SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
Form 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 October 31, 1997: 70,335,000 SHARES
<PAGE>
GEOTEK COMMUNICATIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I: Financial Information
Item 1: Financial Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II: Other Information
Item 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 "forward-looking" statements. The Company
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of such safe harbor with
respect to all of such forward-looking statements. Examples of forward-looking
statements contained herein include the Company's projections with respect to:
(a) the commercial implementation of its US Network and the timing of the
roll-out of its US Network and growth of its subscriber base; (b) the Company's
future financial results, capital needs and sources of financing; (c) the
Company's prospects in foreign countries and (d) the effect of certain
legislation and governmental regulations on the Company. The Company's ability
to predict any such projected results or to predict the effect of any
legislation or other pending events on the Company's operating results is
inherently uncertain. Therefore, the Company wishes to caution each reader of
this report to carefully consider the specific factors discussed with such
forward-looking statements and contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 as such factors in some cases have
affected, and in the future (together with other factors) could affect, the
ability of the Company to achieve its projected results and may cause actual
results to differ materially from those expressed herein.
2
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
(See Note 1)
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 33,223 $ 103,605
Restricted cash 7,949 9,418
Accounts receivable,
principally trade, net 17,197 15,435
Accounts receivable,
related party 1,292
Inventories, net 28,956 28,150
Prepaid expenses and
other current assets 25,814 23,384
--------- ---------
Total current assets 114,431 179,992
Investments in affiliates 37,980 36,972
Property, plant and equipment, net 122,584 93,581
Intangible assets, net 93,901 91,508
Other assets, principally debt
issuance costs 16,497 28,069
--------- ---------
$ 385,393 $ 430,122
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 18,697 $ 20,587
Accrued expenses and other 57,867 49,279
Notes payable, banks and other 4,163 8,075
Current maturities, long-term debt 460 261
--------- ---------
Total current liabilities 81,187 78,202
Long-term debt 253,618 215,430
Other non current liabilities 940 1,008
Minority interest 832 438
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 200,000,000 shares, issued
69,723,000 and 60,026,000 shares
respectively, outstanding 69,485,000
and 59,788,000 shares, respectively 697 600
Capital in excess of par value 477,303 429,483
Foreign currency translation adjustment (3,177) 942
Accumulated deficit (464,632) (334,606)
Treasury stock, at cost (238,000
common shares) (1,386) (1,386)
--------- ---------
8,816 95,044
--------- ---------
$ 385,393 $ 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 30,260 $ 15,170 $ 67,863 $ 43,398
Service income 8,750 8,775 24,726 24,463
------------ ------------ ------------ ------------
Total revenues 39,010 23,945 92,589 67,861
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 30,495 10,411 61,480 30,344
Cost of services 7,888 6,785 20,526 19,033
Engineering and development 14,371 9,734 31,444 26,021
Marketing 10,314 8,678 27,474 24,571
General and administrative 13,103 9,447 33,476 25,431
Depreciation 5,599 4,342 14,151 9,242
Amortization of intangibles 1,174 1,482 3,487 4,000
Equity in losses of investees 1,024 149 4,633 1,169
Interest expense 8,338 8,547 27,297 23,870
Interest income (346) (1,739) (3,629) (4,910)
Other income, net (31) (53) (143) (848)
------------ ------------ ------------ ------------
Total costs and expenses 91,929 57,783 220,196 157,923
------------ ------------ ------------ ------------
Loss from operations before taxes
on income and minority interest (52,919) (33,838) (127,607) (90,062)
Taxes on income (681) (538) (2,026) (1,918)
Minority interest (119) (125) (393) (228)
------------ ------------ ------------ ------------
Net loss (53,719) (34,501) (130,026) (92,208)
------------ ------------ ------------ ------------
Preferred dividends (5,614) (2,683) (16,325) (5,389)
------------ ------------ ------------ ------------
Loss applicable to common stock $ (59,333) $ (37,184) $ (146,351) $ (97,597)
============ ============ ============ ============
Weighted average number of common shares
outstanding 68,373,000 59,209,000 63,724,000 57,779,000
============ ============ ============ ============
Per common share:
Net loss applicable to common shares $ (0.87) $ (0.63) $ (2.30) $ (1.69)
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the nine months ended September 30, 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 2 240
Issuance of common stock
for preferred dividends 1,972 19 9,369
Issuance of common stock in connection
with the acquisition of minority
interest in GTIL 57 1 264
Issuance of common stock on
conversion of preferred stock 7,517 75 (75)
Issuance of Series P Convertible
Preferred Stock 25,000
Issuance of Series Q Convertible
Preferred Stock 30,000
Deemed dividend/interest
on convertible preferred stock
and convertible debt 5,343
Amendment to value of warrants
issued with credit facility (5,996)
Preferred dividends, including
$3,098 in deemed dividends (16,325)
Changes in currency (4,119)
Net loss (130,026)
--------- --------- --------- ----- --------- -------- --------- --------
Balances, September 30, 1997 1,119 $ 11 69,723 $ 697 $ 477,303 $ (3,177) $(464,632) $ (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)
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net loss $(130,026) $(92,208)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Minority interest 393 228
Depreciation and amortization 18,522 13,731
Provision for inventory reserve
for lower of cost or market 1,563
Post acquisition adjustment for
utilization of acquired net
operating loss carry forward 188 1,336
Non-cash acquisition of interest
in subsidiary assigned to a
research and development project 1,859
Non-cash interest expense 23,678 18,744
Equity in net loss of investees 4,633 1,169
Non-cash management consulting expense 2,075
Changes in operating assets and liabilities
(net of effects from acquisitions):
Increase in accounts receivable (3,054) (2,208)
Increase in inventories (2,369) (13,849)
Increase in prepaid expenses and
other assets (6,457) (6,696)
Increase in accounts payable and
accrued expenses 6,700 10,968
Other 179 (614)
--------- --------
Net cash (used in) provided by
operating activities (86,050) (65,465)
--------- --------
Cash flows from investing activities:
Acquisition of licenses (708) (29,738)
Net decrease in temporary investments 7,945
Acquisitions of property and equipment (40,493) (34,045)
Interest capitalized on construction
in progress and pre-commercial
spectrum licenses (6,895) (2,905)
Cash invested in unconsolidated
subsidiaries, net (5,830) (9,953)
Cash received from acquisition of
subsidiary 263
Decrease in contract deposits - other
current assets 481 684
Decrease in restricted cash 1,469 29,838
Other 274
--------- --------
Net cash (used in) provided by investing activities (51,702) (37,911)
--------- --------
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)
Nine Months Ended
September 30,
-------------------------
1997 1996
--------- ---------
Cash flows from financing activities:
Net repayments under
line-of-credit agreements (3,912) (232)
Borrowings under credit facility 20,000
Proceeds from issuance of
convertible notes 75,000
Proceeds from issuance of
convertible preferred stock 55,000 53,350
Deferred financing costs (2,250)
Repayment of capital lease
obligations (164) (369)
Repayments of debt (860)
Exercise of warrants and options 212 2,559
Payment of preferred dividends (3,839) (3,852)
Financing costs (1,080)
Other (116) (431)
-------- --------
Net cash provided by financing
activities 67,181 121,835
-------- --------
Effect of exchange rate changes
on cash 189 (1,614)
-------- --------
(Decrease) increase in cash and
cash equivalents (70,382) 16,845
Cash and cash equivalents,
beginning of period 103,605 61,428
-------- --------
Cash and cash equivalents,
end of period $ 33,223 $ 78,273
======== ========
Supplemental schedule of non-cash
investing and financing activities:
Summary of acquired subsidiaries:
Fair value of assets acquired
in purchase transaction $ 134
Liabilities assumed in purchase
transaction 255
Management consulting fee paid
in common stock 2,075
Issuance of shares in connection
with debt conversion 27,981
Issuance of shares in connection
with acquisition of SMR license 2,000
Acquisition of assets under
capital lease $ 2,840
Issuance of common stock for
preferred dividends 9,388 1,537
Deemed dividend on convertible
preferred stock 3,098
Issuance of common shares
for the acquisition of minority
interest in GTIL 265
Issuance of convertible notes
for minority interest in Geotek
Technologies Israel 800
Issuance of note payable to
acquire remaining 50% interest in MIS 2,000
See notes to consolidated financial statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation and Significant Accounting Policies:
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 consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business. The
Company's existing cash resources as of September 30, 1997, lines of
credit facilities and expected cash flow from operations will be
insufficient to fund its current operations and the full implementation
of the Company's business plan which includes the roll-out of the U.S.
digital wireless network in over 40 markets by the end of 1999 and the
deployment of international digital wireless networks. The Company is
in the early stages of operations in eleven markets in Philadelphia,
Washington DC/Baltimore, New York, Boston, Miami, Dallas, Tampa, San
Antonio, Houston and Phoenix and, as a result, has not yet generated
positive cash flow. Thus, the Company must raise significant additional
capital to fund current operating losses including engineering and
development expenses, subscriber acquisition costs, general and
administrative expenses, working capital and capital expenditures. The
Company does not intend to construct additional markets in the U.S.
until such time that it obtains sufficient additional financing to do
so. Additionally, the Company does not intend to expand existing or new
international FHMA(R) networks until additional capital is obtained.
The Company anticipates that additional financing may be obtained from
one or more sources including, but not limited to, public or private
equity or debt offerings, bank loans, strategic partners, joint
ventures, vendor financing, leasing arrangements, sale of non-strategic
non-FHMA(R) assets or a combination thereof. 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 the requisite
additional capital would prevent the Company from executing its short
and long term business plan, would result in the Company violating
certain contractual covenants, and would affect the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from this
uncertainty.
Revenue Recognition on Long-term Contracts
Revenues and estimates of profit on long-term contracts are recognized
under the percentage of completion method of accounting using the cost
to cost methodology. Profit estimates are revised periodically based
upon changes in facts. Any losses on contracts are recognized
immediately.
Note 2 Inventories, net:
Digital wireless handsets, telephone peripherals and sound and
communication equipment inventories are stated at the lower of cost
(first-in, first-out) or market. The carrying value of the handsets
held for resale to the Company's subscribers are not adjusted to
reflect promotional discounts. In January 1997, the Company adjusted
inventory standard costs to more accurately reflect the market value of
their finished goods inventory.
September 30, 1997 December 31, 1996
------------------ -----------------
Raw materials $ 5,664 $ 3,760
Work-in-process 2,242 2,068
Finished goods 23,505 28,601
------- -------
31,411 34,429
Reserve for lower of cost
or market 2,455 6,279
------- -------
$28,956 $28,150
======= =======
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 Investment in Affiliates:
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 the 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 of 33% 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.
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.
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 $40.0 million
senior unsecured Credit Facility ("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 September 30, 1997, there was $20
million outstanding under the SC-Rig Credit Facility and was drawn down
in November 1997.
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.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6 Shareholders' Equity:
During 1997, 341 and 250 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
4,355,000 shares and 3,320,000 shares of the Company's common stock,
respectively.
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.
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.
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 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.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months ended
September 30, 1997, the Company recognized approximately $1.2 million
and $3.1 million, respectively, as a deemed dividend on Series O Stock,
Series P Stock and Series Q Stock which resulted in a $0.02 and $0.05
increase in net loss applicable to common shares for the respective
periods. With respect to convertible debt, the stated discount is
amortized as additional non-cash interest expense over the period from
the date of issuance until the holder is permitted to convert. The
Company recognized approximately $0.2 million and $2.2 million in
deemed interest on its $24.5 million convertible note with Hughes
Network Systems, Inc. during the three and nine months ended September
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 less important to the Company.
Specifically, under the terms of the major trading area ("MTA")
licenses the Company acquired during the auctions, the construction
requirements by the FCC have been relaxed. A MTA will be "constructed"
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.
With respect to the Company's DFA licenses, those authorized for
spectrum within the geographic area covered by the Company's MTA
licenses can be subsummed into the MTA licenses and regulated as one
MTA license. The Company constructed any remaining DFA licenses prior
to expiration of the waiver.
As permitted by the FCC, the Company is in the process of subsuming its
DFA licenses acquired prior to the auctions with the Company's MTA
licenses so that, together, they are regulated as a single MTA license
with the automatic delayed construction requirements. The subsumming of
the DFA licenses into the MTA licenses is subject to the approval of
the Holders of the Company's 15% Senior Secured Discount Notes
("Discount Notes") which have collateralized by the stock of the
Company's subsidiaries which hold the DFA licenses and Hughes Network
Systems ("HNS"), holder of the Company's $24.5 million loan which is
collateralized by the Company's subsidiary which holds the MTA
licenses. As of the date hereof, HNS has given its approval and
approval of the Trustee of the Discount Notes is pending.
Litigation
In June 1994, the Company filed a lawsuit against Harris Adacom
Corporation B.V. ("Harris"), a Dutch Corporation, to enforce the
Company's right to repayment of a $3.5 million loan made to Harris in
January 1994. In or about May 1994, creditors placed Harris into
bankruptcy. In response to the Company's lawsuit, Harris and its
subsidiaries filed a lawsuit against the Company in the courts of the
State of Israel requesting a declaratory judgment that the Company
entered into a binding agreement for the purchase by the Company of a
significant interest in certain wireless communication business assets
owned by Adacom Technologies Ltd., ("ATL"), an affiliate of Harris and
an Israeli publicly traded company, and subsequently breached such
agreement. 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 and are only an attempt
to delay efforts to collect Harris's debt to the Company. The Company
intends to defend these actions vigorously. However, the results of
litigation are inherently uncertain. If the 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.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 Certain Related Party Transactions:
The Company incurred expenses of $75,000 and $225,000 in each of the
three and nine month periods ended September 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 the S-C Rig Credit
Facility. As discussed in Note 6, 250 shares of the Company's Series P
Stock were converted into 3,320,000 shares of the Company's Common
Stock during the nine months ended September 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 nine months ended
September 30, 1997 includes approximately $2.1 and $5.5 million,
respectively, for activities performed by Rafael under this agreement.
For the three and nine month periods ended September 30, 1996,
engineering and development performed by Rafael was $1.6 million and
$4.5 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 September 30, 1997, the Company had placed firm
orders for equipment totaling $61.7 million of which $47.5 million has
been paid to Rafael to date.
During the three and nine months ended September 30, 1997, the Company,
after the elimination of inter-company revenues, recognized
approximately $2.8 million and $9.5 million, respectively, on its sale
of digital wireless infrastructure equipment to Anam Telecom, the
Company's joint venture in Korea. At September 30, 1997, the Company
had an accounts receivable from Anam Telecom of approximately $1.3
million.
The Company has placed firm orders with HNS for $18.7 million in
infrastructure equipment for which the Company made deposits totaling
$2 million. The Company began receiving the infrastructure equipment in
October 1997 and, accordingly, the Company is drawing down on its $100
million vendor credit facility which bears interest at a rate of 10%
per annum.
Note 10 Subsequent Events:
In November 1997, the Company decided to dispose of and subsequently
entered into a letter of intent to sell its 64% interest in Bogen
Communications International ("BCI") for $18.5 million in cash. In
accordance with the Company's debt covenants, these proceeds are
restricted in their use. This transaction is subject to, among other
things, final documentation. It is anticipated that this transaction,
if consummated, will result in a gain which is not material to the
consolidated results of operations. This disposition is not expected to
have a material effect on the consolidated results of operations of the
Company. At September 30, 1997, the Company consolidated the results of
operations and financial position of BCI. The total assets and
liabilities of BCI at September 30, 1997 as consolidated by the Company
were $25.0 million and $11.5 million, respectively. The table below
sets forth certain information with respect to the results of
operations of BCI, as consolidated by the Company for the three and
nine months ended September 30, 1997 and 1996.
(Dollars in Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Net Product Sales $13,090 $12,388 $37,135 $34,078
Cost of goods sold $ 7,091 $ 6,530 $20,024 $18,628
Operating expenses $ 4,087 $ 4,542 $12,697 $12,252
Net income $ 910 $ 793 $ 1,932 $ 1,417
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 Condensed Consolidating Financial Information For Guarantors
("Guarantor Information"):
In July and August 1995, the Company issued, in a private offering,
$227.7 million aggregate principal amount at maturity of 15% Senior
Secured Discount Notes due July 15, 2005 ("the Discount Notes"). In
connection with the Discount Note offering, the Company's wholly-owned
U.S. Domestic Subsidiaries, including Geotek USA, Inc. (formerly
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., Geotek USA, 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 14 through 19 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, Inc. -Investments in consolidated
(Parent Company) subsidiaries are accounted for by the
Parent Company on the cost basis for
purposes of the Guarantor Information.
Operating results of Subsidiaries are
therefore not reflected in the Parent's
investment accounts or earnings.
(2) Guarantor Subsidiaries -For purposes of the Guarantor
Information, Guarantor Subsidiaries
includes all U.S. wireless subsidiaries
of Geotek USA, Inc. ("Geotek USA")
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, Geotek USA does not contain
the consolidated financial statements of
GTI-Israel, formerly PST, a subsidiary
of Geotek USA, 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 GTI-Israel,
National Band Three Ltd. and Bogen
Communications International, Inc.
(see Note 10).
(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.
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 September 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
------------ ------------ ----------------- ------------------- -----------------.
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $22,533 $ 834 $ 9,856 $ 33,223
Restricted cash 7,949 7,949
Accounts receivable, net 2,811 14,386 17,197
Accounts receivable,
related party 1,707 $ (415) 1,292
Inventories 13,435 15,521 28,956
Prepaid expenses and
other assets 1,466 14,679 9,669 25,814
-------- --------- -------- --------- --------
Total current assets 31,948 31,759 51,139 (415) 114,431
-------- --------- -------- --------- --------
Inter-company account 437,780 89,825 3 (527,608)
Investments in affiliates 19,711 19,113 (844) 37,980
Property, plant and
equipment, net 4,637 100,220 31,610 (13,883) 122,584
Intangible assets, net 12,169 69,550 12,182 93,901
Other assets 14,828 331 2,802 (1,464) 16,497
Investments in subsidiaries,
at cost 90,683 (90,683)
-------- --------- -------- --------- --------
Total Assets $611,756 $291,685 $116,849 $(634,897) $385,393
======== ========= ======== ========= ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 1,021 $ 6,907 $ 10,769 $ 18,697
Accrued expenses and other 2,939 12,838 42,090 57,867
Notes payable, banks and other 4,163 4,163
Current maturities,
long-term debt 370 82 8 460
-------- --------- -------- --------- --------
Total current liabilities 4,330 19,827 57,030 81,187
-------- --------- -------- --------- --------
Long-term debt 225,342 24,500 5,350 $ ($1,574) 253,618
Intercompany accounts 436,398 91,210 (527,608)
Other non current liabilities 2,404 (1,464) 940
Minority interest 832 832
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $.01
par value 11 11
Common stock, $.01 par value: 697 697
Capital in excess of par value 451,140 40,621 74,652 (89,110) 477,303
Foreign currency translation
adjustment (3,177) (3,177)
Accumulated deficit (108,378) (229,661) (111,452) (15,141) (464,632)
Treasury stock, at cost (1,386) (1,386)
-------- --------- -------- --------- --------
342,084 (189,040) (39,977) (104,251) 8,816
-------- --------- -------- --------- --------
$611,756 $ 291,685 $116,849 $(634,897) $385,393
======== ========= ======== ========= ========
</TABLE>
14
<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
---------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 94,218 $ 364 $ 9,023 $ 103,605
Restricted cash 7,794 1,624 9,418
Accounts receivables trade, net 620 14,815 15,435
Inventories, net 15,915 12,235 28,150
Prepaid expenses and other assets 4,514 12,093 6,777 23,384
-------- --------- --------- --------- ---------
Total current assets 106,526 28,992 44,474 179,992
-------- --------- --------- --------- ---------
Inter-company account 307,673 76,303 $(383,976)
Investments in affiliates 11,954 25,181 (163) 36,972
Property, plant and equipment, net 1,155 70,297 32,753 (10,624) 93,581
Intangible assets, net 12,492 66,064 12,952 91,508
Other assets 29,363 217 403 (1,914) 28,069
Investments in Subsidiaries,
at cost 89,921 (89,921)
-------- --------- --------- --------- ---------
$559,084 $ 241,873 $ 115,763 $(486,598) $ 430,122
======== ========= ========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 762 $ 6,993 $ 12,832 $ 20,587
Accrued expenses and other 6,546 11,319 31,414 49,279
Notes payable, banks and other 8,575 $ (500) 8,075
Current maturities, long-term debt 101 155 5 261
-------- --------- --------- --------- ---------
Total current liabilities 7,409 18,467 52,826 (500) 78,202
-------- --------- --------- --------- ---------
Inter-company account 316,716 67,260 (383,976)
Long-term debt 186,823 24,500 5,681 (1,574) 215,430
Other non-current liabilities 2,422 (1,414) 1,008
Minority interest 438 438
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $.01 par value 11 11
Common stock, $.01 par value 600 600
Capital in excess of par value 403,103 40,621 74,106 (88,347) 429,483
Foreign currency translation adjustment 942 942
Accumulated deficit (77,476) (158,431) (87,912) (10,787) (334,606)
Treasury stock, at cost (1,386) (1,386)
-------- --------- --------- --------- ---------
324,852 (117,810) (12,864) (99,134) 95,044
-------- --------- --------- --------- ---------
$559,084 $ 241,873 $ 115,763 $(486,598) $ 430,122
======== ========= ========= ========= =========
</TABLE>
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 Nine Months Ended September 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 $ 3,191 $ 86,156 $(21,484) $ 67,863
Service income 1,042 23,755 (71) 24,726
-------- -------- -------- ---------
Total revenues 4,233 109,911 (21,555) 92,589
-------- -------- -------- ---------
Costs and expenses:
Cost of goods sold 18,411 59,560 (16,491) 61,480
Cost of services 13,397 7,488 (359) 20,526
Engineering and development 8,165 23,076 203 31,444
Marketing $ 225 15,131 12,118 27,474
General and administrative 6,711 8,981 17,784 33,476
Depreciation 250 9,173 5,579 (851) 14,151
Amortization of intangibles 1,558 627 1,839 (537) 3,487
Equity in losses of investees 1,230 3,403 4,633
Interest expense 24,242 2,216 1,326 (487) 27,297
Interest income (3,025) (1,091) 487 (3,629)
Other income (289) (638) (50) 834 (143)
--------- -------- -------- -------- ---------
Total Costs and expenses 30,902 75,463 131,032 (17,201) 220,196
--------- -------- -------- -------- ---------
Loss from operations before
taxes on income and
minority interest (30,902) (71,230) (21,121) (4,354) (127,607)
Taxes on income (2,026) (2,026)
Minority interest (393) (393)
--------- -------- -------- -------- ---------
Net loss $ (30,902) $(71,230) $(23,540) $ (4,354) $(130,026)
========= ======== ======== ======== =========
</TABLE>
16
<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 Nine Months Ended September 30, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm. Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
---------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
REVENUES
Net product sales $ 534 $ 66,828 $(23,964) $ 43,398
Service income 166 24,297 24,463
-------- --------- -------- ---------
Total revenues 700 91,125 (23,964) 67,861
-------- --------- -------- ---------
Costs and expenses:
Cost of goods sold 5,084 43,083 (17,823) 30,344
Cost of services 8,859 10,626 (452) 19,033
Engineering and development $ 1,859 8,137 16,092 (67) 26,021
Marketing 203 11,446 12,922 24,571
General and administrative 8,477 5,843 11,111 25,431
Depreciation 60 3,167 6,015 9,242
Amortization of intangibles 1,686 890 1,424 4,000
Equity in losses of investees 1,169 1,169
Interest expense 22,487 129 2,033 (779) 23,870
Interest income (4,943) (164) (582) 779 (4,910)
Other income, net (124) (766) (82) 124 (848)
--------- -------- --------- -------- ---------
Total Costs and expenses 30,874 42,625 102,642 (18,218) 157,923
--------- -------- --------- -------- ---------
Loss from operations before
taxes on income and
minority interest (30,874) (41,925) (11,517) (5,746) (90,062)
Taxes on income (1,918) (1,918)
Minority interest (228) (228)
--------- -------- --------- -------- ---------
Net loss $ (30,874) $(41,925) $ (13,663) $ (5,746) $ (92,208)
========= ======== ========= ======== =========
</TABLE>
17
<PAGE>
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 Nine Months Ended September
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 ($30,902) $(71,230) $(23,540) $(4,354) $(130,026)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Minority interest 393 393
Depreciation & amortization 1,807 10,689 6,211 (185) 18,522
Equity in losses of investees 1,230 3,403 4,633
Provision for inventory reserve for the
lower of cost or market 1,099 464 1,563
Post acquisition adjustment for
utilization of acquired net operating
loss carry forwards 188 188
Non cash interest expense 21,432 2,246 23,678
Changes in operating assets & liabilities:
Accounts receivable (2,191) (1,278) 415 (3,054)
Inventories 1,381 (3,750) (2,369)
Prepaid expenses and other assets (452) (2,560) (3,445) (6,457)
Accounts payable & accrued expenses (3,348) 1,433 8,615 6,700
Other 30 (30) 179 179
-------- -------- -------- ------- ---------
Net cash used in operating
activities (10,203) (59,163) (12,560) (4,124) (86,050)
-------- -------- -------- ------- ---------
Cash flows from investing activities:
Acquisition of licenses (708) (708)
Acquisitions of property & equipment (892) (37,963) (5,785) 4,147 (40,493)
Decrease in contract deposits 481 481
Interest capitalized on construction in
progress and precommercial spectrum
licenses (1,256) (5,639) (6,895)
Cash invested in unconsolidated
subsidiaries, net (3,246) (2,584) (5,830)
Decrease in restricted cash (155) 1,624 1,469
Other 274 274
-------- -------- -------- ------- ---------
Net cash (used in) provided by
investing activities (5,549) (44,036) (6,264) 4,147 (51,702)
-------- -------- -------- ------- ---------
Cash flows from financing activities:
Net repayments under line of credit
agreements (3,912) (3,912)
Borrowings under credit facility 20,000 20,000
Proceeds from issuance of convertible
preferred stock 55,000 55,000
Repayment of capital lease obligation (164) (164)
Proceeds from exercise of warrants
& options 212 212
Payment of preferred dividends (3,839) (3,839)
Capital contributed from parent (127,142) 103,669 23,496 (23)
Other (116) (116)
-------- -------- -------- ------- ---------
Net cash (used in) provided by
financing activities (55,933) 103,669 19,468 (23) 67,181
-------- -------- -------- ------- ---------
Effect of exchange rate changes on cash 189 189
(Decrease) increase in cash & cash equivalents (71,685) 470 833 (70,382)
Cash & cash equivalents, beginning of period 94,218 364 9,023 103,605
-------- -------- -------- ------- ---------
Cash & cash equivalents, end of period $ 22,533 $ 834 $ 9,856 -- $ 33,223
======== ======== ======== ======= =========
</TABLE>
18
<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 Nine Months Ended September 30, 1996
(Dollars in thousands)
Unaudited
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm. Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
---------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (30,874) $(41,925) $(13,663) $(5,746) $(92,208)
Adjustment to reconcile net loss to net
cash used in operating activities:
Minority interest 228 228
Depreciation & amortization 1,746 4,057 8,256 (328) 13,731
Equity in net loss of investees 1,169 1,169
Non cash management consulting expense 2,075 2,075
Post acquisition adjustment for
utilization of acquired net
operating loss carry forward 1,336 1,336
Non cash acquisition of interest in
subsidiary assigned to a research
& development project 1,859 1,859
Non cash interest expense 18,744 18,744
Changes in operating assets and liabilities:
Accounts receivable (207) (2,001) (2,208)
Inventories (11,903) (1,946) (13,849)
Prepaid expenses (128) (4,061) (2,507) (6,696)
Accounts payable & accrued expenses 4,402 8,096 (1,530) 10,968
Other 75 (95) (594) (614)
--------- -------- -------- ------- --------
Net cash used in operating activities (3,007) (43,963) (12,421) (6,074) (65,465)
--------- -------- -------- ------- --------
Cash flows from investing activities:
Net decrease in temporary investments 7,945 7,945
Acquisition of spectrum licenses (29,738) (29,738)
Acquisitions of property & equipment (120) (31,263) (8,408) 5,746 (34,045)
Interest capitalized on construction
in progress and precommercial licenses (2,905) (2,905)
Cash invested in unconsolidated
subsidiaries (9,953) (9,953)
Cash received from acquisition of subsidiary 263 263
Decrease contract deposits - other
current assets 684 684
Decrease in restricted cash 29,838 29,838
--------- -------- -------- ------- --------
Net cash provided by (used in)
investing activities 27,710 (34,168) (37,199) 5,746 (37,911)
--------- -------- -------- ------- --------
Cash flows from financing activities:
Net borrowings under
line of credit agreements (232) (232)
Proceeds from issuance of convertible notes 75,000 75,000
Deferred financing costs (2,250) (2,250)
Net proceeds from issuance of
Preferred stock 53,350 53,350
Repayments of debt (605) (255) (860)
Repayment of capital lease obligations (45) (324) (369)
Exercise of warrants & options 2,559 2,559
Payment of preferred dividends (3,852) (3,852)
Financing costs (1,080) (1,080)
Other (431) (431)
Capital contributed from parent (128,748) 78,539 49,881 328
--------- -------- -------- ------- --------
Net cash (used in) provided by
financing activities (5,066) 77,934 48,639 328 121,835
--------- -------- -------- ------- --------
Effect of exchange rate changes on cash (1,614) (1,614)
Increase (decrease) in cash & cash equivalents 19,637 (197) (2,595) 16,845
Cash & cash equivalents, beginning of period 53,128 522 7,778 61,428
--------- -------- -------- ------- --------
Cash & cash equivalents, end of period $ 72,765 $ 325 $ 5,183 -- $ 78,273
========= ======== ======== ======= ========
</TABLE>
19
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
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 continued development and deployment
of its FHMA(R) system, a low cost, high quality integrated digital voice and
data wireless communications network which it is currently operating in eleven
markets in the United States ("U.S. Network"). The Company, through its
subsidiaries and joint ventures, may deploy FHMA(R) systems 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. 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 is in the early stages of operations of its networks in
Philadelphia, Washington DC/Baltimore, New York, Boston, Miami, Dallas, Tampa,
San Antonio, Houston and Phoenix and, as a result, has not yet generated
positive cash flow. The Company's existing cash resources at September 30, 1997,
line of credit facilities and expected cash flow from operations will be
insufficient to fund its current operations and the full implementation of the
Company's business plan which includes: the roll out of the US Network in over
40 markets; the deployment of international digital wireless networks; 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; and the acquisition of businesses in the field
of telecommunications and of spectrum in the United States and internationally.
Based on the Company's current business plan, the Company estimates that it
will need approximately $250 million of additional financing through the end of
1998 and additional financing thereafter to implement its business plan. The
amount of significant additional financing required will increase if the Company
experiences: delays in the commercial implementation of its U.S. Network (which
have occurred in the past); cost overruns; or, other unanticipated cash needs.
The Company does not intend to construct additional markets or to expand into
new international digital wireless networks until such time as it obtains
sufficient financing to do so. 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 Company
anticipates that additional financing, may be obtained from one or more sources,
including, but not limited to, public or private equity or debt offerings, bank
loans, strategic partners, joint ventures, vendor financing, leasing
arrangements, sale of non-strategic assets or a combination thereof. 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 the requisite additional
capital would prevent the Company from executing its short and long term
business plan, would result in the Company violating certain contractual
covenants, and would affect the Company's ability to continue as a going
concern. The consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. They do not include any
adjustments that might result from the aforementioned uncertainty.
The Company has historically grouped its operations into two types of
activities: wireless communications and communications products. The Company's
wireless communications subsidiaries are currently engaged in providing digital
wireless communications service in the United States, enhancing its proprietary
FHMA(R) digital wireless system, selling its proprietary digital wireless
infrastructure equipment, implementing digital wireless communications systems
internationally, developing and selling wireless data solutions, and providing
analog trunked mobile radio services in the United Kingdom and Germany. In
November 1997, based upon a letter of intent, the Company agreed to sell its
communication products subsidiary, Bogen Communications International, Inc.
("BCI"), for $18.5 million in cash (see discussion below). BCI is primarily
engaged in the development, manufacturing, and marketing of telephone
peripherals and sound and communications equipment. This transaction is subject
to, among other things, final documentation.
20
<PAGE>
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 the 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 of 33% 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 joint venture is in the early stages of deployment
of a FHMA(R) system in Canada. The deployment of a FHMA(R) system in Canada will
be subject to the same risks attendant to the development and deployment of the
Company's digital wireless system in the United States.
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. Anam Telecom commenced commercial
operations in November 1997 in the Seoul region of Korea. The deployment of a
FHMA(R) based digital system in Korea is subject, but not limited to, the same
risks attendant to the deployment of the Company's digital wireless system in
the United States.
The Company's subsidiary, Geotek Technologies, Inc. ("GTI") has entered
into contracts to provide FHMA(R) based digital systems and related equipment to
Anam Telecom as well as Hyundai Electronics who in turn will sell such equipment
to unrelated Korean regional operators. It is anticipated that the Korean
regional operators will commence commercial operations in the fourth quarter of
1997.
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 40,900 subscribers.
In June 1996, the United Kingdom Department of Trade and Industry awarded
the Company's United Kingdom operating subsidiary, National Band Three Ltd.
("NB3"), a license to operate a digital Public Access Mobile Radio ("PAMR")
network in the United Kingdom. NB3 already provides analog PAMR services to
approximately 64,900 business subscribers throughout the United Kingdom. Under
the terms of the digital license, 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. There can be
no assurance that NB3 will be able to implement a TETRA system or, if
implemented, when NB3 will be in a position to roll-out a TETRA-based system.
The development of a TETRA-based system in the United Kingdom will be subject to
many of the same risks attendant to the development of the Company's digital
wireless system in the United States.
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 nine months
ended September 30, 1997 compared to the same periods in 1996. For purposes of
this discussion, year to date represents the nine month period ended September
30.
21
<PAGE>
Consolidated
Consolidated revenues increased by 63% for the three months ended September
30, 1997 and by 36% 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. These increases were offset by the deconsolidation of the
Company's German Networks which the Company merged with RWE in December 1996 and
now accounts for the merged entity under the equity method of accounting.
Consolidated operating expenses increased by 69% in the third quarter of
1997 and by 40% year to date 1997 compared to the same periods in 1996. This is,
primarily, from increased product costs due to commencing shipment of digital
wireless infrastructure equipment to Korea. In addition, there was increased
engineering and development expenses resulting from certain non-recurring
charges, increased general and administrative expenses for GTI and the U.S.
Network to support the growth and sales of these entities as well as increased
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 $19.2 million to $53.7 million during the
third quarter of 1997 and by $37.8 million to $130.0 million year-to-date 1997,
principally, due to increased engineering and development expense as well as
increased operating cost of the U.S. Network to support the roll-out.
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 September 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 September 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 $ 1,867 $ 7,750 $ 14,752 $ 1,551 $ 25,920
Gross profit (10,264) 4,947 (374) 319 (5,372)
% of revenues 64% (2.5%) 21% (21%)
Engineering and Development 13,213 519 13,732
Marketing 6,351 1,260 299 409 8,319
General and Administrative 3,402 1,900 $ 299 3,175 519 9,295
Equity in losses of less than
50%-owned entities 1,025 1,025
Other (income) expense (9) (9)
(Loss) income before
interest and
amortization & depr (20,008) 1,787 (1,324) (17,061) (1,128) (37,734)
Amortization and
depreciation 3,632 1,218 257 830 54 5,991
(Loss) income before
interest (23,640) 569 (1,581) (17,891) (1,182) (43,725)
Net (loss) income $(23,566) $ 424 $(1,620) $(18,001) $(1,042) $(43,805)
Subscribers 9,900 64,900 20,450* 95,250
</TABLE>
* - Represents the Company's proportionate share of approximately 40,900
subscribers utilizing the networks of the German joint venture.
22
<PAGE>
For the Three Months Ended September 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 $ 198 $ 7,136 $ 1,162 $ 1,500 $ 9,996
Gross profit (4,664) 4,306 373 195 210
% of revenues 60% 32% 13% 2.1%
Engineering and Development 527 $ 8,182 89 8,798
Marketing 4,129 1,474 107 369 6,079
General and Administrative 2,562 482 1,982 415 286 5,727
Equity in losses of less than
50%-owned entities 9 9
Other income 20 (84) (64)
(Loss) income before
interest and
amortization & depr. (11,902) 2,350 (1,641) (8,597) (549) (20,339)
Amortization and
depreciation 2,141 1,562 858 618 47 5,226
(Loss) income before
interest (14,043) 788 (2,499) (9,215) (596) (25,565)
Net (loss) income $(13,257) $ (566) $ (2,648) $ (9,029) $ (648) $(26,148)
Subscribers 1,100 62,300 15,000 78,400
</TABLE>
Revenues from wireless communications increased by $15.9 million or 159%
for the three months ended September 30, 1997. This increase is primarily due to
an increase in Geotek Technologies' revenues resulting from the sale of digital
wireless infrastructure equipment to the Company's Korean customers which
includes the Company's joint venture in Korea (for which the Company eliminates
21% of intercompany revenue). Additionally, revenues increased due to the
increase in the number of subscribers using the U.S. Network and the NB3
network. These increases were offset by the deconsolidation of the German
networks in December 1996 due to the merger with RWE. At September 30, 1997, the
U.S. Network had 9,900 subscribers activated on the system. U.S. Network service
revenues are recognized upon installation of the subscriber unit which occurs
subsequent to activation. 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 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 $13.2 million and $8.2 million for the three months
ended September 30, 1997 and 1996, respectively. The increase is due to
non-recurring development costs for the portable subscriber unit and related
portable docking station as well as switch development costs. 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's U.S. Network is in various stages of operations in 11 markets
throughout the United States and, accordingly, continues to put in place its
marketing, engineering, operations and administrative staff and systems. During
the third quarter of 1997, the Company commenced operations in Houston, Phoenix
and San Antonio. Marketing expenses increased by approximately $2.2 million or
37% due to the U.S. Network marketing programs and increase in staff needed to
execute the roll-out of the U.S. Network in its markets and activities at NB3
related to the planning for a digital network in the United Kingdom.
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 $0.8 million and $0.2 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 September 30, 1997, the
merged entity had approximately 40,900 subscribers of which the Company's
proportionate ownership interest is approximately 20,450.
23
<PAGE>
Wireless activities generated a loss before interest, taxes, amortization
and depreciation of $37.7 million for the three months ended September 30, 1997
compared to $20.3 million in 1996. This increase is primarily due to costs
related to the ongoing 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 nine
months ended September 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 the wireless
data activities include the Company's MIS and GMSI, Inc. subsidiaries.
For the Nine Months Ended September 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>
Total
Revenues $ 3,314 $23,293 $ 71 $ 22,092 $ 6,685 $ 55,455
Gross profit (26,244) 15,098 9 3,092 1,518 (6,527)
% of revenues 65% 13% 14% 23% (12%)
Research and Development 27,668 1,784 29,452
Marketing 15,355 4,216 299 1,215 21,085
General and Administrative 8,981 4,571 1,842 5,901 1,153 22,448
Equity in losses of less than
50%-owned entities 4,608 4,608
Other (income) expense (96) (96)
(Loss) income before
interest and
amortization & depr. (50,484) 6,311 (6,441) (30,776) (2,634) (84,024)
Amortization and depreciation 8,951 3,834 807 2,008 161 15,761
(Loss) income before interest (59,435) 2,477 (7,248) (32,784) (2,795) (99,785)
Net (loss) income $(59,225) $ 1,763 $(7,370) $(32,433) $(2,764) $(100,029)
Subscribers 9,900 64,900 20,450* 95,250
</TABLE>
* - Represents the Company's proportionate share of approximately 40,900
subscribers utilizing the networks of the German joint venture.
For the Nine Months Ended September 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 $ 370 $20,534 $ 3,046 $ 5,932 $ 29,882
Gross profit (13,077) 13,174 309 1,250 1,656
% of revenues 64% 10% 21% 5.5%
Research and Development $ 22,920 616 23,536
Marketing 11,648 4,054 511 1,004 17,217
General and Administrative 5,841 2,024 4,966 1,378 681 14,890
Equity in losses of less than
50%-owned entities 1,029 1,029
Other income (765) (84) (849)
(Loss) income before
interest and
amortization & depr. (29,801) 7,096 (6,113) (24,298) (1,051) (54,167)
Amortization and depreciation 3,793 3,791 2,536 1,224 140 11,484
(Loss) income before interest (33,594) 3,305 (8,649) (25,522) (1,191) (65,651)
Net (loss) income $(33,306) $ 1,856 $(9,056) $(25,328) $(1,305) $(67,139)
Subscribers 1,100 62,300 15,000 78,400
</TABLE>
24
<PAGE>
Revenues from wireless communications increased by $25.6 million or 86% for
the nine months ended September 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. At September 30, 1997, the U.S. Network had
9,900 subscribers activated on the system. U.S. Network service revenues are
recognized upon installation of the subscriber unit which occurs subsequent to
activation. 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 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 $27.7 million for the nine months ended September 30, 1997
compared to $23.0 million for the same period of 1996. The increase is due to
non-recurring development costs for the Company's portable subscriber unit and
switch. 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 $1.8 million for
the nine months ended September 30, 1997 compared to $0.6 million for the same
period of 1996. This increase is due to the growth of MIS Ltd., the Company's
data development subsidiary, which the Company purchased the remaining 50%
interest in July 1996.
The Company's U.S. Network is in various stages of operations in 11 markets
throughout the United States and accordingly, continues to put in place its
marketing, engineering, operations and administrative staff and systems. During
1997, the Company commenced operations in Tampa, Houston, Phoenix and San
Antonio. Marketing expenses increased by approximately $3.9 million or 22% 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 $7.6 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 $3.4 million and $1.2 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 $84.0 million for the nine months ended September 30, 1997
compared to $54.2 million in 1996. This increase is primarily due to costs
related to the ongoing 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
In November 1997, the Company decided to dispose of and subsequently
entered into a letter of intent to sell its 64% interest in Bogen Communications
International ("BCI") for $18.5 million in cash. In accordance with the
Company's debt covenants, these proceeds are restricted in their use. This
transaction is subject to, among other things, final documentation. It is
anticipated that this transaction, if consummated, will result in a gain which
is not material to the consolidated results of operations. This disposition is
not expected to have a material effect on the consolidated results of operations
of the Company. At September 30, 1997, the Company consolidated the results of
operations and financial position of BCI. The total assets and liabilities of
BCI at September 30, 1997 as consolidated by the Company were $25.0 million and
$11.5 million, respectively.
25
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $13,090 $12,388 $37,135 $34,078
Gross profit 5,999 5,858 17,111 15,450
% of revenue 46% 47% 46% 45%
Research and Development 639 825 1,992 2,104
Marketing 1,994 2,418 6,388 6,553
General and Administration 1,454 1,299 4,317 3,595
Other income (20) (54)
Income before interest, tax, minority interest,
amortization & depreciation 1,932 1,316 4,468 3,198
Amortization & depreciation 308 162 596 487
Interest expense, tax & minority interest 714 361 1,940 1,294
Net income (loss) $ 910 $ 793 $ 1,932 $ 1,417
</TABLE>
Revenues from communications products activities increased by $0.7 million
or 6% to $13.1 million for the three months ended September 30, 1997 and by $3.1
million or 9% to $37.1 million year to date 1997. Revenues increased for the
three and nine months due to increases in BCI's core product lines which include
commercial sound, engineered system and Telco products. This is offset by the
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 decreased from 47% to 46% between
the three months ended September 30, 1996 and 1997 and increased from 45% to 46%
year to date 1997. The decrease for the three months is due to an increase in
sales for products with lower gross margins. The increase in year to date 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 nine months ended September 30,
1997 increased by $0.7 million 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 $2.7 million and $1.8 million for the three month periods ended September 30,
1997 and 1996, respectively, and $6.7 million and $6.9 million for the nine
month periods ended September 30, 1997 and 1996, respectively.
Liquidity and Capital Resources
The following discussion of liquidity and capital resources, among other
things, compares the Company's financial and cash position as of September 30,
1997 to the Company's financial and cash position as of December 31, 1996.
The Company requires significant additional capital to fund its current
operations and to implement its wireless communications strategy. In furtherance
of its capital financing strategy, the Company sold $55 million in convertible
preferred stock and renegotiated its $40.0 million line of credit facility
during the nine months ended September 30, 1997. At September 30, 1997, the
Company had $33.2 million of cash and cash equivalents as well as $20.0 million
available under a line of credit facility which was drawn down in November 1997.
Also, the Company has a $100.0 million vendor credit agreement with Hughes
Network Systems ("HNS") for the purchase of infrastructure equipment which it
began accepting delivery in October 1997.
In November 1997, the Company entered into a letter of intent to sell its
64% interest in Bogen Communications International Inc. for $18.5 million in
cash. In accordance with the Company's debt covenants, these proceeds are
restricted in their use.
26
<PAGE>
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 networks.
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.
During the first nine months of 1997, cash and cash equivalents decreased
by $70.4 million to $33.2 million while working capital decreased by $68.6
million to $33.2 million.
Operating Activities
Cash utilized in connection with operating activities, for the nine months
ended September 30, 1997, amounted to $86.1 million. This included changes in
operating assets and liabilities of $5.0 million. This change was primarily
related to an increase in prepaid expenses of $6.5 million, an increase in
inventory of $2.4 million which is offset by an inventory reserve of $1.6
million, an increase in receivables of $3.1 million primarily due to the sale of
digital infrastructure equipment, and an increase in accounts payable and
accrued expenses of $6.7 million.
The Company's U.S. Network operations extended sales and marketing
promotions under which a dealer will be eligible to purchase equipment at a
discount based on achievement of sales goals. According to the Company's policy
in which the Company does not adjust inventory values for temporary sales
promotions, the Company has neither provided an accrual nor adjusted the $13.4
million carrying value of the U.S. Network inventory for promotions as of
September 30, 1997. The results of promotions will be recorded commensurate with
the sale.
Investing Activities
Cash used in investing activities was $51.7 million for the nine months
ended September 30, 1997. The Company expended $40.5 million to acquire
equipment during the first nine months of 1997 and capitalized $6.9 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. As
discussed previously, the Company entered into a joint venture agreement in
Canada in July 1997 under which the Company made an initial investment of $2.0
million and placed $2.3 million into a restricted account as collateral for the
co-investors. This $2.3 million is refundable within 180 days upon registration
of shares of the Company's common stock.
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.
27
<PAGE>
In connection with this transaction, the Company issued warrants to purchase
850,000 shares of the Company's Common Stock at $9.2625 per share (subject to
adjustment in certain circumstances). The warrants are exercisable at any time,
and from time to time, before June 30, 2000.
In April 1997, the Company and S-C Rig Investments - III, L.P. ("S-C Rig"),
a significant stockholder of the Company and an investment group affiliated with
George Soros, modified the terms of the Senior Loan Agreement whereby S-C Rig
made a $40.0 million unsecured credit facility ("S-C Rig Credit Facility")
available to the Company. Under the modified terms of the S-C Rig Credit
Facility, all borrowings are required to be made within three years from the
initial establishment of the credit facility. The borrowings will accrue
interest at a rate of 8% per annum and will mature five years from the date of
the final borrowing thereunder. Original terms of the S-C Rig Credit Facility
were a 10% interest rate per annum and a four year term from the final borrowing
which was required to be made within two years from the establishment of the
Credit Facility. In connection with the modification to the S-C Rig Credit
Facility, the Company lowered the exercise price of the warrants to purchase
approximately 4.2 million shares of common stock (the "Warrant Shares") from
$9.50 to $6.00 per share and extended the Warrant Shared termination date from
April 2001 to April 2003. As of September 30, 1997, $20.0 million was
outstanding under this facility and was drawn down in November 1997.
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.
In October 1997, in connection with the receipt of infrastructure equipment
from HNS, the Company began drawing down on its $100 million vendor credit
facility with HNS.
The Company paid cash dividends totaling approximately $3.8 million on its
outstanding preferred stocks during the nine months ended September 30, 1997.
Proceeds from the exercise of warrants and options totaled approximately $0.2
million during the first nine months of 1997.
As discussed previously, the Company must to raise additional capital to
continue financing its current operations and to fully implement its 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 amount of additional financing
required will increase if the Company experiences: delays in the commercial
implementation of its U.S. Network (which have occurred in the past); cost
overruns; or, unanticipated cash needs. 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 will
prevent the Company from executing its business plan. 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 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, sale of non-strategic non-FHMA(R) assets 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 any such financing on acceptable terms, or at all. The
failure to obtain such financing will prevent the Company from fully executing
its business plan.
28
<PAGE>
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 since 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.
29
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security-Holders
(a) On July 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
30
<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 1996 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
third quarter of 1997.
(i) Current Report on Form 8-K filed July 8, 1997, the Company
announced a series of senior management changes including the
naming of Robert Kerstein as Chief Financial Officer, Zvi Peled
as President and Chief Executive Officer of Geotek Technologies,
Inc., and William A. Opet as President and Chief Executive
Officer of the Company's newly formed mobile data business unit.
In addition the Company announced the departure of Jonathan C.
Crane, the Company's President and Chief Operating Officer, from
his position as an officer and director of the Company effective
June 27, 1997.
31
<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: November 14, 1997 /s/Robert A. Kerstein
---------------------
Robert A. Kerstein
Chief Financial Officer
Date: November 14, 1997 /s/ Valerie E. DePiro
------------------------------
Valerie E. DePiro
V.P., Chief Accounting Officer
and Corporate Controller
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 $144.3 million for the
nine months ended September 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 33,223
<SECURITIES> 0
<RECEIVABLES> 18,489
<ALLOWANCES> 0
<INVENTORY> 28,956
<CURRENT-ASSETS> 114,431
<PP&E> 178,952
<DEPRECIATION> 56,368
<TOTAL-ASSETS> 385,393
<CURRENT-LIABILITIES> 81,187
<BONDS> 253,618
40,000
11
<COMMON> 697
<OTHER-SE> 8,108
<TOTAL-LIABILITY-AND-EQUITY> 385,393
<SALES> 92,589
<TOTAL-REVENUES> 92,589
<CGS> 82,006
<TOTAL-COSTS> 111,036
<OTHER-EXPENSES> (143)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,297
<INCOME-PRETAX> (128,000)
<INCOME-TAX> (2,026)
<INCOME-CONTINUING> (130,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (130,026)
<EPS-PRIMARY> (2.30)
<EPS-DILUTED> (2.30)
</TABLE>
