SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
Form 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number 0-17581
GEOTEK COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 22-2358635
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
102 Chestnut Ridge Road, Montvale, New Jersey 07645
(Address of Principal Executive Office) (Zip Code)
(201) 930-9305
(Registrant's Telephone Number Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
COMMON STOCK OUTSTANDING AT April 30, 1997: 60,769,093 SHARES
<PAGE>
GEOTEK COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I: Financial Information
Item 1: Financial Statements
Item 2: Managements Discussion and Analysis of Financial Condition and
Results of Operations
PART II: Other Information
Item 6: Exhibits and Report on Form 8-K
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain "forward-looking" statements. The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor with
respect to all of such forward-looking statements. Examples of forward-looking
statements contained herein include the Company's projections with respect to:
(a) the commercial implementation of its US Network and the timing of the
roll-out of its US Network and growth of its subscriber base; (b) the Company's
future financial results, capital needs and sources of financing; (c) the
Company's prospects in foreign countries and (d) the effect of certain
legislation and governmental regulations on the Company. The Company's ability
to predict any such projected results or to predict the effect of any
legislation or other pending events on the Company's operating results is
inherently uncertain. Therefore, the Company wishes to caution each reader of
this report to carefully consider the specific factors discussed with such
forward-looking statements and contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 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.
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
(See Note 1)
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 78,265 $ 103,605
Restricted cash 7,685 9,418
Accounts receivables, principally trade, net 14,628 15,435
Inventories, net 32,078 28,150
Prepaid expenses and other current assets 24,454 23,384
--------- ---------
Total current assets 157,110 179,992
Investments in affiliates 36,515 36,972
Property, plant and equipment, net 101,606 93,581
Intangible assets, net 92,070 91,508
Other assets, principally debt issuance costs 26,785 28,069
--------- ---------
$ 414,086 $ 430,122
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 20,247 $ 20,587
Accrued expenses and other 44,388 49,279
Notes payable, banks and other 4,407 8,075
Current maturities, long-term debt 260 261
--------- ---------
Total current liabilities 69,302 78,202
Long-term debt 221,384 215,430
Other non current liabilities 975 1,008
Minority interest 577 438
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 shares, issued 60,626,000
and 60,026,000 shares respectively, outstanding
60,388,000 and 59,788,000 shares, respectively 606 600
Capital in excess of par value 454,384 429,483
Foreign currency translation adjustment (1,928) 942
Accumulated deficit (369,839) (334,606)
Treasury stock, at cost (238,000 common shares) (1,386) (1,386)
--------- ---------
81,848 95,044
--------- ---------
$ 414,086 $ 430,122
========= =========
See notes to consolidated financial statements.
3
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
(See Note 1)
Three Months Ended
March 31,
-----------------------
1997 1996
------ ------
Revenues:
Net product sales $ 14,719 $ 13,848
Service income 7,972 7,705
------------ ------------
Total revenues 22,691 21,553
------------ ------------
Costs and expenses:
Cost of goods sold 11,540 8,760
Cost of services 8,690 7,264
Research and development 8,177 8,023
Marketing 8,376 7,002
General and administrative 9,778 9,794
Amortization of intangibles 1,145 1,198
Equity in losses of investees 1,476 436
Interest expense 9,390 6,672
Interest income (1,576) (1,462)
Other income (31) (608)
------------ ------------
Total costs and expenses 56,965 47,079
------------ ------------
Loss from operations before taxes
on income and minority interest (34,274) (25,526)
Taxes on income (820) (800)
Minority interest (139) (106)
------------ ------------
Net loss $ (35,233) $ (26,432)
------------ ------------
Preferred dividends (5,285) (1,278)
------------ ------------
Loss applicable to common stock $ (40,518) $ (27,710)
============ ============
Weighted average number of common shares
outstanding 60,255,000 56,505,000
============ ============
Per common share:
Net loss applicable to common shares $ (0.67) $ (0.49)
============ ============
See notes to consolidated financial statements.
4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the three months ended March 31, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Capital in Currency
Preferred Stock Common Stock Excess of Translation Accumulated Treasury
Shares Amount Shares Amount Par Value Adjustment Deficit Stock
------ ------ ------ ------ --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 1,119 $11 60,026 $600 $429,483 $ 942 $(334,606) $(1,386)
Issuance of common stock:
Exercise of warrants and
options 85 1 153
Issuance of common stock
for preferred dividends 515 5 3,057
Issuance Series P Convertible
Preferred Stock 25,000
Deemed dividend/interest
on convertible preferred stock
and convertible debt 1,977
Preferred dividends, including $954
in deemed dividends (5,285)
Changes in currency (2,870)
Net loss (35,233)
----- --- ------ ---- -------- ------- --------- -------
Balances, March 31, 1997 1,119 $11 60,626 $606 $454,385 $(1,928) $(369,839) $(1,386)
===== === ====== ==== ======== ======= ========= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
(Note 1)
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss $(35,233) $(26,432)
Adjustments to reconcile net
loss to net cash
used in operating activities:
Minority interest 139 106
Depreciation and amortization 5,898 3,578
Post acquisition adjustment for utilization
of acquired net operating loss carry forward 400
Non cash interest expense 8,283 5,690
Equity in net loss of investees 1,476 436
Non cash management consulting expense 665
Changes in operating assets and liabilities
(net of effects from acquisitions):
Decrease in accounts receivable 807 582
Increase in inventories (3,928) (1,043)
Increase in prepaid expenses and other assets (5,852) (2,042)
Decrease in accounts payable and accrued
expenses (5,230) 2,839
Other (778) 377
-------- --------
Net cash used in operating activities (34,418) (14,844)
-------- --------
Cash flows from investing activities:
Acquisition of licenses (54)
Net decrease in temporary investments 2,111
Acquisitions of property and equipment (12,929) (11,425)
Interest capitalized on construction in progress
and pre-commercial spectrum licenses (2,175) (843)
Cash received from (invested in) unconsolidated
subsidiaries 916 (180)
Decrease in contract deposits - other current assets 1,356 865
Decrease in restricted cash 1,733 9,404
Other 164
-------- --------
Net cash used in investing activities (10,989) (68)
-------- --------
See notes to consolidated financial statements.
6
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in thousands)
(Unaudited)
(Note 1)
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Cash flows from financing activities:
Net repayments under line-of-credit agreements (3,668) (58)
Proceeds from issuance of convertible
notes 75,000
Proceeds from issuance of convertible
preferred stock 25,000
Deferred financing costs (2,213)
Repayment of capital lease obligations (34) (122)
Repayments of debt (800)
Exercise of warrants and options 144 280
Payment of preferred dividends (1,269) (1,278)
Financing costs (450)
Other (23) (112)
--------- ---------
Net cash provided by financing activities 20,150 70,247
--------- ---------
Effect of exchange rate changes on cash (83) (590)
--------- ---------
(Decrease) increase in cash and cash equivalents (25,340) 54,745
Cash and cash equivalents, beginning of period 103,605 61,428
--------- ---------
Cash and cash equivalents, end of period $ 78,265 $ 116,173
========= =========
Supplemental schedule of non cash investing and
financing activities:
Management consulting fee paid in common stock $ 665
Issuance of shares in connection with debt
conversion 10,396
Acquisition of assets under capital lease $ 275
Issuance of common stock for preferred dividends 3,062
Deemed dividend on convertible preferred stock 954
See notes to consolidated financial statements.
7
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation:
The consolidated balance sheet of Geotek Communications, Inc. and
Subsidiaries (the "Company") as of December 31, 1996 has been derived
from the audited consolidated balance sheet contained in the Company's
Form 10-K and is presented for comparative purposes. In the opinion of
management, all significant adjustments including normal recurring
adjustments necessary to present fairly the financial position, results
of operations and cash flows for all periods presented have been made.
The results of operations for interim periods are not necessarily
indicative of the operating results for the full year. Certain 1996
amounts have been reclassified to conform with the 1997 presentation.
Footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the
most recent fiscal year.
The Company's existing cash resources as of March 31, 1997 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 and international expansion. 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 1998 to continue to finance its
operating plans which include significantly increasing the number of
subscribers on the U.S. Network, the roll-out of the U.S. Network
infrastructure, as well as the related sales of its products. The Company
is currently operating in nine markets and is in the process of
constructing four markets. In order to ensure sufficient liquidity
throughout 1997, the Company does not intend to construct additional
markets or to expand into new international digital wireless networks
until such time that it obtains sufficient financing to do so. The
Company anticipates that it will need to raise additional financing to
operate through the first quarter of 1998. The accompanying consolidated
financial statements do not include any adjustments related to the
recoverability and classification of assets or the carrying amounts and
classification of liabilities that might result should the Company be
unable to raise additional capital to execute its business plan.
Note 2 Inventories, net
March 31, 1997 December 31, 1996
-------------- -----------------
Raw materials $ 3,277 $ 3,760
Work-in-process 2,205 2,068
Finished goods 27,702 28,601
------- -------
33,184 34,429
Reserve for lower of
cost or market 1,106 6,279
------- -------
$32,078 $28,150
======= =======
In January, 1997, the Company adjusted inventory standard costs to more
accurately reflect the market value of their finished goods inventory.
Note 3 Note Payable, Banks and Other:
In January 1997, the Company's German subsidiary repaid its DM 5.0
million line of credit with DM 5.0 million restricted cash.
Note 4 Preferred Stock:
In January 1997, the Company sold 500 shares of its Series P Convertible
Preferred Stock ("Series P Stock") to a group of investors affiliated
with George Soros for an aggregate purchase price of $25 million. The
Series P 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 P 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
8
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 29, 1998 and the
remainder thereafter. 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.
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 P Stock; and, (iii)
upon the exercise of the warrants.
The terms of the Company's Series O Convertible Preferred Stock ("Series
O Stock") and Series P Stock allow the Company to institute a Conversion
Restriction period of 60 days if the trading price of the Company's
common stock is less than $6.00 per share for five consecutive trading
days. In April 1997, the Company elected to institute such Conversion
Restriction Period. During the Conversion Restriction Period, the
aggregate amount which can be converted by all holders of Series O Stock
and Series P Stock is $50,000 per day. The 60 day period expires at the
earliest of June 1997, at the Company's election, or if the trading price
of the Company's common stock exceeds $6.00 for five consecutive trading
days.
Note 5 Deemed Dividends and Interest
The staff of the Securities and Exchange Commission recently announced a
new position on accounting for convertible preferred stock and
convertible debt which contains a conversion feature with a stated
discount to the market price of the Company's common stock at the time of
conversion. With respect to convertible preferred stock, solely for
purposes of calculating earnings per share, the stated discount is
amortized over the period from the date of issuance until the holder is
permitted to convert and thus reduces the amount of income available to
common stockholders. During the quarter ended March 31, 1997, the Company
recognized approximately $0.9 million as a deemed dividend on Series O
Stock and Series P Stock which resulted in an $0.02 increase in Net loss
applicable to common shares. With respect to convertible debt, the stated
discount is amortized over the period from the date of issuance until the
holder is permitted to convert, as additional non-cash interest expense.
The Company recognized approximately $1.0 million in deemed interest on
its $24.5 million convertible note with Hughes Network Systems, Inc.
during the quarter ended March 31, 1997.
Note 6 Commitments and Contingent Liabilities:
FCC Waiver
The Company was granted a waiver (the "Waiver") by the Federal
Communication Commission ("FCC") which permits it to construct and
activate certain systems on a delayed construction schedule. The Waiver,
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. The Company's failure to roll-out and thus meet
construction requirements in any of its target markets in which it holds
MTA licenses by April 1999 could result in the loss of its licenses in
such markets.
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
9
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to collect Harris's debt to the Company. The Company intends to defend
such action vigorously.
The Company is subject to other various legal proceedings arising in the
ordinary course of business. In the opinion of management, all such
matters are without merit or are of such kind, or involve such amounts,
as would not have a significant adverse effect on the financial position,
results of operations or cash flows of the Company.
Note 7 Certain Related Party Transactions:
The Company incurred expenses of $75,000 in each of the three month
periods ended March 31, 1997 and 1996, 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, Series P Stock, 10%
of the Company's Senior Secured Discount Notes due 2005, and $40.0
million senior unsecured Credit Facility ("S-C Rig Credit Facility").
Geotek Technologies Israel Ltd. ("GTI-Israel") has entered into a
subcontractor agreement with Rafael, a shareholder of the Company, under
which Rafael will partake in the enhancement and continued development of
the Company's digital wireless communications system. Research and
development expense for the three months ended March 31, 1997 and 1996,
includes approximately $1.1 and $1.0 million, respectively, for research
performed by Rafael under this agreement. GTI-Israel has also entered
into agreements with Rafael under which Rafael will manufacture the
infrastructure equipment to be used by the Company in its US network and
to be sold to third parties. Through March 31, 1997, the Company had
placed firm orders for equipment totaling $58.7 million of which $41.3
million has been paid to Rafael to date.
Note 8 Subsequent Events:
In April 1997, 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, modified the terms of the S-C Rig Credit
Facility. Under the modified terms of the S-C Rig Credit Facility, all
borrowings are required to be made within three years from the initial
establishment of the credit facility. The borrowings will accrue interest
at a rate of 8% per annum and will mature five years from the date of the
final borrowing thereunder. Original terms of the S-C Rig Credit Facility
were a 10% interest rate per annum and a four year term from the final
borrowing which was required to be made within two years from the
establishment of the Credit Facility. In connection with the modification
to the S-C Rig Credit Facility, the Company lowered the exercise price of
the warrants to purchase approximately 4.2 million shares of common stock
(the "Warrant Shares") from $9.50 to $6.00 per share and extended the
warrant termination date from April 2001 to April 2003.
At March 31, 1997, there were no loans outstanding under the $40.0
million SC-Rig Credit Facility.
Also, in April 1997, the Company, and its remaining partner in Canada,
Techcom Inc., received an extension from March 31, 1997 to April 30, 1997
from Industry Canada, the Canadian agency responsible for spectrum
allocation, to form a suitable Canadian entity. During April 1997, the
Company entered into a letter of intent with two Canadian entities to
form a joint venture in Canada to launch mobile wireless communication
services based on the Company's proprietary FHMA(R) technology. The
letter of intent is subject to, among other things, approval of the joint
venture by Industry Canada as a "suitable Canadian entity", the
completion of satisfactory due diligence, approval by the board of
directors and execution of definitive agreements.
Note 9 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
10
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 12 through 17 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 to
Eliminations conform all of the Guarantor Information
to the financial presentation of the
Company's consolidated financial
statements. The principal elimination
entries eliminate investments in
subsidiaries and intercompany balances
and transactions.
11
<PAGE>
Note 9 Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 1997
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70,542 $ 455 $ 7,268 $ 78,265
Restricted cash 7,685 7,685
Accounts receivable net 749 13,879 14,628
Inventories 19,789 12,289 32,078
Prepaid expenses and other assets 1,525 12,856 10,073 24,454
--------- --------- --------- --------- ---------
Total current assets 79,752 33,849 43,509 157,110
--------- --------- --------- --------- ---------
Inter-company account 354,407 74,715 150 $(429,272)
Investments in affiliates 10,991 25,687 (163) 36,515
Property, plant and equipment, net 2,002 79,696 32,168 (12,260) 101,606
Intangible assets, net 12,124 67,238 12,708 92,070
Other assets 28,189 293 317 (2,014) 26,785
Investments in subsidiaries, at cost 90,443 (90,443)
--------- --------- --------- --------- ---------
Total Assets $ 577,908 $ 255,791 $ 114,539 $(534,152) $ 414,086
========= ========= ========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 756 $ 9,463 $ 10,028 20,247
Accrued expenses and other 3,443 9,715 31,230 44,388
Notes payable, banks and other 4,907 $ (500) 4,407
Current maturities, long-term debt 101 155 4 260
--------- --------- --------- --------- ---------
Total current liabilities 4,300 19,333 46,169 (500) 69,302
--------- --------- --------- --------- ---------
Long-term debt 192,994 24,500 5,463 (1,573) 221,384
Intercompany accounts 348,611 80,661 (429,272)
Other non current liabilities 2,488 (1,513) 975
Minority interest 577 577
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $.01 par value 11 11
Common stock, $.01 par value: 606 606
Capital in excess of par value 428,006 40,621 74,627 (88,870) 454,384
Foreign currency translation
adjustment (1,928) (1,928)
Accumulated deficit (86,623) (177,274) (93,518) (12,424) (369,839)
Treasury stock, at cost (1,386) (1,386)
--------- --------- --------- --------- ---------
340,614 (136,653) (20,819) (101,294) 81,848
--------- --------- --------- --------- ---------
$ 577,908 $ 255,791 $ 114,539 $(534,152) $ 414,086
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
Note 9. 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>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
ASSETS
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, net 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>
13
<PAGE>
Note 9. Condensed Consolidating Financial Information for Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ ----------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
REVENUES
Net product sales $ 718 $ 22,000 $ (7,999) $ 14,719
Service income 80 7,892 7,972
-------- -------- -------- --------
Total revenues 798 29,892 (7,999) 22,691
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 3,250 14,393 (6,103) 11,540
Cost of services 5,370 3,620 (300) 8,690
Research and development 1,839 6,344 (6) 8,177
Marketing $ 75 4,445 3,856 8,376
General and administrative 2,131 2,811 4,836 9,778
Amortization of intangibles 517 188 440 1,145
Equity in losses of investees 399 1,077 1,476
Interest expense 7,419 1,751 372 (152) 9,390
Interest income (1,355) (373) 152 (1,576)
Other income (39) (13) (26) 47 (31)
-------- -------- -------- -------- --------
Total Costs and expenses 9,147 19,641 34,539 (6,362) 56,965
-------- -------- -------- -------- --------
Loss from operations before
taxes on income and
minority interest (9,147) (18,843) (4,647) (1,637) (34,274)
Taxes on income (820) (820)
Minority interest (139) (139)
-------- -------- -------- -------- --------
Net loss $ (9,147) $(18,843) $ (5,606) (1,637) $(35,233)
======== ======== ======== ======== ========
</TABLE>
14
<PAGE>
Note 9. Condensed Consolidating Financial Information for Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
REVENUES
Net product sales $ 17 $ 24,322 $(10,491) $ 13,848
Service income 41 7,664 7,705
-------- -------- -------- --------
Total revenues 58 31,986 (10,491) 21,553
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 415 15,508 (7,163) 8,760
Cost of services 2,616 4,679 (31) 7,264
Research and development 3,081 4,942 8,023
Marketing $ 75 2,769 4,158 7,002
General and administrative 2,702 2,606 4,486 9,794
Amortization of intangibles 446 270 482 1,198
Equity in losses of investees 436 436
Interest expense 6,284 53 603 (268) 6,672
Interest income (1,272) (156) (302) 268 (1,462)
Other income (31) (563) (45) 31 (608)
-------- -------- -------- -------- --------
Total Costs and expenses 8,640 11,091 34,511 (7,163) 47,079
-------- -------- -------- -------- --------
Loss from operations before
taxes on income and
minority interest (8,640) (11,033) (2,525) (3,328) (25,526)
Taxes on income (800) (800)
Minority interest (106) (106)
-------- -------- -------- -------- --------
Net loss $ (8,640) $(11,033) $ (3,431) $ (3,328) $(26,432)
======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
Note 9. Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1997
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (9,147) $ (18,843) $ (5,606) $ (1,637) $ (35,233)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest 139 139
Depreciation & amortization 551 3,273 2,327 (253) 5,898
Equity in losses of investees 399 1,077 1,476
Non cash interest expense 7,262 1,021 8,283
Changes in operating assets & liabilities:
Accounts receivable (129) 936 807
Inventories (3,874) (54) (3,928)
Prepaid expenses and other assets (511) (761) (4,580) (5,852)
Accounts payable & accrued expenses (3,109) 866 (2,987) (5,230)
Other 10 (788) (778)
--------- --------- --------- --------- ---------
Net cash used in operating
activities (4,545) (18,447) (9,536) (1,890) (34,418)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of licenses (54) (54)
Acquisitions of property & equipment (880) (11,551) (2,388) 1,890 (12,929)
Decrease in contract deposits 1,356 1,356
Interest capitalized on construction in
progress and precommercial specturm
licenses (360) (1,815) (2,175)
Cash received from unconsolidated subsidiaries 916 916
Decrease in restricted cash 109 1,624 1,733
Other 164 164
--------- --------- --------- --------- ---------
Net cash (used in) provided by
investing activities (215) (13,256) 592 1,890 (10,989)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings under line of credit
agreements (3,668) (3,668)
Proceeds from issuance of convertible
preferred stock 25,000 25,000
Repayment of capital lease obligation (34) (34)
Proceeds from exercise of warrants
& options 144 144
Payment of preferred dividends (1,269) (1,269)
Capital contributed from parent (42,757) 31,794 10,963
Other (23) (23)
--------- --------- --------- --------- ---------
Net cash (used in) provided by
financing activities (18,916) 31,794 7,272 20,150
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash (83) (83)
(Decrease) increase in cash & equivalents (23,676) 91 (1,755) (25,340)
Cash & equivalents, beginning of period 94,218 364 9,023 103,605
--------- --------- --------- --------- ---------
Cash & equivalents, end of period $ 70,542 $ 455 $ 7,268 $ 78,265
========= ========= ========= ========= =========
</TABLE>
16
<PAGE>
Note 9. Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (8,640) $ (11,033) $ (3,431) $ (3,328) $ (26,432)
Adjustment to reconcile net loss to net
cash used in operating activities:
Minority interest 106 106
Depreciation & amortization 456 732 2,390 3,578
Equity in net loss of investees 436 436
Non cash management consulting expense 665 665
Post acquisition adjustment for utilization
of acquired net operating loss
carry forward 400 400
Non cash interest expense 5,690 5,690
Changes in operating assets and liabilities
(net of effects from acquisitions):
Accounts receivable (10) 592 582
Inventories (578) (465) (1,043)
Prepaid expenses 40 (6,855) 450 4,323 (2,042)
Accounts payable & accrued expenses 2,297 (909) 5,774 (4,323) 2,839
Other 25 352 377
--------- --------- --------- --------- ---------
Net cash provided by(used in)
operating activities 304 (17,988) 6,168 (3,328) (14,844)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Net decrease in temporary investments 2,111 2,111
Acquisitions of property & equipment (25) (12,288) (2,440) 3,328 (11,425)
Interest capitalized on contruction in
progress and pre-commercial
spectrum licenses (843) (843)
Cash invested in unconsolidated
subsidiaries (180) (180)
Decrease contract deposits - other current assets 865 865
Decrease in restricted cash 9,404 9,404
--------- --------- --------- --------- ---------
Net cash (used in) investing activities 11,310 (13,131) (1,575) 3,328 (68)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net, (repayments) under
line of credit agreements (58) (58)
Proceeds from issuance of convertible notes 75,000 75,000
Deferred financing costs (2,213) (2,213)
Repayments of debt (605) (195) (800)
Repayment of capital lease obligations (15) (107) (122)
Exercise of warrants & options 280 280
Payment of preferred dividends (1,278) (1,278)
Financing costs (450) (450)
Other (112) (112)
Capital contributed from parent (25,398) 31,894 (6,496)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 45,926 31,289 (6,968) 70,247
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash (590) (590)
Increase (decrease) in cash & equivalents 57,540 170 (2,965) 54,745
Cash & equivalents, beginning of period 53,128 522 7,778 61,428
--------- --------- --------- --------- ---------
Cash & equivalents, end of period $ 110,668 $ 692 $ 4,813 $ 116,173
========= ========= ========= ========= =========
</TABLE>
17
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and the
notes thereto, included elsewhere in this report.
Results of Operations
General
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 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 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 and Tampa in 1997. The
Company is currently constructing four markets. The Company's success in raising
additional capital will dictate its ability to enter into additional markets as
contemplated by the Company's roll-out plan.
Also, In April 1997, the Company, and its partner in Canada, Techcom Inc.,
received an extension from March 31, 1997 to April 30, 1997 from Industry
Canada, the Canadian agency responsible for spectrum allocation, to form a
suitable Canadian entity. During April 1997, the Company entered into a letter
of intent with two Canadian entities to form a joint venture in Canada to launch
mobile wireless communication services based on the Company's proprietary
FHMA(R) technology. The letter of intent is subject to, among other things,
approval of the joint venture by Industry Canada as a "suitable Canadian
entity", the completion of satisfactory due diligence, approval by the board of
directors and execution of definitive agreements.
The Company's 50/50 joint venture in Germany, which was established in
December 1996 through a merger of the Company's German networks and RWE
Telliance A.G. ("RWE") mobile radio network, provides analog service to
approximately 37,000 subscribers.
Additionally, the company holds a 21% interest in Anam Telecommunications,
Inc. ("Anam Telecom"), a holder of a nationwide trunked radio system license in
Korea. 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
18
<PAGE>
will be subject to the same risks attendent to the development and deployment of
the Company's digital wireless system in the United States.
The Company's subsidiary, Geotek Technologies, Inc. ("GTI") has received a
total of approximately $48 million of orders for the Company's proprietary
FHMA(R) system infrastructure and related equipment from Anam Telecom as well as
Hyundai Electronics, who in turn will sell such equipment to unrelated Korean
regional operators. It is anticipated that Anam Telecom and the Korean regional
operators will commence commercial operations in the fourth quarter of 1997.
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
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 many of 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 approximately 64,000 business
subscribers throughout the United Kingdom.
The Company's communications products subsidiaries are primarily engaged in
the development, manufacturing, and marketing of telephone peripherals and sound
and communications equipment.
The Corporate Group includes the Company's Corporate headquarters and the
Geotest, Inc. subsidiary, in which the Company sold in 1996.
Summary of Operations
Consolidated revenues increased for the first three months of 1997 by 5%
over the same period of 1996 principally due to subscriber growth on the
Company's National Band Three Ltd. ("NB3") network in the United Kingdom, offset
by the deconsolidation of the Company's German Networks in December 1996.
Consolidated operating expenses increased by 13% in the first quarter of
1997 compared to 1996, due primarily to increased product costs due to the
write-down of inventory to the lower of cost or market and marketing expenses
associated with the roll-out of the U.S. Network.
Consolidated losses increased by $8.8 million to $35.2 million during the
first quarter of 1997 principally due to increased interest expense due to the
accretion of the Company's 15% Senior Secured Discount Notes, the March 1996
issuance of the 12% Senior Subordinated Convertible Notes ("Convertible Notes"),
and the deemed interest on the Company's $24.5 million convertible note with
Hughes Network Systems, Inc. and increased depreciation on its U.S. Network due
to the ongoing deployment of that network.
19
<PAGE>
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 three
months ended March 31, 1997 and 1996. 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 Three Months Ended March 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek
Network NB3 Activities Technologies Total
------- --- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues $ 485 $ 7,514 $ 42 $ 3,142 $ 11,183
Gross profit (5,986) 5,204 42 594 (146)
% of revenues 69% 100% 19% 1%
Research and Development 7,491 7,491
Marketing 4,519 1,331 376 6,226
General and Administrative 1,608 1,286 664 879 4,437
Equity in losses of less than
50%-owned entities 1,476 1,476
Other (income) expense (13) (13)
(Loss) income before
interest and
amortization & depr (12,100) 2,587 (2,098) (8,152) (19,763)
Amortization and
depreciation 2,875 1,310 266 705 5,156
(Loss) income before
interest (14,975) 1,277 (2,364) (8,857) (24,919)
Net (loss) income ($14,904) $ 806 ($ 2,449) ($ 8,593) ($25,140)
Subscribers 2,000 63,900 18,500* 84,400
</TABLE>
* - Represents the Company's proportionate share of the 37, 000 subscribers
utilizing the networks of the German joint venture.
For the Three Months Ended March 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek
Network NB3 Activities Technologies Total
------- --- ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues $ 58 $ 6,459 $ 975 $ 2,006 $ 9,498
Gross profit (2,942) 4,355 (39) 543 1,917
% of revenues 67% (4%) 27% 20%
Research and Development 7,215 7,215
Marketing 2,844 1,197 239 271 4,551
General and Administrative 2,212 865 1,018 1,034 5,129
Equity in losses of less than
50%-owned entities 436 436
Other income (563) (17) (580)
(Loss) income before
interest and
amortization & depr (7,435) 2,293 (1,715) (7,977) (14,834)
Amortization and
depreciation 864 1,168 738 150 2,920
(Loss) income before
interest (8,299) 1,125 (2,453) (8,127) (17,754)
Net (loss) income ($ 8,051) $ 673 ($ 2,609) ($ 7,935) ($17,922)
Subscribers 200 58,600 12,500 71,300
</TABLE>
20
<PAGE>
Revenues from wireless communications increased by $1.7 million or 18% for
the three months ended March 31, 1997. This increase is primarily due to the
increase in the number of subscribers using the NB3 network as well as, an
increase in Geotek Technologies' revenues for GMSI, Inc. offset by the
deconsolidation of the German networks in December 1996 due to the merger with
RWE. 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 inventory to the lower
of cost or market.
Research and development expenses related to the digital wireless system
and subscriber unit were $7.4 million for the three months ended March 31, 1997
compared to $7.2 million for the same period of 1996. The Company expects
significant research and development expenses to continue in the future in
connection with continued enhancements to the system and subscriber unit and
adaptation of the digital wireless system to frequencies other than 900 MHz.
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 $1.7 million or 37% 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 markets. General and administrative expenses decreased $0.7 million due
to the deconsolidation of the Company's German Networks in December 1996.
The Company's equity in losses of less than 50% owned entities in 1996 is
attributable solely to the results of the Company's Korean joint ventures. The
comparable loss for 1997 is attributable to the Company's German and Korean
joint ventures of $1.1 million and $0.4 million, respectively. 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. 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 had approximately 37,000
subscribers of which the Company's proportionate ownership interest is
approximately 18,500.
Wireless activities generated a loss before interest, taxes, amortization
and depreciation of $19.8 million for the three months ended March 31, 1997
compared to $14.8 million in 1996. 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 offset by the deconsolidation of the
German networks in 1997.
Communications Products Activities
The table below sets forth certain information with respect to the results
of operations of Bogen Communication Intenational and subsidiaries ("BCI"), a
64% owned entity, as consolidated by the Company for the three months ended
March 31, 1997 and 1996.
(Dollars in Thousands)
March 31
1997 1996
---- ----
Revenues $11,508 $11,358
Gross profit 5,320 4,805
% of revenue 46% 42%
Research and Development 686 654
Marketing 2,150 2,123
General and Administration 1,204 914
Other income (26) (35)
Income before interest, tax, minority interest,
amortization & depreciation 1,306 1,149
Amortization & depreciation 365 356
Interest expense, tax & minority interest 941 793
Net income (loss) $350 $125
Revenues from communications products activities increased by $150,000 or
1% to $11.5 million for the three months ended March 31, 1997. The increase in
BCI's core product lines, commercial sound, engineered system and Telco
products, was offset by the $1.0 million decrease in the Office Automation
product line ("OAS") which as phased out beginning in
21
<PAGE>
December 1995 and eliminated in December 1996.
Gross profit as a percentage of revenues increased from 42% to 46% in 1997.
The increase is mainly due to an increase in the sales price of most of the
Company's domestic products and a reduction in direct material costs.
General and administration expense for the three months ended March 31,
1997 increased by $0.4 million from the same period of 1996 due to increased
headcount, bank charges for BCI's new lined credit facility, and other one time
charges.
Corporate Group
The Corporate Group includes the Company's Corporate headquarters and
Geotest, Inc. subsidiary, which, in accordance with a December 1996 definitive
agreement, was sold by the Company. The Company's Corporate Group generated a
loss before net interest expense, amortization, depreciation and other charges
of $2.1 million and $3.1 million for the three month periods ended March 31,
1997 and 1996, respectively.
Liquidity and Capital Resources
The Company requires significant additional capital to implement its
wireless communications strategy. In furtherance of its strategy, the Company
sold convertible preferred stock and renegotiated its $40.0 million line of
credit facility during the three months ended March 31, 1997. At March 31, 1997,
the Company had $78.3 million of cash and cash equivalents as well as $40.0
million available under a line of credit facility. Also, the Company has a
$100.0 million vendor credit agreement with Hughes Network Systems for the
purchase of infrastructure equipment.
The Company's short term cash needs are attributable primarily to capital
expenditures, inventory, 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 is currently operating in nine markets and is in the process
of constructing four markets. The Company's existing cash resources as of March
31, 1997 will be insufficient to fund the full implementation of the Company's
business 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. In order to
ensure sufficient liquidity throughout 1997, the Company does not intend to
construct additional markets or to expand into new international digital
wireless networks until such time that it obtains sufficient financing to do so.
The Company anticipates that it will need to raise additional financing to
operate through the first quarter of 1998. 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 prevent the Company from
executing its business plan.
The following discussion of liquidity and capital resources, among other
things, compares the Company's financial and cash position as of March 31, 1997,
to the Company's financial and cash position as of December 31, 1996.
During the first three months of 1997, cash and cash equivalents decreased
by $25.3 million to $78.3 million, while working capital decreased by $14.0
million to $87.8 million as of March 31, 1997.
Operating Activities
Cash utilized in connection with operating activities, for the three months
ended March 31, 1997, amounted to $34.4 million. This included changes in
operating assets and liabilities of $14.9 million. This change was primarily
related to an
22
<PAGE>
increase in inventory of $3.9 million, $3.3 million in advances made to
suppliers for 800 MHz infrastructure production, and a decrease in accounts
payable and accrued expenses of $5.2.
During the second quarter of 1997, the Company's U.S. Network operations
began a sales and marketing promotion under which a dealer will be eligible to
receive a rebate from the U.S. Network based upon achievement of certain sales
levels by June 30, 1997. The Company has neither provided an accrual for this
promotion as of March 31, 1997 nor adjusted the $16 million carrying value of
the U.S. Network inventory for this promotion as of March 31, 1997. The results
of this promotion will be recorded in the second quarter of 1997 commensurate
with the achievement of certain required sales levels by the Company's dealers..
Investing Activities
Cash outflows from investing activities was $11.0 million. The Company
expended $13.0 million to acquire equipment during 1996 and capitalized $2.1
million in interest on construction in progress and pre-commercial FCC licenses.
During the first quarter of 1997, the Company contributed approximately
$2.5 million to Terrafon, the Company's joint venture in Germany, representing
the initial capital call for the Company's 50% portion of Terrafon's estimated
1997 operating capital.
Financing Activities
In January 1997, the Company sold 500 shares of its Series P Convertible
Preferred Stock ("Series P Stock") to a group of investors for an aggregate
purchase price of $25 million. The Series P 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 P 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 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.
In April 1997, 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, modified the terms of the 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. Under the modified terms of the S-C Rig Credit
Facility, all borrowings are required to be made within three years from the
initial establishment of the credit facility. The borrowings will accrue
interest at a rate of 8% per annum and will mature five years from the date of
the final borrowing thereunder. Original terms of the S-C Rig Credit Facility
were a 10% interest rate per annum and a four year term from the final borrowing
which was required to be made within two years from the establishment of the
Credit Facility. In connection with the modification to the S-C Rig Credit
Facility, the Company lowered the exercise price of the warrants to purchase
approximately 4.2 million shares of common stock (the "Warrant Shares") from
$9.50 to $6.00 per share and extended the Warrant Shared termination date from
April 2001 to April 2003.
The Company paid cash dividends totaling approximately $1.2 million on its
outstanding preferred stocks during the first quarter of 1997. Proceeds from the
exercise of warrants and options totaled approximately $0.1 million during the
first three months of 1997.
Based on the Company's current business plan which includes over 40 U.S.
markets, the Company estimates that it will need approximately $275 million of
additional financing 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 the loading of subscribers, 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 its market by market roll-out plan 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
23
<PAGE>
financing on a timely basis may prevent the Company from executing its business
plan.
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 Standards 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.
24
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Report on Form 8-K
(a) Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
(b) Report on Form 8-K
The following report on Form 8-K was filed by the Company during the
first quarter of 1997.
(i) Current Report on Form 8-K filed January 23, 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.
25
<PAGE>
GEOTEK COMMUNICATIONS, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GEOTEK COMMUNICATIONS, INC.
Date: May 15, 1997 /s/ MICHAEL H. CARUS
---------------------
Michael H. Carus
V.P., Acting Chief Financial Officer,
Chief Accounting Officer and
Corporate Controller
26
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 $39.6 million for the
three months ended March 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 78,265
<SECURITIES> 0
<RECEIVABLES> 14,628
<ALLOWANCES> 0
<INVENTORY> 32,078
<CURRENT-ASSETS> 157,110
<PP&E> 148,611
<DEPRECIATION> 47,005
<TOTAL-ASSETS> 414,086
<CURRENT-LIABILITIES> 69,302
<BONDS> 221,384
40,000
11
<COMMON> 606
<OTHER-SE> 81,231
<TOTAL-LIABILITY-AND-EQUITY> 414,086
<SALES> 22,691
<TOTAL-REVENUES> 22,691
<CGS> 20,230
<TOTAL-COSTS> 28,952
<OTHER-EXPENSES> (31)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,390
<INCOME-PRETAX> (34,413)
<INCOME-TAX> 820
<INCOME-CONTINUING> (35,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,233)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
