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 June 30, 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 July 31, 1997: 66,687,000 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 4: Submission of Matters to a Vote of Security-Holders
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 Aforward-looking@ statements. The Company
desires to take advantage of the Asafe 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.
2
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
(See Note 1)
June 30, December 31,
1997 1996
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,234 $ 103,605
Restricted cash 6,383 9,418
Accounts receivable, principally trade, net 17,346 15,435
Accounts receivable, related party 4,109
Inventories, net 28,792 28,150
Prepaid expenses and other current assets 23,777 23,384
--------- ---------
Total current assets 131,641 179,992
Investments in affiliates 38,370 36,972
Property, plant and equipment, net 113,132 93,581
Intangible assets, net 93,504 91,508
Other assets, principally debt issuance costs 17,310 28,069
--------- ---------
$ 393,957 $ 430,122
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 16,657 $ 20,587
Accrued expenses and other 51,184 49,279
Notes payable, banks and other 3,983 8,075
Current maturities, long-term debt 329 261
--------- ---------
Total current liabilities 72,153 78,202
Long-term debt 245,690 215,430
Other non current liabilities 941 1,008
Minority interest 712 438
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 66,321,000
and 60,026,000 shares respectively, outstanding
66,083,000 and 59,788,000 shares, respectively 663 600
Capital in excess of par value 448,390 429,483
Foreign currency translation adjustment (2,305) 942
Accumulated deficit (410,912) (334,606)
Treasury stock, at cost (238,000 common shares) (1,386) (1,386)
--------- ---------
34,461 95,044
--------- ---------
$ 393,957 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 22,884 $ 14,380 $ 37,603 $ 28,228
Service income 8,005 7,983 15,977 15,688
------------ ------------ ------------ ------------
Total revenues 30,889 22,363 53,580 43,916
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 19,445 11,173 30,985 19,933
Cost of services 6,560 6,348 12,638 12,248
Engineering and development 9,011 8,305 17,073 16,286
Marketing 9,310 8,965 17,160 15,893
General and administrative 11,628 7,025 20,373 15,985
Depreciation 4,266 2,586 8,552 4,900
Amortization of intangibles 1,168 1,320 2,313 2,518
Equity in losses of investees 2,133 584 3,609 1,020
Interest expense 9,569 8,651 18,959 15,323
Interest income (1,707) (1,709) (3,283) (3,171)
Other income, net (81) (187) (112) (795)
------------ ------------ ------------ ------------
Total costs and expenses 71,302 53,061 128,267 100,140
------------ ------------ ------------ ------------
Loss from operations before taxes
on income and minority interest (40,413) (30,698) (74,687) (56,224)
Taxes on income (525) (580) (1,345) (1,380)
Minority interest (135) 3 (274) (103)
------------ ------------ ------------ ------------
Net loss (41,073) (31,275) (76,306) (57,707)
------------ ------------ ------------ ------------
Preferred dividends (6,373) (1,428) (10,702) (2,706)
------------ ------------ ------------ ------------
Loss applicable to common stock $ (47,446) $ (32,703) $ (87,008) $ (60,413)
============ ============ ============ ============
Weighted average number of common shares
outstanding 62,798,000 57,756,000 61,527,000 57,064,000
============ ============ ============ ============
Per common share:
Net loss applicable to common shares $ (0.76) $ (0.57) $ (1.41) $ (1.06)
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the six months ended June 30, 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 151 1 230
Issuance of common stock
for preferred dividends 1,278 13 6,230
Issuance of common stock in
connection with the
acquisition of minority
interest in GTIL 52 1 239
Issuance of common stock on
conversion of preferred stock -- -- 4,814 48 (48)
Issuance of Series P Convertible
Preferred Stock 25,000
Deemed dividend/interest
on convertible preferred stock
and convertible debt 3,954
Amendment to value of warrants
issued with credit facility (5,996)
Preferred dividends, including
$1,908 in deemed dividends (10,702)
Changes in currency (3,247)
Net loss (76,306)
----- --- ------ ---- -------- ------- --------- -------
Balances, June 30, 1997 1,119 $11 66,321 $663 $448,390 $(2,305) $(410,912) $(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)
Six Months Ended
June 30,
------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss $(76,306) $(57,707)
Adjustments to reconcile net
loss to net cash
used in operating activities:
Minority interest 274 103
Depreciation and amortization 11,980 7,513
Provision for inventory reserve for the lower of
cost or market 595
Post acquisition adjustment for utilization
of acquired net operating loss carry forward 119 875
Non cash interest expense 16,271 12,050
Equity in net loss of investees 3,609 1,020
Non cash management consulting expense 1,549
Changes in operating assets and liabilities (net of
effects from acquisitions):
Increase in accounts receivable (6,020) (1,471)
Increase in inventories (1,237) (5,121)
Increase in prepaid expenses and other assets (4,435) (3,228)
Decrease in accounts payable and accrued
expenses (2,025) 14,088
Other (925) 552
-------- --------
Net cash provided by operating activities (58,100) (29,777)
-------- --------
Cash flows from investing activities:
Acquisition of licenses (695) (400)
Spectrum license deposit returned from FCC 1,784
Net decrease in temporary investments 7,945
Acquisitions of property and equipment (27,698) (25,966)
Interest capitalized on construction in progress
and pre-commercial spectrum licenses (4,474) (1,807)
Cash invested in unconsolidated subsidiaries, net (3,830) (350)
Decrease in contract deposits - other current assets 496 1,046
Decrease in restricted cash 3,035 20,394
Other 274
-------- --------
Net cash (used in) provided by investing activities (32,892) 2,646
-------- --------
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)
Six Months Ended
June 30,
-------------------
1997 1996
---- ----
Cash flows from financing activities:
Net repayments under line-of-credit agreements (4,092) 1,100
Borrowings under credit facility 20,000
Proceeds from issuance of convertible
notes 75,000
Proceeds from issuance of convertible preferred
stock 25,000 53,350
Deferred financing costs (2,213)
Repayment of capital lease obligations (79) (244)
Repayments of debt (800)
Exercise of warrants and options 211 1,752
Payment of preferred dividends (2,548) (2,555)
Financing costs (810)
Other (59) (333)
--------- ---------
Net cash provided by financing activities 38,433 124,247
--------- ---------
Effect of exchange rate changes on cash 188 (905)
--------- ---------
(Decrease) increase in cash and cash equivalents (52,371) 96,211
Cash and cash equivalents, beginning of period 103,605 61,428
--------- ---------
Cash and cash equivalents, end of period $ 51,234 $ 157,639
========= =========
Supplemental schedule of non cash investing and
financing activities:
Management consulting fee paid in common stock $ 1,549
Issuance of shares in connection with debt conversion 18,691
Issuance of shares in connection with acquisition of
SMR license 2,000
Acquisition of assets under capital lease $ 1,031
Issuance of common stock for preferred dividends 6,243 151
Deemed dividend on convertible preferred stock 1,908
Issuance of common shares for the acquisition of
minority interest in GTIL 240
See notes to consolidated financial statements.
7
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIAIRES
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 June 30, 1997, expected
cash flow from operations and the $30 million of funds raised in August
1997 through the sale of the Company's Series Q Convertible Preferred
Stock (see Note 10) 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 initial commercialization stages of its domestic
networks and, as a result, has not yet generated positive cash flow.
The Company is planning to raise additional 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 additional markets.
In order to ensure sufficient liquidity to operate 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
second 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 modified or original business plan. The accompanying
consolidated financial statements do not include any adjustments
related to the recoverability and classification of assets or 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
June 30, 1997 December 31, 1996
------------- -----------------
Raw materials $ 4,196 $ 3,760
Work-in-process 1,181 2,068
Finished goods 25,586 28,601
------ ------
30,963 34,429
Reserve for lower of cost
or market 2,171 6,279
----- -----
$ 28,792 $ 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 Investment in Affiliates
In June 1997, the Company contributed approximately $4.7 million to
Anam Telecommunications Co. Ltd. ("Anam Telecom"), the Company's joint
venture in Korea, which represents the Company's portion of Anam
Telecom's 1997 capital requirements. In March 1997, the Company
contributed approximately $2.5 million to Terrafon, the Company's joint
venture in Germany, which represents the Company's portion of the
estimated 1997 operating budget. These investments are accounted for
under the equity method of accounting.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 Note Payable, Banks and Other:
In January 1997, the Company's German subsidiary repaid its DM 5.0
million (approximately $3.3 million) line of credit with DM 5.0 million
(approximately $3.3 million) restricted cash.
Note 5 Long-Term Debt
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 facility. At June 30, 1997, there was $20
million outstanding under the $40.0 million SC-Rig 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 "S-C Rig
Warrants") from $9.50 to $6.00 per share and extended the warrant
termination date from April 2001 to April 2003. The S-C Rig Warrants,
which when issued were valued at $13.4 million and recorded in other
assets, were revalued at $4.5 million due to the modification of the
terms. The $6.0 million excess of the net book value of the S-C Rig
Warrants over the new valuation was recorded by the Company as a
decrease in additional paid in capital. S-C Rig Warrants are being
amortized over the term of the underlying credit facility,
approximately five years.
Additionally, in connection with the drawdown of $20.0 million under
the S-C Rig Credit Facility, a proportionate amount of the remaining
valuation of the S-C Rig Warrants was transferred to long-term debt and
is reflected as a discount on the issuance of the loans made under the
facility.
Note 6 Preferred Stock:
During the second quarter of 1997, 271 and 100 shares, including
accrued dividends through the date of conversion, of the Company's
Series O Convertible Preferred Stock ("Series O Stock") and Series P
Convertible Preferred Stock ("Series P Stock"), respectively were
converted into approximately 3,546,000 shares and 1,386,000 shares of
the Company's common stock, respectively.
Pursuant to an agreement between the Company and the holders (the
"Series O Holders") of the Company's Series O Stock, the Series O
Holders were only permitted to convert 20% of the shares of Series O
Stock held by them prior to July 1, 1997. Due to relatively favorable
market conditions for the Company and in exchange for an agreement by
the Series O Holders to convert additional shares of Series O Stock
prior to July 1, 1997 at a higher conversion price than would otherwise
have been in effect, on July 1, 1997, the Company permitted the Series
O Holders to convert additional shares of Series O Stock. As a result,
as of June 30, 1997 an aggregate of 271 shares of Series O Stock were
converted into Common Stock, representing 27% of the 1,000 shares of
Series O Stock initially issued on December 31, 1996.
The terms of the Company's 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 expired in June 1997.
In January 1997, the Company sold 500 shares of its 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 lowest daily volume weighted
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
1933, 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.
Note 7 Deemed Dividends and Interest
The staff of the Securities and Exchange Commission recently clarified
their 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 three months and six months ended June
30, 1997, the Company recognized approximately $0.9 million and $1.9
million, respectively, as a deemed dividend on Series O Stock and
Series P Stock which resulted in a $0.02 and $0.03 increase in net loss
applicable to common shares for the respective periods. 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 and $2.0 million in deemed interest on its
$24.5 million convertible note with Hughes Network Systems, Inc. during
the three and six months ended June 30, 1997.
Note 8 Commitments and Contingent Liabilities:
FCC Waiver
In June of 1993, the Company was granted a four-year waiver ("Waiver")
of the FCC's construction and loading rules which permitted the Company
to construct and activate certain systems on a delayed schedule. Prior
to the FCC's 900 MHz spectrum auctions, the Waiver protected the
Company's designated frequency area ("DFA") licenses from revocation
for lack of construction. Following the FCC's 1996 900MHz spectrum
auctions, however, the Waiver became obsolete. Specifically under the
terms of the major trading area ("MTA") licenses the Company acquired
during the auctions, the construction requirements will be satisfied if
one-third of the market's population is served within three years of
the date of the grant, August 12, 1999 and two-thirds of the population
are served within five years of the grant, August 12, 2001. The
Company's DFA licenses acquired prior to the auctions can be combined
with the Company's MTA licenses so that together, they are regulated as
a single MTA license with the automatic delayed construction
requirements.
Litigation
In June 1994, the Company filed a lawsuit against Harris Adacom
Corporation B.V. (AHarris@), 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., (AATL@), an affiliate of Harris and
an Israeli publicly traded company, and subsequently breached such
agreement. In July 1997, the plaintiffs filed a motion with the court
seeking to amend the Statement of Claim to assert a claim for monetary
damages of approximately $27 million arising out of the same
transaction. In addition, the plaintiffs are seeking to add Yaron
Eitan, the Company's Chairman of the Board, and Yoram Bibring,
President and CEO of Geotek International Networks, Inc. as party
defendants. The plaintiffs' motion to amend requires approval of the
court. Based upon independent analysis and the advice of counsel, the
Company believes that none of plaintiffs' claims, which they seek to
amend in their motion to amend, have any merit
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and the Company intends to vigorously oppose the motion to amend. Based
upon independent analysis and the advice of counsel, the Company
believes none of plaintiffs' claims in this 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 this action vigorously. However,
the results of litigation are inherently uncertain. If Plaintiffs
prevail in this action, it could have a material adverse effect on the
financial position of the Company.
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 9 Certain Related Party Transactions:
The Company incurred expenses of $75,000 and $150,000 in each of the
three and six month periods ended June 30, 1997 and 1996, respectively,
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"). As discussed in Note 6, 100
shares of the Company's Series P Stock were converted into 1,386,000
shares of the Company's Common Stock during the quarter ended June 30,
1997.
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.
Engineering and development expense for the three and six months ended
June 30, 1997, includes approximately $0.6 and $1.7 million,
respectively, for activities performed by Rafael under this agreement.
For the three and six month periods ended June 30, 1996, engineering
and development performed by Rafael was $1.9 million and $2.9 million,
respectively. 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 June 30, 1997, the Company had placed firm orders for equipment
totaling $59.1 million of which $44.7 million has been paid to Rafael
to date.
During the three and six months ended June 30, 1997, the Company, after
the elimination of inter-company revenues recognized approximately $6.7
million on its sale of digital wireless infrastructure equipment to
Anam Telecom, the Company's joint venture in Korea. At June 30, 1997,
the Company had an accounts receivable from Anam Telecom of
approximately $4.1 million.
Note 10 Subsequent Events:
In August 1997, the Company sold 600 shares of its Series Q Convertible
Preferred Stock ("Series Q Stock") for an aggregate purchase price of
$30 million. The Series Q 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 October 10, 1997, each share of Series Q 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%, and 90% on January 1, 1998 and April 1, 1998,
respectively). However, the holder can only convert up to a maximum of
25% prior to January 1, 1998, an additional 25% prior to March 31,
1998, an additional 30% prior to June 30, 1998 and the remainder
thereafter. Beginning in August, 1997, the Company will recognize
deemed dividends resulting from the stated discount on conversion of
Series Q stock (see Note 7 for Deemed Dividends on Preferred Stock). In
connection with this transaction, the Company issued warrants to
purchase 1,800,000 shares of the Company's Common Stock at $8.00 per
share (subject to adjustment in certain circumstances). The warrants
are exercisable at any time, and from time to time, before February 10,
2001.
In July 1997, Industry Canada, the Canadian regulatory agency
responsible for spectrum allocation, affirmed its 1996 authorization of
900 MHz licenses to Geotek Communications Canada Inc. ("Geotek Canada")
in the provinces of Ontario, Quebec and British Columbia. Geotek
Canada, the license holder, is a wholly-owned subsidiary of GeoNet
Communications Canada Inc. ("GeoNet Canada") which the Company formed
in July 1997 with two Canadian partners. The Company invested $2
million in GeoNet Canada and two Canadian partners invested $1 million
each, for a total initial investment of $4 million. The Company
received a 50% equity interest and has the maximum
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
allowable voting interest in accordance with Canadian foreign ownership
regulations. Additionally, the Company deposited $2.3 million in a
restricted cash account as collateral for the co-investor's investment.
The deposit is refundable within 180 days upon the registration of
additional shares of the Company's Common Stock. The Company and its
partners are currently negotiating a series of agreements, which will
include future financing commitments for GeoNet Canada and is subject
to, among other things, the parties' agreement on the business plan,
build-out and marketing strategies, FHMA(R) equipment supply
agreements, board of directors approvals and the completion of
satisfactory due diligence by all parties. The parties also reserve the
right to withdraw from the joint venture, should they be unable to
execute these agreements.
Note 11 Condensed Consolidating Financial Information For Guarantors
(AGuarantor 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 13 through 18 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
Discount Notes, the condensed consolidating financial information of
the Guarantor Subsidiaries is presented on the following basis:
(1) Geotek Communications, -Investments in consolidated
Inc.(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.
(APSI@) 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, principally National
Band Three Ltd. and Bogen
Communications International, Inc.
(4) Reclassifications and
Eliminations -Certain reclassifications were made
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.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 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
------------- ------------ -------------- ------------------ --------------
ASSETS (1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $42,075 $531 $8,628 $51,234
Restricted cash 6,383 6,383
Accounts receivable, net 1,709 15,637 17,346
Accounts receivable, related party 5,272 ($1,163) 4,109
Inventories 14,429 14,335 28,792
Prepaid expenses and other assets 1,354 14,131 8,292 23,777
-------- -------- -------- --------- --------
Total current assets 49,812 30,800 52,164 (1,163) 131,641
-------- -------- -------- --------- --------
Inter-company account 396,543 80,392 87 (477,022)
Investments in affiliates 17,989 20,312 69 38,370
Property, plant and equipment, net 2,946 92,408 31,147 (13,369) 113,132
Intangible assets, net 12,346 68,649 12,509 93,504
Other assets 16,051 318 2,905 (1,964) 17,310
Investments in subsidiaries, at cost 90,683 (90,683)
-------- -------- -------- --------- --------
Total Assets $586,370 $272,567 $119,152 ($584,132) $393,957
======== ======== ======== ========= ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $352 $6,941 $9,364 $ 16,657
Accrued expenses and other 5,129 7,075 38,980 51,184
Notes payable, banks and other 4,483 $(500) 3,983
Current maturities, long-term debt 165 119 45 329
-------- -------- -------- --------- --------
Total current liabilities 5,646 14,135 52,872 (500) 72,153
-------- -------- -------- --------- --------
Long-term debt 217,399 24,500 5,365 (1,574) 245,690
Intercompany accounts 393,007 83,815 (477,022)
Other non current liabilities 2,405 (1,464) 941
Minority interest 712 712
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $.01 par value 11 11
Common stock, $.01 par value: 663 663
Capital in excess of par value 422,252 40,621 74,627 (89,110) 448,390
Foreign currency translation
adjustment (2,305) (2,305)
Accumulated deficit (98,215) (199,696) (98,539) (14,462) (410,912)
Treasury stock, at cost (1,386) (1,386)
-------- -------- -------- --------- --------
323,325 (159,075) (26,217) (103,572) 34,461
-------- -------- -------- --------- --------
$586,370 $272,567 $119,152 $(584,132) $393,957
======== ========= ======== ========= ========
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11. 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
------------- ------------ -------------- ------------------ --------------
ASSETS (1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
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>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 Condensed Consolidating Financial Information for Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 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 $ 1,784 $ 52,819 ($17,000) $ 37,603
Service income 202 15,846 (71) 15,977
-------- -------- --------- --------
Total revenues 1,986 68,665 (17,071) 53,580
-------- -------- --------- --------
Costs and expenses:
Cost of goods sold 10,726 33,338 (13,079) 30,985
Cost of services 7,860 5,273 (495) 12,638
Engineering and development 3,315 13,489 270 17,073
Marketing $150 8,853 8,156 17,160
General and administrative 4,357 5,602 10,414 20,373
Depreciation 119 5,447 3,511 (525) 8,552
Amortization of intangibles 1,037 400 876 2,313
Equity in losses of investees 1,020 2,589 3,609
Interest expense 16,452 1,474 1,339 (306) 18,959
Interest income (2,311) (1,278) 306 (3,283)
Other income (85) (426) (34) 433 (112)
-------- -------- -------- --------- --------
Total Costs and expenses 20,739 43,251 77,673 (13,396) 128,267
-------- -------- -------- --------- --------
Loss from operations before
taxes on income and
minority interest (20,739) (41,265) (9,008) (3,675) (74,687)
Taxes on income (1,345) (1,345)
Minority interest (274) (274)
-------- -------- -------- --------- --------
Net loss ($20,739) ($41,265) ($10,627) ($3,675) ($76,306)
======== ======== ======== ========= ========
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 Condensed Consolidating Financial Information for Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
------------- ------------ -------------- ------------------ --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales $220 $47,259 ($19,251) $28,228
Service income 88 15,600 15,688
-------- -------- --------- --------
Total revenues 308 62,859 (19,251) 43,916
-------- -------- --------- --------
Costs and expenses:
Cost of goods sold 3,082 30,620 (13,769) 19,933
Cost of services 5,778 6,549 (81) 12,246
Engineering and development 5,502 10,797 (12) 16,287
Marketing $150 7,369 8,374 15,893
General and administrative 5,420 3,280 7,287 15,987
Depreciation 23 1,209 3,801 (133) 4,900
Amortization of intangibles 966 578 974 2,518
Equity in losses of investees 1,020 1,020
Interest expense 14,464 58 1,329 (528) 15,323
Interest income (3,195) (162) (342) 528 (3,171)
Other income (78) (589) (206) 78 (795)
-------- -------- -------- --------- --------
Total Costs and expenses 18,770 26,105 69,182 (13,917) 100,140
-------- -------- -------- --------- --------
Loss from operations before
taxes on income and
minority interest (18,770) (25,797) (6,323) (5,334) (56,224)
Taxes on income (1,380) (1,380)
Minority interest (103) (103)
-------- -------- -------- --------- --------
Net loss ($18,770) ($25,797) ($7,806) ($5,334) ($57,707)
======== ======== ======== ========= ========
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS For the Six Months Ended June 30, 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 ($20,739) ($41,265) ($10,627) ($3,675) ($76,306)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Minority interest 274 274
Depreciation & amortization 1,157 6,605 4,403 (185) 11,980
Equity in losses of investees 1,020 2,589 3,609
Provision for inventory
reserve for the lower of
cost or market 1,225 (630) 595
Post acquisition adjustment
for utilization of acquired
net operating loss carry
forwards 119 119
Non cash interest expense 14,229 2,042 16,271
Changes in operating assets
& liabilities:
Accounts receivable (1,089) (6,094) 1,163 (6,020)
Inventories 261 (1,498) (1,237)
Prepaid expenses and other
assets (340) (2,012) (2,083) (4,435)
Accounts payable & accrued
expenses (1,827) (4,296) 4,098 (2,025)
Other 20 100 (1,045) (925)
-------- -------- -------- --------- --------
Net cash used in operating
activities (6,480) (38,429) (10,494) (2,697) (58,100)
-------- -------- -------- --------- --------
Cash flows from investing activities:
Acquisition of licenses (695) (695)
Acquisitions of property
& equipment (880) (26,081) (4,007) 3,270 (27,698)
Decrease in contract deposits 496 496
Interest capitalized on
construction in progress
and precommercial specturm
licenses (720) (3,754) (4,474)
Cash invested in unconsolidated
subsidiaries, net (1,246) (2,584) (3,830)
Decrease in restricted cash 1,411 1,624 3,035
Other 274 274
-------- -------- -------- --------- --------
Net cash (used in) provided by
investing activities (1,435) (30,256) (4,471) 3,270 (32,892)
-------- -------- -------- --------- --------
Cash flows from financing activities:
Net borrowings under line of
credit agreements (4,092) (4,092)
Borrowings under credit facility 20,000 20,000
Proceeds from issuance of
convertible preferred stock 25,000 25,000
Repayment of capital lease
obligation (79) (79)
Proceeds from exercise of
warrants & options 211 211
Payment of preferred dividends (2,548) (2,548)
Capital contributed from parent (86,833) 68,945 18,461 (573)
Other (59) (59)
-------- -------- -------- --------- --------
Net cash (used in) provided by
financing activities (44,249) 68,945 14,310 (573) 38,433
-------- -------- -------- --------- --------
Effect of exchange rate changes
on cash 188 188
(Decrease) increase in cash & cash
equivalents (52,143) 167 (395) (52,371)
Cash & cash equivalents, beginning
of period 94,218 364 9,023 103,605
-------- -------- -------- --------- --------
Cash & cash equivalents, end
of period $42,075 $531 $8,628 $51,234
======== ======== ======== ========= ========
</TABLE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS For the Six Months Ended June 30, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc.
Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
------------- ------------ -------------- ------------------ --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss ($18,770) ($25,797) ($7,806) ($5,334) ($57,707)
Adjustment to reconcile net
loss to net cash used in
operating activities:
Minority interest 103 103
Depreciation & amortization 988 1,788 4,870 (133) 7,513
Equity in net loss of
investees 1,020 1,020
Non cash management
consulting expense 1,549 1,549
Post acquisition adjustment for
utilization of acquired net
operating loss carry forward 875 875
Non cash interest expense 12,050 12,050
Changes in operating assets and
liabilities:
Accounts receivable (106) (1,365) (1,471)
Inventories (3,391) (1,730) (5,121)
Prepaid expenses 37 (1,003) (2,262) (3,228)
Accounts payable & accrued
expenses 4,908 1,530 7,650 14,088
Other 50 502 552
-------- -------- -------- --------- --------
Net cash provided by (used in)
operating activities 283 (25,430) 837 (5,467) (29,777)
-------- -------- -------- --------- --------
Cash flows from investing activities:
Net decrease in temporary
investments 7,945 7,945
Acquisition of spectrum licenses (400) (400)
Spectrum license deposit return 1,784 1,784
Acquisitions of property
& equipment (104) (24,535) (6,661) 5,334 (25,966)
Cash invested in unconsolidated
subsidiaries (350) (350)
Interest capitalized on
construction in progress
and precommercial spectrum
licenses (1,807) (1,807)
Decrease contract deposits - other
current assets 1,046 1,046
Decrease in restricted cash 20,394 20,394
-------- -------- -------- --------- --------
Net cash provided by (used in)
investing activities 27,885 (24,958) (5,615) 5,334 2,646
-------- -------- -------- --------- --------
Cash flows from financing activities:
Net borrowings under
line of credit agreements 1,100 1,100
Proceeds from issuance of
convertible notes 75,000 75,000
Deferred financing costs (2,213) (2,213)
Net proceeds from issuance of
Preferred stock 53,350 53,350
Repayments of debt (605) (195) (800)
Repayment of capital lease
obligations (30) (214) (244)
Exercise of warrants & options 1,752 1,752
Payment of preferred dividends (2,555) (2,555)
Financing costs (810) (810)
Other (333) (333)
Capital contributed from parent (52,894) 50,833 1,928 133
-------- -------- -------- --------- --------
Net cash provided by financing
activities71,600 50,228 2,286 133 124,247
-------- -------- -------- --------- --------
Effect of exchange rate changes
on cash (905) (905)
Increase (decrease) in cash & cash
equivalents 99,768 (160) (3,397) 96,211
Cash & cash equivalents, beginning
of period 53,128 522 7,778 61,428
-------- -------- -------- --------- --------
Cash & cash equivalents, end
of period $152,896 $362 $4,381 -- $157,639
======== ======== ======== ========= ========
</TABLE>
18
<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 and financial position 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 engineering 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 additional markets. The Company's success
in raising additional capital will dictate its ability to enter into additional
markets beyond these thirteen as contemplated by the Company's roll-out plan.
In July 1997, Industry Canada, the Canadian regulatory agency responsible
for spectrum allocation, affirmed its 1996 authorization of 900 MHz licenses to
Geotek Communications Canada Inc. ("Geotek Canada") in the provinces of Ontario,
Quebec and British Columbia. Geotek Canada, the license holder, is a
wholly-owned subsidiary of GeoNet Communications Canada Inc. ("GeoNet Canada")
which the Company formed in July 1997 with two Canadian partners. The Company
invested $2 million in GeoNet Canada and two Canadian partners invested $1
million each, for a total initial investment of $4 million. The Company received
a 50% equity interest and has the maximum allowable voting interest in
accordance with Canadian foreign ownership regulations. The Company and its
partners are currently negotiating a series of agreements, which will include
future financing commitments for GeoNet Canada and is subject to, among other
things, the parties' agreement on the business plan, build-out and marketing
strategies, FHMA(R) equipment supply agreements, board of directors approvals
and the completion of satisfactory due diligence by all parties. The parties
also reserve the right to withdraw from the venture, should they be unable to
execute these agreements. The development and deployment of a FHMA(R) based
digital system in Canada 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 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 radio service to
approximately 38,500 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 operates in the 900
MHz frequency band in the United States. The deployment of a FHMA(R) based
digital system in Korea will be subject to the same risks attendent to the
deployment of the Company's digital wireless system in the United States.
19
<PAGE>
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, which in accordance with a December 1996 definitive
agreement, the Company sold in 1996.
Summary of Operations
The summary of operations provides an analysis of the three and six months
ended June 30, 1997 compared to the same periods in 1996. For purposes of this
discussion, year to date represents the six month period ended June 30.
Consolidated
Consolidated revenues increased by 39% for the three months ended June 30,
1997 and by 22% year to date 1997 over the same period of 1996 principally due
to GTI commencing shipments of digital wireless infrastructure equipment to
Korea, and subscriber growth on the U.S. Network and the NB3 network in the
United Kingdom, offset by the deconsolidation of the Company's German Networks
in December 1996.
Consolidated operating expenses increased by 34% in the second quarter of
1997 and by 23% year to date 1997 compared to 1996, due primarily to increased
product costs due to commencing shipment of digital wireless infrastructure
equipment to Korea, increased general and administrative expenses for GTI and
the U.S. Network to support the growth and sales of these entities, and sales
and administrative expenses for NB3 related to activities associated with the
planning for a digital wireless system in the United Kingdom.
Consolidated losses increased by $9.8 million to $41.1 million during the
second quarter of 1997 and by $18.6 million to $76.3 million year to date 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.
20
<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 June 30, 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 wireless
data activities includes the Company's MIS and GMSI, Inc. subsidiaries.
For the Three Months Ended June 30, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek Wireless
Network NB3 Activities Technologies Data Total
-------- -------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 962 $ 8,029 $ 29 $ 6,828 $ 2,504 $ 18,352
Gross profit (10,089) 5,105 4 3,460 611 (909)
% of revenues 64% 50% 24% (5%)
Engineering and Development 7,306 1,010 8,316
Marketing 4,966 1,625 430 7,021
General and Administrative 3,126 1,544 879 2,288 107 7,944
Equity in losses of less than
50% -owned entities 2,108 2,108
Other (income) expense (74) (74)
(Loss) income before
interest and
amortization & depr (18,107) 1,936 (2,983) (6,134) 936 (26,224)
Amortization and
depreciation 2,768 1,306 263 527 53 4,917
(Loss) income before
interest (20,875) 630 (3,246) (6,661) (989) (31,141)
Net (loss) income ($20,810) $ 532 ($ 3,244) ($ 6,527) ($1,035) ($31,084)
Subscribers 5,400** 64,700 19,250* 89,350
</TABLE>
* - Represents the Company's proportionate share of approximately 38,500
subscribers utilizing the networks of the German joint venture.
** - Due to sales promotions at the end of June 1997, certain signed service
contracts were not activated on the network until the first weeks of July.
As of July 5, 1997, the Company had approximately 6,000 subscribers
activated.
For the Three Months Ended June 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek Wireless
Network NB3 Activities Technologies Data Total
-------- -------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 114 $ 6,939 $ 909 $ 2,426 $10,388
Gross profit (5,471) 4,620 (25) 512 (364)
% of revenues 67% (3%) 21% (4%)
Engineering and Development $ 7,343 180 7,523
Marketing 4,675 1,383 165 364 6,587
General and Administrative 1,067 784 1,966 136 188 4,141
Equity in losses of less than
50% -owned entities 584 584
Other income (222) 17 (205)
(Loss) income before
interest and
amortization & depr. (10,991) 2,453 (2,757) (7,479) (220) (18,994)
Amortization and
depreciation 952 1,061 940 338 48 3,337
(Loss) income before
interest (11,943) 1,392 (3,697) (7,817) 266 (22,331)
Net (loss) income ($12,747) $ 1,807 ($3,799) ($8,026) ($303) ($23,068)
Subscribers 500 60,500 13,100 74,100
</TABLE>
21
<PAGE>
Revenues from wireless communications increased by $8.0 million or 77% for
the three months ended June 30, 1997. This increase is primarily due to an
increase in Geotek Technologies' revenues due to the sale of digital wireless
infrastructure equipment to the Company's joint venture in Korea (after
elimination of intercompany revenue of 21%) and the increase in the number of
subscribers using the U.S. Network and the NB3 network 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 service costs related to the roll-out of the digital
network in additional markets, the cost of which are currently not covered by
revenues, and the cost of subscriber inventory units which are currently being
marketed under a promotion program at an amount less than cost.
Engineering and development costs related to the digital wireless system
and subscriber unit were $7.3 million for the three months ended June 30, 1997
and 1996. The Company expects significant engineering and development costs to
continue in the future in connection with continued enhancements, maintenance
and upgrades to the system and subscriber unit and adaptation of the digital
wireless system to frequencies other than 900 MHz.
Development costs related to wireless data products were $1.0 million for
the quarter ended June 30, 1997 compared to $0.2 million for the same period of
1996. This increase is due to the consolidation of MIS Ltd., the Company's data
development subsidiary beginning in July 1996 upon the Company purchasing the
remaining 50% interest.
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 $0.4 million or 7% 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 and activities at NB3 related to the planning for a digital
network in the United Kingdom. General and administrative expenses increased
$3.8 million due to increased administrative staff to support the roll-out of
the U.S. Network, Geotek Technologies infrastructure sales and NB3 digital
network activities.
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 $1.5 million and $0.6 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 and thus, deconsolidated these entities. At June 30, 1997, the merged
entity had approximately 38,500 subscribers of which the Company's proportionate
ownership interest is approximately 19,250.
Wireless activities generated a loss before interest, taxes, amortization
and depreciation of $26.2 million for the three months ended June 30, 1997
compared to $19.0 million in 1996. This increase is primarily due to costs
related to the commencement of the roll-out of the digital wireless
communication system in the U.S. offset by the deconsolidation of the German
networks in 1997.
The tables below set forth certain information with respect to the results
of operations of the Company's Wireless Communications Activities for the six
months ended June 30, 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 wireless
data activities includes the Company's MIS and GMSI, Inc. subsidiaries.
22
<PAGE>
For the Six Months Ended June 30, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek Wireless
Network NB3 Activities Technologies Data Total
-------- -------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,447 $15,543 $ 71 $ 7,340 $ 5,134 $29,535
Gross profit (15,980) 10,151 9 3,466 1,199 (1,155)
% of revenues 65% 12% 47% 23% (4%)
Research and Development 14,080 1,640 15,720
Marketing 9,004 2,956 806 12,766
General and Administrative 5,579 2,671 1,543 3,101 259 13,153
Equity in losses of less than
50% -owned entities 3,584 3,584
Other (income) expense (87) (87)
(Loss) income before
interest and
amortization & depr. (30,476) 4,524 (5,118) (13,715) (1,506) (46,291)
Amortization and
depreciation 5,319 2,616 550 1,178 107 9,770
(Loss) income before
interest (35,795) 1,908 (5,668) (14,893) (1613) (56,061)
Net (loss) income ($35,659) $ 1,339 ($5,751) ($14,432) ($1,722) ($56,225)
Subscribers 5,400** 64,700 19,250* 89,350
</TABLE>
* - Represents the Company's proportionate share of approximately 38,500
subscribers utilizing the networks of the German joint venture.
** - Due to sales promotions at the end of June 1997, certain signed service
contracts were not activated on the network until the first weeks of July.
As of July 5, 1997, the Company had approximately 6,000 subscribers
activated.
For the Six Months Ended June 30, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
US Other Int'l Geotek Wireless
Network NB3 Activities Technologies Data Total
-------- -------- ----------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 172 $13,398 $1,884 $ 4,432 $19,886
Gross profit (8,413) 8,868 (64) 1,055 1,446
% of revenues 66% (3%) 24% 7%
Research and Development $14,211 527 14,738
Marketing 7,519 2,580 404 635 11,138
General and Administrative 3,279 1,542 2,984 963 395 9,163
Equity in losses of less than
50% -owned entities 1,020 1,020
Other income (785) (785)
(Loss) income before
interest and
amortization & depr. (18,426) 4,746 (4,472) (15,174) (502) (33,828)
Amortization and
depreciation 1,652 2,229 1,678 606 93 6,258
(Loss) income before
interest (20,078) 2,517 (6,150) (15,780) (595) (40,086)
Net (loss) income ($20,576) $ 2,422 ($6,408) ($15,772) ($657) ($40,991)
Subscribers 500 60,500 13,100 74,100
</TABLE>
23
<PAGE>
Revenues from wireless communications increased by $9.6 million or 49% for
the six months ended June 30, 1997. This increase is primarily due to an
increase in Geotek Technologies' revenues for the sale of digital wireless
infrastructure equipment and the increase in the number of subscribers using the
NB3 network 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 service costs related
to the roll-out, the cost of which are currently not covered by revenues, and
the cost of subscriber inventory units which are currently being marketed under
a promotion program at an amount less than cost.
Engineering and development cost related to the digital wireless system and
subscriber unit were $14.1 million for the six months ended June 30, 1997
compared to $14.2 million for the same period of 1996. The Company expects
significant engineering and development costs to continue in the future in
connection with continued enhancements, maintenance and upgrades 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 15% 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 increased $3.9 million due
to increased administrative staff to support the roll-out of the U.S. Network,
Geotek Technologies Sales and NB3 digital network activities.
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 $2.5 million and $1.0 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.
Wireless activities generated a loss before interest, taxes, amortization
and depreciation of $46.3 million for the six months ended June 30, 1997
compared to $33.8 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 International and subsidiaries ("BCI"), a
64% owned entity, as consolidated by the Company for the three and six months
ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three months ended June 30 Six months end June 30
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 12,537 $ 10,322 $ 24,045 $ 21,690
Gross profit 5,792 4,787 11,112 9,592
% of revenue 46% 46% 46% 44%
Research and Development 696 667 1,353 1,279
Marketing 2,289 2,085 4,394 4,135
General and Administration 1,423 1,044 2,863 2,141
Other income (8) 35 (34)
Income before interest, tax, minority interest,
amortization & depreciation 1,392 956 2,536 2,037
Amortization & depreciation 86 193 288 480
Interest expense, tax & minority interest 635 265 1,226 933
Net income (loss) $ 671 $ 499 $ 1,022 $ 624
</TABLE>
24
<PAGE>
Revenues from communications products activities increased by $2.2 million
or 21% to $12.5 million for the three months ended June 30, 1997 and by $2.3
million or 11% to $24.0 million year to date 1997. Revenue's increased for the
three and six months is due to increases in BCI's core product lines, which
include commercial sound, engineered system and Telco products, is offset by the
$1.2 million decrease in the Office Automation product line ("OAS") which was
phased out beginning in December 1995 and eliminated in December 1996.
Gross profit as a percentage of revenues remained consistent between the
three months ended June 30 1997 and 1996 was stable at 46% and increased from
44% to 46% year to date 1997. The increase in gross profit is resulting from the
re-negotiation of certain supply agreements and a reduction in direct material
costs.
General and administration expense for the three and six months ended June
30, 1997 increased by $0.4 million and $0.7 million respectively from the same
period of 1996 due to increased headcount, bank charges for BCI's new line of
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 $2.3 million and $1.8 million for the three month periods ended June 30, 1997
and 1996, respectively and $4.4 million and $4.8 million for the six month
periods ended June 30, 1997 and 1996.
Liquidity and Capital Resources
The Company requires significant additional capital to implement its
wireless communications strategy. In furtherance of its capital financing
strategy, the Company sold $25 million convertible preferred stock and
renegotiated its $40.0 million line of credit facility during the six months
ended June 30, 1997. At June 30, 1997, the Company had $51.2 million of cash and
cash equivalents as well as $20.0 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 and in
August 1997, the Company received $30 million from the sale of its Series Q
Convertible Preferred Stock.
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
engineering 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 additional 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 additional markets. The Company's existing cash
resources as of June 30, 1997 and the $30 million of funds raised through the
August 1997 sale of the Company's Series Q Convertible Preferred Stock 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 to operate throughout 1997, the Company does not
intend to construct additional markets or to expand into
25
<PAGE>
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 second 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 modified or original business plan.
The following discussion of liquidity and capital resources, among other
things, compares the Company's financial and cash position as of June 30, 1997,
to the Company's financial and cash position as of December 31, 1996.
During the first six months of 1997, cash and cash equivalents decreased by
$52.4 million to $51.2 million, while working capital decreased by $42.3 million
to $59.5 million as of June 30, 1997.
Operating Activities
Cash utilized in connection with operating activities, for the six months
ended June 30, 1997, amounted to $58.1 million. This included changes in
operating assets and liabilities of $14.6 million. This change was primarily
related to an increase in prepaid expenses of $4.4 million, an increase in
inventory of $1.2 million, an increase in receivables of $6.0 million, primarily
due to the sale of digital infrastructure equipment, and a decrease in accounts
payable and accrued expenses of $2.0.
During the third quarter of 1997, the Company's U.S. Network operations
extended a sales and marketing promotion under which a dealer will be eligible
to purchase equipment at a discount based upon the achievement of certain sales
goals in the third quarter. The Company has neither provided an accrual for this
promotion as of June 30, 1997 nor adjusted the $14.4 million carrying value of
the U.S. Network inventory for this promotion as of June 30, 1997. The results
of this promotion will be recorded in the third quarter of 1997 commensurate
with the achievement of the required sales goals.
Investing Activities
Cash used in investing activities was $32.9 million for the six months
ended June 30, 1997. The Company expended $27.7 million to acquire equipment
during the first six months of 1997 and capitalized $4.5 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. During the second quarter of 1997, the Company
contributed $4.7 million to Anam Telecom, the Company's joint venture in Korea,
representing the Company's 21% portion of the 1997 capital requirements.
Financing Activities
In January 1997, the Company sold 500 shares of its Series P Convertible
Preferred Stock (ASeries 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 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. (AS-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
26
<PAGE>
warrants to purchase approximately 4.2 million shares of common stock (the
AWarrant Shares@) from $9.50 to $6.00 per share and extended the Warrant Shared
termination date from April 2001 to April 2003. As of June 30, 1997, $20.0
million was outstanding under this facility.
In August 1997, the Company sold 600 shares of its Series Q Convertible
Preferred Stock ("Series Q Stock") for an aggregate purchase price of $30
million. The Series Q 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 October
10, 1997, each share of Series Q 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%, and 90% on January 1, 1998 and April 1, 1998,
respectively). However, the holder can only convert up to a maximum of 25% prior
to January 1, 1998, an additional 25% prior to March 31, 1998, an additional 30%
prior to June 30, 1998 and the remainder thereafter. In connection with this
transaction, the Company issued warrants to purchase 1,800,000 shares of the
Company's Common Stock at $8.00 per share (subject to adjustment in certain
circumstances). The warrants are exercisable at any time, and from time to time,
before February 10, 2001.
The Company paid cash dividends totaling approximately $2.5 million on its
outstanding preferred stocks during the six months ended June 30, 1997. Proceeds
from the exercise of warrants and options totaled approximately $0.2 million
during the first six 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
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 ("FASB") issued
Statement No. 128, "Earnings per Share" which is applicable for financial
statements issued after December 15, 1997. 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.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The adoption of
SFAS No. 130 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic area, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 131 will have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
27
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security-Holders
(a) On June 16, 1997, the Company held its Annual Meeting of Stockholders. As
of the record date the total number of votes eligible to cast at the Annual
Meeting was 62,327,129. The following proposals were presented for a vote
by the Company's stock holders:
PROPOSAL I - Election of Ten (10) Directors
PROPOSAL II - Approval of the Amendment to the Company's Restated
Certificate of Incorporation to Increase the Number of Authorized Shares to
200,000,000 Shares of Common Stock.
PROPOSAL III - Approval of the adoption of an Employee Stock Purchase Plan
for the Company.
PROPOSAL IV - Approval of the Company's 1994 Stock Option Plan, as Amended
and Restated.
PROPOSAL V - Approval of the Issuance of Shares of Common Stock Underlying
the Series O Convertible Preferred Stock, Series P Convertible Preferred
Stock, and Certain Warrants.
PROPOSAL VI - Ratification of the Appointment of Coopers & Lybrand L.L.P.
as the Company's independent auditors for the 1997 fiscal year.
Each such proposal was approved by the Company's stockholders as set forth
in 4 (c) below.
(b) N/A
(c) PROPOSAL I - Election of Directors
Name of Nominee Votes for Votes Withheld
--------------- ---------- --------------
Judith C. Areen 49,839,568 1,584,545
Walter Auch 49,830,367 1,593,746
George Calhoun 49,837,667 1,586,446
Purnendu Chatterjee 49,852,380 1,571,733
Winston Churchill 49,856,663 1,567,450
Yaron Eitan 49,852,517 1,571,596
Haynes G. Griffin 49,842,617 1,581,496
Richard Krants 49,437,692 1,986,421
Richard Liebhaber 49,854,017 1,570,096
William Spier 49,846,267 1,577,846
PROPOSAL II
Approval of the Amendment to the Company's Restated Certificate of
Incorporation to Increase the Number of Authorized Shares to 200,000,000
Shares of Common Stock.
Votes for Against Abstain
--------- ------- -------
49,679,226 1,383,892 360,995
PROPOSAL III
Approval of the Adoption of an Employee Stock Purchase Plan for the
Company.
Votes for Against Non-Vote Abstain
--------- ------- -------- -------
25,610,176 1,605,843 23,953,192 254,902
28
<PAGE>
PROPOSAL IV
Approval of the Company's 1994 Stock Option Plan, as Amended and Restated.
Votes for Against Non-Vote Abstain
--------- ------- -------- -------
18,230,481 6,884,964 25,916,678 391,990
PROPOSAL V
Approval of the Issuance of Shares of Common Stock Underlying the Series O
Convertible Preferred Stock, Series P Convertible Preferred Stock, and
Certain Warrants.
Votes for Against Non-Vote Abstain
--------- ------- -------- -------
24,153,937 1,266,652 25,658,543 344,981
PROPOSAL VI
Ratification of the Appointment of Coopers & Lybrand L.L.P. as the
Company's independent auditors for the 1997 fiscal year.
Votes for Against Abstain
--------- ------- -------
50,934,557 340,075 149,481
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
second quarter of 1997.
(i) Current Report on form 8-K filed April 22, 1997, the Company
modified the terms of its Senior Loan agreement with S-C Rig
Investments L.P.. Under the modified agreement, all borrowings
bear interest at a rate of 8% per annum and will maintain five
years from the final borrowing, original terms were 10% interest
per annum and four year term. Additionally, the stock price of
the warrants to purchase 4.2 million shares of the Company's
Common Stock was lowered from $9.50 to $6.00 and the expiration
date was extended from April 2001 to April 2003.
29
<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: August 14, 1997 /s/Robert A. Kerstein
----------------------------
Robert A. Kerstein
Chief Financial Officer
Date: August 14, 1997 /s/ Michael H. Carus
---------------------------
Michael H. Carus
V.P., Chief Accounting Officer
and Corporate Controller
30
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 $85.7 million for the
six months ended June 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 51,234
<SECURITIES> 0
<RECEIVABLES> 21,455
<ALLOWANCES> 0
<INVENTORY> 28,792
<CURRENT-ASSETS> 131,641
<PP&E> 164,338
<DEPRECIATION> 51,206
<TOTAL-ASSETS> 393,957
<CURRENT-LIABILITIES> 72,153
<BONDS> 245,690
40,000
11
<COMMON> 663
<OTHER-SE> 36,940
<TOTAL-LIABILITY-AND-EQUITY> 393,957
<SALES> 53,580
<TOTAL-REVENUES> 53,580
<CGS> 43,623
<TOTAL-COSTS> 69,100
<OTHER-EXPENSES> (112)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,959
<INCOME-PRETAX> (74,687)
<INCOME-TAX> (1,345)
<INCOME-CONTINUING> (76,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76,306)
<EPS-PRIMARY> (1.41)
<EPS-DILUTED> (1.41)
</TABLE>
