of $5.0 million. In connection with
this transaction, Vanguard Cellular Systems, Inc. ("Vanguard"), a stockholder of
the Company, purchased an additional 531,463 shares of Series L Stock on
September 1, 1995 (the "Transaction Date") for aggregate purchase price of $5.0
million. The shares pay a dividend of 7.5% per annum, contain a Common Stock
conversion premium and can be redeemed by the Company in certain circumstances.
The Company has reserved 1,062,926 shares of its $.01 par value Common Stock
issuable upon conversion of the Series L Stock. The Company has paid cash
dividends of $750,000 and $351,000 during the years ended December 31, 1996 and
1995, respectively.
In May 1995, the Company sold 1,162.5 shares of its Series M Cumulative
Convertible Preferred Stock ("Series M Stock"), to a group of investors for an
aggregate purchase price of $11,625,000. The Series M Stock pay a dividend of
8.5% per annum, contain a Common Stock conversion premium and can be redeemed by
the Company in certain circumstances. The Company has reserved 1,223,684 shares
of the Company's $.01 par value Common Stock issuable upon conversion of Series
M Stock. The Company has paid cash dividends of $988,000 and $592,000 during the
years ended December 31, 1996 and 1995, respectively.
In April 1995, the Company sold $10.0 million of Series K Cumulative Convertible
Preferred Stock ("Series K Stock") to an affiliate of the Company's joint
venture partner in Korea. The shares pay a dividend of 7% per annum for 5 years,
carry a Common Stock conversion premium and can be redeemed by the Company in
certain circumstances. The Company has reserved 851,064 shares of the Company's
$.01 par value Common Stock issuable upon conversion of the Series K Stock. The
Company has paid cash dividends of $700,000 and $489,000 during the years ended
December 31, 1996 and 1995, respectively.
At December 31, 1994, there were 15 shares of Series E Preferred Stock and 20
shares of Series I Preferred Stock issued and outstanding. In May 1995, the
Series E Preferred shares were canceled. At December 31, 1993, there were
345,000 of Series A Preferred Stock and 30 shares of Series E Preferred Stock
issued and outstanding. In February 1994, all of the Series A Preferred shares
then outstanding were converted into an equal number of common shares.
In December 1994, the Company issued a total of 20 shares of Series I
Convertible Preferred Stock ("Series I Stock") at a price of $500,000 per share
or total consideration of $10.0 million to investors affiliated with George
Soros. The shares bear a dividend, payable quarterly in either cash or common
shares, for five years at a rate of 7% per annum and carry a conversion premium.
The Company has the option to retire the shares, in either cash or common shares
if the price of the Company's common stock exceeds 150% of the conversion price
for any 20 days within a period of 30 consecutive days. The Company has reserved
851,064 shares of its $.01 par value Common Stock issuable upon conversion of
the Series I Stock. The Company has paid cash dividends of $700,000 during each
of the years ended December 31, 1996 and 1995, respectively.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was ascribed to the SMR
license which is included in intangible assets and will be amortized over twenty
years.
In February 1994, the Company sold 2.5 million shares of common stock to
Vanguard Cellular Systems Inc. ("Vanguard") for a total of $30 million (before
expenses of $750,000). See below for a description of the options issued to
Vanguard.
The Company has reserved approximately 33.2 million shares of the Company's $.01
par value Common Stock issuable upon the conversion of all redeemable preferred
stocks, convertible preferred stock, and convertible indebtedness.
Warrants and Options
A summary of the compensatory warrants and options issued for other than
employee benefit purposes during the years ended December 31, 1996, 1995 and
1994 is as follows (shares in thousands):
<TABLE>
<CAPTION>
1996 Exercise
Outstanding Outstanding Price
Name January 1, Granted Exercised Canceled December 31 Per Share
---- --------- ------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loan warrants and options 7,831 6,711 14,542 $8.13-$12.94
Warrants issued with 3,350 3,350 $9.26-$11.00
preferred stocks
Vanguard options 7,000 (7,000) $15.00-$17.00
PSI merger 865 (147) 718 $0.61-$5.06
Private Placements 19 (5) (3) 11 $1.85-$4.81
Other warrants and options 1,626 800 (76) (7) 2,343 $0.59-$13.87
------ ------ ---- ------ ------
Total Outstanding 17,341 10,861 (228) (7,010) 20,964
====== ====== ===== ======= ======
1995 Exercise
Outstanding Outstanding Price
Name January 1, Granted Exercised Canceled December 31, Per Share
---- --------- ------- --------- -------- ------------ ---------
Loan warrants and options 381 7,531 (8) (73) 7,831 $1.25-$9.90
Vanguard options 10,000 (3,000) 7,000 $15.00-$17.00
PSI Merger 973 (95) (13) 865 $0.61-$5.06
Private Placements 67 (10) (38) 19 $1.85-$4.98
Other warrants and options 1,365 493 (220) (12) 1,626 $0.59-$14.00
----- --- ----- ----- ------
Total Outstanding 12,786 8,024 (333) (3,136) 17,341
====== ====== ===== ======== =======
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1994 Exercise
Outstanding Outstanding Price
Name January 1 Granted Exercised December 31 Per Share
---- --------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Loan warrants and options 130 300 (49) 381 $1.25-$7.88
Vanguard options 10,000 10,000 $15.00-$18.00
PSI Merger 1,056 (83) 973 $0.61-$5.06
Private Placements 1,026 (959) 67 $1.85-$4.98
Other warrants and options 1,208 220 (63) 1,365 $1.00-$6.00
----- ------ ------- ------
Total Outstanding 3,420 10,520 (1,154) 12,786
===== ====== ======= ======
</TABLE>
All warrants and options outlined above are vested upon issuance, except those
issued in September 1996 pursuant the Company's vendor financing agreement with
HNS which are exercisable beginning September 27, 1997.
Loan Warrants and Options
In connection with the issuance of the Discount Notes, the Senior Convertible
Notes, S-C Rig Credit Facility, and HNS vendor financing, the Company issued
approximately 6.8 million, 1.0 million, 4.2 million and 2.5 million warrants to
purchase common stock, respectively. As of December 31, 1996, all warrants
remain outstanding.
Preferred Stock
During 1996, in connection with the issuance of Series N Stock and Series O
Stock, the Company issued warrants to purchase 1.65 million and 1.7 million
shares of the Company's common stock at $11.00 and $9.2625 per share,
respectively.
Vanguard Options
In 1994, the Company issued Vanguard Cellular Systems, Inc. ("Vanguard") options
to purchase 10 million shares of the Company's Common Stock ("Series A Options")
at an exercise price of $15.00 to $17.00 per share. In connection with the
issuance of the Series L Stock to Vanguard and Toronto Dominion Investments,
Inc. ("TDI"), the terms of the Series A Options were modified whereby the total
number of Series A Options were decreased from 10 million to 7 million and TDI
held approximately 1.8 million of the Series A Options.
In September 1996, the Series A Options expired. Additionally, the Company's
Management Consulting Contract with Vanguard was terminated (See Note 16).
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 5), the Company granted options to purchase a total of 800,000 shares of
the Company's common stock at $10 per share.
14. Stock Compensation Plans
The Company issues employee and director options to purchase shares of the
Company's $.01 par value Common Stock under two separate non-qualified stock
option plans which were adopted in 1989 and 1994 and allow the Company to issue
approximately 6.0 million shares. Under these plans, employees and directors are
granted ten year options to purchase shares of the Company's Common Stock at the
greater of $8.00 per share or the closing price of the
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's Common Stock on NASDAQ on the date of grant except in certain
circumstances such as employment agreements. Employees vest over a period of
three to five years from the date of grant.
The Company has adopted the disclosure only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") but applies the
recognition criteria under Accounting Principles Board Opinion No. 25 ("APB No.
25") and related interpretations in accounting for its plans. Compensation
expense in accordance with APB No. 25 was insignificant to the Company's results
of operations in 1996 and 1995. If the Company elected to recognize compensation
costs for stock option plans based on the fair value at the date of grant for
awards under these plans, consistent with methods prescribed by SFAS No. 123,
net loss and loss per share would have been the following pro forma amounts for
the years ended December 31 (in thousands):
1996 1995
---- ----
Net loss
As reported ($138,222) ($87,199)
Pro forma ($142,564) ($89,957)
Loss per share
As reported ($2.51) ($1.75)
Pro forma ($2.58) ($1.80)
The pro forma net loss and loss per share for 1996 and 1995 are not
necessarily representative of the net loss and loss per share in future
years because the 1996 and 1995 amounts do not include the incremental fair
value of non-vested stock options granted prior to the adoption of SFAS No.
123.
The fair value of the Company's stock options used to compute proforma net
income and loss per share disclosures is the estimated present value at
grant date using the Black Scholes option-pricing model with the following
assumptions for 1996: dividend yield of 0% as the Company is prohibited from
paying dividends on its Common Stock in accordance with the restrictions of
the covenants of the Company's Discount Notes; expected volatility of
approximately 51%; an average risk free interest rate of 6.0%; and, an
expected average holding period of approximately 1.5 years from date of
vesting. Assumptions for 1995 are as follows: dividend yield 0%, expected
volatility of approximately 53%; an average risk-free interest rate of 5.9%;
and an expected average holding period of approximately 1.5 years from date
of vesting.
Presented below is a summary of the status of the Company's stock options
held by the Company's employees and directors and the related transactions
for the years ended December 31 (shares in thousands):
<TABLE>
<CAPTION>
1996 1995
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Balance, beginning of year 4,902 $8.26 2,465 $6.54
Granted 1,345 $9.25 2,666 $9.53
Exercised (412) $4.47 (129) $2.18
Canceled (206) $8.63 (100) $7.89
----- -----
Balance, end of year 5,629 $8.76 4,902 $8.26
===== =====
Exercisable, end of year 2,199 1,593
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant-date fair value of options granted during the
years ended December 31 are (shares in thousands):
<TABLE>
<CAPTION>
1996 1995
Weighted Average Weighted Average
Shares Exercise Price Fair Value Shares Exercise Price Fair Value
------ -------------- ---------- ------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares granted:
below market price 200 $9.97 $5.30 435 $8.15 $3.74
at market price 283 $10.01 $4.12 1,058 $8.60 $3.76
above market price 862 $8.84 $3.69 1,173 $10.88 $3.48
----- -----
1,345 2,666
===== =====
</TABLE>
The following table sets forth the status of the Company's fixed stock
options outstanding and exercisable at December 31, 1996 (share in thousands):
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Price Shares Contractual Life Price Shares Price
-------------- ------ ---------------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.00-$8.13 1,931 7.44 $6.46 946 $5.06
$8.19-$9.50 2,110 8.35 $8.83 872 $8.93
$9.69-$16.00 1,588 8.40 $11.45 381 $10.70
----- -----
$1.00-$16.00 5,629 8.05 $8.76 2,199 $7.57
===== =====
</TABLE>
15. Fair Value of Financial Instruments
The recorded amount of cash, cash equivalents, temporary investments and
notes payable banks and other, approximates fair value due to the short term
maturities of these assets and liabilities.
Investments in affiliates are accounted for by the equity method and pertain to
equity investments in privately held companies for which fair values are not
readily available. Management believes the fair values to be at least equal to
carrying amounts. The fair value of the Company's cash and cash equivalents,
temporary investments, restricted cash, and notes payable are considered to be
equal to the carrying amount as they are short-term in nature. The value of the
Company's Convertible Notes and Discount Notes were determined using the market
price of the debt instrument at December 31. The Company determines the fair
value of its warrants using the Black Scholes option pricing model. The asset
and liability amounts recorded in the balance sheet (carrying amount) and the
estimated fair values of financial instruments at December 31, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 103,605 $ 103,605 $ 61,428 $ 61,428
Temporary investments 7,945 7,945
Restricted cash 9,418 9,418 36,971 36,971
Notes payable 8,075 8,075 8,285 8,285
Long term debt, including
current portion 215,691 232,683 125,452 135,399
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Company's S-C Rig Credit Facility and HNS vendor
financing agreement, the Company issued 4.2 million and 2.5 million
warrants to purchase shares of the Company's common stock. At December 31,
1996, the S-C Rig Warrants and HNS Warrants were carried at $11.4 and $8.4,
respectively and have a fair value of $6.5 million and $5.7 million,
respectively.
16. 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 the years ended December 31, 1996, 1995, and
1994, Vanguard earned approximately 199,000, 300,000, and 258,000 shares,
respectively pursuant to this agreement. The fair market value of these
shares have been recorded as marketing expenses in 1996, 1995, and 1994 at
approximately $2.1 million, $2.4 million and $2.5 million, respectively.
The Company incurred expenses of $300,000 in 1996, 1995 and 1994, 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 has entered into a subcontractor agreement with Rafael under
which Rafael will partake in the development of the digital wireless
network to be deployed by the Company and its subsidiaries in the United
States and Korea. Research and development expense for the years ended
December 31, 1996, 1995 and 1994 includes approximately $11.7 million,
$12.5 million, and $11.1 million, respectively, for research performed by
Rafael under this agreement. GTI-Israel has also entered into agreements
with Rafael under which Rafael manufactures the infrastructure equipment to
be used by the Company in its U.S. network and for the sale of such
equipment by the Company to third parties. Through December 31, 1996 and
1995, the Company had placed firm orders for equipment and engineering
totaling $24.0 million and $22.6 million, respectively and had made an
advance payment (recorded in other current assets) of $2.5 million and $1.2
million to Rafael under these orders as of December 31, 1996 and 1995,
respectively.
In 1995, the Company issued 250,000 shares of common stock to Rafael in
connection with the development of the digital wireless communications
system. The shares were valued at $2.0 million, which amount was recorded
in 1995 as research and development costs.
In July 1996, the Company issued a Convertible Promissory Note in the
amount of $800,000, due December 31, 1996, for additional shares, held by a
minority shareholder, in the Company's subsidiary GTI-Israel (See Note 2).
In October 1995, Rafael Development Corporation ("RDC") converted all the
principal and interest issued to it by GTI-Israel under convertible
debentures into shares of GTI-Israel representing its 38% interest in
GTI-Israel. The Company issued to Rafael 1.8 million shares of unregistered
Company common stock in exchange for RDC's shares of GTI-Israel. The
Company valued the unregistered shares at $8.6 million and recorded the
excess of the value of the shares over the fair value of the underlying
assets of GTI-Israel of $7.8 million as goodwill which is being amortized
over 20 years. As part of the arrangement, RDC was granted an option to
purchase up to 10% of GTI-Israel in certain circumstances. Additionally, in
October 1995, RDC purchased 338,000 shares of Company common stock for $3.0
million.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Segment Information:
The Company's operations have been classified into two business segments:
wireless communications and communications products. The wireless
communications group is engaged in the commercial roll-out and enhancement
of its digital wireless network in the United States, principally through
its PSI and GTI-Israel subsidiaries, sale of digital wireless
infrastructure equipment, provision of mobile radio services in the United
States (PSI and MetroNet), the United Kingdom (NB3), and Germany, and the
development of certain mobile data applications (GMSI and MIS). The
enhancement of the Company's digital wireless network is primarily taking
place in Israel. GMSI is located in Canada and markets its products in
Canada, the United States and the United Kingdom.
The communications products group is principally engaged, through the
Company's Bogen Communications International subsidiary, in the
development, manufacturing and marketing of telephone and facsimile
peripheral products and commercial audio and paging equipment in the United
States and Germany. During 1995, the communications products group decided
to phase out of the Office Automation Services ("OAS") product line. The
communications products group has taken a charge of $2.2 million related to
this action of which $1.5 million relates to the writedown of its inventory
to expected net realizable value.
Corporate and other consists primarily of the Company's corporate
headquarters activities and an insignificant subsidiary of the Company.
Sales between industry segments are not material.
Information about the Company's segments in 1996, 1995 and 1994 follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Wireless communications $ 42,623 $ 32,986 $ 25,668
Communications products 46,269 44,518 46,075
Corporate and other 3,902 2,775 1,248
--------- --------- ---------
$ 92,794 $ 80,279 $ 72,991
========= ========= =========
Operating income (loss):
Wireless communications $(109,652) $ (65,493) $ (37,225)
Communications products 4,012 (1,693) 45
Interest and other income (expense), net (27,800) (17,706) 105
Corporate and other (4,782) (2,307) (5,330)
--------- --------- =========
Loss from continuing operations $(138,222) $ (87,199) $ (42,405)
========= ========= =========
Identifiable assets:
Wireless communications $ 268,648 $ 159,364 $ 95,222
Communications products 25,085 24,979 35,663
Corporate and other assets 136,389 108,221 48,959
--------- --------- ---------
$ 430,122 $ 292,564 $ 179,844
========= ========= =========
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Depreciation and amortization:
Wireless communications $ 17,745 $ 8,212 $ 5,884
Communications products 1,398 1,242 1,181
Corporate and other 925 670 373
--------- --------- ---------
$ 20,068 $ 10,124 $ 7,438
========= ========= =========
Capital expenditures - property and equipment:
Wireless communications $ 48,828 $ 32,906 $ 9,386
Communications products 1,017 803 939
Corporate and other 201 144 133
--------- --------- ---------
$ 50,046 $ 33,853 $ 10,458
========= ========= =========
Capital expenditures - intangibles:
Wireless communications $ 32,192 $ 13,055 $ 14,785
Communications products 48 94 3,548
--------- --------- ---------
$ 32,240 $ 13,149 $ 18,333
========= ========= =========
Geographic Segments:
Revenues:
United States $ 35,581 $ 36,720 $ 41,591
Europe 48,229 38,368 27,926
Foreign 36,976 17,027 3,474
Elimination of intercompany revenues (27,992) (11,836)
--------- --------- ---------
$ 92,794 $ 80,279 $ 72,991
========= ========= =========
Operating income (loss):
United States $ (73,494) $ (50,770) $ (22,624)
Europe (4,642) (486) (637)
Foreign (19,689) (12,360) (15,267)
Interest and other income (expense), net (27,800) (17,706) 105
Corporate and other (4,551) (2,287) (3,982)
Elimination of intercompany income (8,046) (3,590)
--------- --------- ---------
Loss from continuing operations $(138,222) $ (87,199) $ (42,405)
========= ========= =========
Identifiable assets:
United States $ 148,158 $ 87,453 $ 51,511
Europe 48,911 71,671 41,807
Foreign 96,689 27,839 38,503
Corporate and other 136,364 105,601 48,023
--------- --------- ---------
$ 430,122 $ 292,564 $ 179,844
========= ========= =========
</TABLE>
The Company is subject to the risks inherent in conducting business across
national boundaries, including currency exchange rate fluctuations,
international incidents, military outbreaks, economic downturns, government
instability, nationalization of foreign assets, government protectionism and
changes in governmental policy, any of which could adversely affect the
Company's business in one or more of its international markets or in the
U.S. in addition, the licensing and other operational risks attendant upon
commencing and maintaining wireless communications networks in foreign
countries are similar to those in the U.S., including availability of
spectrum capacity and transmission sites, competition and government
regulation. Development of the Company's business in international markets
may impose a significant burden on the Company's financial, managerial and
personnel resources. There can be no assurance that the Company will be
successful in developing its business in any of these markets or that any
such expansion of the Company's business will be profitable.
18. Subsequent Events:
In January 1997, the Company sold to entities affiliated with George Soros,
500 shares of its Series P Convertible Preferred Stock ("Series P Stock")
for an aggregate purchase price of $25 million. The Series P Stock contains
terms which are substantially similar to those related to the Series O Stock
(see Note 13). In connection with this transaction, the Company issued
warrants to purchase 850,000 shares of the Company's Common Stock at $9.2625
per share (subject to adjustment in certain circumstances). The warrants are
exercisible at any time, and from time to time, before June 30, 2000.
Additionally, in February 1997, the Company filed a registration statement
under the Securities Act of 1993, as amended, with regard to the resale of
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of Common Stock issuable (i) for dividends; (ii) upon conversion of
Series P Stock; and, (iii) upon the exercise of the warrants.
19. 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 Discount Notes"). In connection with
the Discount Note offering, the Company's wholly-owned U.S. Domestic
Subsidiaries, including PowerSpectrum, Inc. and its Subsidiaries,
(collectively referred to as the "Guarantor Subsidiaries") fully and
unconditionally guarantee such Discount Notes jointly and severally. The
Guarantor Subsidiaries are wholly owned by the Company. In addition, the
Discount Notes are collateralized by a pledge of the capital stock owned by
the Company in National Band Three Ltd., PowerSpectrum, Inc. and
Subsidiaries, MetroNet Systems, Inc., Geotek GmbH Holding Corporation and
Bogen Communications International, Inc.
The Guarantor Information of Geotek Communications, Inc. and Subsidiaries
has been presented on pages F-33 through F-41 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 Discount Notes include covenants that place
restrictions on the Company primarily related to making certain investments,
paying dividends and incurring additional debt.
Notes to Guarantor Information:
Basis of Presentation - To conform with the terms and conditions of the
Notes, the condensed consolidating financial information of the Guarantor
Subsidiaries are presented on the following basis:
(1) Geotek Communications, Inc. -Investments in consolidated
(Parent Company) subsidiaries 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 Geotek Financing
Corporation, Geotek License Holding
Inc., 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) Reclassifications and -Certain reclassifications were made
Eliminations to 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.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For (Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Reclassi-
fications Geotek
Geotek Guarantor Non-Guarantor & Elimin- Comm., Inc.
Comm. Inc Subsidiaries Subsidiaries ations & Subsidiaries
--------- ------------ ------------ ------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS (1) (2) (3) (4)
CURRENT ASSETS:
Cash and cash equivalents $ 94,218 $ 364 $ 9,023 $ 103,605
Restricted cash 7,794 1,624 9,418
Accounts receivables trade, net 620 14,815 15,435
Inventories 15,915 12,235 28,150
Prepaid expenses and other assets 4,514 12,093 6,777 23,384
--------- --------- --------- --------- --------
Total current assets 106,526 28,992 44,474 179,992
--------- --------- --------- --------- --------
Inter-company account 307,673 76,303 $(383,976)
Investments in affiliates 11,954 25,181 (163) 36,972
Property, plant and equipment, net 1,155 70,297 32,753 (10,624) 93,581
Intangible assets, net 12,492 66,064 12,952 91,508
Other assets 29,363 217 403 (1,914) 28,069
Investments in Subsidiaries, at cost 89,921 (89,921)
--------- --------- --------- --------- --------
$ 559,084 $ 241,873 $ 115,763 $(486,598) $430,122
========= ========= ========= ========= ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 762 $ 6,993 $ 12,832 $ 20,587
Accrued expenses and other 6,546 11,319 31,414 49,279
Notes payable, banks and other 8,575 $ (500) 8,075
Current maturities, long-term debt 101 155 5 261
--------- --------- --------- --------- --------
Total current liabilities 7,409 18,467 52,826 (500) 78,202
--------- --------- --------- --------- --------
Inter-company account 316,716 67,260 (383,976)
Long-term debt 186,823 24,500 5,681 (1,574) 215,430
Other non-current liabilities 2,422 (1,414) 1,008
Minority interest 438 438
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $ 01 par value 11 11
Common stock, $ 01 par value 600 600
Capital in excess of par value 403,103 40,621 74,106 (88,347) 429,483
Foreign currency translation adjustment 942 942
Accumulated deficit (77,476) (158,431) (87,912) (10,787) (334,606)
Treasury stock, at cost (1,386) (1,386)
--------- --------- --------- --------- --------
324, 852 (117,810) (12,864) (99,134) 95,044
--------- --------- --------- --------- --------
$ 559,084 $ 241,873 $ 115,763 $(486,598) $430,122
========= ========= ========= ========= ========
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31. 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Reclassi
fications Geotek
Geotek Guarantor Non-Guarantor & Elimin- Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries ations & Subsidiaries
--------- ------------ ------------- ----------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
ASSETS
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
Deposits for spectrum licenses 3,500 8,000 11,500
Inventories 1,328 9,155 10,483
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>
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Reclassi
fications Geotek
Geotek Guarantor Non-Guarantor & Elimin- Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries ations & Subsidiaries
--------- ------------ ------------- ----------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales $ 806 $ 86,602 $ (28,540) $ 58,868
Service income 481 33,445 33,926
--------- --------- --------- ---------
Total revenues 1,287 120,047 (28,540) 92,794
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 6,876 54,941 (20,783) 41,034
Cost of services 16,322 24,402 (667) 40,057
Research and development 1,861 9,148 26,583 (64) 37,528
Marketing 300 21,280 17,104 38,684
General and administrative 9,692 11,837 23,309 44,838
Interest expense 28,315 886 2,264 (988) 30,477
Interest and other income (6,253) (165) (404) 988 (5,834)
Amortization of intangibles 1,385 804 1,977 4,166
Equity in losses of investees 79 79
Other expenses (income) (1,031) (635) (458) 171 (1,953)
--------- --------- --------- --------- ---------
Total costs and expenses 34,348 66,353 149,718 (21,343) 229,076
--------- --------- --------- --------- ---------
Loss from continuing operations
before taxes on income and
minority interest (34,348) (65,066) (29,671) (7,197) (136,282)
Taxes on income (1,603) (1,603)
Minority interest (337) (337)
--------- --------- --------- --------- ---------
Net loss $ (34,348) $ (65,066) $ (31,611) $ (7,197) $(138,222)
========= ========= ========= ========= =========
</TABLE>
F-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Reclassi
fications Geotek
Geotek Guarantor Non-Guarantor & Elimin- Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries ations & Subsidiaries
--------- ------------ ------------- ----------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales $ 83 $64,366 $(11,836) $52,613
Service income 2,020 25,646 27,666
--------- --------- --------- ---------
Total revenues 2,103 90,012 (11,836) 80,279
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 46 40,580 (8,246) 32,380
Cost of services 5,256 15,135 20,391
Research and development 15,805 19,775 35,580
Marketing $ 300 9,513 18,211 28,024
General and administrative 5,729 10,753 14,345 30,827
Interest expense 15,383 316 2,462 (1,447) 16,714
Interest income (5,989) (76) (530) 1,447 (5,148)
Amortization of intangibles 920 1,065 2,177 4,162
Equity in losses of investees 1,563 3,332 4,895
Other expenses (income) (2,121) (476) (2,597)
--------- --------- --------- --------- ---------
Total costs and expenses $17,906 $40,557 $115,011 $(8,246) $165,228
--------- --------- --------- --------- ---------
Loss from continuing
operations before taxes
on income and
minority interest (17,906) (38,454) (24,999) (3,590) (84,949)
Discontinued operations:
Taxes on income (2,222) (2,222)
Minority interest (28) (28)
--------- --------- --------- --------- ---------
Net loss $(17,906) $(38,454) $(27,249) $(3,590) $(87,199)
========= ========= ========= ========= =========
</TABLE>
F-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Reclassi
fications Geotek
Geotek Guarantor Non-Guarantor & Elimin- Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries ations & Subsidiaries
--------- ------------ ------------- ----------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
REVENUES
Net product sales $350 $ 48,968 $ (948) $ 48,370
Service income 2,115 22,506 24,621
--------- --------- --------- ---------
Total revenues 2,465 71,474 (948) 72,991
--------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 208 31,777 (811) 31,174
Cost of services 1,358 15,220 16,578
Research and development $256 5,941 13,280 19,477
Marketing 5,983 12,308 18,291
General and administrative 4,551 4,294 10,998 7 19,850
Interest expense 2,534 64 2,097 (1,595) 3,101
Interest income (3,638) (172) (546) 1,595 (2,761)
Amortization of intangibles 594 711 962 505 2,772
Equity in losses of investees 1,159 2,409 (512) 3,056
Other expenses (income) 3,524 (445) (52) 3,027
--------- --------- --------- --------- ---------
Total costs and expenses 8,980 17,942 88,453 (811) 114,565
--------- --------- --------- --------- ---------
Loss from operations before
taxes on income and
minority interest (8,980) (15,477) (16,979) (137) (41,574)
Taxes on income (660) (660)
Minority interest (185) 14 (171)
--------- --------- --------- --------- ---------
Net loss $ (9,165) $ (15,477) $ (17,625) $ (137) $ (42,405)
========= ========= ========= ========= =========
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries & Elimination's & Subsidiaries
------------ ------------ ------------ ----------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (34,348) $ (65,066) $ (31,611) $ (7,197) $ (138,222)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest 43 43
Depreciation & amortization 1,480 5,782 13,302 (496) 20,068
Post acquisition adjustment for utilization of
acquired net operating loss carry forward 357 357
Equity in losses of investees 79 79
Deferred tax expense 614 614
Non-cash compensation expense 100 100
Inventory reserves 5,226 257 5,483
Acquired research and development project 1,861 1,861
Non-cash management consulting expense 2,061 2,061
Non-cash license income (279) (279)
Non-cash interest expense 26,458 137 26,595
Changes in operating assets and
liabilities (net of effect from acquisitions):
Increase in accounts receivable (599) (3,585) (4,184)
Increase in inventories (19,813) (3,757) (23,570)
Decrease in prepaid expenses and other assets (2,448) (11,776) 2,205 (12,019)
Increase in accounts payable & accrued expenses 5,550 10,030 16,967 32,547
Other, net (834) 1,050 216
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (2,102) (74,297) (4,158) (7,693) (88,250)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of licenses (30,192) (30,192)
Net decrease in temporary investments 7,945 7,945
Proceeds from sale of property, plant & equipment 106 106
Acquisitions of property, plant & equipment (162) (45,048) (12,529) 7,693 (50,046)
Capitalized interest on construction in process
and pre-commercial licenses (599) (6,569) (7,168)
Cash invested in acquisition of
subsidiaries, net (8,531) (267) (8,798)
Change in restricted cash 27,553 27,553
Contract deposits (1,015) (1,246) (2,261)
Other, net (48) (48)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 25,191 (81,809) (13,984) 7,693 (62,909)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit agreements 24 24
Repayments of debt (1,706) (332) (2,038)
Net proceeds from issuances of convertible notes 75,000 75,000
Proceeds from issuance
of convertible preferred stock 103,350 103,350
Deferred financing costs (3,300) (3,300)
Proceeds from draw down
of credit agreement 24,500 24,500
Repayment of capital lease obligation (60) (438) (498)
Financing costs (1,080) (1,080)
Proceeds from exercise of warrants & options 2,568 2,568
Payment of preferred dividends (5,138) (5,138)
Intercompany financing (153,339) 133,154 20,185
Other, net 149 149
------------ ------------ ------------ ------------ ------------
Net cash provided by
financing activities 18,001 155,948 19,588 193,537
------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash (201) (201)
Increase (decrease) in cash & cash equivalents 41,090 (158) 1,245 42,177
Cash & cash equivalents, beginning of year 53,128 522 7,778 61,428
------------ ------------ ------------ ------------ ------------
Cash & cash equivalents, end of year $ 94,218 364 $ 9,023 $ 103,605
============ ============ ============ ============ ============
</TABLE>
F-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended December 31. 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries & Elimination's & Subsidiaries
------------ ------------ ------------ ----------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (17,906) $ (38,454) $ (27,249) $ (3,590) $ (87,199)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest 28 28
Depreciation & amortization 957 1,738 7,429 10,124
Provisions for inventory reserve for
lower of cost or market 73 1,513 1,586
Non-cash interest expense 11,631 270 11,901
Non-cash license income (658) (658)
Post acquisition adjustment for utilization
of acquired net operating loss carryforward 950 950
Gain on sale of property and equipment (45) (48) (93)
Equity in losses of investees 1,563 3,332 4,895
Non cash related party compensation expense 90 90
Issuance of stock for management
consulting fee 2,439 2,439
Issuance of shares in connection
with Research and development project 2,032 2,032
Changes in operating assets and liabilities
(net of effect from acquisitions):
Decrease (increase) in accounts receivable 58 (1,582) (421) (1,945)
Increase in inventories (1,284) (1,953) (161) (3,398)
Increase (decrease) in prepaid expenses
and other assets (112) (143) 2,506 851 3,102
Increase in accts payable & accrued expenses 826 6,597 4,321 1,438 13,182
Other 1,400 1,400
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (2,996) (27,332) (9,353) (1,883) (41,564)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of and deposits for spectrum licenses (3,500) (9,555) (94) (13,149)
Net decrease in temporary investments 14,015 14,015
Restricted cash (32,675) (1,741) (34,416)
Contract deposits-other current assets (1,227) (1,227)
Acquisitions of property, plant & equipment (84) (27,616) (9,580) 3,427 (33,853)
Interest capitalized on construction in progress (487) (487)
Proceeds from sale of property, plant & equipment 45 205 250
Proceeds from sale of BCI 7,000 7,000
Non-cash transaction expense for BCI 740 740
Cash used in acquisition
of subsidiaries, net (9,732) (9,732)
Other 2,106 2,106
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
investing activities (22,870) (37,613) (11,697) 3,427 (68,753)
------------ ------------ ------------ ------------ ------------
</TABLE>
F-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial InformationFor Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
For the Year Ended December 31. 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries & Elimination's & Subsidiaries
------------ ------------ ------------ ----------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net repayments under
line of credit agreements (1,000) (1,000)
Proceeds from issuances of preferred stock 30,863 30,863
Repayments of debt (850) (510) (951) (2,311)
Deferred financing costs (4,692) (4,692)
Repayments under capital lease obligation (400) (217) (617)
Repayment of secured notes (25,000) (25,000)
Proceeds from issuance of senior
secured notes and related warrants 36,000 36,000
Proceeds from issuance of senior secured
discount notes & related warrants 110,079 110,079
Proceeds from issuance of common stock 3,000 3,000
Proceeds from exercise of
warrants & options 1,073 1,073
Payment of preferred dividends (4,132) (4,132)
Intercompany financing (88,169) 65,559 24,154 (1,544)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 57,772 65,049 21,986 (1,544) 143,263
------------ ------------ ------------ ------------ ------------
Effect of exchange rates on cash 951 951
Increase in cash & cash equivalents 31,906 104 1,887 33,897
Cash & cash equivalents, beginning of year 21,222 418 5,891 27,531
------------ ------------ ------------ ------------ ------------
Cash & cash equivalents, end of year $ 53,128 $ 522 $ 7,778 -- $ 61,428
============ ============ ============ ============ ============
</TABLE>
F-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Reclassi
fications Geotek
Geotek Guarantor Non-Guarantor & Elimin- Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries ations & Subsidiaries
--------- ------------ ------------- ----------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (9,165) $ (15,477) $ (17,625) $ (137) $ (42,405)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest 185 (14) 171
Provision for inventory reserve for
lower of cost or market 1,195 1,195
Depreciation & amortization 615 894 5,418 512 7,438
Post acquisition adjustment for utilization
of acquired net operating loss carryforward 573 573
Non cash interest expense 391 391
Equity in losses of investees 1,159 2,409 (512) 3,056
Reserve for impairment of loan 3,500 3,500
Issuance of stock for management consulting fee 2,517 2,517
Changes in operating assets and liabilities
(net of effect from acquisitions):
Decrease in accounts receivable 24 852 876
Decrease (increase) in inventories 30 (3,228) 137 (3,061)
Increase in prepaid expenses and other assets (553) (51) (4,708) (5,312)
(Decrease) increase in accounts payable &
accrued expenses (509) 850 6,559 6,900
Other 33 53 (2) 84
--------- --------- --------- --------- ---------
Net cash used in operating activities (4,344) (11,160) (8,571) -- (24,077)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of licenses (12,961) (2) (12,963)
Net increase in temporary investments (17,531) 3,444 (14,087)
Acquisitions of property, plant & equipment (67) (2,250) (8,141) (10,458)
Changes in restricted cash (2,555) (2,555)
Cash invested in acquisition of subsidiaries, net (1,332) (49,064) 24,554 (25,842)
Loan to Harris Adacom B.V. (3,500) (3,500)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities (24,986) (11,767) (57,207) 24,554 (69,405)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings, under
line of credit agreements 2,390 2,390
Proceeds from debt and warrants 2,674 2,674
Repayments of debt (1,053) (454) (1,507)
Proceeds from issuance of convertible
preferred stock 10,000 10,000
Proceeds from issuance of senior
secured note & related warrants 25,000 25,000
Proceeds from issuance of stock & warrants
to Vanguard 29,250 29,250
Proceeds from exercise of warrants & options 3,848 3,848
Payment of preferred dividends (2,066) (2,066)
Intercompany financing (59,995) 18,684 65,865 ( 24,554)
Other 33 24 (346) (289)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 7,691 18,708 67,455 ( 24,554) 69,300
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash 27 27
Increase (decrease) in cash & cash equivalents (21,639) (4,219) 1,703 (24,155)
Cash & cash equivalents, beginning of year 42,861 4,637 4,188 51,686
--------- --------- --------- --------- ---------
Cash & cash equivalents, end of year $ 21,222 $ 418 $ 5,891 $27,531
========= ========= ========= ========= =========
</TABLE>
F-41
<PAGE>
Registered no: 2672488
NATIONAL BAND THREE LIMITED
Annual report
for the year ended 31 December 1996
F-42
<PAGE>
NATIONAL BAND THREE LIMITED
Annual report
for the year ended 31 December 1996
Registered no: 2672488
Pages
Directors and advisers F-44
Directors' report F-45 - F-46
Report of the auditors F- 47
Profit and loss account F - 48
Balance sheet F -49
Cash flow statement F - 50
Notes to the financial statements F - 51- F - 61
F-43
<PAGE>
Directors and advisers
Executive directors E J Watts
R Conroy
M Davey
D Henson
G Darsley
Non-executive directors
Y Eitan - Chairman
Y Bibring
G M Calhoun
A D Robb
Secretary and registered office Wren House
Hedgerows Business Park
Colchester Road
Springfield
CHELMSFORD
Essex
CM2 5PF
Registered Auditors Coopers & Lybrand
1 Embankment Place
LONDON
WC2N 6NN
Bankers National Westminster Bank Plc
21 Lombard Street
LONDON
EC3P 3AR
F-44
<PAGE>
NATIONAL BAND THREE LIMITED
Directors' report
for the year ended 31 December 1996
The directors present their report and the audited financial statements for the
year ended 31 December 1996.
Principal activities
The profit and loss account for the period is set out on page 48.
The principal activities of the company are the expansion and operation of a
national mobile communication system, under licences granted by the Department
of Trade and Industry under the Telecommunications Act 1984 and the Wireless
Telegraphy Act 1949.
Review of business and future developments
During the year the company continued to expand the capacity, coverage and
facilities of the network. It has also invested in and strengthened its sales
and marketing capability. This helped the continued growth in the subscriber
base during the year and provided new products and services. Both the level of
business and the year end financial position were satisfactory, and the
directors expect the level of activity to continue for the foreseeable future.
During the year the company was awarded a licence to operate a digital network.
This will significantly enhance the current range of products and services
available to customers in the future and facilitate the penetration of related
and competitive markets.
Dividends and transfers to reserves
The directors do not recommend the payment of a dividend. The profit for the
period of (pound)2,490,000 (1995: (pound)1,605,000) has been taken to reserves.
Changes in fixed assets
The movements in fixed assets during the year are set out in note 9 to the
financial statements.
F-45
<PAGE>
Directors
The directors of the company during the year ended 31 December 1996 were:
A D Robb
G M Calhoun
Y Eitan
Y Bibring
E J Watts
R Conroy
D Henson
M Davey
S A Style (resigned on 31 January 1997)
G Darsley was appointed to the board on 17 February 1997.
Directors' interests
None of the directors held any interest in the shares of the company at 31
December 1996 (1995: None).
At the year end the directors held options over the shares of National Band
Three's parent company, Geotek Communications, Inc.
Statement of directors' responsibilities
The directors are required by UK company law to prepare financial statements for
each financial year that give a true and fair view of the state of affairs of
the company and of the profit or loss of the company for that period.
The directors confirm that suitable accounting policies have been used and
applied consistently and reasonable and prudent judgements and estimates have
been made in the preparation of the financial statements for the year ended 31
December 1996. The directors also confirm that applicable accounting standards
have been followed and that the financial statements have been prepared on the
going concern basis.
The directors are responsible for keeping proper accounting records, for taking
reasonable steps to safeguard the assets of the company and to prevent and
detect fraud and other irregularities.
Auditors
The company's auditors are Coopers & Lybrand. Under an elective resolution the
company has dispensed with the need to reappoint auditors on an annual basis.
By order of the board
/s/ G. Darsley
Secretary
28 February 1997
F-46
<PAGE>
NATIONAL BAND THREE LIMITED
Report of the auditors to the members of
NATIONAL BAND THREE LIMITED
We have audited the balance sheets of National Band Three Limited as of 31
December 1996 and 1995 and the related statements of income, changes in
shareholders' equity and cash flows for the years ended 31 December 1996 and
1995. The financial statements on pages F-48 to F-61 are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United Kingdom which do not differ in any significant respects from
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Band Three Limited, as
of 31 December 1996 and 1995 and the results of their operations and cash flows
for the years ended 31 December 1996 and 1995 in conformity with generally
accepted accounting principles in the United Kingdom.
Accounting principles and financial statement presentation generally accepted in
the United Kingdom vary in certain significant respects from accounting
principles and financial statement presentation generally accepted in the United
States. The application of these requirements would have affected the financial
statement presentation and the determination of net income for the years ended
31 December 1996 and 1995 and of shareholders' equity as of 31 December 1996 and
1995, to the extent summarised in note 21 to the financial statements.
COOPERS & LYBRAND
Chartered Accountants and Registered Auditors
London
28 February 1997
F-47
<PAGE>
NATIONAL BAND THREE LIMITED
Profit and loss account
for the year ended 31 December 1996
Notes 1996 1995
(pound)'000 (pound)'000
----- ---------- ----------
Turnover 2 18,164 15,835
Cost of sales (9,522) (8,366)
------- ------
Gross profit 8,642 7,469
Net operating expenses 3 (6,015) (5,696)
------- ------
Operating profit 2,627 1,773
Interest receivable and similar income 120 98
Interest payable and similar charges 6 (217) (266)
------- ------
Profit on ordinary activities before taxation 7 2,530 1,605
Tax on profit on ordinary activities 8 (40) --
------- ------
Retained profit for the financial year 15 2,490 1,605
======= ======
All figures in the profit and loss account relate to continuing operations.
There is no difference between the profit on ordinary activities before taxation
and the profit for the year as stated above, and their historical cost
equivalents.
There have been no other gains and losses in the year.
F-48
<PAGE>
NATIONAL BAND THREE LIMITED
Balance sheet
at 31 December 1996
Notes 1996 1995
(pound)'000 (pound)'000
----- ----------- -----------
Fixed assets
Tangible assets 9 12,522 11,889
------- -------
Current assets
Stocks 10 411 193
Debtors 11 3,246 3,322
Cash at bank and in hand 3,553 1,817
------- -------
Total current assets 7,210 5,332
Creditors: amounts falling due
within one year 12 (9,748) (9,727)
------- -------
Net current liabilities (2,538) (4,395)
------- -------
Total assets less current liabilities 9,984 7,494
Provisions for liabilities and charges
Deferred taxation 13 -- --
------- -------
Net assets 9,984 7,494
======= =======
Capital and reserves
Called up share capital 14 9,000 9,000
Share premium account 15 8,800 8,800
Goodwill reserve 15 (9) (58)
Profit and loss account 15 (7,807) (10,248)
------- -------
Total equity shareholders' funds 16 9,984 7,494
======= =======
The financial statements on pages F-48 to F-61 were approved by the board of
directors on 28 February 1997 and were signed on its behalf by:
/s/ G. Darsley
Director
F-49
<PAGE>
NATIONAL BAND THREE LIMITED
Cash flow statement
for the year ended 31 December 1996
Notes 1996 1995
(pound)'000 (pound)'000
----- ----------- -----------
Net cash inflow from operating activities 17 5,243 3,024
----- -----
Returns on investments and servicing of finance
Interest received 120 98
Interest paid (217) (266)
----- -----
Net cash outflow from returns on
investments and servicing of finance (97) (168)
----- -----
Taxation
United Kingdom corporation tax paid -- --
----- -----
Investment activities
Purchase of tangible fixed assets (3,470) (2,801)
Sale of tangible fixed assets 60 135
----- -----
Net cash outflow from investing activities (3,410) (2,666)
----- -----
Increase in cash and cash equivalents 18 1,736 190
===== =====
F-50
<PAGE>
NATIONAL BAND THREE LIMITED
Notes to the financial statements
for the year ended 31 December 1996
1 Principal accounting policies
The financial statements have been prepared in accordance with applicable
Accounting Standards in the United Kingdom. A summary of the more important
accounting policies, which have been applied consistently, is set out below.
Basis of accounting
The financial statements are prepared in accordance with the historical cost
convention.
Goodwill
Goodwill arising on the acquisition of businesses is written off directly to an
unrealised goodwill reserve. It is amortised to the profit and loss account
reserve over five years, the directors' estimate of its useful economic life.
Tangible fixed assets
The cost of tangible fixed assets is their purchase cost, together with any
incidental expenses of acquisition.
Depreciation is calculated so as to write off the cost of tangible fixed assets,
less their estimated residual values, on a straight line basis over the expected
useful economic lives of the assets concerned.
The estimated useful lives used for this purpose are:
Short term leasehold improvements Over the term of the lease
Plant and machinery Between three and ten years
Fixtures and fittings Between three and five years
Motor vehicles Four years
No depreciation is charged on assets in the course of construction.
Stocks
Stocks are stated at the lower of cost and net realisable value. Provision is
made where necessary for obsolete, slow moving and defective stocks.
Turnover
Turnover, which excludes value added tax, represents the invoiced value of goods
and services supplied.
Operating leases
Costs in respect of operating leases are charged on a straight line basis over
the lease term.
F-51
<PAGE>
NATIONAL BAND THREE LIMITED
Deferred taxation
Provision is made for deferred taxation, using the liability method, on all
material timing differences to the extent that it is probable that a liability
or asset will crystallise.
Pension costs
The company operates a "money purchase" pension scheme for the benefit of its
employees.
The company provides no other post retirement benefits to its employees.
Related party transactions
The company has taken advantage of the exemptions under Financial Reporting
Standard 8 not to disclose any transactions with entities that are part of the
group qualifying as related parties.
2 Turnover
Turnover consists entirely of sales in one class of business made in the United
Kingdom.
3 Net operating expenses
1996 1995
(pound)'000 (pound)'000
----------- -----------
Selling and distribution costs 3,440 3,544
Administrative expenses 2,575 2,152
----- -----
6,015 5,696
===== =====
4 Directors' emoluments
1996 1995
(pound)'000 (pound)'000
----------- -----------
Emoluments (including pension contributions
and benefits in kind) 567 481
=== ===
F-52
<PAGE>
NATIONAL BAND THREE LIMITED
Emoluments (excluding pension contributions) include amounts paid to:
1996 1995
(pound) (pound)
------- -------
The chairman Nil Nil
======= =======
The highest paid director 166,603 121,306
======= =======
The number of directors (including the chairman and the highest paid director)
who received emoluments (excluding pension contributions) within the following
ranges was:
1996 1995
Number Number
------ ------
(pound)0 to (pound)5,000 3 3
(pound)5,001 to (pound)10,000 - -
(pound)10,001 to (pound)15,000 - 1
(pound)30,001 to (pound)35,000 - -
(pound)40,001 to (pound)45,000 - 1
(pound)45,001 to (pound)50,000 1 -
(pound)60,001 to (pound)65,000 - 1
(pound)65,001 to (pound)70,000 1 2
(pound)70,001 to (pound)75,000 - 1
(pound)75,001 to (pound)80,000 1 -
(pound)80,001 to (pound)85,000 1 -
(pound)85,001 to (pound)90,000 1 -
(pound)120,001 to (pound)125,000 - 1
(pound)165,001 to (pound)170,000 1 -
====== ======
A provision of (pound)80,000 has been established in these financial statements
in respect of bonus payments which may be made to directors at the company's
discretion. As these bonuses have not yet been approved, the above disclosures
include no amounts in respect of bonuses for the year. However, bonus payments
made in relation to the year ended 31 December 1995 are included in the figure
for 1996 above.
F-53
<PAGE>
NATIONAL BAND THREE LIMITED
5 Employee information
The average weekly number of persons (including executive directors) employed by
the company during the year was:
1996 1995
Number Number
------ ------
By activity
Administration 28 26
Technical 42 43
Marketing 40 38
----- ------
110 107
===== ======
1996 1995
(pound)'000 (pound)'000
----------- -----------
Staff costs (for the above persons)
Wages and salaries 2,994 2,766
Social security costs 310 277
Other pension costs 160 154
----- ------
3,464 3,197
===== =====
6 Interest payable and similar charges
1996 1995
(pound)'000 (pound)'000
----------- -----------
Interest payable on sums owed to parent undertaking 217 266
===== =====
7 Profit on ordinary activities before taxation
1996 1995
(pound)'000 (pound)'000
----------- -----------
The profit on ordinary activities before taxation is
stated after charging/(crediting):
Exceptional cost of sales 340 -
Depreciation 2,815 2,362
Auditors' remuneration 20 20
Auditors' remuneration for non-audit services 11 18
Rentals under operating leases on land and buildings 1,242 1,168
Hire of equipment under operating leases 1,562 1,358
Profit on disposal of fixed assets (38) (58)
===== =====
F-54
<PAGE>
NATIONAL BAND THREE LIMITED
8 Profit on ordinary activities before taxation
The exceptional cost of sales related to a provision for costs to be incurred in
moving one of the company's switching sites, presently located in Manchester.
9 Tax on profit on ordinary activities
1996 1995
(pound)'000 (pound)'000
----------- -----------
United Kingdom corporation tax at 33% (1995: 33%)
Current tax 40 Nil
=== ===
The charge for corporation tax in the year is abnormally low due to the
availability of losses brought forward from previous years.
10 Tangible fixed assets
<TABLE>
<CAPTION>
Plant
Short term and Fixtures
leasehold machinery and Motor
improvements as restated fittings vehicles Total
(pound)'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cost
At 1 January 1996 5 23,937 614 812 25,368
Additions - 3,102 53 315 3,470
Disposals - (191) (26) (192) (409)
--- ------ --- --- ------
At 31 December 1996 5 26,848 641 935 28,429
--- ------ --- --- ------
Depreciation
At 1 January 1996 3 12,836 316 324 13,479
Charge for year - 2,487 121 207 2,815
Disposals - (191) (23) (173) (387)
--- ------ --- --- ------
At 31 December 1996 3 15,132 414 358 15,907
--- ------ --- --- ------
Net book value
At 31 December 1996 2 11,716 227 577 12,522
=== ====== === === ======
At 31 December 1995 2 11,101 298 488 11,889
=== ====== === === ======
</TABLE>
Included in the plant and machinery above are assets under construction to the
value of (pound)1,303,000 (31 December 1995: (pound)235,000) which did not incur
depreciation during the year.
F-55
<PAGE>
NATIONAL BAND THREE LIMITED
11 Stocks
1996 1995
(pound)'000 (pound)'000
----------- -----------
Goods for resale 411 193
=== ===
12 Debtors
1996 1995
(pound)'000 (pound)'000
----------- -----------
Amounts falling due within one year
Trade debtors 2,123 1,955
Amounts owed by fellow subsidiary undertakings 94 155
Other debtors 33 136
Prepayments and accrued income 996 1,076
----- -----
3,246 3,322
===== =====
13 Creditors: amounts falling due within one year
1996 1995
(pound)'000 (pound)'000
----------- -----------
Trade creditors 2,821 2,106
Amount owed to parent undertaking 3,112 4,432
Corporation tax 40 --
Other taxes and social security 273 215
Accruals and deferred income 3,502 2,974
----- -----
9,748 9,727
===== =====
14 Deferred taxation
The total liability to deferred taxation is as follows:
<TABLE>
<CAPTION>
Amount provided Amount unprovided
----------------------------- -----------------------------
1996 1995 1996 1995
(pound)'000 (pound)'000 (pound)'000 (pound)'000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Excess of capital allowances over
depreciation -- -- 549 355
Other -- -- (294) (77)
--- --- ----- ----
Nil Nil 255 278
=== === ===== ====
</TABLE>
F-56
<PAGE>
NATIONAL BAND THREE LIMITED
15 Called up share capital
1996 1995
(pound)'000 (pound)'000
----------- -----------
Authorised
12,000,000 ordinary shares of (pound)1 each 12,000 12,000
======= =======
Allotted, called up and fully paid
9,000,000 ordinary shares of (pound)1 each 9,000 9,000
======= =======
16 Share premium account and reserves
<TABLE>
<CAPTION>
Share Profit
premium Goodwill and loss
account reserve account Total
(pound)'000 (pound)'000 (pound)'000 (pound)'000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
At 1 January 1996 8,800 (58) (10,248) (1,506)
Transfer in respect of
amortisation of goodwill 49 (49)
Profit for the financial year 2,490 2,490
------ --- ------ ----
At 31 December 1996 8,800 (9) (7,807) 984
====== === ====== ====
</TABLE>
17 Reconciliation of movements in shareholders' funds
1996 1995
(pound)'000 (pound)'000
Profit for the financial year 2,490 1,605
Opening shareholders' funds 7,494 5,889
------- -------
Closing shareholders' funds 9,984 7,494
======= =======
F-57
<PAGE>
NATIONAL BAND THREE LIMITED
18 Reconciliation of operating profit/(loss)
to net cash inflow from operating activities
1996 1995
(pound)'000 (pound)'000
----------- -----------
Operating profit 2,627 1,773
Profit on sale of tangible fixed assets (38) (58)
Depreciation of tangible fixed assets 2,815 2,362
Amounts written off fixed assets - 175
Increase in stocks (218) (116)
Decrease/(increase) in debtors 76 (217)
Decrease in creditors (19) (895)
----- -----
Net cash inflow from operating activities 5,243 3,024
===== =====
19 Cash and cash equivalents
1996 1995
(pound)'000 (pound)'000
----------- -----------
Changes in the period
At 1 January 1996 1,817 1,627
Net cash inflow 1,736 190
----- -----
At 31 December 1996 3,553 1,817
===== =====
1996 1995
(pound)'000 (pound)'000
----------- -----------
Analysis of balances
Cash at bank and in hand 3,553 1,817
===== =====
20 Financial commitments
Capital commitments 1996 1995
(pound)'000 (pound)'000
----------- -----------
Contracted for but not provided 790 1,490
===== =====
Authorised but not yet contracted for 13 Nil
===== =====
F-58
<PAGE>
NATIONAL BAND THREE LIMITED
Operating lease commitments
At 31 December 1996 the company had annual commitments under non-cancellable
operating leases, as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Other Other
Land and operating Land and operating
buildings leases buildings leases
(pound)'000 (pound)'000 (pound)'000 (pound)'000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Leases which expire:
Within one year 305 80 300 84
Within two to five years 323 1,604 285 1,539
After five years 590 - 566 -
----- ----- ----- -----
1,218 1,684 1,151 1,623
===== ===== ===== =====
</TABLE>
21 Ultimate parent company
The directors regard Geotek Communications Inc (formerly Geotek Industries,
Inc), a company incorporated in the United States of America, as the ultimate
parent company.
Copies of the parent's consolidated financial statements may be obtained from
The Secretary, Geotek Communications, Inc. 102 Chestnut Ridge Road, Montvale,
New Jersey 07645, United States of America.
22 Summary of differences between UK GAAP and US GAAP
These Financial Statements are prepared in British Pounds and presented in
accordance with UK GAAP which differs in certain significant respects from US
GAAP. These differences, which have a significant effect on consolidated net
income and shareholders' equity, are discussed and quantified in a table of
adjustments below. While this is not a comprehensive summary of all differences
between UK GAAP and US GAAP, other differences are immaterial.
Significant differences between UK GAAP and US GAAP
(a) Deferred income taxes
Under UK GAAP, deferred taxes are only provided on timing differences
where it is considered probable that such taxes will become payable in the
foreseeable future. Under SFAS No. 109, "Accounting for Income Taxes", US GAAP
requires deferred taxes to be provided in full under the liability method. There
is no net adjustment recorded to the deferred income tax accounts for them to
comply with US GAAP. Taxes on income presented in 1996 and 1995 reflect the
utilization of (pound)630,000 and (pound)770,000 pre-acquisition net operating
loss, respectively, which had a full valuation allowance established at the time
F-59
<PAGE>
NATIONAL BAND THREE LIMITED
of acquisition by the Company. The utilization of this net operating loss has
been recorded in 1995 as a reduction to intangible assets.
(b) Goodwill
Under UK GAAP, the Company eliminates goodwill against reserves in the year
in which it arises. US GAAP requires that goodwill is capitalized and amortized
through the income statement over the estimated period of benefit. Additionally,
under applicable rules of "push-down accounting" goodwill associated with the
Parent Company's acquisition of the Company was "pushed down" onto the books of
the Company at the time of the acquisition. The Parent Company's policy is to
amortize goodwill on a straight line basis over 20 years. Amortization expense
relating to goodwill was (pound)227,000 and (pound)260,000 for December 31, 1996
and 1995, respectively. The carrying value of goodwill at December 31, 1996
after the adjustment for utilization of pre-acquisition net operating loss (see
(a)) and amortization was (pound)3,753,000.
(c) Statements of Cash Flows
The Company prepares its Consolidated Statements of Cash Flows under United
Kingdom Financial Reporting Standard No. 1, "Cash Flow Statements" ("FRS 1").
Its objectives and principles are similar to those set out in the US Statement
of Financial Accounting Standards No. 95, "Statement of Cash Flows" ("SFAS 95").
The principal differences between the standards relate to classification. Under
FRS 1, the Company presents its cash flows as (a) operating activities; (b)
returns on investments and servicing of finance; (c) taxation; (d) investing
activities; and (e) financing activities. SFAS 95 requires only three categories
of cash flow activity; (a) operating; (b) investing; and (c) financing. Cash
flows from taxation and returns on investments and servicing of finance shown
under FRS 1 would be included as operating activities SFAS 95.
Statements of income
The following is a summary of significant items which reconcile the
statements of income form that reported under UK GAAP to that which would be
reported has US GAAP been applied.
Year Ended Year Ended
31, December 31, December
1996 1995
(pound)'000 (pound)'000
----------- -----------
Net income (loss) as shown in the
financial statements (pound)2,490 (pound)1,605
US GAAP adjustments:
Amortization of goodwill (227) (260)
Taxes on Income (630) (770)
----------- ---------
Net income (loss) under US GAAP (pound)1,633 (pound)575
=========== =========
Shareholders' Funds
F-60
<PAGE>
NATIONAL BAND THREE LIMITED
The following is a summary of the significant items which reconcile
shareholders' funds from that reported under UK GAAP to that which would be
reported had US GAAP been applied.
As of December 31,
(pound)'000
-----------------------------------
1996 1995
------------- -------------
Shareholders' funds shown in the financial
statements (pound)9,984 (pound)7,494
US GAAP adjustments:
Goodwill 3,753 4,000
Deferred Income Tax (361) --
------------- -------------
Shareholders' funds under US GAAP (pound)13,376 (pound)11,494
============= =============
F-61
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Bogen Communications International, Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of BOGEN COMMUNICATIONS INTERNATIONAL, INC. and SUBSIDIARIES
(formerly European Gateway Acquisition Corp.) (the "Company") listed in Item
14(a)(2) of this Form 10-K. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bogen
Communications International, Inc. and Subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
March 7, 1997
New York, New York
F-62
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 and 1995
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
ASSETS
1996 1995
------- -------
CURRENT ASSETS:
Cash and cash equivalents $885 $ 1,276
Accounts receivable (less allowance
for doubtful accounts of $470
and $424 at December 31, 1996 and
1995, respectively) 6,517 4,992
Inventory, net 6,519 7,598
Prepaid expenses and other current
assets 780 366
------ -------
TOTAL CURRENT ASSETS 4,701 14,232
Property and equipment, net 2,130 2,191
Goodwill and intangible assets, net 4,308 14,706
Other assets 247 175
------- -------
TOTAL ASSETS $31,386 $31,304
======= =======
The accompanying notes are an integral part of these
consolidated financial statements
F-63
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 and 1995
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
LIABILITIES
1996 1995
------- -------
CURRENT LIABILITIES:
Amounts outstanding under revolving credit
agreements $4,828 $4,944
Accounts payable 3,707 2,861
Accrued expenses 3,026 3,610
Income taxes payable - 1,353
Advances and notes payable to related parties 746 537
Current maturities of notes payable to
non-related parties 5 174
------- -------
TOTAL CURRENT LIABILITIES 12,312 13,479
Advances and notes payable to related parties 361 3,458
Notes payable to non-related parties 8 -
Other long term liabilities 536 674
Minority interest 593 550
------- -------
TOTAL LIABILITIES 13,810 18,161
------- -------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 1,000,000 shares
authorized; none issued and outstanding at
December 31, 1996 and 1995, respectively - -
Common stock - $.001 par value; 50,000,000 shares
authorized; 5,758,850 and 5,759,350 shares issued
and outstanding at December 31, 1996 and 1995,
respectively. 6 6
Additional paid-in capital 21,774 19,175
Accumulated deficit (4,177) (6,185)
Currency translation adjustments (27) 147
------- -------
TOTAL STOCKHOLDERS' EQUITY 17,576 13,143
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,386 $31,304
======= =======
The accompanying notes are an integral part of these
consolidated financial statements
F-64
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1996 1995 1994
------- ------- ------
Net sales $ 46,269 $ 44,518 $ 45,922
Cost of goods sold 25,004 27,338 29,739
--------- --------- ---------
Gross profit 21,265 17,180 16,183
Operating expenses:
Research and development 2,892 2,307 1,999
Selling, general and administrative 14,360 15,067 12,555
Amortization of goodwill and
intangible assets 445 443 424
--------- --------- ---------
Income (loss) from operations 3,568 (637) 1,205
Other (income) expenses:
Other (income) - (237) (39)
Interest expense, net 596 587 498
Interest expense - related parties 72 619 696
Transaction costs - 1,491 -
Minority interest of consolidated
subsidiaries 337 184 326
--------- --------- ---------
Income(loss) before provision
for income taxes 2,563 (3,281) (276)
Provision for income taxes 555 1,262 79
--------- --------- ---------
Net Income (loss) $2,008 $(4,543) $(355)
========= ========= =========
Net Income (loss) per common share:
Net Income (loss) $ 0.35 $ (1.37) $ (0.18)
========= ========= =========
Weighted average number of common
shares outstanding 5,759,075 3,311,668 1,925,000
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
F-65
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK SUBJECT TO
POSSIBLE REDEMPTION AND STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
SUBJECT TO ------------ ADDITIONAL CURRENCY
POSSIBLE NUMBER OF PAID-IN ACCUMULATED TRANSLATION
REDEMPTION SHARES AMT CAPITAL DEFICIT ADJUSTMENTS
---------- ------ --- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 1,575 1,615,155 $ 2 $ 12,638 $ (2,428) $ 37
Recapitalization by foreign subsidiary -- -- -- (967) 967 --
Accretion of redemption value
of common stock 52 -- -- (52) -- --
Reclass of common stock subject to
redemption to common stock
upon the Company's acquisition
of Bogen and Speech Design (1,627) 309,845 -- 1,627 -- --
Forgiveness of Bogen inter-
company debt by Geotek -- -- -- 7,155 -- --
Issuance of common stock and other
adjustments to effect combination
of Bogen and Speech Design -- 3,701,919 4 (1,966) -- --
Issuance of common stock and warrants
to purchase 60,000 shares of
common stock for services provided
to facilitate the acquisition of
Bogen and Speech Design -- 132,431 -- 740 -- --
Dividend paid by subsidiary to minority
shareholders -- -- -- -- (181) --
Translation adjustments -- -- -- -- -- 110
Net loss (4,543) --
--------- --------- -------- --------- --------- --------
Balance at December 31, 1995 $ -- 5,759,350 $ 6 $ 19,175 $ (6,185) $ 147
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-66
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK SUBJECT TO
POSSIBLE REDEMPTION AND STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
SUBJECT TO ------------ ADDITIONAL CURRENCY
POSSIBLE NUMBER OF PAID-IN ACCUMULATED TRANSLATION
REDEMPTION SHARES AMT CAPITAL DEFICIT ADJUSTMENTS
---------- ------ --- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Restructuring of $3,000 related
party note with related interest -- -- -- 2,602 -- --
Repurchased and canceled common
stock -- (500) -- (3) -- --
Translation adjustments -- -- -- -- -- (174)
Net Income -- -- -- -- 2,008 --
----------- --------- ---------- -------- -------- --------
Balance at December 31, 1996 $ -- 5,758,850 $ 6 $ 21,774 $ (4,177) $ (27)
=========== ========= ========== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-67
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 2,008 $(4,543) $ (355)
Adjustments to reconcile net income (loss)to net
cash provided by(used in)operating activities:
Non-cash transaction costs -- 740 --
Depreciation and amortization 978 868 574
Amortization of goodwill and intangible assets 445 443 424
Provisions for doubtful accounts and
inventory obsolescence (1,362) 1,344 1,281
Minority interest 337 184 326
Change in operating assets and liabilities
(net of effects from acquisitions):
Accounts receivable (1,703) 984 (405)
Inventories 2,269 (49) (2,914)
Prepaid expenses and other current assets (532) 200 (230)
Payables and accrued expenses (1,040) 1,901 412
Other (138) -- 145
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,262 2,072 (742)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,017) (1,035) (892)
Acquisition of Satelco -- -- (392)
Cash obtained in the acquisition of
Speech Design and Bogen -- 8,149 --
Proceeds on the sale of property, plant and
equipment 3 -- --
Acquisition of investments and intangibles (102) (60) --
Collection of notes receivable 15 37 38
------- ------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,101) 7,091 (1,246)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amounts(paid to) non-related parties, net (161) (688) (509)
Amounts borrowed (paid) under revolving credit
agreements, net 23 (691) 1,875
Dividend paid to Geotek related to combination
of Bogen and Speech Design -- (7,000) --
Dividend paid by subsidiary to minority shareholders (294) (181) --
Amounts borrowed from (paid to) related parties, net (341) 415 552
Cash overdraft receipts -- -- 118
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (773) (8,145) 2,036
------- ------- -------
INCREASE (DECREASE) IN CASH (612) 1,018 48
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,276 148 87
Effects of Exchange Rate on Cash 221 110 13
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 885 $ 1,276 $ 148
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-68
<PAGE>
BOGEN COMMUNCATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1996 1995 1994
---- ---- ----
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 609 $ 829 $ 654
Cash paid for income taxes 2,175 4 6
Non Cash Investing and Financing Activities:
Restructuring of $3,000 debt by Geotek
treated as equity contribution 2,602 -- --
Forgiveness of Bogen debt by
Geotek treated as an equity
contribution -- 7,155 --
Goodwill pushed down from parent -- -- 14,252
Adjustments to combine companies -- 1,966 --
Notes payable to Geotek in
consideration for acquiring
Bogen and Speech Design -- 3,000 --
Common stock issued to Geotek in
consideration for acquiring Bogen
and Speech Design -- 4 --
Common stock and warrants issued as
consideration for certain services
provided to the Company in connection
with the acquisition of Bogen and
Speech Design -- 740 --
Assets acquired (net of cash):
Prepaid assets -- 8 --
Intangible assets -- 34 --
Liabilities assumed:
Accrued expenses -- 160 --
Note payable to non-related party -- 115 --
Advances from Geotek -- 33 --
------- ------- -------
Net liabilities assumed $ -- $ (266) $ --
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements
F-69
<PAGE>
1. Summary of Significant Accounting Policies
A. Principles of Consolidation
The consolidated financial statements of Bogen Communications
International, Inc., formerly European Gateway Acquisition Corp. (the
"Company"), include the accounts of Bogen Corporation ("Bogen") and Bogen's
wholly owned subsidiary, Bogen Communications, Inc. ("BCI"), as well as
Speech Design GmbH ("Speech Design"), its 67%-owned subsidiary Satelco AG,
and its wholly owned subsidiaries, Speech Design (Israel), Ltd. And Speech
Design (UK), Ltd. All significant intercompany balances and transactions
have been eliminated in consolidation. Certain 1995 and 1994 balances have
been reclassified to conform with the 1996 presentation.
B. Nature of Operations
The Company's operations are conducted in one segment engaged in
developing, manufacturing, and marketing sound and communication products.
Product lines sold by the company are as follows: Telephone Products
("Telco") Commercial Audio Products ("Commercial Sound") Intercom/Paging
Equipment ("Engineered Systems")
C. Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
D. Basis of Presentation
On August 21, 1995, the Company acquired a 99% interest in Bogen
Corporation ("Bogen") and a 67% interest in Speech Design GmbH ("Speech
Design") from Geotek Communications, Inc. ("Geotek"). The Company paid
Geotek $7,000 in cash, a convertible promissory note in the aggregate
principal amount of $3,000, 3,700,000 shares of the Company's common stock
and warrants to acquire 200,000 shares of common stock of the Company. As a
result, Geotek acquired approximately 64% of the stock of the Company,
thereby giving it a controlling interest in the Company. Geotek, in
addition, contributed approximately $7,155 of intercompany indebtedness
from Bogen to equity as part of the transaction. Further, as contingent
consideration, the Company could be liable to pay Geotek an amount up to
$11,000, based upon a calculation of operating results of Bogen and Speech
Design during the two years after the acquisition. Based on management's
review of the earnout calculation, which takes into account Speech Design
and Bogen's operating results for the last two quarters of 1995, all of
1996 and the first two quarters of 1997, the anticipated contingent
consideration payment, if any, will not have a material effect on the
Company's financial position and operating results.
In May 1996, the Company and Geotek entered into the most recent amendment
to the Stock Purchase Agreement effective January 1, 1996. Pursuant to such
agreement, (i) the $3,000 convertible promissory note payable by the
Company to
F-70
<PAGE>
Geotek, due February 1997, was reduced and restructured to a $500
non-convertible promissory note due July 1997, (ii) the earnout formula was
revised to reflect an increase in the amount the Company could be liable to
pay Geotek from $11,000 to $13,500 in connection with the reduction of the
principal amount of the promissory note, and (iii) Geotek was granted an
option to purchase, at any time through October 31, 1997, from the Company
$3,000 worth of Common Stock with exercise prices ranging from 100% to 65%
of market price, depending on the date of exercise.
For accounting purposes, the acquisition is being treated as a joint
acquisition of the Company by Bogen and Speech Design, companies under the
common control of Geotek. The transaction is considered a reverse
acquisition with Geotek as the acquiror for accounting purposes. The
historical financial statements reflect the combination of Bogen and Speech
Design in a manner similar to a pooling of interests. Accordingly, the
historical financial statements reflect the combined operations of Bogen
and Speech Design prior to the transaction.
E. Transaction Costs
The Company incurred transaction costs of $1,491 in connection with the
acquisition of Bogen and Speech Design which have been charged to
non-operating expenses for the year ended December 31, 1995. These costs
consist of non-recurring legal and other professional fees and other costs
of the transaction amounting to $751 and a non-cash charge of $740 for the
estimated fair value of 132,400 shares of common stock of the Company and
warrants to purchase 60,000 shares of the Company's common stock at $5.25
per share, for services provided to the Company by various unrelated
parties in connection with facilitating the acquisition of Bogen and Speech
Design.
F. Revenue Recognition
Sales, net of expected returns, are recognized upon shipment.
G. Goodwill
Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill also includes the effect of push-down accounting
described below, by which Bogen recorded in its financial statements
Geotek's goodwill associated with its purchase of Bogen. Goodwill is being
amortized using the straight-line method over 40 years. The Company
periodically evaluates the recoverability of goodwill and measures any
impairment by comparison to estimated undiscounted cash flows from future
operations.
H. Cash and Cash Equivalents
Cash includes cash on-hand and all highly-liquid debt instruments purchased
with original maturities of three months or less.
I. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Reserves are established for valuation purposes or determined by
management on a periodic basis, as required by conditions of obsolescence.
F-71
<PAGE>
J. Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the asset which
generally ranges from three to ten years. Leasehold improvements are
amortized ratably over their remaining lease terms, or estimated useful
lives, if shorter.
Expenditures for maintenance, repairs and renewals of minor items are
charged to operations as incurred. Major renewals and improvements are
capitalized. Upon disposition, the cost and related accumulated
depreciation is removed from the accounts and the resulting gain or loss is
reflected in operations for the period.
K. Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (FAS 109). FAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns.
L. Net Income (Loss) Per Share
Net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock and common
stock equivalents outstanding during the year, (unless anti-dilutive).
M. Credit Risk
The Company develops, produces, markets and sells commercial audio,
electronic, paging, communications and other equipment and
telecommunications peripherals. The Company performs on-going credit
evaluations of its customers. The accounts receivable resulting from its
sales transactions generally are not collateralized. The Company provides
reserves for potential losses from these receivables.
N. Translation of Foreign Currencies
Foreign denominated assets and liabilities of the Company are translated
from local currencies into U.S. dollars at the exchange rates in effect at
the end of the period. Revenues and expenses are translated at average
exchange rates prevailing during the period. Local currencies are
considered to be the functional currencies of the Company and its
subsidiaries. Translation adjustments that arise from translation of the
Company and its subsidiaries' financial statements are accumulated in a
separate component of shareholder's equity. Transaction gains and losses
that arise from exchange rate changes on transactions denominated in a
currency other than local currencies are included in income as incurred.
O. Fair Value of Financial Instruments
The recorded amount of cash, cash equivalents, notes payable and advances,
approximates fair value due to the short term maturities of these assets
and liabilities.
F-72
<PAGE>
P. Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement 128, Earnings per Share, effective for periods ending after
December 15, 1997. This statement establishes standards for computing and
presenting earnings per share ("EPS"), and replaces the current
presentation of primary EPS with basic EPS, which excludes the effect of
common stock equivalents. The Company will adopt this standard in 1997, and
is presently analyzing the impact of this new standard on its financial
statements and related disclosures.
2. Inventory
Inventory, at the lower of cost (first in, first out) or market, as of
December 31, 1996 and 1995, is as follows:
1996 1995
------- ------
Raw materials and supplies $1,525 $1,864
Work in progress 701 1,155
Finished goods 4,293 4,579
----- -----
TOTAL $6,519 $7,598
====== ======
The inventory balances are net of a reserve for inventory valuation and
obsolescence of $1,126 and $2,552 at December 31, 1996 and 1995,
respectively.
3. Property and Equipment
Property and equipment at December 31, 1996 and 1995 is comprised of the
following items:
1996 1995
------- ------
Machinery, equipment and tooling $ 3,581 $ 3,363
Furniture and office equipment 1,774 1,485
Leasehold improvements 694 600
------- -------
6,049 5,448
Less: accumulated depreciation
and amortization, net of
disposals (3,919) (3,257)
------- -------
$ 2,130 $ 2,191
======= =======
Depreciation and amortization expense was approximately $978, $868, and
$574 for the years ended December 31, 1996, 1995 and 1994, respectively.
4. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following, at December 31,
1996 and 1995:
F-73
<PAGE>
1996 1995
------- ------
Goodwill $16,295 $16,345
Other intangibles 220 123
------- --------
Total intangibles 16,515 16,468
Less: accumulated amortization (2,207) (1,762)
------- -------
$14,308 $14,706
======= =======
As explained above in Note 1D, the acquisition of Bogen and Speech Design
was accounted for as a reverse acquisition by Geotek. No goodwill was
recorded in connection with this transaction.
In January 1994 Geotek acquired a greater than 95% interest in Bogen, and
pursuant to the rules of push-down accounting, the acquisition gave rise to
a new basis of accounting and the goodwill related to Geotek's acquisition
was "pushed- down" to the financial statements of Bogen. Accordingly, Bogen
recorded net goodwill in the amount of $14,300 in the first quarter of
1994. The goodwill is being amortized over its then remaining life of
approximately 38 years. The related amortization expense for the pushed
down goodwill was approximately $378 for the year ended December 31, 1996,
and $376 for the years ended December 31, 1995 and 1994.
Goodwill in the amount of $685 represents the excess of cost over the fair
value of net assets acquired by Speech Design related to the acquisition of
its 67% owned subsidiary Satelco. This Goodwill is being amortized using
the straight-line method over 20 years.
Amortization of goodwill and other intangibles was approximately $445,
$443, and $424 for the years ended December 31, 1996, 1995 and 1994,
respectively.
5. Revolving Credit Agreements
In August 1995, Bogen Communications, Inc. ("BCI"), a wholly owned
subsidiary of Bogen, extended a $10,000 domestic revolving senior line of
credit for a two year term expiring August 1997. The line is collateralized
by substantially all the assets of Bogen and is guaranteed by Geotek.
Advances bear interest at the rate of 2% to 2.75% over the lender's prime
rate. At December 31, 1996, the lender's prime rate was 8.25%. Advances to
Bogen were made based on a percentage of accounts receivable and inventory.
As of December 31, 1996 and 1995, Bogen had short term domestic borrowings
outstanding under the line of credit of $1,545 and $3,670, respectively.
The amounts available under the credit line based upon accounts receivable
and inventory were $2,126 and $437 at December 31, 1996 and 1995,
respectively. Under the terms of the line of credit, Bogen cannot, among
other actions, declare or pay any dividends, return capital to its
stockholders or redeem or repurchase any of its outstanding capital stock.
Net assets of Bogen restricted under this agreement were $16,655 and
$14,910 at December 31, 1996 and 1995, respectively.
In the first quarter of 1997, BCI obtained a new revolving senior credit
line for a period of two years. The new credit line has a maximum line of
borrowing of $7,000 and bears an annual interest rate of .75% over the
lenders prime rate,
F-74
<PAGE>
replaces Bogen's previous line of $10,000 with an annual interest rate of
2.5% over the lender's prime rate. The senior loan is collaterized by all
of the accounts receivable, inventory, property, plant and equipment, and
general intangibles of BCI and is guaranteed by the Company. Under the
terms of this line of credit, BCI cannot, among other actions, declare or
pay dividends, return capital to its stockholders or redeem or repurchase
any of its outstanding capital stock.
In August 1995, in connection with the Company's acquisition of Bogen and
Speech Design, Geotek also agreed to provide Bogen with a working capital
line of credit for two years in the aggregate principal amount of $2,000.
Amounts drawn under the line bear interest at 1% per annum above the rate
Bogen pays for its then largest credit facility. There were no borrowings
under this facility at December 31, 1996 or 1995.
At December 31, 1996 and 1995, Speech Design had short term lines of credit
and overdraft facilities of $4,344, and $3,453, respectively, of which
short term borrowings amounted to $3,283 and $1,274, respectively. The
amounts available under these credit lines were $1,061 and $2,179 at
December 31, 1996 and 1995, respectively, with rates tied to short-term
bank notes and Euromarket loans. Speech Design's short term lines of credit
are collaterized by all of Speech Design's accounts receivable and
inventory. At December 31, 1996 interest rates on these short term lines
ranged from 4.4% to 6.3%.
Total outstanding revolving lines of credit are summarized as follows at
December 31, 1996 and 1995:
1996 1995
---- ----
Domestic Lines of Credit Utilized $1,545 $3,670
Foreign Lines of Credit Utilized:
Speech Design 2,805 627
Satelco 478 647
------ ------
$4,828 $4,944
====== ======
6. Long-Term Debt
A: ADVANCES and NOTES PAYABLE TO RELATED PARTIES
Advances and notes payable to related parties at December 31, 1996 and 1995
consist of the following:
1996 1995
-------- ------
Advances from Geotek $152 $ 138
Notes Payable - Geotek (at prime rate + 1%) - 133
Notes Payable - Geotek (at Swiss prime rate
+ 1%) - 266
Loan from Speech Design Shareholder (at
German discount rate + 2%) 129 -
Loan from Related Party (at Zurich Kantonal
Bank rate) 232 317
Notes Payable - Geotek (at 13%) 594 3,141
------ ------
Total 1,107 3,995
F-75
<PAGE>
Less: Current Maturities (746) (537)
------ ------
$361 $3,458
====== ======
Advances from Geotek
Advances from Geotek consist of net non-interest bearing advances made to
Bogen.
Notes Payable - Geotek (at prime rate + 1%)
This note payable to Geotek from Speech Design is payable in quarterly
installments of $33 plus interest at the prime rate plus 1%.
Notes Payable - Geotek
This note payable to Geotek is from Satelco, a 67% owned subsidiary of
Speech Design, and is payable in quarterly installments of $87 beginning in
September, 1995 plus annual payments of interest at the Swiss prime rate
plus 1%.
Loan from Speech Design Shareholders
This note payable to Speech Design's minority shareholders matures on
December 31, 1999, at which date it can be renewed or called in at three
months notice. Interest is paid in quarterly installments and is charged at
2% over the German discount rate.
Loan from Related Party
This $315 original note from the minority shareholders of Satelco is
payable in quarterly installments of $31 plus interest at the Zurich
Kantonal Bank rate with installments beginning February, 1995. The payments
of this note have been suspended (with the approval of the noteholder)
until such time as the Satelco subsidiary becomes profitable. Accordingly,
this note payable has been classified as long-term.
Notes Payable (by the Company) to Geotek
This note payable to Geotek from the Company was incurred at the date of
acquisition for $3,000 plus interest payable quarterly in arrears at
varying rates equal to the Company's highest borrowing rate plus 2%. In May
1996, the $3,000 note plus accrued interest was reduced and restructured,
retroactive to January 1, 1996, to a $500 non-convertible promissory note
due July 1997.
B: NOTES PAYABLE TO NON-RELATED PARTIES
Notes payable to non-related parties at December 31, 1996 and 1995 consist
of the following:
1996 1995
------- ------
Various Notes Payable (at prime rate) $ - $ 60
Notes Payable (with imputed interest at 9%) - 37
Notes Payable (at 12% interest rate) - 12
Notes Payable to Bank (at Libor
plus 2.5% interest) 13 -
Notes Payable to Bank (at 8.5% interest rate) - 65
---- ------
Total 13 174
Less: Current Maturities (5) (174)
------ ------
$ 8 $ -
====== ======
Various Notes Payable (at prime rate)
Payable in monthly installments of $12 plus interest at the prime rate.
F-76
<PAGE>
Notes Payable (with imputed interest at 9%)
Payable in annual installments of $150 including imputed interest at 9%.
Notes Payable (at 12% interest rate)
Payable in monthly installments of $4 plus interest at 12%.
Notes Payable to Bank (at Libor plus 2.5%)
Payable in monthly installments of $.4 plus interest at the Libor rate plus
2.5%.
Notes Payable to Bank (at 8.5% interest rate)
Payable by Speech Design in quarterly installments plus interest at 8.5%.
Principal maturities of long-term debt over the next five years and
thereafter are as follows:
Related
Parties Other Total
------- ----- -----
1997 $ 746 $ 5 $ 751
1998 -- 8 8
1999 129 -- 129
2000 -- -- --
2001 -- -- --
Thereafter 232 -- 232
------ ------ ------
$1,107 $ 13 $1,120
====== ====== ======
7. Income Taxes
The Company's pre-tax book income is as follows for the years ended
December 31, 1996 and 1995:
1996 1995
---- ----
Domestic U.S. Operations $1,322 $(4,886)
Foreign Operations 1,241 1,605
------ ------
Total $2,563 $(3,281)
====== =======
The components of income tax expense are as follows for the years ended
December 31, 1996 and 1995:
1996 1995
---- ----
Current Income Tax
(Foreign Only) $ 555 $1,262
Deferred Income Tax - -
------ -----
Total Income Tax Expense $ 555 $1,262
====== ======
The difference between the provision for income taxes computed at the U.S.
federal statutory rate and the provision as reported are as follows:
1996 1995
---- ----
Provision at U.S. Statutory Rate $ 871 $(1,116)
Non-deductible Expenses 338 785
Change in Valuation Allowance (793) 998
F-77
<PAGE>
German Taxes 162 604
Other (23) (9)
---- ------
Tax Provision as Reported $555 $1,262
==== ======
The Company has net operating loss ("NOL") carryforwards for U.S. tax
purposes of approximately $7,847 as of December 31, 1996, which expire
between the years 2004 through 2010. Under Section 382 of the Internal
Revenue Code of 1986, as amended, the net operating loss carryforwards are
subject to certain limitations on their utilization as a result of the
changes in control of the Company in 1991 and 1995.
The components of deferred tax assets at December 31, 1996 and 1995, were
as follows:
1996 1995
---- ----
Deferred Tax Assets:
NOL Carryforwards $2,808 $2,601
Deferred Rent 191 251
Inventory Items 592 1,185
Allowance for Doubtful Accounts 157 163
Accrued Liabilities 196 470
Property, Plant & Equipment 137 103
Other 56 58
----- -----
TOTAL DEFERRED TAX ASSETS $4,137 $4,831
Less, Valuation Allowance (4,137) (4,831)
------- ------
NET DEFERRED TAX ASSETS $ 0 $ 0
======= =====
In accordance with SFAS No. 109, the Company has established a valuation
allowance of $4,137 and $4,831 for the years ended December 31, 1996 and
1995, respectively. The valuation allowance was established due to the
uncertainty of the realization of the deferred tax assets. A significant
portion of the deferred tax assets which are currently subject to a
valuation allowance may be allocated to reduce goodwill or other noncurrent
intangible assets when subsequently recognized due to the application of
SFAS No. 109 and purchase accounting.
8. Commitments and Contingencies
Operating Leases
The Company occupies its plant and office facilities and operates certain
equipment under leases expiring at various dates through 2005. The facility
lease contains an escalation clause and provides for payments of taxes and
expenses over base rent. The facility lease also contains a five year
renewal option.
The minimum annual rental commitments over the next five years under
operating leases are as follows:
F-78
<PAGE>
Year Ending
December 31,
------------
1997 $ 1,351
1998 1,307
1999 1,214
2000 1,043
2001 368
Thereafter 975
------
$6,258
======
Bogen's facility lease includes scheduled rent increases over the lease
term. Rent expense has been recorded on a straight-line basis and the
related deferred rent obligation of $478 and $597 at December 31, 1996 and
1995, respectively, is classified as a long-term liability.
Rent expense charged to operations totaled approximately $1,151, $1,055,
and $779 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Employment and Consulting Agreements
Compensation of Directors
Directors, other than non-employee directors who are members of the
Executive Committee of the Board, receive no compensation for acting as
directors to the Company. During 1996, Messrs. Rosenfeld and Stern received
$50,000 each as members of the Company's Executive Committee.
Employment Contracts
In January 1996, the Company entered into an agreement with Mr. Zvi Peled
generally setting forth the terms and provisions of his employment as
President and Chief Executive Officer of the Company. Mr. Peled joined the
Company in such capacity in March 1996. Mr. Peled's base salary is $150,000
per annum and he is entitled to a minimum annual bonus of $50,000,
contingent upon the satisfaction of performance criteria established by the
Company's Board of Directors and Mr. Peled at the start of each year. In
addition, the Company agreed to grant Mr. Peled stock options to purchase
175,000 shares of the Company's Common Stock, at the following prices:
75,000 shares at an exercise price of $5.00 per share, 75,000 shares at an
exercise price of $7.50 per share, and 25,000 shares at an exercise price
of $10.00 per share. Such options will vest in equal installments over a
five year period. In addition, the Company provides Mr. Peled with $2,000
per month towards home rental payments, as well as a car. Effective January
1, 1997, and in lieu of participating in the Company's 401(k) Retirement
Savings Plan and the Company's life and disability insurance plans, Mr.
Peled receives an additional $2,300 per month, which amount is applied
towards Mr. Peled's personal benefits program. In the event that Mr.
Peled's employment is terminated without cause, Mr. Peled will continue to
receive his salary and benefits until he obtains a replacement position or
for six months, whichever is sooner. Pursuant to the employment agreement,
Mr. Peled was provided with a $10,000 relocation allowance.
The Company also has a written agreement with Mr. Yoav M. Cohen, dated
August 1, 1996, generally setting forth the terms and provisions of his
employment as Chief Financial Officer of the Company. Mr. Cohen joined the
Company in such capacity on July 31, 1996. Mr. Cohen's annual base salary
is $110,000 and he may receive an annual bonus equal to 1 - 1.5% of the
profits of the Company during the relevant fiscal year. Pursuant to the
employment agreement, the Company agreed
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<PAGE>
to grant Mr. Cohen stock options, in accordance with the terms and
provisions of the Company's 1996 Incentive Stock Option Plan, to purchase
50,000 shares of the Company's Common Stock. Mr. Cohen also participates in
the Company's 401(k) Retirement Savings Plan, health and dental plans, and
disability and life insurance plans and is provided with Life Insurance
with an annual premium of up to $3,000 annually. In addition, Mr. Cohen is
provided with a Company car, insured by the Company. In the event that Mr.
Cohen is terminated without cause, he is entitled to a severance package
pursuant to which he would continue to receive his base salary and related
benefits for six months.
Mr. Menashe Ben-David is employed by the Company pursuant to a written
agreement with Geotek, dated June 7, 1991, which has no definite term. The
agreement provides for Mr. Ben-David to receive a base salary of $75,000
per year, subject to periodic review and increase by Geotek. Geotek has
also agreed to provide life and health insurance to Mr. Ben-David as well
as an automobile. Mr. Ben- David also received a total of 50,000 stock
options to purchase shares of common stock of Geotek. Geotek is entitled to
terminate the employment agreement at any time upon thirty days prior
written notice; provided, however, that Geotek continues to pay Mr.
Ben-David his base salary for a period of six months from termination of
the agreement, unless Mr. Ben-David is terminated as a result of certain
conditions. Mr. Ben-David has agreed not to compete with Geotek for a
period of two years after his employment is terminated. The Company has
assumed all of Geotek's obligations under this agreement.
Mr. Kasimir Arciszewski is employed by Speech Design pursuant to a written
agreement dated February 9, 1993 which has no definite term. The agreement
provides for Mr. Arciszewski to receive a base salary of DM 180,000
($119,682 as of December 31, 1996), subject to review and increase by the
parties at the end of each calendar year. In addition, Mr. Arciszewski is
entitled to annual bonuses based on Speech Design's pre-tax profits. Speech
Design has agreed to provide Social Security and health insurance benefits
to Mr. Arciszewski and agreed to furnish an automobile to him. Mr.
Arciszewski has agreed not to compete with Speech Design during the term of
the agreement and for one year thereafter and Speech Design has agreed to
compensate Mr. Arciszewski during this noncompetition period. Mr.
Arciszewski has agreed not to disclose any of Speech Design's business or
trade secrets.
Commitments
At December 31, 1996, the Company had commitments to purchase merchandise
from foreign vendors of $627 under documentary letters of credit and $394
under other sight documents. Pursuant to the sale of Aryt Optronics, Ltd.
by Geotek in 1992, the Company obtained certain benefits and concessions
from Reshef Technologies, Ltd. ("Reshef"), formerly a related company to
Bogen. Such concessions and benefits would be lost by the Company if
certain target purchases from Reshef were not met. Purchases made under
this agreement complied with the target purchase requirements and
approximated $3,612, and $6,284 in 1995 and 1994, respectively. The
concessions and benefits from Reshef expired on December 31, 1995.
Litigation
The Company is not aware of any material pending or threatened legal
proceedings to which it is a party or of which any of its property is
subject.
F-80
<PAGE>
9. Stockholder's Equity
Common Stock and Common Stock Subject to Possible Redemption
The following discussion summarizes the incorporation of the Company, the
capitalization, and the requirements and privileges of the shareholders in
the periods preceding the consummation of the acquistion of Bogen and
Speech Design on August 21, 1995.
The Company was incorporated in Delaware on May 6, 1993 with the objective
of acquiring a medium-sized operating business engaged in industrial
manufacturing or industrial services and located in Germany, Switzerland or
Austria (a "Business Combination"). The Company's founding directors and
advisors purchased 500,000 common shares, $.001 par value, for five hundred
dollars during the three month period after incorporation. On September 30,
1993, 125,000 shares were returned to the Company by the founding
shareholders and was retroactively reflected in the financial statements as
a net issuance of 375,000 shares.
On October 15, 1993, the Company sold 1,550,000 units ("Units") in an
initial public offering ("Offering") of the Company's common stock. Each
unit consisted of one share of the Company's common stock, $.001 par value,
and two Redeemable Common Stock Purchase Warrants ("Warrants"). Each
Warrant entitled the holder to purchase, during the period commencing on
the later of the consummation by the Company of its Business Combination or
one year from the effective date of the Offering and ending seven years
from the effective date of Offering, from the Company one share of common
stock at an exercise price of $5.50. The Warrants are redeemable at a price
of $.01 per Warrant upon 30 days notice at any time, only in the event that
the last sale price of the common stock is at least $10.00 per share for 20
consecutive trading days ending on the third day prior to date on which
notice of redemption is given. The proceeds of the offering were deposited
in a Trust Fund to fund a Business Combination or liquidation of the
Company.
The Company, after signing a definitive agreement for a Business
Combination, submitted such transaction for shareholder approval. In the
event that 20% or more of the shareholders excluding, for this purpose,
those persons who were shareholders prior to the Offering, had voted
against the Business Combination, the Business Combination would not have
been consummated. For the first Business Combination consummated by the
Company, all of the Company's shareholders prior to the Offering, including
all of the officers, directors and advisors of the Company ("Initial
Shareholders") agreed to vote their shares of common stock in accordance
with the vote of the majority in interest of all other shareholders of the
Company ("Public Shareholders") with respect to any Business Combination.
After consummation of the Company's first Business Combination, these
voting safeguards were no longer applicable.
When the Business Combination was approved and consummated, any Public
Shareholder who had voted against the Business Combination could have
demanded that the Company redeem his shares. The per share redemption price
equaled the amount in the Trust Fund, as of the record date for
determination of shareholders entitled to vote on the Business Combination,
divided by the number of shares held by Public Shareholders. Accordingly,
Public Shareholders holding 19.99% of the aggregate number of shares owned
by all Public Shareholders could have had
F-81
<PAGE>
their shares redeemed at the time of the Business Combination. The Company
classified the value of this redemption as common stock, subject to
possible redemption, on its balance sheet at December 31, 1994 prior to the
consummation of the Business Combination. Such Public Shareholders were
entitled to receive their per share interest in the Trust Fund computed
without regard to shares held by Initial Shareholders. On August 21, 1995,
in connection with the Company's acquisition of Bogen and Speech Design,
the Company reclassified the common stock subject to possible redemption to
common stock. No shares of stock were redeemed as discussed above.
The Company's Certificate of Incorporation had provided for mandatory
liquidation of the Company, without shareholder approval, in the event that
the Company did not consummate a Business Combination.
Warrants
In June 1993, 300,000 Warrants were issued to various individuals in
consideration for providing the Company bridge financing until its offering
in October 1993. As referred to above, the Company issued 3,100,000
Warrants to purchase its common stock in connection with the Offering.
Warrants to purchase 200,000 shares of common stock were issued to Geotek
in August 1995 in connection with the acquisition of Bogen and Speech
Design. Another 60,000 Warrants were issued as consideration for providing
certain financings and services provided to the Company to facilitate the
Business Combination. At December 31, 1996, 3,660,000 Warrants were
outstanding.
Options
In 1996, the Company adopted the 1996 Incentive Stock Option Plan (the
"1996 Plan") pursuant to which an aggregate of 1,253,335 shares of the
Company's Common Stock were reserved for issuance pursuant to the plan. The
1996 Plan can award stock options to eligible employees of the Company and
its subsidiaries (including employee directors), non-employee directors,
and independent contractors and consultants who perform services for the
Company. The options vest over a period of five years and are exercisable
at prices determined on a case by case basis. The Company will apply the
intrinsic value based method permitted by Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation." During 1996,
there were no options granted, exercised or exercisable under the 1996
Plan.
In 1994, Bogen adopted an Employee Stock Option Plan (the "Bogen Plan").
Under the Bogen Plan, an aggregate of 3,000,000 shares may be issued to
members of its Board of Directors, designated officers and employees and
independent contractors or consultants who perform services for the
Company. No option granted under the Bogen Plan is intended to be an
incentive stock option within the meaning of section 442A(b) of the
Internal Revenue Code of 1986 for income tax purposes. During 1994,
1,400,000 options were granted under the Bogen Plan at a price of
F-82
<PAGE>
$1.14 per share which approximated fair value. These options vest over a
five (5) year period. All options granted under the Bogen Plan were
outstanding at December 31, 1996, 1995, and 1994. In 1997, the Company
intends to cancel all the options granted under the Bogen Plan and grant
certain participants under the Bogen Plan an option for a Share of Common
Stock of the Company under the 1996 Plan in exchange for an option of three
shares of Common Stock of Bogen, granted to a participant in the Bogen Plan.
Options, for an aggregated 253,325 shares of Common Stock will be granted
under the 1996 Plan to former participants of the Bogen Plan.
Push-Down of Goodwill
Pursuant to Accounting Principles Board No. 16 "Business Combinations"
("APB 16"), the accumulated deficit of Bogen was required to be restated on
the date of applying push-down accounting (see Note 1G, Goodwill). The
restated accumulated deficit includes Geotek's recorded equity in the
income and losses of Bogen since its original acquisition and all goodwill
amortization recorded by Geotek relating to the acquisition of Bogen.
Therefore, a reclassification of $8,524 was made from accumulated deficit
to additional paid-in capital in January 1994.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with
such designations, voting and other rights and preferences as may be
determined from time to time by the Board of Directors.
Common Stock
At December 31, 1996 and 1995, 3,960,000 shares of common stock were
reserved for issuance upon exercise of redeemable warrants.
10. Related Party Transactions
In 1995, the Company issued 132,431 shares of its common stock for services
received in connection with the acquisition of Bogen and Speech Design. Of
these shares, 19,565 were issued to a member of the Board of Directors of
Geotek.
During 1995, in conjunction with the acquisition of Bogen and Speech Design
Geotek forgave $7,155 in long-term debt due Geotek, which was recorded as
an increase in additional paid-in capital. As part of this acquisition, the
Company issued $3,000 in convertible promissory notes to Geotek which was
reduced and restructured to a $500 non-convertible promissory note due July
1997 (see Note 1D "Basis of Presentation").
11. Economic Dependency
During the years ended December 31, 1996, 1995 and 1994, the Company
purchased audio components of approximately $12,072, $8,853, and $14,016,
respectively, from three suppliers located in the Republic of South Korea.
Any future inability of any of these suppliers to provide the Company with
a sufficient level of components may have a negative impact on the
Company's operations.
Sales to one customer approximated $4,506 and $4,400 and accounted for more
than 10% of the Company's net sales in 1996 and 1995, respectively. Sales
to a
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<PAGE>
different customer approximated $7,100 and accounted for more than 10% of
the Company's net sales in 1994.
Twenty of Bogen's employees are subject to collective bargaining agreements
which expire in mid-1997.
12. Employee Benefit Plans
Bogen participates in multi-employer pension plans which cover all union
employees. Contributions for the periods ended December 31, 1996, 1995 and
1994 were approximately $17, $15, and $18, respectively.
Employees of the Company are also eligible to participate in a defined
contribution 401(K) plan sponsored by Geotek. The Company provides a
matching contribution to a portion of funds contributed by employees.
Amounts charged to expense were $83, $82, and $108 for the years ended
December 31, 1996, 1995 and 1994, respectively.
13. Segments
The Company's operations are conducted in one segment in the United States
(Bogen) and Germany (Speech Design). Information about the Company for
1996, 1995, and 1994 has been presented geographically as follows:
1996 1995 1994
------ ------- ------
Geographic Segments:
Revenues:
United States $30,671 $30,677 $37,745
Foreign 15,598 13,841 8,177
------- ------- -------
$46,269 $44,518 $45,922
======= ======= =======
Operating income (loss):
United States $ 1,862 $(2,405) $ (18)
Foreign 1,706 1,768 1,223
------- ------- -------
Income (loss) from operations $ 3,568 $ (637) $ 1,205
======= ======== =======
Identifiable assets:
United States $23,604 $24,425 $27,467
Foreign 7,782 6,879 5,399
------- ------- -------
$31,386 $31,304 $32,866
======= ======= =======
14. Fourth Quarter Adjustments
Certain adjustments and provisions amounting to $1,500, primarily related
to inventory valuations for the OAS product line, were recorded in the
fourth quarter of 1995.
F-84
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
The information called for by Items 10, 11, 12 and 13 (except for the
information regarding executive officers called for by Item 10 which is included
in Part I hereof as Item A in accordance with General Instruction G(3)) is
hereby incorporated by reference from the Company's definitive Proxy Statement
for its 1997 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
Page
----
(a)(1) Financial Statements
See "Item 8. Financial Statements and
Supplementary Data," for Geotek Communications
Inc. and Subsidiaries F-1 to F-41
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 49
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed by the
Company during the fourth quarter of 1996:
Current Report on Form 8-K filed October 7, 1996, reporting
that the Company and a wholly-owned subsidiary of the Company,
Geotek Finance Corporation ("GC"), entered into a vendor credit
financing agreement and a manufacturing agreement with Hughes
Network Systems, Inc. ("HNS"), pursuant to which HNS agreed to
manufacture certain of the components required for construction
of the Company's 900MHz FHMA(R) network equipment and to
provide up to $100.0 million of financing (the last $50.0
million of which is subject to the satisfaction by the Company
of certain operating criteria) for up to 90% of the purchase
price of equipment scheduled for delivery to the Company prior
to June 30, 1999.
Current report dated December 31, 1996, reporting the issuance
of 1,000 shares of the Company's Series O Convertible Preferred
Stock ("Series O Stock") for an aggregate purchase price of $50
41
<PAGE>
million. The Series O Stock pays dividends in either shares of
the Company's Common Stock or cash at a rate of 10% per annum.
Each share is convertible at a conversion price which varies
based on the price of the Company's Common Stock discounted
based on the length on time the Series O Stock is held by the
investor. In connection with this transaction, the Company
issued warrants to purchase 1.7 million shares of the Company
Common Stock at $9.2625 per share (subject to adjustment is
certain circumstances) which can be exercised at any time from
time to time before June 30, 2000. Additionally, the Company
announced a letter of intent, with investors affiliated with
George Soros, to issue 500 shares of the Company's Series P
Convertible Preferred Stock ("Series P Stock") for an aggregate
purchase price of $25 million. The terms of the Series P Stock
are substantially identical to those of the Series O Stock.
(c ) Exhibits
The following exhibits are filed as part of this report
(Exhibit numbers correspond to the exhibits required by Item
601 of Regulation S-K for an Annual Report on Form 10-K):
Exhibit
No.
----
3.1 Restated Certificate of Incorporation of the Company,
as amended.(1)
3.2 By-Laws of the Company, as amended through May 30,
1992.(2)
4.1 Restated Certificate of Incorporation of the Company,
as amended (incorporated from Exhibit 3.1 above).(1)
4.2 By-Laws of the Company, as amended through May 30, 1992
(incorporated from Exhibit 3.2 above).(2)
4.3 Certificate of Designation of Series H Participating
Cumulative Convertible Preferred Stock.(3)
4.4 Certificate of Designation of Series I Cumulative
Convertible Preferred Stock.(1)
4.5 Certificate of Designation of Series K Cumulative
Convertible Preferred Stock.(4)
4.6 Certificate of Designation of Series L Cumulative
Convertible Preferred Stock.(5)
4.7 Certificate of Designation of Series M Cumulative
Convertible Preferred Stock.(5)
42
<PAGE>
**4.8 1989 Employee Stock Option Plan, as amended, of the
Company.(6)
**4.9 1994 Employee Stock Option Plan of the Company.(7)
4.10 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed February 26,
1993.(8)
4.11 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed February 16,
1994.(1)
4.12 Note and Warrant Purchase Agreement, dated as of June
1, 1993, by and between the Company and SC-Geo L.P.(9)
4.13 Form of 30-month Warrant Certificate granted to
Investors in connection with Note and Warrant Purchase
Agreement referenced in Exhibit 4.12, dated July 2,
1993.(9)
4.14 Form of 60-month Warrant Certificate granted to
Investors in connection with Note and Warrant Purchase
Agreement referenced in Exhibit 4.12, dated July 2,
1993.(9)
4.15 Form of 30-month Commitment Warrant Certificate granted
to Investors in connection with Note and Warrant
Purchase Agreement referenced in Exhibit 4.12, dated
June 1, 1993.(9)
4.16 Form of 60-month Commitment Warrant Certificate granted
to Investors in connection with Note and Warrant
Purchase Agreement referenced in Exhibit 4.12, dated
June 1, 1993.(9)
4.17 Note and Warrant Purchase Agreement, dated as of March
20, 1995, by and among the Company, The SC Fundamental
Value Fund, L.P. and SC Fundamental Value BVI, LTD.(7)
43
<PAGE>
4.18 Warrant Certificate in connection with Note and Warrant
Purchase Agreement referenced in Exhibit 4.17, dated
March 30, 1995.(7)
4.19 Warrant Certificate in connection with Note and Warrant
Purchase Agreement referenced in Exhibit 4.17, dated
March 30, 1995.(7)
4.20 Senior Secured Convertible Note dated March 30, 1995
from the Company in connection with the Note and
Warrant Purchase Agreement referenced in Exhibit
4.17.(7)
4.21 Senior Secured Convertible Note dated March 30, 1995
from the Company in connection with the Note and
Warrant Purchase Agreement referenced in Exhibit
4.17.(7)
4.22 Pledge Agreement, dated as of March 30, 1995, by and
among the Company, certain of its subsidiaries, and SC
Fundamental Inc., as agent for, and on behalf of The SC
Fundamental Value Fund, L.P. and SC Fundamental Value
BVI, LTD.(7)
4.23 Unit (Note and Warrant) Purchase Agreement, dated June
29, 1995, by and between the Company and Smith Barney
Inc. (10)
4.24 Indenture, dated as of June 30, 1995, between the
Company and IBJ Schroder Bank & Trust Company, as
trustee. (10)
4.25 Pledge Agreement, dated as of July 6, 1995, by and
between the Company and IBJ Schroder Bank & Trust
Company, as collateral agent. (10)
4.26 Share Transfer Agreement, dated July 6, 1995 between
the Company and IBJ Schroder Bank & Trust Company, as
collateral agent. (10)
4.27 Charge Over Shares, dated July 6, 1995, between the
Company and IBJ Schroder Bank & Trust Company, as
collateral agent. (10)
4.28 Warrant Agreement, dated as of June 30, 1995, by and
between the Company and IBJ Schroder Bank & Trust
Company, as warrant agent. (10)
44
<PAGE>
4.29 Loan agreement dated as of December 21, 1995, between
the Company and Hughes Network System, Inc. (11)
4.30 Note Purchase Agreement, dated March 4, 1996, by and
between the Company and Smith Barney Inc.(12)
4.31 Indenture, dated as of March 5, 1996, between the
Company and The Bank of New York, as trustee. (12)
4.32 Senior Loan Agreement dated April 4, 1996 between the
Company and SC Rig Investment-III L.P. (12)
4.33 Warrant Agreement dated April 4, 1996 between the
Company and SC Rig Investment-III L.P. (12)
4.34 Registration Rights Agreement, dated March 5, 1995,
between the Company and Smith Barney Inc. (11)
4.35 Form of Subscription Agreement to purchase Series N
Cumulative Convertible Preferred Stock and Warrants.
(14)
4.36 Certificate of Designation of Series N Cumulative
Convertible Preferred Stock.(14)
4.37 Form of 60-month Warrant Certificate granted to
investors in connection with Subscription Agreement
referenced in Exhibit 4.35.(14)
4.38 Certificate of Designation of Series O Convertible
Preferred Stock.(15)
4.39 Form of Letter Agreement by and between the Company and
each of the purchasers of Series O Preferred Stock.(15)
4.40 Form of 42-month Warrant Certificate granted to certain
purchasers of Series O Preferred Stock and the
purchaser of the Series P Preferred Stock.(15)
4.41 Form of Registration Rights Agreement by and among the
Company and the purchasers of the Series O Preferred
Stock.(15)
4.42 Certificate of Designation of Series P Convertible
Preferred Stock.(16)
4.43 Certificate of Correction, filed January 6, 1997, to
correct a certain error in the Certificate of
Designation of Series O Convertible Preferred
Stock.(16)
4.44 Certificate of Correction, filed January 29, 1997, to
correct a certain error in the Certificate of
Designation of Series O Convertible Preferred
Stock.(16)
45
<PAGE>
10.1 Stockholders Voting Agreement, dated as of February 23,
1994, among the Company, Vanguard Cellular Systems,
Inc., S-C Rig Investments-III, L.P., Evergreen
Canada-Israel Investment & Co., Ltd., Yaron Eitan and
Winston Churchill.(1)
10.2 Asset Exchange Agreement, dated as of March 24, 1995,
by and between the Company, Metro Net Systems, Inc.,
Nextel Communications, Inc. and certain Nextel
subsidiaries. (7)
10.3 FHMA Commercial Subscriber Unit Agreement, dated as of
June 8, 1994, between the Company and Mitsubishi
Consumer Electronics America Inc. (13)
10.4 FHMA Portable Subscriber Unit Agreement dated as of May
19, 1995 between the Company and Hughes Network
Systems, Inc. (13)
10.5 Vendor Credit Financing Agreement, dated as of
September 27, 1996, by and among Geotek Financing
Corporation, the Company and Hughes Network Systems,
Inc.(17)
10.6 Security Agreement, dated as of September 27, 1996, by
and among Geotek Financing Corporation, the Company and
Hughes Network Systems, Inc.(17)
10.7 Form of Warrants to Purchase Common Stock.(17)
10.8 Amended and Restated Borrower Pledge Agreement, dated
as of September 27, 1996, by and among Geotek Financing
Corporation, the Company and Hughes Network Systems,
Inc.(17)
*12 Computation of Ratio of Earnings to Fixed Charges
*21 Subsidiaries of the Company.
*23.1 Consent of Coopers & Lybrand L.L.P. - Geotek
Communications, Inc. Bogen Communications
International, Inc.
*23.2 Consent of Shachak & Co. - Geotek Technologies Israe
Ltd.
*23.3 Consent of Coopers & Lybrand - National Band Three
Limited
* Filed herewith
** Compensation Plan
46
<PAGE>
- ----------
(1) Incorporated by reference to the Exhibits to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993.
(2) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-3 (Registration No. 33-64117) filed with the Commission
on November 9, 1995.
(3) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (Registration No. 33-72820)
filed with the Commission on January 25, 1994.
(4) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (Registration No. 33-85296)
filed with the Commission on May 26, 1995.
(5) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated May 26, 1995.
(6) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-3 (Registration No. 33-72820) filed with the Commission
on December 10, 1993.
(7) Incorporated by reference to the Exhibits to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
(8) Incorporated by reference to the Exhibits to Post-Effective Amendment No. 2
to the Company's Registration Statement on Form S-1 (Registration No.
33-42185) filed with the Commission on August 27, 1993.
(9) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K/A No. 1 filed with the Commission with respect to events whose
earliest date was June 18, 1993.
(10) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated July 6, 1995.
(11) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated December 27, 1995.
(12) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated March 4, 1996.
(13) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K/A dated June 26, 1995.
(14) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated June 20, 1996.
47
<PAGE>
(15) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated December 31, 1996.
(16) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated January 23, 1997.
(17) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated September 27, 1996.
48
<PAGE>
GEOTEK COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C (1) Column C (2) Column D Column E
- -------- -------- ------------ ------------- -------- --------
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Other Deduction Period
--------- -------- ----- --------- ------
Description
- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts $1,487 $413 $(199)(c,d) $356 (a) $1,346
Deferred tax asset valuation account 52,850 45,038 357 (e) 97,531
Reserve for inventory
lower of cost or market 2,858 5,483 2,061 (b) 6,279
------ ------ ------- ------ -------
$57,195 $ 5,896 $44,839 $2,774 $105,156
======= ======= ======= ====== ========
Year ended December 31, 1995:
Allowance for doubtful accounts $1,125 $950 $588 $1,487
Deferred tax asset valuation account 15,400 37,450 52,850
Reserve for inventory
lower of cost or market 1,293 2,504 939 2,858
------ ------ ------- ------ -------
$17,818 $3,454 $37,450 $1,527 $57,195
======= ====== ======= ====== =======
Year ended December 31, 1994:
Allowance for doubtful accounts $840 $527 $242 (a) $1,125
Deferred tax asset valuation account 5,877 9,523 15,400
Reserve for inventory
lower of cost or market 99 1,195 1 (b) 1,293
------ ------ ------ ---- -------
$6,816 $1,722 $9,523 $243 $17,818
====== ====== ====== ==== =======
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
(b) Write-off of obsolete inventory.
(c) Liability of deconsolidated and partially disposed entity.
(d) Foreign Currency Fluctuation
(e) Post acquisition adjustment for utilization of acquired net operating loss
carry forwards.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Yaron I. Eitan
------------------------------------
Yaron I. Eitan, Chairman of the Board,
Chief Executive Officer, and Director
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 31, 1997 by the following persons on behalf of
the registrant in the capacities indicated.
/s/ Yaron I. Eitan Chairman of the Board, Chief Executive
- -------------------------------- Officer and Director (Principal
Yaron I. Eitan Executive Officer)
/s/ Walter E. Auch Director
- --------------------------------
Walter E. Auch
/s/ George Calhoun Director
- --------------------------------
George Calhoun
/s/ Purnendu Chatterjee Director
- --------------------------------
Purnendu Chatterjee
/s/ Winston Churchill Director
- --------------------------------
Winston Churchill
/s/ Jonathan C. Crane President, Chief Operating Officer
- -------------------------------- and Director
Jonathan C. Crane
/s/ Haynes Griffin Director
- --------------------------------
Haynes Griffin
<PAGE>
/s/ Richard Krants Director
- --------------------------------
Richard Krants
/s/ Richard T. Liebhaber Director
- --------------------------------
Richard T. Liebhaber
/s/ Kevin Sharer Director
- --------------------------------
Kevin Sharer
/s/ William Spier Director
- --------------------------------
William Spier
/s/ Michael Carus Vice President, Acting Chief Financial
- -------------------------------- Officer (Principal Financial Officer),
Michael Carus Chief Accounting Officer and Corporate
Controller
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No.
- -------
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P. -
Geotek Communications, Inc.
Bogen Communications International, Inc.
23.2 Consent of Shachak & Co. -
Geotek Technologies Israel Ltd.
23.3 Consent of Coopers & Lybrand -
National Band Three Limited
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 $43.6 million, $89.1
million and $144.7 million for the years ended December 31, 1994, 1995 and 1996,
respectively.
EXHIBIT 21
SUBSIDIARIES OF GEOTEK COMMUNICATIONS, INC.
Geotek Communications, Inc. PowerSpectrum, Inc.
- --------------------------------------------------------------------------------
Cumulous Holding Corp., Inc. PowerSpectrum of D.C., Inc.
(Holds all interest in Cumulous PowerSpectrum of Seattle, Inc.
Communications) PowerSpectrum of Miami, Inc.
Geotek Acquisition Corp. (Shell Company) PowerSpectrum of Indianapolis, Inc.
Geotek BmgH Holdings Corporation
Terrafon AG.
Geotek Beteiligungs GmbH i.G. (a PowerSpectrum of Atlanta, Inc.
wholly owned subsidiary of Geotek PowerSpectrum of Jacksonville, Inc.
Communications GmbH) PowerSpectrum of Kansas City, Inc.
Geotek Communications GmbH i.G. PowerSpectrum of Philadelphia, Inc.
(Geotek Beteiligungs & Geotek Comm. PowerSpectrum of New Orleans, Inc.
are holding companies for interest in PowerSpectrum of Phoenix, Inc.
Preussag and DBF Bundelfunk) PowerSpectrum of Minneapolis, Inc.
DBF Bundelfunk GmbH PowerSpectrum of Cincinnati, Inc.
Metro Net Systems, Inc. (Operations of PowerSpectrum of Denver, Inc.
SMR Systems in NY Metro area) PowerSpectrum of Memphis, Inc.
National Band Three Limited (UK SMR PowerSpectrum of Tampa, Inc.
Provider) PowerSpectrum of Rochester, Inc.
PowerSpectrum, Inc. (Holds all interest PowerSpectrum of Buffalo, Inc.
in the license holding subsidiaries) PowerSpectrum of Nashville, Inc.
USI Venture Corp. (Shell Company) PowerSpectrum of Orlando, Inc.
Geotek Asia, Inc. PowerSpectrum of Boston, Inc.
ANSA Communications PowerSpectrum of Hartford, Inc.
Bogen Communications International, Inc. PowerSpectrum of Salt Lake City, Inc.
Bogen Corporation PowerSpectrum of Dallas, Inc.
Bogen Communications, Inc. PowerSpectrum of New York City, Inc.
Satelco AG
Speech Design
CLW Communications, Inc. PowerSpectrum of Chicago, Inc.
GMSI, Inc. PowerSpectrum Microwave
MIS Holdings Ltd. (All PowerSpectrum of (city) hold FCC
Mobile Information Systems Ltd. Licenses)
Mobile Message Service of Texas, Inc.
Oak Hill Communications, Inc.
MacDermott Communications
Geotek Technologies Israel Ltd.
<PAGE>
EXHIBIT 21, continued
Geotek Communications, Inc.
Geotek License Holdings, Inc.
Geotek Financing Corporation
Geotek of America, Inc.
Geotek USA, Inc.
Gelico, Inc.
Gelico of Chicago, Inc.
Geotek of Atlanta, Inc.
Geotek of Boston, Inc.
Geotek of Chicago, Inc.
Geotek of D.C., Inc.
Geotek of Dallas, Inc.
Geotek of Houston, Inc.
Geotek of Miami, Inc.
Geotek of New York, Inc.
Geotek of Orlando, Inc.
Geotek of Philadelphia, Inc.
Geotek of Tampa, Inc.
EXHIBIT 23.1
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Geotek Communications, Inc. on Form S-3 (Nos. 33-49548, 33-55506, 33-57530,
33-61034, 33-72820, 33-78540, 33-85296, 33-62073, 33-62327, 33-64117, 33-64533,
333-2849, 333-8731 and 333-21199), on Form S-4 (No 33-62333) and on Form S-8
(No. 33-67144) of our report dated March 31, 1997 on our audits of the
consolidated financial statements and consolidated financial statement schedule
of Geotek Communications, Inc. and Subsidiaries as of December 31, 1996 and
1995, and for the years ended December 31, 1996, 1995 and 1994, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 31, 1997
<PAGE>
EXHIBIT 23.1, continued
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Geotek Communications, Inc. on Form S-3 (Nos. 33-49548, 33-55506, 33-57530,
33-61034, 33-72820, 33-78540, 33-85296, 33-62073, 33-62327, 33-64117, 33-64533,
333-2849, 333-8731 and 333-21199), Form S-4 (No. 33-62333) and Form S-8 (No.
33-67144) of our report dated March 7, 1997, on our audits of the consolidated
financial statements of Bogen Communications International, Inc. (Formerly
European Gateway Acquisition Corp.) as of December 31, 1996 and 1995, and for
the years ended December 31, 1996 and 1995, which is included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 31, 1997
EXHIBIT 23.2
[LETTERHEAD OF SHACHAK & CO.]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements of Geotek Communications, Inc. on Form
S-3 (Nos. 33-49548, 33-55506, 33-57530, 33-61034, 33-72820, 33-78540, 33-85296,
33-62073, 33-62327, 33-64117, 33-64533, 333-2849, 333-8731 and 333-21199), Form
S-4 (No. 33-62333) and Form S-8 (No. 33-67144) of our report dated March 26,
1997, on our audits of the financial statements of Geotek Technologies Israel
(1992) Ltd. (f/k/a PowerSpectrum Technology Ltd.) as of December 31, 1996 and
1995, and for the years ended December 31, 1996, 1995 and 1994, which report is
included in this Annual Report on Form 10-K.
/s/ SHACHAK PEER REZNICK & CO
Shachak Peer Reznick & Co.
Certified Public Accountants (Isr.)
March 31, 1997
Tel Aviv, Israel
EXHIBIT 23.3
[LETTERHEAD OF COOPERS & LYBRAND]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Geotek Communications, Inc. on Form S-3 (Nos. 33-49548, 33-55506, 33-57530,
33-61034, 33-72820, 33-78540, 33-85296, 33-62073, 33-62327, 33-64117, 33-64533,
333-2849, 333-8731 and 333-21199), Form S-4 (No. 33-62333) and Form S-8 (No.
33-67144) on our audits of the financial statements of National Band Three
Limited as of 31 December 1996 and 1995, and for the years ended 31 December
1996 and 1995, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND
London, United Kingdom
27 March 1997
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