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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission file number 0-17581
GEOTEK COMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2358635
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(State of Incorporation) (I.R.S. Employer Identification No.)
102 Chestnut Ridge Road, Montvale, New Jersey 07645
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 930-9305
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
-----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X. NO___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or amendment
to this Form 10-K. [X]
Based on the average price bid for the Registrant's Common Stock as
of March 10, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant as of such date was approximately $125,706,000.
As of March 10, 1998, the number of outstanding shares of the
Registrant's Common Stock was approximately 102,555,485
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference information from
the Registrant's Proxy Statement to be filed in connection with its 1998 Annual
Meeting of Stockholders.
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GEOTEK COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. BUSINESS....................................................... 2
Item 2. PROPERTIES......................................................20
Item 3. LEGAL PROCEEDINGS...............................................21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............22
Item A. EXECUTIVE OFFICERS..............................................23
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.....................................25
Item 6. SELECTED FINANCIAL DATA.........................................26
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................39
PART III
ITEMS 10, 11, 12 AND 13 (EXCEPT FOR THE INFORMATION REGARDING EXECUTIVE OFFICERS
CALLED FOR BY ITEM 10, WHICH IS INCLUDED IN PART I HEREOF AS ITEM A) ARE
INCORPORATED BY REFERENCE FROM THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR ITS
1998 ANNUAL MEETING OF STOCKHOLDERS.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.....................................................40
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 within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Securities Reform
Act"). The Company desires to take advantage of the "safe harbor" provisions of
the Securities Reform Act 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. When used in this document, the
words, "anticipate," "plan," "intend," "believe," "estimate" and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current view of the Company with respect to future events. Such
forward-looking statements relate to, among other things, (i) the development
and commercial implementation of the Driver Logistics(TM) System and the FHMA
Network (as hereinafter defined) in the Company's target markets in the United
States, (ii) the procurement of radio spectrum and transmission sites, (iii) the
Company's ability to compete for customers successfully, (iv) the Company's
ability to obtain the necessary financing, (v) the Company's ability to
renegotiate certain terms and conditions of debt obligations (vi) the risks of
international business, and (vii) the effect of certain legislation and
governmental regulation on the Company. The prediction of future results is
inherently subject to various risks and uncertainties, including those discussed
under "Risk Factors" and elsewhere in this report, and accordingly, actual
results may differ materially from those expressed or implied by the
forward-looking statements included in and incorporated by reference into this
Report. The Company wishes to caution each reader of this Report to consider
carefully the specific factors discussed with such forward-looking statements as
such factors in some cases have affected, and in the future (together with other
factors) could affect, the ability of the Company to achieve its projected
results and may cause actual results to differ materially from those expressed
herein.
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PART I
Item 1. BUSINESS
Overview of the Company
Geotek Communications, Inc. (the "Company" or "Geotek") is a provider
of mobile logistics systems operating over the Company's proprietary network, a
spectrum-efficient, high quality, 900 MHz integrated digital voice and data
wireless communication network which is based on frequency hopping, multiple
access technology (the "FHMA(R) Network"). The Company's core product is the
Driver Logistics(TM) System, a motor vehicle-based intelligence system designed
to improve the productivity of the fleet driver.
Geotek markets Driver Logistics Systems in the 11 markets in which it
operates FHMA Networks. The Company maintains specialized mobile radio licenses
("SMR") in over 40 metropolitan trading areas throughout the United States.
During 1997, the Company devoted, and expects to continue to devote, substantial
financial and management resources to continue developing and implementing its
Driver Logistics Systems and network technology.
The Driver Logistics System integrates voice and data communications,
hardware and specialized software applications with the Company's proprietary
digital voice and packet data network. The system allows users to increase the
productivity of drivers in the field by organizing work schedules, assigning
jobs to mobile workers, tracking work status and completion, sending and
receiving directions, locating stolen and lost vehicles, verifying transactions
and communications among mobile work groups. The Company believes that mobile
fleets, with their dynamic job scheduling and rapid response requirements stand
to benefit the most from the use of the Driver Logistics System.
Background
During a substantial portion of 1997, the Company engaged in two
business activities: wireless communications and communications products. In
late 1997, the Company announced its intent to realign its operations to focus
on its wireless communications activities in the United States. Consistent with
this change in focus, on November 26, 1997, the Company discontinued its
communications products segment and sold Bogen Communications International,
Inc. ("BCI"), for $18.5 million. BCI was primarily engaged in the development,
manufacturing, and marketing of telephone peripherals and sound and
communications equipment. (See "Discontinued Operations" below.)
During 1997, Geotek's wireless communications subsidiaries provided
mobile voice and data services to businesses in the United States, the United
Kingdom and Germany. The Company and its affiliates held licenses and network
interests in the United States, the United Kingdom, Germany, Korea, Canada and
Argentina. In February 1998, the Company sold both its interest in its German
joint venture ("Terrafon") and its wholly-owned subsidiary in the United
Kingdom, National Band Three Ltd. ("NB3") for DM7 million and $82 million
respectively. (See "International Operations" below). During 1997, the Company's
wireless communications subsidiaries also marketed and sold FHMA digital network
equipment to network operators and equipment suppliers in Korea (See
"International Operations" below).
The Company is incorporated under the laws of the State of Delaware.
Its principal executive offices are located at 102 Chestnut Ridge Road,
Montvale, NJ 07645 and its telephone number is (201) 930-9305.
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The 1998 Market Focus
The Company is focused on the substantial market for mobile
logistics. As part of its effort to engage the mobile marketplace, during the
first quarter of 1998, the Company announced both a corporate repositioning and
a major branding initiative under the concept of "WorkPower for the Road(TM)."
The Company's Driver Logistics System is designed to provide the tools for
increasing the productivity of drivers, while reducing errors, late deliveries,
and wasted trips. The Company believes that many businesses will seek to realize
the value associated with improving driver productivity.
The Driver Logistics System
The five key features to the Geotek Driver LogisticsSystem are: 1)
navigation to aid on time arrival, improve routing, and increase customer
service; 2) safety and security to protect drivers, their passengers, their
payloads, and their vehicles; 3) task processing to simplify paperwork and
automate routine tasks; 4) driver well-being to relieve driver stress and
fatigue and to enhance, alertness; and 5) communications to provide real-time
voice and data transmissions between drivers and their key contacts.
The Company's core product offering, the Driver Logistics System(TM)
1000, is a restructured, upgraded and integrated system that includes
hardware, software applications, network usage, installation, training, and
maintenance and is sold under a multi-year contract. The Driver Logistics System
1000 software, "WorkPak(TM), which is included in the package, is a software
suite that runs on the Windows 95(R)operating environment and is planned to
contain the following software applications, including:
o OfficeLine(TM)- two-way telephony, two-way messaging, and digital two-way
dispatch radio services.
o OfficeLine Messaging - allows users to send and receive text from mobile
workers. Messages can be stored in memory for recall at any time. Message
receipt can be confirmed and messages which are not received, are resent
until received. All messages are time and date-stamped for accurate
communications records.
o OfficeLine Voice - allows dispatchers to communicate immediately with
individuals or groups and to log these transmissions. Two-way cellular-like
telephony features include speed dialing, last number redial,
previously-dialed number memory, and dual-tone multi-frequency (DTMF)
capabilities during active telephone calls. All voice communications are
logged into the system for reporting purposes.
o JobSMART(TM) - a fleet and driver optimization tool for real-time job
assignment and tracking. It allows dispatchers to schedule assignments for
the entire mobile fleet, track their progress, identify problems as they
occur, and update the driver's schedule throughout the day. This function
organizes the workday more effectively to enable drivers to do more in less
time.
o DriveGuide(TM)- a real time GPS-based vehicle location system that allows
dispatchers to locate their fleet vehicles on the Driver Logistics
WorkStation(TM) at any time. The system uses detailed electronic maps and
global positioning satellite receivers to plot the location of vehicles.
o G-Protect(SM) - a vehicle tracking function designed to prevent theft and
loss. It also uses detailed electronic maps and global positioning satellite
receivers to plot the location of stolen vehicles.
The Driver Logistics System 1000 Hardware includes:
o The DriveStation(TM) - an in-vehicle device with a four-inch screen and
ergonomically designed keys. Formerly called the Enhanced Mobile Workstation
or "EMW", the DriveStation(TM) is designed to operate
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under all vehicle and road conditions using the Geotek SmartPort(TM), the
gateway to the FHMA network. With the DriveStation(TM), drivers can receive
job assignments, customer information, job status changes, routing and
re-routing directions, and emergency assistance. They can also engage
two-way text messaging, voice telephony, and digital radio communication.
The DriveStation(TM) has two optional accessories that provide additional
communication:
- S.W.I.P.E.(TM) (Send. Write. Identify. Print. Exchange.), a Point
of Sale device that enables on-site credit transactions and provides printed
receipts; and
- The Driver Logistics Portable which allows users to extend
information exchange beyond the vehicle by providing portable voice and text
communications capabilities.
o The Driver Logistics(TM) WorkStation - is an IBM-personal computer, powered
by an Intel 166 MHz Pentium microprocessor with 32 megabits of RAM. The
WorkStation features a 15-inch color monitor, a high quality microphone, and
built-in speakers housed in a mini-tower configuration.
Product Development
Subject to the availability of financing, the Company, in the future,
plans to introduce additional products and services, including the Driver
Logistics System 2000 and System 3000 which are currently in the early stages of
development. The Driver LogisticsSystem 2000 is expected to feature more robust
software and advancements in the areas of safety/security, communications, and
task processing. In addition, the Company intends to introduce with its Driver
Logistics System 3000, a menu-driven, pad-sized screen device designed to
provide drivers with portability, an Internet interface, and a full portfolio of
hosted services.
Configuration of the Geotek Network Service Area
The Company's FHMA Network employs a macrocellular architecture
consisting of a relatively small number of transmission sites with transmitters
capable of covering a radius of up to approximately 25 miles in diameter, the
precise size depending upon geography and topography. The macrocells are
configured to form a digital wireless network in a given market. A base station
containing the central computer system and switching equipment is located at or
near one of the transmission sites in each market The system's use of a
relatively small number of sites and its ability to reuse frequencies enables
the Company to divide each cell coverage area into several sectors. In contrast,
many other wireless service providers, including conventional cellular system
and other enhanced specialized mobile radio ("ESMR") operators, build multiple
overlapping "cells," (multicell) sometimes dozens in a market, each with its own
low power transmission station. The Company believes its use of a relatively
small number of transmission sites enables it to reduce the infrastructure cost
required to service a market relative to the multicell approach employed by more
traditional wireless service providers. The Company also believes that its
system design allows it to initiate service in a given market at a lower cost
and achieve profitability with fewer customers than other digital wireless
communications providers. Further, the Company's ability to reuse frequencies
enables it to increase, at a relatively low cost, the capacity of its networks,
as such capacity is needed by further dividing a coverage area into sectors or
adding additional sites. The Company also believes that its networks will be
less expensive to operate than other multicell systems because, among other
things, the networks require less equipment, which results in lower costs for
transmission lines and site leases.
Technology
The U.S. digital wireless network is based on the Company's
proprietary frequency hopping FHMA Network. The FHMA Network integrates Time
Division Multiple Access (TDMA), a standard digital transmission technique
currently utilized by digital cellular systems, with spatial sectorization,
frequency hopping, error correction coding and voice multiplexing. The Company
believes that the combination of
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these techniques permits it to significantly increase the capacity of its radio
spectrum over that of traditional analog specialized mobile radio ("SMR")
capacity and improve the quality and security of wireless communications over
current analog systems.
The Network Roll-Out
The Company is in the early stages of operations of its FHMA networks
in 11 metropolitan markets in the United States in Baltimore/Washington D.C.,
Boston, Dallas, Miami, New York, Orlando, Philadelphia, Tampa, Houston, San
Antonio and Phoenix. Subject to the availability of financing, the Company's
short-term business plan is to add customers and customer revenues and upgrade
the Driver Logistics System for sale in the 11 markets in which it is currently
operating. In accordance with its long-term business plans, subject to the
availability of additional financing, the Company intends to deploy its networks
in over 40 of the largest metropolitan markets throughout the United States in
which it currently owns licenses, on a regional basis. In the United States, the
Company controls 900 MHz frequencies with approximately 2,170 channels which the
Company believes should be sufficient to initiate digital wireless services in
all of the Company's targeted markets.
The Company will be required to raise substantial financing, a
portion of which must be raised beginning in the second quarter of 1998, in
order to fund its ongoing working capital needs and to implement both its short
and long term business plans. (See Negative Cash Flow; Anticipated Future
Losses; Significant Future Capital Requirements; Need for Additional Cash;
Dilution, in Risk Factors below, as well as Footnote 1 to the Consolidated
Financial Statements.)
The Key Stages of the FHMA Network Roll-Out
The roll-out of the Company's FHMA Network in a particular market, the
pre-requisite to providing Driver Logistics Systems, consists of the following
key stages:
Propagation. Propagation analysis involves the identification, through software
programs and engineering analyses, of the optimal areas in a target market for
the placement of the base station and remote sites. The Company has
substantially completed its propagation analysis for the 11 U.S. target markets
in which it is currently operating.
Procurement of Site Leases and Permits. The Company must procure leases and
permits for the sites at which the digital wireless infrastructure base stations
and remote sites are to be located. The Company has engaged multiple site
leasing organizations to assist the Company in identifying potential site
leases, negotiating leases and acquiring required local approvals. The
acquisition of leases and required permits is typically a two-to-six-month
process, although delays may occur from time to time. As the Company increases
its coverage area in each of its target markets (including the markets where it
currently provides service), it will need to procure additional site leases.
Build-out. Preparation of each base station, which includes ventilation and air
conditioning, grounding and
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equipment installation, testing and optimization, averages ten to twelve weeks.
As the Company adds customers and increases its coverage area in markets, it may
be required to increase the number of remote sites in such market.
Acquisition of Additional Spectrum and Transmission Sites. The Company may
require additional spectrum to add capacity and services in certain of its
existing markets as well as any future markets in the U.S. The Company
anticipates that it may eventually need more spectrum in its more populated
markets. As spectrum is a finite resource, there can be no assurance that the
Company will be able to obtain additional spectrum to meet its possible needs.
Additionally, the acquisition of additional spectrum may require significant
additional capital in certain of its more populated markets.
There are only a limited number of existing communications towers capable of
providing the Company with sufficient coverage for its radio transmissions and
supporting its transmission equipment. If the Company cannot obtain leases for
existing towers, it may be required to purchase sites, obtain necessary permits
and build such towers, which could take up to one year for each tower and
require additional financing. (See "Need for Additional Spectrum and
Transmission Sites" in Risk Factors below).
Integration Of New Services and Software. The Company's current and proposed
Driver Logistics Systems involve a complex integration of sophisticated voice
and data applications that utilize newly developed hardware and specialized
software products. The introduction of additional services requires testing and
hardware and software modifications in order to integrate such services with the
existing FHMA Network and Driver Logistics Systems. In addition, new software
may be required to solve technical difficulties that may arise in the operation
and performance of the FHMA Network and Driver Logistics Systems due to the
addition of customers, increased coverage area, and differences in geography and
topography in particular markets. (See "Integration of New Services and
Software" in Risk Factors below).
Marketing and Distribution
The Company markets its Driver Logistics System both directly to
end-users and indirectly through a network of independent dealers and
distribution partners that have existing relationships with a large number of
its target customers. The Company utilizes dealers and agents that sell
communications systems solutions and services to business users. The Company's
strategy is to focus on acquiring and maintaining several dealer relationships
within each market. The Company supports its dealers in each local market with
Geotek employees that consist of indirect channel managers in the sales and
training area and technical support staff for installation and technical
information.
The Company has initiated marketing activities with selected
distribution partners. These partners sell logistics solutions to business
customers and, in many cases, these customers want to extend these solutions to
their mobile workforce by means of a wireless communications system. For
example, the Company is pursuing an arrangement with IBM, whereby IBM and the
Company are jointly developing a solution to integrate existing legacy office
applications with wireless networks, which the Company believes can provide
additional value to both IBM's and the Company's customers.
The Company intends to pursue further alliances, relationships, and
additional distribution agreements with data equipment, data services, and data
software companies. If consummated, the relationships could provide the Company
with access to both distribution capabilities as well as an established customer
base. The successful implementation of the Company's Driver Logistics Systems
and FHMA Network will depend, in part, on the Company's ability to develop,
maintain, and grow relationships with such parties. Delays in the implementation
of the wireless networks may adversely affect the Company's relationship with
its dealers, VARS, and distribution partners.
In addition, the Company has increased its direct sales force to
augment the dealer network.
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Increasing the size of the Company's sales force will result in substantial
additional expenses to the Company. The Company has no proven record of success
with marketing its products and services.
International Operations
Korea
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
Network on an 800 MHz frequency. Anam Telecom commenced operations in November
1997 in the Seoul region of Korea.
In 1997, the Company, through its subsidiary, Geotek Technologies,
Inc. ("GTI"), began delivering equipment and supervising the construction of
FHMA based digital networks under contracts with Anam Telecom, a related party,
and Hyundai Electronics Industries Co., Ltd. ("HEI"). HEI, in turn, sold such
equipment and services to unrelated Korean regional operators. The Korean
regional operators commenced operation in the fourth quarter of 1997. (See
"Risks of International Business" below.)
Canada
In July 1997, the Company entered into a joint venture agreement with
two Canadian partners for the purpose of deploying FHMA Networks in the
provinces of Ontario, Quebec and British Columbia utilizing 900 MHz licenses
previously awarded to Geotek Communications Canada, Inc., a wholly owned
subsidiary of GeoNet Communications Canada, Inc. by Industry Canada, the
regulatory agency responsible for spectrum allocation in Canada. The Company's
joint venture partners withdrew from the joint venture in the first quarter of
1998. The Company has the option to reapply to Industry Canada for licenses at
such time that the Company obtains financing sufficient to pursue its business
in Canada.
Argentina
The Company owns a 70% equity interest in Geotek Argentina S.A.,
which holds a nationwide trunked radio system license in Argentina. In August,
1997, Geotek Argentina S.A., was awarded 1 MHz frequency licenses in the 900 MHz
band covering metropolitan Buenos Aires, Cordova, Mendoza and Santa Fe, and is
currently in the process of deploying its demonstration site in Buenos Aires.
European Assets
In December 1997, consistent with the Company's strategy to focus on
its U.S. operations and FHMA Networks, the Company entered into definitive
agreements to sell its European analog assets. In February 1998, the Company
completed the sale to Telesystems International Wireless, Inc. ("Telesystems")
of the Company's interest in its German joint venture ("Terrafon") and the
Company's wholly-owned subsidiary in the United Kingdom, National Band Three
Ltd. ("NB3").
The Company sold all of the issued and outstanding shares of capital
stock of NB3, a wholly-owned subsidiary and provider of analog Private Mobile
Access Radio ("PAMR") service to approximately 64,900 business subscribers in
the United Kingdom, for approximately $82 million in cash. Five percent of the
$82 million purchase price is being held in escrow to satisfy the Company's
indemnity obligations, if any, under the agreement and will be released within
six months after the closing of the transaction, assuming no indemnity claims
are made. This transaction resulted in a gain to the Company of approximately,
$60.2 which will be recorded in the first quarter of 1998. At December 31, 1997,
the total assets and liabilities of NB3, are presented as net asset held for
sale in the amount of $ 22.0 million and consist of approximately $4.5
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million in cash, $3.2 million in accounts receivable, $5.2 million in goodwill
and $18.5 million in property, plant and equipment. The Company sold its
interest in Terrafon, the Company's 50/50 joint venture in Germany which was
formed through the merger of the Company's German networks with RWE Telliance
A.G. ("RWE") mobile radio network in December 1996 for DM 7,000,000
(approximately $3.9 million) in cash. DM 500,000 of the purchase price is being
held in escrow to satisfy the Company's indemnity obligations, if any, under the
agreement and will be released within fifteen months after the closing of the
transaction. Upon the decision to sell its investment in Terrafon, the
Corporation recognized a loss of approximately $12.9 million which was
recognized in the period ended December 31, 1997.
Other
GMSI
The Company owns an 80% interest in GMSI, Inc. ("GMSI"), a system
integrator for the transportation market which designs, manufactures, and sells
fleet management systems using mobile data software. GMSI is a leader in the
market for data dispatch systems used in large fleets for taxi, limousine,
paratransit, and public transportation. GMSI provides integrated solutions which
can operate on the Company's network. GMSI markets its products through a
combination of direct sales and value added resellers in North America, Asia,
and Europe. A proprietary software package, Wireless Network Interface ("WNI"),
enables the GMSI systems to work with a variety of wireless networks, in
addition to the Company's network, including SMR, private channel, and public
wireless data systems.
The GMSI systems are integrated into the customers' office based
dispatch systems and host computer systems. In addition, GMSI provides a variety
of mobile data terminals, radio modems, installation services, and licenses,
third party software applications for use in fleet management.
Discontinued Operations - Communications Product Segment
On November 26, 1997, the Company sold its communications products
subsidiary, Bogen Communications, Inc. ("BCI") for $18.5 million in cash. The
Company owned approximately 64% of the issued and outstanding capital stock of
BCI, which, in turn, owned 99% of Bogen Corporation ("Bogen") and 68% of Speech
Design GmbH ("Speech Design"). Bogen developed, produced and sold telephone and
telecommunications peripherals and sound and communications equipment through
its wholly-owned subsidiary, Bogen Communications, Inc. Speech Design, located
in Munich, Germany, developed, manufactured, and marketed telephone peripheral
hardware utilizing digital voice processing technologies. The Company has
presented the financial position and results of operations as discontinued
operations in the Company's Consolidated Financial Statements (See Footnote 2 to
the Company's consolidated financial statements).
Competition
See discussion of "Competition" in Risk Factors, below.
Government and Industry Regulation
The licensing, construction and operation of SMR systems in the United
States is regulated by the FCC under the Communications Act of 1934, as amended
(the "Communications Act"). The FCC currently regulates two types of 900 MHz SMR
licenses, both authorizing ten channels of 12.5 kHz in width from base station
to mobile. The Company holds both types. The first type is the Designated Filing
Areas ("DFA") licenses, which were issued by the FCC in the 1980's in 50 urban
markets, on a site-specific basis. The second type is the Major Trading Areas
("MTA") license, issued pursuant to the FCC's 900 MHz specialized mobile radio
("SMR") spectrum auctions, which were concluded in 1996. MTA licenses authorize
much larger
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territories in 51 markets.
At December 31, 1997, the Company held authorizations for 185 MTA
licenses and 98 DFA licenses. The MTA licenses are non-site-specific and have an
extended construction period of 3-5 years. Where the MTA licenses overlap
coverage with a DFA license, the MTA licensee must ensure non-interference
protection for the incumbent DFA licensee. Where the MTA licensee itself holds
the incumbent DFA license, the DFA license may be canceled or subsumed into the
MTA license, thereby assuming the regulatory/construction advantages of an MTA
license. In 1998, the Company has subsumed virtually all of its DFA licenses
that are surrounded by its MTA licenses, in order to take advantage of
regulatory/construction advantages. (See "Need for Additional Spectrum and
Transmission Sites.")
Most of the equipment utilizing the Company's technology that is used
to send signals must satisfy certain technical standards and receive FCC type
acceptance approval. In addition, the Company's equipment and transmitter sites
must comply with the FCC's guidelines for human exposure to radio frequency
("RF") radiation. These guidelines apply to all MTA-based 900 MHz SMR licenses.
Although the Company's base stations and current subscriber units have received
such type acceptance approval from the FCC, there can be no assurance that
future generations of subscriber units or other equipment will meet such
standards.
Under the Communications Act, SMR system providers were traditionally
regulated as private carriers and, therefore, were subject to less regulation by
both the FCC and individual states than were common carriers such as cellular
telephone companies. However, the FCC has initiated and is likely to continue to
initiate regulatory proceedings with wide-ranging implications for the wireless
telecommunications industry. Most of the rule-makings were initiated in response
to congressional amendments to the Communications Act, as directed by the
Omnibus Budget Reconciliation Act of 1993 (the "Budget Act"). The Budget Act
reconfigured the wireless marketplace to include a category of Commercial Mobile
Radio Service (CMRS) providers, which included all wireless carriers who offer
wireless services, interconnected to the public switched network to a
substantial portion of the public, for profit. In 1996, President Clinton signed
into law the Telecommunications Act of 1996 (the "Telecommunications Act") which
imposes sweeping reform of telecommunications policy. Although the majority of
the Telecommunications Act's measures directly impact large common carriers,
cable and broadcast operators, and Internet service providers, many of the
Telecommunications Act's provisions have an effect upon the wireless
marketplace, and upon the Company.
Under the Budget Act and Regulations which have been promulgated
thereunder, the Company is now required to provide services on a
"non-discriminatory basis" and on terms that are not "unjust and unreasonable,"
as such terms are defined in the Communications Act. As a practical matter,
"non-discriminatory basis" means that the Company cannot tailor certain service
packages and price offerings to individual customers that are not generally
available to similarly situated parties. In addition, the Company must now limit
its foreign investors to 25% or less.
The Company, like other common carriers, is now subject to various
state and federal programs designed to aid poor, rural, or disabled users of
telecommunications services. In particular, as a common carrier providing
interstate telecommunications services, the Company must comply with the FCC's
Universal Service program as well as the FCC's Telecommunications Relay Services
program. Both of these programs generally require the Company to contribute a
certain percentage of its interstate telecommunications revenues. In addition to
Federal requirements, many states have adopted, or will soon adopt, universal
service programs as well. States are permitted to require CMRS providers to
contribute in a non-discriminatory manner. The Company is also subject to the
requirements that it comply with the Commission's Equal Employment Opportunity
("EEO") rules and file annual reports concerning EEO complaints. Finally, the
Company is required to pay annual regulatory fees to the Commission based upon
the number of subscribers.
Under past proceedings, the FCC determined that Local Exchange
Carriers ("LECs") must offer
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interconnection to CMRS providers on reasonable terms and conditions, and under
the principle of mutual compensation. The FCC declined to impose direct
interconnection obligations for CMRS-to-CMRS transmissions. Although it is not
yet final, the FCC may enforce specific limits with respect to prices, terms,
and conditions of interconnection arrangements for LEC-CMRS interconnection, to
ensure that CMRS providers are granted equal competitive footing with more
established LEC service providers. While the 8th Circuit Court of Appeals
vacated much of the FCC's local competition rules and policies dealing with
interconnection to LEC networks in July 1997, it generally left intact those
policies governing LEC-CMRS interconnection. In addition, on December 30, 1997,
the FCC's Common Carrier Bureau issued a formal letter ruling, declaring that
LECs may not charge CMRS providers for LEC-originated traffic that terminates on
CMRS networks. This letter confirmed prior FCC rule-making policy and may be
further challenged by LECs.
In a separate proceeding, the FCC amended its rules to permit
broadband and narrowband CMRS providers to offer wireless local loop and related
services. Specifically, the FCC adopted a definition of "wireless local loop"
that is sufficiently broad to allow the provision, by CMRS providers such as the
Company, of certain fixed services. The definition of "wireless local loop" is
"the path between the subscriber and the first point of switching or aggregation
of traffic." Such an expansion in available service offerings could be
beneficial to the Company.
In late 1997, the FCC completed its proceeding designed to ensure the
availability of 911 and enhanced 911 (or "E911") services for users of mobile
telephones. The FCC's decision generally requires covered providers (as well as
other mobile telephone providers) to transmit all 911 calls to Public Safety
Answering Points ("PSAPs") , including calls made by non-subscribers. In
compliance with FCC rules, the Company will satisfy its 911 responsibilities
through the use of a trained dispatcher.
If digital calling technology is employed by the Company in a
particular market, it must generally transmit 911 calls made using text
telephone devices ("TTY's'), used by the hearing-impaired, by no later than
October 1, 1998 (analog service providers must already provide TTY access to
911). With regard to the FCC's E911 requirements, by April 1998, the Company is
required to transmit certain caller data to the PSAP as well as the cell site of
the caller. Finally, by October 2001, the Company's systems must be capable of
notifying the PSAP of the approximate geographic location of the caller. These
last two E911 requirements only become effective if the local or state 911
system has adopted a cost recovery mechanism and has requested these enhanced
services from the wireless provider.
In its docket No. 94-54 proceeding, the FCC adopted several
operational requirements for CMRS providers, including the requirement that
"covered SMR" providers offer "manual" roaming. The FCC is currently seeking
comment on whether it should require "automatic" (carrier-to-carrier) roaming as
well. In this same proceeding, the FCC already concluded that covered SMR
providers must allow the unrestricted resale of their services. Because the
Docket No. 94-54 proceeding's definition of covered SMR provider includes those
900 MHz SMR providers holding MTA licenses, the Company is required to comply
with the agency's resale and roaming policies. For the same reason, the Company
is subject to the FCC's "number portability" requirements adopted in Docket
95-116. Several industry trade associations have sought to delay or eliminate
the FCC's number portability requirements for certain CMRS providers, including
covered SMR providers. The applicability of these four proceedings -- "E911",
"roaming", "resale", and "number portability" - to the Company depends upon the
FCC's definition of "covered SMR" and whether the Company falls within that
definition. The FCC's determination in these proceedings remains subject to
further revision.
Other Regulatory Matters
In 1996, the President signed into law the Communications Assistance
for Law Enforcement Act ("CALEA") which requires communications carriers to
allow law enforcement the ability to "monitor" calls on their wireless systems.
CALEA requires compliance with Federal Bureau of Investigation Assistance
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Capability Requirements within four years of the signing of CALEA into law. On
October 10, 1997, the FCC commenced a rule making proceeding, soliciting comment
on which types of communications providers should be subject to CALEA. The FCC
tentatively concluded that carriers offering services similar to those offered
by the Company should be covered by CALEA. However, this proposal is subject to
revision through the agency's rule making process as well as the actions of the
FBI. Although it is not yet certain, it is likely that the Company, along with
other SMR operators, may be waived from complying with CALEA.
Patents and Technology Rights
GTI-Israel, in its own name and jointly with the Company, has filed
several patent applications in Israel and in other countries, including the
United States. In addition, GTI-Israel has an exclusive royalty free right to
utilize the technology covered by U.S. patents issued to Rafael.
In addition to those patent applications filed by GTI-Israel, the
Company also has filed patent applications in Israel, the United States and
other countries based on technology developed by the Company. In August, 1997,
the Company was granted a design patent in the United States for a mobile
communications terminal. As of December 31, 1997, no Israeli patents have been
issued to the Company or GTI-Israel and there can be no assurance that a patent
will be issued from any pending or future patent applications or that if any are
issued that any of them will have any commercial significance. The Company is
aware of certain patents and patent applications held or filed by others which
generally relate to the subject matter of the Company's activities. The Company
believes that none of such patents or applications is likely to have a material
adverse effect on the ability of the Company to utilize any technology currently
intended to be utilized by the Company.
The Company owns several trademarks, including Geotek(R) and FHMA, in
the United States and certain other countries. Where other applications have
been filed, registrations are still pending.
The Company's engineering and development expense related to the
digital wireless communication system totaled $39.6 million in 1997 compared to
$34.0 million in 1996 and $33.0 million in 1995.
Employees
As of December 31, 1997, the Company had approximately 685 full-time
employees engaged in its wireless communications businesses. The Company
considers its relationship with its employees to be good.
As of December 31, 1997, subcontractors, including Rafael, were
engaged in the production, development and enhancement of the Company's FHMA
Network. Rafael's employees are represented by a labor union, and, from time to
time, there have been labor disputes between Rafael and its employees. To date,
these slow-downs have not had a material effect on the Company's business. There
can be no assurance, however, that any future disputes will not adversely affect
Rafael's ability to deliver equipment to the Company, which could further delay
the future technical development and enhancements to the Driver Logistics
System.
RISK FACTORS
Negative Cash Flow; Anticipated Future Losses; Significant Future Capital
Requirements; Need For Additional Cash; Dilution
The Company has never been profitable, has never generated positive
cash flow from consolidated operations and, since its inception, has incurred
significant net operating losses and negative cash flow. The Company had
consolidated net losses from continuing operations of $225.7 million, $140.3
million and $83.1 million for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, the Company had a
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deficiency of earnings before interest, taxes, depreciation and amortization
("EBITDA") of $161.5 million, $96.6 million and $62.4 million for such periods,
respectively. The Company anticipates that its net losses from operations and
its EBITDA deficiency will continue during the commercialization and continued
development of the Driver Logistics System and the implementation of the FHMA
Network. There can be no assurance that the Company's Driver Logistics System
and FHMA Network will ever provide a revenue base adequate to achieve or sustain
profitability or generate positive cash flow.
The Company will be required to raise substantial financing, a
portion of which must be raised beginning in the second quarter of 1998, in
order to continue to fund its ongoing working capital needs and to implement
its business plan. The Company's short-term business plan is to increase the
number of customers and customer revenues and to offer new services in the 11
markets in which it is currently operating, and its long-term business plan is
to roll-out the Driver Logistics System utilizing the FHMA network in over 40
markets and to enhance its network operations and to take advantage of
international
opportunities. The Company estimates that through the end of 1998, approximately
$85 million will be required in order to fund working capital needs and debt
service, affecting the Company's ability to significantly increase the number of
customers subscribing to the Driver Logistics System in the 11 markets in which
it is currently operating. At December 31, 1997, the Company had approximately
$13.4 million of cash and cash equivalents and a $89.6 million vendor credit
facility available, the last $50 million of which is subject to satisfaction of
certain conditions and can only be used for the purchase of infrastructure
equipment from Hughes Network Systems, Inc. The $13.4 million in cash and cash
equivalent may be used for working capital and general corporate purposes. In
addition, the Company had $9.1 million in restricted cash from the sale of BCI,
which was released in the first quarter of 1998, and in February 1998, upon
completion of the sale of its European analog networks, received an additional
$85 million in restricted cash. In accordance with amendments under the
indenture governing its Senior Secured Discount Notes due 2005 ("15% Discount
Notes"), the Company can use the proceeds from the sale of European assets as
follows: 40% for qualifying capital expenditures; 40% for working capital; and
20% for the repayment of the pro rata portion of the accreted value of the
Discount Notes. The Company does not intend to construct additional U.S. markets
until such time as it obtains sufficient financing to do so. In addition, the
Company does not intend to expand existing or to deploy new international FHMA
networks until additional capital is obtained. Further, the Company may require
financing for certain of its debt obligations, including potential redemption
obligations with respect to certain series of the Company's preferred stock.
(See "Substantial Leverage; Future Repayment Obligations.")
To meet its additional capital requirements and to successfully
implement its strategy, the Company plans to seek additional financing, to the
extent available, from one or more sources, including, but not limited to,
public or private equity or debt financing, bank loans, strategic partners,
joint ventures, vendor financing, leasing arrangements, asset sales or a
combination of these sources. The Company has obtained the consent of a majority
of the holders of certain of the Company's debt securities to utilize up to
approximately $40 million of the proceeds from debt financings and/or additional
asset sales for working capital purposes. There can be no assurance that the
Company will be able to obtain the additional financing, in a timely manner,
necessary to satisfy its cash requirements or to implement its strategy
successfully. The failure to obtain the requisite additional capital in the
short term, fiscal 1998, would prevent the Company from executing its short and
long-term business plan, would result in the Company violating certain debt and
contractual covenants, and would raise substantial doubts about the Company's
ability to continue as a going concern.
The issuance of additional equity securities or securities
convertible into equity securities, in addition to the possible conversion of
existing convertible preferred stock, and convertible notes, the redemption of
redeemable preferred stock, the exercise of warrants and options or the possible
repayment of other similar obligations in Company stock, will result in the
dilution of the Company's stockholders. Further, under the applicable conversion
formulae for certain series of Preferred Stock, the number of shares of Common
Stock issuable upon conversion will increase if the market price of the Common
Stock decreases. Moreover, the Company cannot determine accurately the number of
dividend shares which may be issued to the holders of the Company's Series N
through Series S Convertible Preferred Stock, as such number is based upon the
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market price of the Common Stock prior to the payment of such dividend.
Substantial Leverage; Future Repayment Obligations
As of December 31, 1997, the Company's consolidated long-term debt,
including current portion and redeemable preferred stock, was approximately
$326.1 million. During 1997, the Company's annual cash payments for debt service
and preferred stock dividends were $18.2 million and will increase to
approximately $20 million in 1998 and to at least $55.0 million beginning in
2001. The Company's obligations to pay principal on its currently outstanding
indebtedness will commence in October 1998 (except that the Company is required
to use 20% of the proceeds from the sale of NB3 and Terrafon to make a tender
offer to the holders of the Company's 15% Senior Secured Discount Notes due 2005
(the "15% Discount Notes"), on a pro rata basis according to the accreted value
of the 15% Discount Notes, within 30 days after the consummation of such sales)
when principal and interest payments on indebtedness to Hughes Network Systems
in the original principal amount of $24.5 million will become due and payable to
the extent this indebtedness has not then been converted into Common Stock or
renegotiated by the Company.
Interest payments on borrowings under the Company's vendor financing
agreement with HNS are semi-annual and will commence on July 15, 1999 (unless an
event of default occurs earlier), and principal payments will commence in 1999.
The Company's obligations will increase significantly starting in 2001, when
interest payments will commence on the 15% Discount Notes and the principal
amount of any of the Company's 12% Senior Subordinated Convertible Notes due
2001 (the "12% Notes") then outstanding will become due and payable. The Company
also is required to repay $40 million in November 2002 pursuant to a Senior Loan
Facility (the "Senior Loan Facility") to entities affiliated with S-C Rig (as
defined below). In October 2000, the Company's Series H Cumulative Redeemable
Convertible Preferred Stock ("Series H Preferred Stock") is redeemable at the
option of the holders for an aggregate price of $40 million. The Company may
elect to pay the redemption price in shares of Common Stock having an aggregate
market value equal to 150% of the redemption value of the Series H Preferred
Stock being redeemed. If the Company's cash flow from operations is insufficient
to make such payments, the Company would be required to refinance or renogotiate
the terms of some or all of such indebtedness in order to avoid a default. There
can be no assurance that the Company would be able to refinance such
indebtedness on acceptable terms or in a timely manner. A default under the 15%
Discount Notes or the 12% Notes would have a material adverse effect on the
Company's financial position (see Footnote 1 to the Company's consolidated
financial statements).
The Company's substantial indebtedness may have important adverse
consequences, including (i) impairment of the Company's ability to obtain
additional financing in the future for working capital, capital expenditures and
general corporate purposes; (ii) direction of a substantial portion of the
Company's cash flow from operations to the payment of principal and interest,
reducing funds available for other purposes, including the successful and timely
development and marketing of the Driver Logistics System, (iii) the Company
becoming more highly leveraged than other competing companies; and (iv) an
increased vulnerability to a downturn in its business or the economy in general.
In addition, the instruments governing the Company's outstanding indebtedness
impose significant operating and financial restrictions, which limit, among
other things, the Company's ability to incur indebtedness, utilize proceeds of
debt financings and/or asset sales for working capital purposes, repay new
indebtedness, pay dividends, make investments, engage in transactions with
stockholders and affiliates, issue capital stock of its subsidiaries, create
liens, sell assets and engage in mergers and acquisitions. Although these
instruments contain exceptions to these restrictions that are designed to allow
the Company to operate its business without undue restraint, such restrictions,
together with the Company's high degree of leverage, could limit its ability to
effect future financings and respond to changing market conditions.
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Dependence Upon Commercial Implementation of the Driver Logistics System and
FHMA Network
The Company's success will depend to a significant extent on its
ability to successfully market its Driver Logistics System in its target United
States markets. The successful and timely commercialization of the Driver
Logistics System will depend on various factors, many of which are beyond the
Company's control. These factors include, among others, the timely and
cost-effective manufacture, construction, testing, and integration of the FHMA
network infrastructure and software sufficient to provide adequate coverage,
stability, and capacity, the procurement and preparation of base station and
remote sites, the receipt of necessary regulatory approvals, the availability of
substantial additional financing in the short term and long term, recruitment
and successful training of the Company's sales staff and dealer network,
increasing competition, and market acceptance of the Driver Logistics System.
Dependence Upon Integration of New Services and Software
The Company's current and proposed services involve a complex
integration of sophisticated voice and data applications that utilize newly
developed hardware and specialized software products. The development and
implementation of the Driver Logistics System and FHMA Network to date has
raised and continue to raise technical difficulties, which have and may
continue to adversely affect service to customers in certain markets. Additional
technical difficulties may arise from time to time as the Company continues to
make hardware and software modifications, add new services and increase the
number of customers in a particular market. The introduction of additional
services is expected to require testing and hardware and software modifications
in order to integrate such services with the existing services, which may
present technical problems. During the fourth quarter of 1997, the Company began
introducing new operating system software in its current U.S. markets.
Integration of such software required significant modification to the network
and the hardware utilized by the Company's customers, as well as testing. The
success and timing of the integration of new services and new software and/or
the negative impact, if any, to the Company's customers from an interruption of
service cannot be predicted. In addition, new software may be required to solve
technical difficulties that may arise in the operation and performance of the
Driver Logistics System and FHMA Network as additional subscribers are added in
a particular market or as the coverage area in any market is increased.
Furthermore, each of the Company's U.S. target markets could present unique
technical issues due to differences in geography and topography, which may also
require new software. Delays in the integration of new services and new
software, or an adverse reaction from the Company's customers, could have a
material adverse effect on the Company's ability to successfully market the
Driver Logistics System, and accordingly upon other financial results, such as
revenues, cash flow and results of operations.
Dependence On Customer Receipts; Need to Lower Cost of Manufacturing Customer
Equipment
To date, the Company's operating expenditures incurred with respect
to its existing and planned offerings in each of its commercial markets have
significantly exceeded customer receipts. The Company attributes this
performance to two factors. Currently, customer equipment is provided to
customers for substantially less than the cost to manufacture such equipment.
Second, as a result of the Company's early promotional efforts and technical
difficulties, the Company has no significant amounts of anticipated revenue from
its U.S. customers. The Company's goal is to decrease such losses as it
continues to add customers and eliminate technical difficulties. Additionally,
the Company hopes to be able to lower the manufacturing cost of customer
equipment as customer volume increases and additional vendors manufacture the
units. However, there can be no assurance regarding the amount, if any, that the
Company's customers will pay for the Driver Logistics System or for service or
that the Company will be able to reduce the manufacturing cost of customer
equipment sufficiently to make manufacturing cost-effective; nor can there be
any assurance that the Company will be able to improve its collection of
revenues. More generally, there can be no assurance that the Driver Logistics
System will achieve market acceptance in the Company's targeted markets. The
inability of the Company to increase the price paid by customers, reduce
sufficiently its costs for its equipment, or establish an adequate customer base
in each of its markets could have a material adverse effect on the
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Company's cash flow from operations and financial position and the Company's
ability to compete in the marketplace (see Footnote 1 to the Company's
consolidated financial statements for discussion on impairment of long-lived
assets).
Dependence Upon The Driver Logistics Portable.
The Company recently introduced the Driver Logistics(TM) Portable
(the "Portable"). This may create additional technical challenges specific to
those customers using the Portable, including being able to provide a
commercially acceptable level of system coverage to those customers. In order to
provide proper network support for the Portable, the Company may be required to
construct additional sectors and acquire additional frequencies, which could
materially impact cost structure. The Company's ability to successfully
integrate the Portable and the costs required for such integration cannot be
accurately determined until the completion of additional analysis and testing.
The Company's inability to adequately integrate the Portable into its network or
to successfully market the Portable to its customers could adversely affect the
Company's ability to successfully market the Driver Logistics Portable.
Limited Operating History
The Company has limited experience in marketing Driver Logistics
Systems and in developing, establishing and operating wireless communications
networks. Further, a significant portion of the Company's operating experience
to date has occurred in foreign markets, primarily the United Kingdom and has
involved technology different from the Company's proprietary technology. The
Company's experience to date in the United States has been limited to providing
primarily voice and data dispatch services during 1996 to a relatively few
number of customers in seven of its 11 current markets. During 1997, the Company
provided voice and data services in eleven markets. Therefore, there is limited
historical financial and operating information to evaluate the Company's ability
to operate successfully as a provider of integrated digital voice and data
wireless communications services.
Need to Manage Growth; Dependence On Key Personnel
Successful development and marketing of the Driver Logistics System
in the Company's target markets will require expansion of the Company's
operating, financial and management systems, which, in turn, will require
additional senior management and a substantial number of additional technical
and sales personnel. The Company's success will depend in part on its ability to
attract, retain, motivate, train and manage additional individuals as well as
existing personnel. The substantial growth in the wireless communications
industry in recent years has created a strong need for talented and experienced
individuals and, accordingly, the market for such individuals is very
competitive. There can be no assurance that the Company will be able to attract
and retain such individuals necessary to support the proposed expansion of its
operations.
The success of the Company will depend greatly upon the experience
and active participation of its management. The Company has entered into
employment agreements with certain members of senior management, including those
employees who oversee the operations of the Company's main operating units. The
loss of members of its senior management could adversely affect the Company's
business. In addition, the successful further development and successful
marketing of the Driver Logistics System will depend, to a large extent, upon
the ability of the Company's engineers and scientific technical personnel to
perfect and improve existing and proposed products. The loss of some or all of
such personnel, the inability of the Company to attract additional personnel, or
the inability of such persons to design products or to continue product
enhancement in response to subscribers' demands or competitive pressures would
inhibit the Company's ability to sell its products and services and to operate
profitably.
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Need for Additional Spectrum and Transmission Sites
The Company may require additional spectrum to add capacity and
services in certain of its existing markets as well as any future markets in the
U.S. The Company anticipates that it may eventually need more spectrum in
certain of its more populated markets. Because spectrum is a finite resource,
there can be no assurance that the Company will be able to obtain additional
spectrum to meet its possible needs. Additionally, acquisition of additional
spectrum may require significant capital resources. The inability of the Company
to obtain additional spectrum that it may require could limit its ability to
expand its services and to increase the number of customers able to utilize the
Company's proprietary FHMA digital wireless network and Driver Logistics Systems
in certain markets.
There are only a limited number of existing communications towers
capable of providing the Company with sufficient coverage for its radio
transmissions and supporting its transmission equipment. If the Company cannot
obtain leases for existing towers, it may be required to purchase sites, obtain
necessary permits and build such towers, which could take up to one year for
each tower. If the Company is required to build new towers, the implementation
of the FHMA network Driver Logistics System in one or more of its target U.S.
markets could be delayed.
Impact of Government Regulation
The licensing, construction and operation of SMR systems in the
United States is regulated by the FCC under the Communications Act of 1934, as
amended (the "Communications Act"). The FCC currently regulates two types of 900
MHz SMR licenses, both authorizing ten channels of 12.5 KHz in width from base
station to mobile. The Company holds both types. The first type is the
Designated Filing Areas ("DFAs") licenses, which were issued by the FCC in the
1980's in 50 urban markets, on a site-specific basis. The second type is the
Major Trading Areas ("MTA") license, issued pursuant to the FCC's 900 MHz
specialized mobile radio ("SMR") spectrum auctions, which were concluded in
1996. MTA licenses authorize much larger territories in 51 markets. At December
31, 1997, the Company held authorizations for 185 MTA and 98 DFA licenses. The
MTA licenses are non-site-specific and have an extended construction period of
3-5 years. Where the MTA licenses overlap coverage with a DFA license, the MTA
licensee must ensure non-interference protection for the incumbent DFA licensee.
Where the MTA licensee itself holds the incumbent DFA license, the DFA license
may be canceled or subsumed into the MTA license, thereby assuming the
regulatory/construction advantages of an MTA license. The Company has subsumed
virtually all of its DFA licenses that are surrounded by its MTA licenses, in
order to take advantage of regulatory/construction advantages. (See "Need for
Additional Spectrum and Transmission Sites.")
In accordance with the Indenture (the "Indenture") governing the 15%
Discount Notes, the Company pledged an interest in certain of its subsidiaries
that hold a majority of the Company's DFA Licenses. In addition, on December 21,
1995, the Company, through its subsidiaries, entered into the Loan Agreement and
on September 27, 1996 entered into a Vendor Credit Financing Agreement (the
"Credit Agreement") with HNS pursuant to which the assets of the Company's
subsidiary, Geotek License Holdings, Inc., consisting of all MTA licenses
obtained by the Company during 900 MHz SMR spectrum auctions were pledged to HNS
as security. In December 1997, the trustee under the Indenture and HNS agreed to
reallocate the MTA licenses among subsidiaries of the Company all of whose stock
is pledged either to the Indenture trustee or to HNS.
As permitted by the FCC, the Company subsumed its Designated
Frequency Area ("DFA") licenses which were acquired prior to the 1996 auctions
with the Company's MTA licenses so that, together, they are regulated as a
single MTA license. Under the terms of the MTA licenses the Company acquired
during the auctions, a MTA will be "constructed" if one-third of the market's
population is served within three years of the grant, August 12,
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1999, and two-thirds of the population are served within five years of the
grant, August 12, 2001. As an alternative, the Company may elect for the FCC to
waive the requirements for August 12, 1999 and agree that the construction
requirements, that the Company provide substantial service to the MTA, be met by
August 12, 2001. At December 31, 1997, approximately $39.4 million (cost basis)
of the Company's $72.7 million of licenses were being utilized for commercial
service.
Most of the equipment utilizing the Company's technology that is used
to send signals must satisfy certain technical standards and receive FCC type
acceptance approval. In addition, the Company's equipment and transmitter sites
must comply with the FCC's guidelines for human exposure to radio frequency
("RF") radiation. These guidelines apply to all MTA-based 900 MHz SMR licenses.
Although the Company's base stations and current customer equipment have
received such type acceptance approval from the FCC, there can be no assurance
that future generations of customer units or other equipment will meet such
standards.
Dependence Upon Third Party Providers
The Company is dependent upon a relatively small number of
manufacturers for its products. Rafael Armament Development Authority
("Rafael"), a related party and a division of the Israeli Ministry of Defense,
is subcontracted for manufacturing and enhancing the base station and remote
sites. The terms of the Company's license of FHMA technology from Rafael and the
Company's receipt of certain capital grants provided by the State of Israel
impose limitations on the Company's ability to transfer the manufacture and
enhancement of certain aspects of its FHMA infrastructure absent the approval of
Rafael and the State of Israel.
Rafael has developed the base station equipment. In September 1996,
the Company and a wholly-owned subsidiary of the Company, Geotek Financing
Corporation ("GFC"), entered into an agreement with HNS pursuant to which HNS
agreed to manufacture certain of the components required for the construction of
900 MHz FHMA base station equipment in order to expand the Company's
manufacturing supply sources. In addition, HNS is providing up to $100 million
of financing (the last $50.0 million of which is subject to the satisfaction by
the Company of certain operating criteria) for up to 90% of the purchase price
of equipment scheduled for delivery by HNS to the Company prior to June 30,
1999. As of December 31, 1997, the Company has drawn down $10.4 million of the
$100 million. Rafael and HNS are currently producing base station equipment for
the Company's U.S. wireless network.
The Company procures all other components utilized in connection with
its digital wireless system from third parties. Farbell Electronics manufactures
large and small screen vehicle-mounted customer units and HNS manufactures the
portable unit. In 1997, Mitsubishi Consumer Electronics of America ("MCEA")
manufactured the mobile car radio, but will no longer do so. The Company does
not believe this will have a material impact on the Company's business because
going forward, the mobile car radio will be manufactured by GTI-Israel, a
subsidiary of the Company. In June 1997, the Company also entered into a
development and purchasing agreement with IBM to develop and produce an enhanced
telephone and dispatch switch, in order to upgrade its existing switches for
high customer capacity.
There can be no assurance that such third parties will deliver such
equipment on a timely basis. Although the Company believes that it can obtain
all components necessary to build the digital wireless system from other
sources, it may encounter delays in the event of a component shortage due to the
time needed to identify alternative sources and manufacture substitute
components. With the exception of Rafael and HNS, none of the Company's
suppliers has previously manufactured FHMA system equipment. Failure to obtain
hardware components on a timely basis or at satisfactory prices could result in
delays or cost overruns in the implementation of the U.S. network and Driver
Logistics System.
The Company has agreements with several parties, including IBM to
manage the construction of the U.S. wireless network base station and remote
sector sites. The Company also has engaged, and intends to engage, other third
party contractors to manage all or certain aspects of such construction or
installation in certain of its U.S. target markets. A failure such
contractors to manage properly the
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preparation and construction of the Company's base station and remote sector
sites could delay the enhancement and continued roll-out of the FHMA Network,
thereby jeopardizing the Company's FCC licenses and general adversely affect the
Company's business.
Risks of International Business
Certain of the Company's products and components are manufactured
outside of the U.S. and its engineering and development activities are dependent
upon foreign providers. (See "Dependence on Third Party Providers.") Further,
the Company currently sells its products and services in various countries and
may pursue opportunities in other countries. Accordingly, the Company is
subject, but not limited, to the risks inherent in conducting business across
international boundaries, including currency exchange rate fluctuations,
international incidents, military outbreaks, economic downturns, government
instability, nationalization of foreign assets, government protectionism and
changes in governmental policy, any of which could adversely affect the
Company's business in one or more of its international markets or in the U.S.
For instance, the November devaluation of the Korean Won may have an adverse
impact on the Company's investments in Korea, the Company's ability to collect
receivables in dollars, or the Company's ability to successfully market its
products in that country in the future.
The Company and entities in which the Company has an interest
currently hold licenses to operate communication networks in Korea and
Argentina. The licensing and other operational risks attendant upon commencing
and maintaining wireless communications networks in foreign countries are
similar to those in the U.S., including availability of spectrum capacity and
transmission sites, competition and government regulation.
In July 1997, the Company entered into a joint venture agreement with
two Canadian partners for the purpose of deploying FHMA Networks in the
provinces of Ontario, Quebec and British Columbia utilizing 900 MHz licenses
previously awarded to Geotek Communications Canada, Inc., a wholly owned
subsidiary of Geotek Communications Canada, Inc. by Industry Canada, the
regulatory agency responsible for spectrum allocation in Canada.
The Company's joint venture partners withdrew from the joint venture
in the first quarter of 1998. The Company has the option to reapply to Industry
Canada for licenses at such time that the Company obtains financing sufficient
to pursue its business in Canada.
In Korea, the network is based upon the implementation of the FHMA
Network on the 800 MHz frequency. There can be no assurance that the Company
will be able to successfully adapt and market its FHMA Network to another
frequency or standard on a timely or cost-effective basis, if at all. Further,
the roll-out of products and services in each of these countries will be subject
to the same risks attendant to the marketing and development of the Company's
Driver Logistics System and FHMA Network in the U.S. Moreover, certain foreign
regulatory authorities may limit the Company's ownership interest in licenses or
the operating entity which it owns and operates under such licenses. There can
be no assurance that the Company will be successful in developing its business
in any of these markets.
Certain international regulations may limit the Company's interest in
entities that hold licenses or operate wireless networks in various countries.
Thus, the Company's ability to expand its interest in international markets may
be limited.
Year 2000 Issues
The Company's software and hardware were developed relatively
recently and, therefore, do not require any significant modifications for the
Year 2000. However, the Company may face Year 2000 issues as it seeks to
coordinate with other entities with which it interacts electronically, including
suppliers, customers and
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distribution partners. Although the Company is not currently aware of any
material problems, an assessment has not been made of the anticipated costs,
problems and uncertainties associated with the Year 2000 consequences.
Competition
Competition in the logistic wireless communications industry is
intense and is expected to increase. The Company faces significant competition
in each of the U.S. markets that it currently serves and expects to face
significant competition in its planned United States markets as well. The
Company competes with established, new and planned SMR, cellular, paging,
satellite, personal communications services ("PCS") and public data service
providers. In addition, the Company competes with manufacturers of PMR
equipment, which target private network operators and SMR customers. Many of the
Company's competitors have substantially greater technical, marketing, sales and
distribution resources, access to capital, and experience providing wireless
communications services than the Company.
The Company competes for subscribers primarily on the basis of
services offered, the technical quality of its system, capacity, coverage and
price. Many of the target customers for the Company currently use other wireless
communications services. In order to compete effectively, the Company must
attract a portion of its target customers from their existing providers. The
Company's marketing strategy emphasizes its integrated package of voice and data
services, which the Company believes differentiates it from other wireless
communications providers. However, there can be no assurance that potential
customers will perceive the Company's services to be superior to those offered
by other wireless communications providers.
Risk of Rapid Technology Changes
The telecommunications industry is subject to rapid and significant
technological changes, which could result in new product and/or service
offerings. The Company believes that such new offerings could compete directly
with those currently offered by the Company or could lower the cost of currently
competing offerings such that the Company would be required to reduce the prices
for its offerings. Any such reduction would ultimately affect the Company's cash
flow from operations. While the Company is unaware of any proposed changes that
are expected to materially diminish the attractiveness of its products and
services, the nature or timing of technological changes or the effect of such
changes on the Company's business cannot be predicted. In the future, the
Company expects to encounter competition from new technologies, including but
not limited to ESMR networks, PCS and possibly satellite technology, as well as
from advances in existing technologies such as cellular, paging and mobile data
transmission. (See "Competition" above).
Proprietary Information and Patent Issues.
The Company protects its proprietary information by way of
confidentiality and non-disclosure agreements with employees and third parties
who may have access to such information. The Company continually reviews its
technology developments in order to file patent applications and has filed
patent applications with respect to certain aspects of its FHMA technology in
Israel, the U.S. and other countries and expects to file additional patent
applications in Israel and the U.S. Generally, the Company intends to file all
patent applications in the United States and Israel and in such other countries
as it deems appropriate. There can be no assurance that such applications will
be granted. There can be no assurance that any patents issued will afford
meaningful protection against competitors with similar technology or that any
patents issued will not be challenged by third parties. There also can be no
assurance that others will not independently develop similar technologies,
duplicate the Company's technologies or design around the patented aspects of
any technologies developed by the Company. Many patents and patent applications
have been filed by third parties with respect to wireless communications
technology. The Company does not believe that its technology infringes on the
patent rights of third parties. However, there can be no assurance that certain
aspects of the Company's technology will not be challenged by the holders of
such patents or that
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<PAGE>
the Company will not be required to obtain a license from or otherwise acquire
from third parties the right to use certain technology. The failure to overcome
such challenges or obtain such licenses or rights could have a material adverse
effect on the Company's operations.
Influence by Significant Stockholders; Preemptive Rights
As of December 31, 1997, approximately 36.2% of the total voting
power of the Common Stock (on a fully-diluted basis) was beneficially owned by
the directors and executive officers of the Company and their affiliates.
Consequently, the Company's directors and executive officers will be able to
exert significant influence with respect to all matters upon which stockholder
approval is required.
Pursuant to certain agreements among them, certain of the principal
stockholders of the Company have the right to require certain other stockholders
to cause (to the extent permitted by law and to the extent within such other
stockholders' control) the directors of the Company to vote, or refrain from
voting, in accordance with such stockholders' direction with respect to the
election of directors. In addition, S-C Rig Investments-III, L.P. ("S-C Rig")
and Vanguard Cellular Systems, Inc. have preemptive rights with respect to
certain issuances of voting securities by the Company which permit them to
purchase voting securities of the Company, at the same price and on the same
terms as the Company may offer to third parties, in an amount sufficient to
maintain their respective percentage interests in the voting securities of the
Company on a fully-diluted basis. The Company also has granted to the holders of
the Series H Preferred Stock, Series I Cumulative Convertible Preferred Stock,
Series K Cumulative Convertible Preferred Stock and Series N Cumulative
Convertible Preferred Stock the right to elect additional directors to the Board
of Directors of the Company upon the occurrence of certain events of default.
The operation of such provisions could result in such stockholders exerting
significant influence over the Board of Directors of the Company.
Shares of Common Stock Reserved for Issuance; Shares of Common Stock Eligible
for Sale
As of December 31, 1997, the Company had an aggregate of
approximately 73.6 million issued and outstanding shares of Common Stock. In
addition as of such date, the Company had reserved for issuance an aggregate of
approximately 124.9 million shares of Common Stock issuable pursuant to (i)
outstanding vested and non-vested options, warrants and similar rights; (ii)
conversion of other outstanding convertible securities of the Company (including
shares issuable upon conversion of the Company's preferred stock); (iii)
dividends on the Company's preferred stock; and (iv) contingent obligations to
issue additional shares. Pursuant to the Company's Restated Certificate of
Incorporation, the Company currently has 200 million authorized shares of Common
Stock. Subject to certain limitations, the persons holding such options,
warrants and convertible securities may obtain the shares of Common Stock
underlying such options, warrants and convertible securities at any time. The
issuance of a large number of shares of Common Stock would dilute the percentage
interest of other existing stockholders of the Company.
Item 2. PROPERTIES
In February 1997, the Company's principal place of business was moved
to 102 Chestnut Ridge Road, Montvale, New Jersey. The Company rents, from an
unaffiliated third party, approximately 50,000 square feet of office space for
approximately $1.2 million per year, plus taxes and utilities. The lease expires
February 2007. The Company's Montvale facility functions as its corporate
headquarters.
GMSI leases its facilities in Ontario, Canada pursuant to a lease,
with an unaffiliated third party, that expires in April 2005. Annual base rental
payments over the remainder of the lease are approximately $140,000.
In addition, the Company leases office space in each of the target
markets in which it intends to provide service as it enters a target market. In
addition to office space, the Company must secure leases for its
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transmission equipment at suitable locations in each of these U.S. markets. As
of December 31, 1997, the Company had leased office space in 11 of its target
sales markets and transmission sites in 14 of its target sales markets. The
aggregate annual rental payments pursuant to these leases are approximately $5.1
million.
Item 3. LEGAL PROCEEDINGS
Harris Adacom. 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., 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. This motion is pending. In addition,
plaintiffs are seeking to add Yaron Eitan, the Company's Chairman of the Board,
and Yoram Bibring, who, prior to the Company's reorganization in December 1997,
was President and CEO of Geotek International Networks, Inc. as defendants. The
Company believes that plaintiffs' claims in such action are primarily an attempt
to delay efforts to collect Harris' debt to the Company and that the Company has
meritorious defenses. The Company intends to defend such action vigorously.
***
The Company develops and utilizes technology for substantially all of
the services and products it offers and intends to offer and has, from time to
time, been the subject of infringement claims related thereto. It is often
difficult to predict the outcome of such litigation and the amount of damages
that may be awarded. The Company does not believe that any pending or threatened
litigation related to the Company's technology or use thereof will have a
material adverse effect on financial position and results of operations.
The Company also is, from time to time, a party to litigation, which
may or may not be covered by insurance, arising in the ordinary course of
business. The Company does not believe that results of such litigation, even if
the outcome were unfavorable to the Company, would have a material adverse
effect on its business.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholder's
during the fourth quarter of 1997.
[The remainder of this page was intentionally left blank]
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Item A. EXECUTIVE OFFICERS
As of the date hereof, the executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Yaron I. Eitan 41 Chairman of the Board and Chief Executive Officer
Dr. George Calhoun 45 Senior Vice President-Strategic Marketing and Director
Valerie E. DePiro 32 Vice President, Chief Accounting Officer and Corporate Controller
Anne E. Eisele 42 Senior Vice President and Chief Financial Officer
Michael McCoy 45 Executive Vice President and Chief Operating Officer
Zvi Peled 49 President and CEO-Geotek Technologies
Robert Vecsler 33 Senior Vice President-Business Affairs, General Counsel and Secretary
</TABLE>
Mr. Eitan has served as Chief Executive Officer and as a director of
the Company since March 1989 and as Chairman of the Board since October 1996.
From March 1989 until October 1996, Mr. Eitan also served as President of the
Company. Mr. Eitan also served as Chairman of the Board of Bogen and as a
director of Geotek Technologies Israel Ltd., GMSI and NB3, subsidiaries of the
Company.
Dr. Calhoun was appointed Senior Vice President - Strategic Marketing
in December 1997 and was appointed a director of the Company in July 1993, when
he became President of the Company's wireless communications group. In October
1996, he was appointed the Vice Chairman of Strategy & Technology of the
Company. Dr. Calhoun joined the Company in June 1992 as President, Chief
Operating Officer and a director of GTIL. He also served as a director of NB3.
Dr. Calhoun previously served in various positions with InterDigital
Communications Corporation (formerly International Mobile Machines Corporation),
a corporation co-founded by Dr. Calhoun and engaged in the development of
digital radio technology, most recently as General Manager of the Intellectual
Property Licensing Division, which position he held until June 1992.
Ms. DePiro has served as Vice President, Chief Accounting Officer and
Corporate Controller since September 1997. Ms. DePiro joined the Company in 1995
and served as Director of Financial Reporting and Analysis from October 1995 to
September 1997. Ms. DePiro is a Certified Public Accountant; and from 1989 to
1995 was in the audit practice with Coopers & Lybrand LLP.
Ms. Eisele was appointed Senior Vice President, Chief Financial
Officer in February, 1998. Prior to joining the Company, Ms. Eisele was
President, Chief Financial Officer and Chief Operating Officer of DeSoto, Inc.,
a $100 million manufacturer and marketer of consumer and industrial products.
From 1984 through 1996, Ms. Eisele served in various management positions at
DeSoto Inc. From April 1994 through September 1996, Ms. Eisele served as a
director of DeSoto, Inc.
Mr. McCoy was appointed Executive Vice President and Chief Operating
Officer in December, 1997. He joined the Company in November 1994 and served as
Senior Vice President and Chief Financial Officer of Geotek Communications, Inc.
and as President and Chief Executive Officer of the U.S. Network division of the
Company. Prior to joining Geotek in 1994, Mr. McCoy was a member of the Office
of the Chairman and Senior Vice President of Business Development for LCI
International, Inc., a facilities-based long distance telecommunications
company. Prior to that, Mr. McCoy was President and Chief Operating Officer of
Coradian Corporation, a publicly-held telephone equipment distribution company
Mr. Peled serves as President and Chief Executive Officer of Geotek
Technologies, Inc., a wholly owned subsidiary that develops and manufactures
FHMA technology. Before joining Geotek in July 1997, Mr. Peled served as
President and Chief Executive Officer of Bogen Communications International,
Inc. and from 1975 until July, 1996, Mr. Peled worked for Elbit, a diversified
electronics company where he rose
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<PAGE>
through successive positions of responsibility from electronic system engineer
to Divisional General Manager.
On January 13, 1998, the Israeli Purchase Tax and Value Added Tax
Authority filed a criminal complaint against Elbit and Mr. Peled, in his
capacity as General Manager. The complaint is based on falsification of records
pertaining to Elbit's purchase tax obligations.
Mr. Vecsler has served as Senior Vice President-Business Affairs
since June 1997 and General Counsel and Secretary of the Company since March
1996. From May 1995 through March 1996, he served as Corporate Counsel for the
Company. Prior to joining the Company, from August 1994 until April 1995, Mr.
Vecsler served as Assistant General Counsel at Enviro Source, Inc. From April
1993 until July 1994, he served as Counsel to Fletcher Asset Management, Inc.
Mr. Vecsler practiced law at Kelly, Drye & Warren from September 1988 until
March 1993.
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<PAGE>
PART II
Item 5. MARKET PRICE FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock currently trades on The NASDAQ Stock
Market(TM) under the symbol "GOTK" and on the Pacific Stock Exchange under the
symbol "GEO".
The following tables set forth, for the quarters indicated, the high
and low sales prices for the Company's Common Stock as reported on the NASDAQ
National Market:
Year Ended December 31, 1997 High Low
First Quarter........................................... 8 1/8 5
Second Quarter.......................................... 6 5/16 3 21/32
Third Quarter........................................... 5 11/16 4 1/8
Fourth Quarter.......................................... 4 3/8 1 11/32
Year Ended December 31, 1996 High Low
First Quarter........................................... 12 6 5/16
Second Quarter.......................................... 14 7/8 9 3/4
Third Quarter........................................... 13 3/4 8
Fourth Quarter.......................................... 9 1/8 5 7/16
As of March 10, 1998 there were 1,568 record holders of the Common Stock.
The Company has not declared or paid any cash dividends on the Common
Stock since commencing operations and is restricted from paying any dividends on
the Common Stock due to debt covenant restrictions. At present, the Company is
obligated to pay, for a five-year period following the issuance of its Series H
preferred stock, cumulative dividends of $2,000,000 per year on the Series H
preferred stock, in cash, and, for a five-year period following the issuance of
its Series I preferred stock and Series K preferred stock, respectively,
cumulative dividends equaling $700,000 per year on the Series I preferred stock
and $700,000 per year on the Series K preferred stock, in cash or shares of
Common Stock of the Company, before any cash dividends may be paid on the Common
Stock. In addition, the Company is presently obligated to pay cumulative annual
dividends of $750,000 per year on its Series L preferred stock, in cash or
additional shares of Series L preferred stock, cumulative annual dividends of
$977,500 per year on its Series M preferred stock, annual cumulative dividends
in Common Stock equaling $5,472,500 on the Series N preferred stock, and annual
dividends of $2,695,000, $1,250,000, and $2,839,000 on the Series O, Series P,
and Series Q preferred stock, respectively, in cash or Common Stock, before any
cash dividends may be paid on the Common Stock. At present, the Company is
current in payment of all required dividends on its outstanding preferred stock.
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<PAGE>
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Year ended December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 65,510 $46,525 $35,761 $ 26,916 $18,912
Net loss from continuing operations (225,688) (140,320) (83,075) (42,774) (50,476)
Income (loss) from discontinued operations 6,109 2,098 (4,124) 369 287
Net loss (219,579) (138,222) (87,199) (42,405) (53,735)
Basic and diluted net loss per share from continuing (3.77) (2.55) (1.67) (0.91) (1.42)
operations
Basic and diluted income (loss) per share from .09 .04 (.08) .01 .01
discontinued operations
Basic and diluted net loss per share applicable to (3.68) (2.51) (1.75) (.90) (1.52)
common shares
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $331,750 $418,021 $278,420 $166,630 $126,190
Long-term debt (net of current portion) and 283,422 255,060 136,512 68,383 42,416
redeemable preferred stock
Shareholders' equity (78,821) 95,070 76,035 77,277 69,276
</TABLE>
The historical financial results have been reclassified to reflect the 1997
disposition of the Company's communication products segment.
The difference in financial results among the years is influenced by the
following acquisitions and dispositions. In 1993 NB3, GMSI and the remaining
interest in PowerSpectrum, Inc. were acquired and Oram Electric Industries,
Ltd., Oram Power Supplies 1990, Ltd. and Geopower were sold. In 1994, 49%
interests in PBG and DBF were acquired. In 1995, the remaining interests in PBG
and DBF were acquired and the Company increased its interest in GTIL from 56% to
94%. In 1996, the operating assets of the Company's German Networks were
contributed to a 50/50 joint venture, Terrafon, the Company acquired the
remaining 50% interest in MIS, and the Company formed a joint venture in Korea,
Anam Telecom and increased its interest is GTIL from 94% to 97%. During 1997
the Company increased its ownership interest in GTIL to 98%. On November 26,
1997, with the discontinuation of the communications products segment, the
Company sold its 64% interest in BCI for $18.5 million and in December 1997 the
Company entered into two agreements to sell NB3 and Terrafon which sales were
consummated during the first quarter of 1998, See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Accordingly, the Company reduced the carrying value of its investment in
Terrafon to the fair market value.
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<PAGE>
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the consolidated financial statements and the notes thereto,
included elsewhere in this report. 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 to the carrying value of assets and liabilities
that might result from the aforementioned uncertainty (see risk factors
contained in Part I of the form 10-K and footnote 1 to the consolidated
financial statements).
Results of Operations
General
Geotek Communications, Inc. and subsidiaries (collectively, "the Company") have
devoted and expect to continue to devote substantial financial and management
resources to the development and marketing of its Driver Logistics(TM) System
and for the deployment of its frequency hopping multiple access ("FHMA(R)")
Network. The Driver Logistics(TM) System involves a complex integration of
sophisticated digital voice and data applications that utilize hardware and
specialized software. The Company currently operates its FHMA(R) Network in
eleven markets in the United States ("U.S. Network"). The Company, through its
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 and has had 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 an ongoing
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 proceed with the implementation of its operating plan.
The Company is in various 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 December 31, 1997,
proceeds from the sale of non-strategic assets, and expected cash flow from
operations will be insufficient to fund its current operations and the full
implementation of the Company's business plan in the short and long term.
The Company's short term business plan is to add customers and customer revenues
and market its Driver Logistics System in its existing markets. The
Company's long term business plan includes: the roll out of the US Network in
over 40 markets; the ongoing deployment of existing international digital
wireless networks; the repayment of convertible debt and redeemable preferred
stock (if such are not converted into equity); and, the repayment of the
Company's line of credit and vendor credit facility and Senior Secured Discount
Notes ("Discount Notes") due 2005.
Based on the Company's current business plan, the Company estimates that it will
need approximately $85 million of additional financing through the end of fiscal
1998, with a portion needed beginning in the second quarter of 1998, to execute
its short term business plan (fiscal 1998) and significant additional financing
thereafter to implement its long term business plan. 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 other unanticipated cash needs. The Company does not intend to
construct additional U.S. 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 the 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. Additionally, the Company intends and hopes to
renegotiate certain existing cash obligations. The Company will attempt to
obtain additional financing 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, or a
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<PAGE>
combination thereof. There can be no assurance that the Company will be able to
obtain any such financing or renegotiate existing obligations on acceptable
terms or at all. Any additional equity or debt financing may involve substantial
dilution to the interest of holders of the Company's equity securities. The
failure to obtain the requisite additional capital commencing in the second
quarter would prevent the Company from executing its short and long term
business plan, would result in the Company violating certain contractual and
debt covenants, and would affect and raise substantial doubt about the Company's
ability to continue as a going concern. The Company also expects to impact cash
flow through stringent cost control and expenditure reduction. 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 to the carrying
value of assets and liabilities that might result from the aforementioned
uncertainty.
The Company has historically grouped its operations into two types of
activities: wireless communications and communications products. On November 26,
1997, the Company discontinued its communication products subsidiary, with the
sale of its 64% interest in Bogen Communications International, Inc. ("BCI"),
for $18.5 million in cash (see discussion below). BCI was primarily engaged in
the development, manufacturing, and marketing of telephone peripherals and sound
and communications equipment. The Company's wireless communications subsidiaries
are currently engaged in marketing and enhancing its Driver Logistics(TM) System
in the United States. Additionally, the wireless communications subsidiaries are
involved in: enhancing the proprietary FHMA(R) Network; selling its proprietary
digital wireless infrastructure equipment internationally; and implementing
digital wireless communications systems internationally. In December 1997, the
Company entered into two definitive agreements to sell its analog trunked mobile
radio services in the United Kingdom and Germany for approximately $82 million
and DM 7 million, respectively. These sales were consummated in February 1998
(see discussion below).
In July 1997, the Company entered into a joint venture agreement with two
Canadian partners for the purpose of deploying FHMA(R) Networks in the provinces
of Ontario, Quebec and British Columbia utilizing 900MHz licenses previously
granted to Geotek Communications Canada Inc., a wholly-owned subsidiary of
GeoNet Communications Canada Inc. ("GeoNet Canada"), by Industry Canada, the
regulatory agency responsible for spectrum allocation in Canada. 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. Additionally, the
Company deposited $2.3 million in a restricted cash account as collateral for
the Canadian partners' investments. The parties reserved the right to withdraw
from the venture. In the first quarter of 1998, the Canadian partners notified
the Company and subsequently withdrew from the joint venture. The Canadian
partners were repaid their investment from the restricted cash account and the
balance of cash in the joint venture became available to the Company. The
withdrawal of the Canadian partners resulted in the loss of The Canadian
licenses although the Company may reapply for licenses at such time that the
Company obtains sufficient financing to pursue its deployment of the network in
Canada.
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
800MHz frequency. The Company's FHMA(R) system operates in the 900MHz 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.
Additionally, the devaluation of the Korean Won during the fourth quarter of
1997 or any additional devaluation of the Won could result in an adverse effect
on the ability of Anam Telecom to deploy and operate the FHMA(R) system in
Korea.
In 1997, the Company, through its subsidiary Geotek Technologies, Inc. ("GTI"),
entered into contracts to provide Anam Telecom, as well as Hyundai Electronics
("HEI"), FHMA(R) Network equipment and to supervise network construction. HEI,
in turn, will sell such equipment to the Korean regional operators. To date all
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<PAGE>
contracts have been denominated in dollars; however, the further devaluation of
the Korean Won may have an adverse effect on the Company's ability to sell
infrastructure in Korea in the future or to negotiate satisfactory agreements or
amendments to existing agreements.
The Company owns a 70% interest in Geotek Argentina S.A. which holds a
nationwide trunked radio system license in Argentina. The license was awarded in
August 1997 and covers metropolitan Buenos Aires, Cordova, Mendoza and Santa Fe.
Geotek Argentina is currently deploying a demonstration site in Buenos Aires.
The deployment of a FHMA(R) Network in Argentina is subject, but not limited to,
the same risks attendant to the deployment of the Company's digital wireless
system in the United States.
In connection with its strategic initiative to focus its efforts on marketing
the Driver Logistics(TM) System in the U.S., in December 1997, the Company
entered into two definitive agreements to sell its European assets. The sales
were consummated in February 1998. Under the first agreement, the Company sold
its operating subsidiary, National Band Three Ltd. ("NB3"), for approximately
$82 million in cash. NB3 provides analog Public Access Mobile Radio ("PAMR")
services to approximately 64,500 subscribers in the United Kingdom and, in 1996,
was awarded a license to operate a digital PAMR network in the United Kingdom.
Under the second agreement, the Company sold its 50/50 joint venture in Germany,
Terrafon, for approximately DM 7 million in cash. Terrafon was established in
December 1996 through a merger of the Company's German networks and RWE
Telliance A.G. ("RWE") mobile radio network and provides analog radio service to
approximately 42,700 subscribers. The use of proceeds from the sales of NB3 and
Terrafon are subject to significant limitations outlined in the Indenture
governing the Company's Discount Notes (see "Liquidity and Capital Resources").
Summary of Operations
The results of operations are presented for continuing operations of the
Company. Results of the discontinued operation, communication products, have
been reclassified.
Consolidated
1997 Compared to 1996
Consolidated revenues from continuing operations increased by 41% in 1997 over
1996 principally due to revenues from GTI for the sale of digital wireless
infrastructure equipment to two customers in Korea which totaled approximately
$22.7 million in 1997.
Consolidated operating expenses increased by 38% in 1997, due to increased
engineering and development activities associated with the enhancement of the
Company's digital wireless network and development of portable customer units;
cost of sales for digital wireless infrastructure (which approximate the revenue
recognized); increase in general and administration expenses to support the U.S.
Network roll-out and international activities; and increased marketing expenses
associated with the roll-out of the U.S. Network.
Consolidated losses from continuing operations increased by $85.4 million to
$225.7 million in 1997.
On a consolidated basis, interest expense increased in 1997 by 20% due to the
accretion of the Discount Notes and the accretion of the value of the warrants
issued in connection with the Discount Notes; the March 1996 issuance of the 12%
Senior Subordinated Convertible Notes ("Convertible Notes"); deemed interest on
the Company's debt that is convertible at a discount to market; and interest on
the Company's line of credit and vendor financing facilities. This increase in
interest was offset by capitalized interest on construction in progress.
Interest income decreased by 34% in 1997 due to a lower level of cash and cash
equivalents held during the year.
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<PAGE>
1996 Compared to 1995
Consolidated revenues from continuing operations increased by 30% in 1996 over
1995 principally due to subscriber growth on the Company's NB3 network in the
United Kingdom and the inclusion of the Company's German Networks on a
consolidated basis in 1996 prior to the contribution of the operating assets and
liabilities of these networks to the Terrafon joint venture.
Consolidated operating expenses increased by 52% in 1996, due to: increased
engineering and development activities associated with the enhancement of the
Company's digital wireless network and development of customer units, increase
in general and administration expenses to support the U.S. Network roll-out and
international activities, and increased marketing expenses associated with the
roll-out of the U.S. Network.
Consolidated losses from continuing operations increased by $57.2 million to
$140.3 million in 1996.
On a consolidated basis, interest expense increased by 87% in 1996 due to the
accretion of the Discount Notes, the accretion of the value of the warrants
issued in connection with the Discount Notes and the March 1996 issuance of the
Convertible Notes.
Interest income increased in 1996 due to a higher level of cash and cash
equivalents held during the year.
Wireless Communications Activities
As discussed previously, the Company entered into two agreements to sell its
ownership interests in its European assets in the United Kingdom and Germany.
The table below set forth certain information with respect to the results of
operations of the Company's core activities as of December 31, 1997, 1996 and
1995 (dollars in thousands).
1997 1996 1995
---- ---- ----
Net total revenue $ 34,202 $ 13,894 $ 10,070
Gross margin (39,790) (14,628) 277
(116%) (105%) 3%
Engineering and Development 39,609 34,520 33,273
General & Administrative Expense 39,003 27,693 19,027
Sales and Marketing 25,394 23,735 12,021
Equity in loss of investees 4,632 79 1,563
Other (income)/loss 190 (1,494) (2,121)
Loss before interest, taxes,
depreciation & amortization (148,618) (99,161) (63,486)
Depreciation & amortization 24,533 8,438 3,088
Loss before interest and taxes (173,151) (107,599) (66,574)
Net loss $(199,172) $(129,199) ($81,507)
1997 Compared to 1996
Revenues from wireless communications activities increased by $20.3 million or
146% for the year ended December 31, 1997. This increase was primarily due to an
increase in GTI revenues resulting from the sale of digital wireless
infrastructure equipment to the Company's Korean customers of $22.7 million
which includes the Company's joint venture in Korea (for which the Company
eliminates its 21% ownership interest of revenue). The cost related to the sales
to Korea approximate the revenues recognized. Additionally, revenues increased
due to the increase in the number of customers using the U.S. Network. The
increase in negative gross profit for the Company is primarily the result of
increased direct service costs related to the roll-out of the digital network in
additional
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markets in the U.S. Network, the cost of which are currently not covered by
revenues, and the cost of inventory of customer handsets which are marketed
under a promotion program at an amount less than cost.
Engineering and development costs related to the digital wireless system and
customer handsets increased $5.1 million or 15% for the year ended December 31,
1997 and 1996, respectively. The increase was due to one time development costs
for the portable 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 to the
FHMA(R) Network and Driver Logistics(TM) System, but at lower levels than 1997.
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 $1.7 million or
7% due to the U.S. Network marketing programs and an increase in staff needed to
execute the roll-out of the U.S. Network in its markets.
The increase in the Company's 1997 general and administrative expenses of $11.3
million or 41% was due to costs associated the Company's financing activities
related to the construction of the U.S. Network.
The Company's equity in losses of less than 50% owned entities in 1997 was
primarily attributable to the results of the Company's Korean joint ventures. 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.
Wireless communications activities generated a loss before interest, taxes,
amortization and depreciation of $148.6 million for the year ended December 31,
1997 compared to $99.2 million in 1996. This increase was primarily due to costs
related to the
ongoing roll-out of the digital wireless network in the U.S. and enhancement of
the digital wireless network.
1996 Compared to 1995
Revenues from wireless communications activities increased by $3.8 million to
$13.9 million or 38% for the year ended December 31, 1996 compared to 1995. This
increase was primarily due to the increase for GMSI, Inc.'s contract related to
the Singapore taxi fleet as well as revenues from Geotest Inc., a subsidiary
sold in 1996, which recorded revenues of $3.9 million and $2.8 million in 1996
and 1995, respectively.
The increase in negative gross profit for the U.S. Network was primarily the
result of increased direct costs related to the roll-out, the cost of which are
currently not covered by revenues, and the write-down of pre-production
inventory to replacement cost. In 1995, the U.S. Network included the results of
the Company's MetroNet subsidiary. In November 1995, the Company exchanged the
assets of MetroNet, primarily 800MHz licenses, with Nextel Communications Inc.
for certain 900MHz licenses.
Engineering and development expenses (net of government grants of $0.3 million
and $5.9 million in 1996 and 1995, respectively) related to the digital wireless
system and customer units were $34.5 million for the year ended December 31,
1996 compared to $33.3 million for the same period of 1995. The increase in the
1996 expense was primarily attributable to costs related to the development of
the U.S. Network's commercial customer unit and enhancements to the Company's
proprietary digital wireless network, including system software. In addition,
the Company expensed the $1.9 million excess of the consideration paid over the
fair value of the net assets received in the purchase of MIS Information Systems
Holdings Ltd. as the acquisition primarily related to ongoing software
development projects in process. The Company expects significant engineering and
development expenses to continue in the future in connection with enhancements
made to the
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<PAGE>
system and subscriber unit.
The Company was in the process of rolling out its wireless service over its
proprietary digital wireless network in the United States and, accordingly,
continued to put in place its marketing, engineering, operations and
administrative staff and systems. Marketing expenses increased by approximately
$11.7 million or 97% due to the U.S. Network marketing programs and an increase
in staff needed to execute the roll-out of the U.S. Network in the initial 1996
markets.
General and administrative expense increased $8.7 million or 46% due to an
increase in administrative staff needed to support the beginning of the U.S.
Network roll-out and the Company's expanding international business development
activities.
The Company's equity in losses of less than 50% owned entities for the year
ended December 31, 1996 and 1995 is attributable primarily to the results of the
Korean joint ventures. The loss for 1996 is presented net of a $1.4 million
reimbursement received by the Company from Anam Telecom for expenses incurred by
the Company on behalf of its Korean joint venture in connection with the trunked
radio system license process. As discussed above, the Company's Korean joint
ventures are in the process of establishing a digital network in Korea. It is
expected that these entities will continue to generate substantial losses in the
near future.
Wireless communications activities generated a loss before interest, taxes,
amortization and depreciation of $99.2 million for the year ended December 31,
1996 compared to $63.5 million in 1995. This increase is primarily due to costs
related to the commencement of the roll-out of the digital wireless
communication system for the U.S.
As previously discussed, in December, 1997, the Company entered into two
definitive agreements to sell its analog trunked mobile radio services in the
United Kingdom and Germany for approximately $82 million and DM 7 million,
respectively. These sales were consummated in February 1998. The net assets of
NB3 and investment in Terrafon at December 31, 1997 are presented as net assets
held for sale. This transaction will result in a gain of approximately $60.2
million which will be recognized in the first quarter of 1998. Upon the decision
to sell Terrafon, the Company reduced the carrying value of the investment to
fair market value. The loss, which is included in Equity in loss of investees
at December 31, 1997, was $12.9 million.
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<PAGE>
Below is a summary of financial data related to NB3 and Terrafon
(dollars in thousands)
1997 1996 1995
---- ---- ----
Net total revenue $ 31,308 $ 32,631 $ 25,691
Gross margin 20,350 15,965 13,756
65% 49% 54%
General & Administrative Expense 6,042 7,829 3,582
Sales and Marketing 5,581 5,993 6,042
Equity in loss of investees 17,116 - 3,332
Other (income)/loss 4,493 (458) (240)
(Loss) income before interest, taxes,
depreciation & amortization (12,882) 2,601 1,040
Depreciation & amortization 5,992 10,232 5,794
Loss before interest and taxes (18,874) (7,631) (4,754)
Net loss $ (20,407) $(9,023) $(5,692)
Discontinued Operations -- Communications Products Activities
On November 26, 1997, the Company discontinued its communication products
segment with the sale of its 64% interest in BCI for $18.5 million in cash. The
capital stock of BCI was pledged to the holders of the Company's Discount Notes.
The Company's debt covenants and amendment thereto place timing restrictions on
the Company's ability to utilize the proceeds for working capital purposes. At
December 31, 1997, the Company had received $18.5 million in proceeds, however,
$9.1 million is reflected in the 1997 consolidated balance sheet under the
caption Restricted Cash. This amount was released based upon the completion
of certain conditions during the first quarter of 1998. This transaction
resulted in a 1997 gain of approximately $3.8 million.
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 December 31, 1997 to
the Company's financial and cash position as of December 31, 1996 (See footnote
1 to the consolidated financial statements).
The Company requires significant additional capital, commencing in the second
quarter of 1998; to fund its current operations, working capital, and debt
service requirements and to implement its strategy of providing WorkPower for
the Road through the Driver Logistics(TM) System. The Company estimates that the
amount required for Fiscal 1998 is approximately $85 million. In furtherance of
its capital financing strategy in fiscal 1997, the Company sold $55 million in
convertible preferred stock and renegotiated its $40.0 million line of credit
facility. At December 31, 1997, the Company had $13.4 million of cash and cash
equivalents. In November 1997, the Company discontinued its communication
products segment. At December 31, 1997, $9.1 million of the net proceeds is
included in restricted cash and was released during the first quarter of 1998.
The Company has a $100.0 million vendor credit facility, the last $50 million of
which is subject to the satisfaction of certain conditions, with Hughes Network
Systems ("HNS"). The credit facility is for the purchase of infrastructure
equipment for which the Company began accepting delivery in October 1997. At
December 31, 1997, $10.4 million of this facility was utilized. Additionally,
the Company entered into two agreements to sell its interests in NB3 and
Terrafon for approximately $82 million and DM 7 million, respectively. The
Company's ability to utilize the proceeds of the sales is limited in
accordance with the amended Indenture governing the Company's Discount Notes.
Under the Indenture, the Company must repay the pro-rata portion of the
accreted value of the Discount Notes
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<PAGE>
in the aggregate of 20% of the net proceeds. In addition, 40% of the net
proceeds must be used for the purchase of qualifying capital expenditures. The
balance of the net proceeds, 40%, can be used for general corporate purposes and
working capital with funds accessible under certain time restrictions beginning
in February 1998.
The Company's short term cash needs related to fiscal 1998 are attributable
primarily to debt service requirements, capital expenditures, inventory,
marketing, general and administrative expenses, trade payables and engineering
and development costs associated with the marketing of its Driver Logistic(TM)
System and the implementation and deployment of its digital FHMA(R) Networks.
One of the advantages of the Company's FHMA(R) Network 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 coverage or capacity is needed. In addition, the Company
currently estimates that it will continue engineering and development activities
during the next 12 months but at substantially lower levels than in 1997. These
activities include enhancements to the Driver Logistic(TM) System and FHMA(R)
Network including additional hardware and software applications.
During 1997, cash and cash equivalents decreased by $89.3 million to $ 13.4
million while working capital decreased by $129.7 million to ($18.4) million.
Operating Activities
Cash utilized in connection with operating activities, for the year ended
December 31, 1997, amounted to $117.1 million. This included changes in
operating assets and liabilities of $11.3 million. This change was primarily
related to a decrease in prepaid expenses of $2.7 million, a decrease in
receivables of $1.3 million, and an increase in accounts payable and accrued
expenses of $24.8 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 sales promotions, the Company has
neither provided an accrual nor adjusted the $13.1 million carrying value of the
U.S. Network inventory for promotions as of December 31, 1997. The results of
promotions will be recorded commensurate with the sale.
Investing Activities
Cash used in investing activities was $67.0 million for the year ended December
31, 1997. The Company expended $61.7 million to acquire equipment during 1997
and capitalized $8.6 million in interest on construction in progress and
pre-commercial FCC licenses. Commensurate with the definitive agreement to sell
NB3 and reclassification of NB3's assets and liabilities to net assets held for
sale, NB3's cash balance of $4.5 million was reclassified to net assets held for
sale.
In November 1997, the Company sold its 64% interest in BCI. The proceeds from
the sale were $18.5 million.
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<PAGE>
During the first quarter of 1997, the Company contributed approximately $2.6
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. In January 1998, this $2.3 million was used to repay the investors
for their initial investment and the cash in the joint venture became available
to the Company.
Financing Activities
In January 1997, the Company sold 500 shares of its Series P Cumulative
Convertible Preferred Stock ("Series P Stock") to a group of investors
affiliated with George Soros for an aggregate purchase price of $25 million. The
Series P Stock pays dividends in either shares of the Company's Common Stock or
cash at a rate of 10% per annum (12% per annum after a dividend payment failure)
at the option of the Company. Additionally, commencing April 1, 1997, each share
of Series P Stock is convertible by the holder into the number of shares of the
Company's Common Stock as obtained by dividing the $50,000 stated value per
share plus any accrued or unpaid dividends at the date of conversion by the
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 began at 100%, became 95%, and 90% on
June 29, 1997 and December 31, 1997, respectively, and becomes 88% on June 29,
1998). However, the holder could only convert up to a maximum of 20% prior to
June 30, 1997, an additional 30% prior to December 31, 1997, and can convert an
additional 30% prior to June 29, 1998 and the remainder thereafter. In
connection with this transaction, the Company issued warrants to purchase
850,000 shares of the Company's Common Stock at $9.2625 per share (subject to
adjustment in certain circumstances). The warrants are exercisable at any time,
and from time to time, before June 30, 2000.
In April 1997, the Company and S-C Rig Investments - III, L.P. ("S-C Rig"), a
significant stockholder of the Company and an investment group affiliated with
George Soros, modified the terms of the Senior Loan Agreement whereby S-C Rig
made a $40.0 million unsecured credit facility ("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 Shares termination date from
April 2001 to April 2003. As of December 31, 1997, $40.0 million was outstanding
under this facility.
In August 1997, the Company, in a private placement, 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 began at 100% and becomes 95%, and 90% on January 1, 1998 and
April 1, 1998, respectively). However, the holder could 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
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<PAGE>
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 February 1998, the Company completed an exchange offer whereby certain
holders of the Company's Series O Cumulative Convertible Preferred Stock
("Series O Stock") and Series Q Cumulative Convertible Preferred Stock ("Series
Q Stock") exchanged $22.4 million for shares of the Company's Series R Preferred
Stock ("Series R Stock") and Series S Preferred Stock ("Series S Stock"), whose
conversion price is fixed at an amount above the market price of the Company's
Common Stock. The $15.6 million of Series R Stock is convertible at $2.00 per
share and the $6.5 million of Series S Stock is convertible at $4.00 per share
which is adjusted under certain circumstance to $3.00 or at 110% of the market
price. Additionally, the Company lowered the exercise price of 3.0 million of
the Series O Stock and Series Q Stock warrants to $4.00 per share.
Under the exchange the holders also converted $12.1 million of Series O and Q
stock into Common Stock at $1.00 per share.
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. At December 31, 1997, approximately $10.4 million was drawn down and
$89.6 million was available, the last $50 million of which is subject to
satisfaction of certain conditions.
The Company paid cash dividends totaling approximately $5.1 million on its
outstanding preferred stocks during the year ended December 31, 1997 and
proceeds from the exercise of warrants and options totaled approximately $0.2
million.
As discussed previously, the Company must raise additional capital beginning in
the second quarter of 1998 to continue financing its current operations and to
implement its business plan in the short (fiscal 1998) and the long term. 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 Discount Notes due 2005; the financing of existing
international digital wireless networks; and the acquisition 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 short (fiscal 1998) and long term
business plan. The Company does not intend to construct additional U.S. 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, 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 on common stock, 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 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.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes
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<PAGE>
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 but may affect the determination and presentation of reportable
segments; although it may impact the disclosures of reportable segment data, the
Company is currently assessing the disclosure requirements.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Financial Statements:
Geotek Communications, Inc. and Subsidiaries
Reports of Independent Accountants F-1 - F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Shareholders' (Deficit)
Equity for the years ended December 31, 1997, 1996 and 1995 F-5 - F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-8 - F-9
Notes to Consolidated Financial Statements F-10 - F-49
Separate Company Financial Statements for Subsidiary whose
Capital Stock is Pledged as Collateral
National Band Three, Ltd. F-50 - F-72
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<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
The information called for by Items 10, 11, 12 and 13 (except for the
information regarding executive officers called for by Item 10 which is included
in Part I hereof as Item A in accordance with General Instruction G(3)) is
hereby incorporated by reference from the Company's definitive Proxy Statement
for its 1998 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
Page
----
(a)(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data."
for Geotek Communications, Inc. and Subsidiaries F-1 - F-49
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 47
(b)Reports on Form 8-K
The following Current Reports on Form 8-K were filed by the
Company during the fourth quarter of 1997:
Form 8-K filed December 23, 1997,reporting that the holders of
a majority in aggregate principal amount of the Company's 15%
Senior Secured Discount Notes due 2005 consented to
the amendment of certain provisions of the Indenture, dated
June 30, 1995, between the Company and IBJ Schroeder Bank &
Trust Company, as Trustee.
Form 8-K filed December 23, 1997 that the Company entered into
agreements to sell its interest in National Band Three Ltd. In
the United Kingdom and Terrafon Bundelfunk Geschaftsfuhrungs
GesellschaftmBH in Germany.
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(c) Exhibits
The following exhibits are filed as part of this report (Exhibit
numbers correspond to the exhibits required by Item 601 of
Regulation S-K for an Annual Report on Form 10-K):
Exhibit
No.
3.1 Restated Certificate of Incorporation of the Company, as
amended. /(1)
3.2 By-Laws of the Company, as amended through May 30, 1992.
/(2)
4.1 Restated Certificate of Incorporation of the Company, as
amended (incorporated from Exhibit 3.1 above). /(1)
4.2 By-Laws of the Company, as amended through May 30, 1992
(incorporated from Exhibit 3.2 above). /(2)
4.3 Certificate of Designation of Series H Participating
Cumulative Convertible Preferred Stock. /(3)
4.4 Certificate of Designation of Series I Cumulative
Convertible Preferred Stock. /(1)
4.5 Certificate of Designation of Series K Cumulative
Convertible Preferred Stock. /(4)
4.6 Certificate of Designation of Series L Cumulative
Convertible Preferred Stock. /(5)
4.7 Certificate of Designation of Series M Cumulative
Convertible Preferred Stock. /(5)
** 4.8 1989 Employee Stock Option Plan, as amended, of the
Company. /(6)
** 4.9 1994 Employee Stock Option Plan of the Company. /(7)
4.10 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed February 26, 1993.
/(8)
4.11 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company filed February 16, 1994.
/(1)
40
<PAGE>
4.12 Note and Warrant Purchase Agreement, dated as of June 1,
1993, by and between the Company and SC-Geo L.P. /(9)
4.13 Form of 30-month Warrant Certificate granted to Investors
in connection with Note and Warrant Purchase Agreement
referenced in Exhibit 4.12, dated July 2, 1993. /(9)
4.14 Form of 60-month Commitment Warrant Certificate granted
to Investors in connection with Note and Warrant Purchase
Agreement referenced in Exhibit 4.12, dated June 1, 1993.
/(9)
4.15 Note and Warrant Purchase Agreement, dated as of March
20, 1995, by and among the Company, The SC Fundamental
Value Fund, L.P. and SC Fundamental Value BVI, LTD. /(7)
4.16 Warrant Certificate in connection with Note and Warrant
Purchase Agreement referenced in Exhibit 4.17, dated
March 30, 1995. /(7)
4.17 Warrant Certificate in connection with Note and Warrant
Purchase Agreement referenced in Exhibit 4.17, dated
March 30, 1995. /(7)
4.18 Senior Secured Convertible Note dated March 30, 1995 from
the Company in connection with the Note and Warrant
Purchase Agreement referenced in Exhibit 4.17. /(7)
4.19 Senior Secured Convertible Note dated March 30, 1995 from
the Company in connection with the Note and Warrant
Purchase Agreement referenced in Exhibit 4.17. /(7)
4.20 Pledge Agreement, dated as of March 30, 1995, by and
among the Company, certain of its subsidiaries, and SC
Fundamental Inc., as agent for, and on behalf of The SC
Fundamental Value Fund, L.P. and SC Fundamental Value
BVI, LTD. /(7)
4.21 Unit (Note and Warrant) Purchase Agreement, dated June
29, 1995, by and between the Company and Smith Barney
Inc. /(10)
41
<PAGE>
4.22 Indenture, dated as of June 30, 1995, between the Company
and IBJ Schroder Bank & Trust Company, as trustee. /(10)
4.23 Pledge Agreement, dated as of July 6, 1995, by and
between the Company and IBJ Schroder Bank & Trust
Company, as collateral agent. /(10)
4.24 Share Transfer Agreement, dated July 6, 1995 between the
Company and IBJ Schroder Bank & Trust Company, as
collateral agent. /(10)
4.25 Warrant Agreement, dated as of June 30, 1995, by and
between the Company and IBJ Schroder Bank & Trust
Company, as warrant agent. /(10)
4.26 Loan agreement dated as of December 21, 1995, between the
Company and Hughes Network System, Inc. /(11)
4.27 Note Purchase Agreement, dated March 4, 1996, by and
between the Company and Smith Barney Inc. /(12)
4.28 Indenture, dated as of March 5, 1996, between the Company
and The Bank of New York, as trustee. /(12)
4.29 Senior Loan Agreement dated April 4, 1996, between the
Company and SC Rig Investment-III L.P. /(12)
4.30 Warrant Agreement dated April 4, 1996, between the
Company and SC Rig Investment-III L.P. /(12)
4.31 Registration Rights Agreement dated March 5, 1995,
between the Company and Smith Barney. /(12)
4.32 Form of Subscription Agreement to purchase Series N
Cumulative Convertible Preferred Stock and Warrants.
/(14)
4.33 Certificate of Designation of Series N Cumulative
Convertible Preferred Stock. /(14)
4.34 Form of 60-month Warrant Certificate granted to investors
in connection with Subscription Agreement referenced in
Exhibit 4.35. /(14)
4.35 Certificate of Designation of Series O Convertible
Preferred Stock. /(15)
4.36 Form of Letter Agreement by and between the Company and
each of the
42
<PAGE>
purchasers of Series O Preferred Stock. /(15)
4.37 Form of 42-month Warrant Certificate granted to certain
purchasers of Series O Preferred Stock and the purchaser
of the Series P Preferred Stock. /(15)
4.38 Form of Registration Rights Agreement by and among the
Company and the purchasers of the Series O Preferred
Stock. /(15)
4.39 Certificate of Designation of Series P Convertible
Preferred Stock. /(16)
4.40 Certificate of Correction, filed January 6, 1997, to
correct a certain error in the Certificate of Designation
of Series O Convertible Preferred Stock. /(16)
4.41 Certificate of Correction, filed January 29, 1997, to
correct a certain error in the Certificate of Designation
of Series O Convertible Preferred Stock. /(16)
4.42 Amendment No. 1 to Senior Loan Agreement dated April 4,
1996 between the Company and SC Rig Investment - III L.P.
/(18)
4.43 Amended and Restated Warrant Agreement dated April 22,
1996 between the Company and SC Rig Investment - III L.P.
/(18)
4.44 Certificate of Designation of Series R Convertible
Preferred Stock /(19)
4.45 Certificate of Correction, filed February 23, 1998, to
correct a certain error in the Certificate of Designation
of Series R Convertible Preferred Stock /(19)
4.46 Certificate of Designation of Series S Convertible
Preferred Stock /(19)
10.1 Stockholders Voting Agreement, dated as of February 23,
1994, among the Company, Vanguard Cellular Systems, Inc.,
S-C Rig Investments-III, L.P., Evergreen Canada-Israel
Investment & Co., Ltd., Yaron Eitan and Winston
Churchill. /(1)
10.2 Asset Exchange Agreement, dated as of March 24, 1995, by
and between the Company, Metro Net Systems, Inc., Nextel
Communications, Inc. and certain Nextel subsidiaries.
/(7)
10.3 FHMA Commercial Subscriber Unit Agreement, dated as of
June 8, 1994, between the Company and Mitsubishi Consumer
Electronics America Inc. /(13)
10.4 FHMA Portable Subscriber Unit Agreement dated as of May
19, 1995 between the Company and Hughes Network Systems,
Inc. /(13)
10.5 Vendor Credit Financing Agreement, dated as of September
27, 1996, by and
43
<PAGE>
among Geotek Financing Corporation, the Company and
Hughes Network Systems, Inc. /(17)
10.6 Security Agreement, dated as of September 27, 1996, by
and among Geotek Financing Corporation, the Company and
Hughes Network Systems, Inc. /(17)
10.7 Form of Warrants to Purchase Common Stock. /(17)
10.8 Amended and Restated Borrower Pledge Agreement, dated as
of September 27, 1996, by and among Geotek Financing
Corporation, the Company and Hughes Network Systems,
Inc. /(17)
10.9 Conversion and Exchange Agreement by and between the
Company and certain other parties, dated February 13,
1998 /(19)
10.10 Registration Rights Agreement by and between the Company
and certain other parties, dated February 18, 1998
10.11 Agreement for Sale and Purchase of Shares, dated December
18, 1997, by and between the Company, Geotek GmbH
Holdings Corporation, Telesystem International Wireless,
Inc. and TIWC Holdings (UK) Limited /(20)
10.12 Purchase Agreement, dated as of December 18, 1997, by and
among the Company, Geotek Communications GmbH, o.tel.o
Communications GmbH & Co., and RegioKon Deutschland
Gellschaft fur BundelfunkdienstmbH /(20)
* 10.13 First Amendment dated as of December 1, 1997 to the
Indenture dated as of June 30, 1995 between the Company
and IBJ Schroder Bank & Trust Company as Trustee
* 10.14 First Amendment dated as of December 1, 1997 to the
Pledge Agreement dated as of July 6, 1995 between the
Company and IBJ Schroder Bank & Trust Company as Trustee
* 10.15 GEONET System Security Agreement dated as of
December 1, 1997among the Company and Geotek USA, Inc.
and IBJ Schroder Bank & Trust Company as collateral agent
* 12 Computation of Ratio of Earnings to Fixed Charges
* 21 Subsidiaries of the Company.
* 23.1 Consent of Coopers & Lybrand L.L.P.-
Geotek Communications, Inc.
44
<PAGE>
* 23.2 Consent of Shachak Peer Reznick & Co. -
Geotek Technologies Israel Ltd.
* 23.3 Consent of Coopers & Lybrand -
National Band Three Limited
* 27 Financial Data Schedule
* Filed herewith
** Compensation Plan
- --------
(1) Incorporated by reference to the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993.
(2) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-3 (Registration No. 33-64117) filed with the
Commission on November 9, 1995.
(3) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (Registration No. 33-72820)
filed with the Commission on January 25, 1994.
(4) Incorporated by reference to the Exhibits to Amendment No. 1 to the
Company's Registration Statement on Form S-3 (Registration No. 33-85296)
filed with the Commission on May 26, 1995.
(5) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated May 26, 1995.
(6) Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-3 (Registration No. 33-72820) filed with the
Commission on December 10, 1993.
(7) Incorporated by reference to the Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994.
(8) Incorporated by reference to the Exhibits to Post-Effective Amendment No.
2 to the Company's Registration Statement on Form S-1 (Registration No.
33-42185) filed with the Commission on August 27, 1993.
(9) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K/A No. 1 filed with the Commission with respect to events whose
earliest date was June 18, 1993.
(10) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated July 6, 1995.
(11) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated
45
<PAGE>
December 27, 1995.
(12) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated March 4, 1996.
(13) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K/A dated June 26, 1995.
(14) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated June 20, 1996.
(15) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated December 31, 1996.
(16) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated January 23, 1997.
(17) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated September 27, 1996.
(18) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated April 22, 1997.
(19) Incorporated by reference to the Exhibits to the Company's Current Report
on form 8-K dated February 18, 1998.
(20) Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K dated December 18, 1997 (filed January 21, 1998).
46
<PAGE>
GEOTEK COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C (1) Column C (2) Column D Column E
- -------- --------- ------------ ------------- -------- --------
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Other Deduction Period
--------- -------- ----- --------- ------
Description
- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts $ 871 $ 986 (647) (g)(d) $ 372 (a) $ 838
Deferred tax asset valuation account 93,394 47,835 141,229
Reserve for inventory
lower of cost or market 5,153 9,299 13,452 (f) 1,000
----------- ------- --------- ------- --------------
$99,418 $10,285 $47,188 $13,824 $143,067
======= ====== ======= ======= ========
Year ended December 31, 1996:
Allowance for doubtful accounts $ 1,063 $256 ($199) (c)(d) $ 249 (a) $ 871
Deferred tax asset valuation account 48,019 45,732 357 (e) 93,394
Reserve for inventory
lower of cost or market 305 5,226 378 (b) 5,153
----------- ------ -------- ------- ----------
$ 49,387 $5,482 $45,533 $ 984 $ 99,418
========= ===== ====== ======= ======
Year ended December 31, 1995:
Allowance for doubtful accounts $ 760 $ 639 $ 336 (a) $ 1,063
Deferred tax asset valuation account 12,268 35,751 48,019
Reserve for inventory
lower of cost or market 26 281 2 (b) 305
------------ -------- --------- ---------- ----------
$ 13,054 $ 935 $35,751 $ 373 $ 49,387
======== ======= ======= ======= =======
<S> <C>
(a) Uncollectible accounts written off, net of recovery. (f) Adjustment of standard inventory costs
(b) Write-off of obsolete inventory. (g) Related to reclassification of entity
(c) Liability of deconsolidated and partially disposed entity. as an asset held for sale
(d) Foreign Currency Fluctuation
(e) Post acquisition adjustment for utilization of acquired net operating loss
carryforwards
</TABLE>
47
<PAGE>
[ COOPERS & LYBRAND L.L.P. LETTERHEAD ]
REPORT OF INDEPENDENT ACCOUNTANTS
--------------
To the Board of Directors and Shareholders
of Geotek Communications, Inc.:
We have audited the consolidated financial statements and the consolidated
financial statement schedule of Geotek Communications, Inc. and Subsidiaries as
listed in Item 14(a)(1) and (2) of this Form 10-K. The consolidated financial
statements and the consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the consolidated
financial statement schedule based on our audits. We did not audit the financial
statements of Geotek Technologies Israel (1992) Ltd, a consolidated
subsidiary, which statements reflect revenues of approximately 32%, 0% and 0%
and losses from continuing operations of approximately 10%, 13%, and 12% of the
corresponding consolidated totals in 1997, 1996 and 1995, respectively. These
statements were audited by other auditors whose report, which included an
explanatory paragraph with respect to Geotek Technologies Israel (1992) Ltd.'s
ability to continue as a going concern, has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Geotek Technologies
Israel (1992) Ltd. for 1997, 1996, and 1995, is based solely on the report of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits, and the report of other auditors, provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above presently fairly, in all
material respects, the consolidated financial position of Geotek
Communications, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, based
on our audits and the report of other auditors, the consolidated financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
The consolidated financial statements referred to above have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations, has significant debt obligations and has
negative operating and investing cash flows that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets, including
long-lived assets which is dependent on the Company's ability to implement its
operating plans, or the amounts and classification of liabilities, that may
result from the outcome of this uncertainty.
New York, New York
March 16, 1998
[ SHACHAK PEER REZNICK & CO. LETTERHEAD ]
F - 1
<PAGE>
AUDITORS= REPORT TO THE BOARD OF DIRECTORS OF
GEOTEK TECHNOLOGIES ISRAEL (1992) LTD.
We have audited the accompanying balance sheets of GEOTEK TECHNOLOGIES ISRAEL
(1992) LTD. (f/k/a PowerSpectrum Technology Ltd.) as of December 31, 1997 and
1996, and the statements of operations, changes in shareholders' equity and
statements of cash flows for the years ended December 31, 1997, 1996, and 1995.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel (which do not materially differ from those established by the American
Institute of Certified Public Accountants), including those prescribed under
the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether
caused by an error in the financial statements or by an irregularity therein. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Company's Board
of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a fair basis for our
opinion.
The financial statements referred to above have been prepared on the basis of
historical cost, restated for the general purchasing power of the Israeli
currency, in conformity with statements of the Institute of Certified Public
Accountants in Israel ("ICPA"). Condensed financial statements in nominal NIS
values as required according to the guidelines of the ICPA, are not presented.
In our opinion, except for the omission of the condensed financial statements in
nominal NIS values, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1997 and 1996 and the results of its operations, changes in shareholders'
equity and cash flows for the years ended December 31, 1997, 1996 and 1995, in
conformity with generally accepted accounting principles.
The financial statements referred to above have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1B to the
financial statements, the Company has suffered recurring losses from operations
and has incurred significant working capital and shareholders' deficit that
raise substantial doubt about its ability to continue as a going concern.
Recoverability of the Company's assets including intangible and other long-lived
assets, is dependent on the Company's ability to receive further funding and
purchase orders from its shareholders or others. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets, or the amounts and classification
of liabilities, that may result from the outcome of this uncertainty.
Pursuant to Section 211 of the Companies Ordinance (New Version) 1983, we state
that we have obtained all the information and explanations we have required and
that our opinion on the above mentioned financial statements is given according
to the best of our information and the explanations received by us and as shown
by the books of the Company.
SHACHAK PEER REZNICK & CO.
Certified Public Accountants (Israel)
Ramat Gan
March 16, 1998
F - 2
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,393 $ 102,720
Restricted cash 16,140 9,418
Accounts receivables trade, net of allowance for doubtful
accounts of $838 in 1997 and $871 in 1996 7,097 8,919
Inventories, net 21,477 21,631
Assets held for sale 27,121 -
Net assets of discontinued operations - 12,985
Prepaid expenses and other current assets 6,667 11,105
Advances to related parties 11,500 11,500
--------- ---------
Total current assets 103,395 178,278
Investments in affiliates 15,923 37,017
Property, plant and equipment, net 112,983 91,451
Intangible assets, net 80,867 83,499
Other assets, principally debt issuance costs 18,582 27,776
--------- ---------
$ 331,750 $ 418,021
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 25,170 $ 17,253
Accrued expenses and other 53,951 46,252
Notes payable, banks and other - 3,247
Current maturities, long-term debt 42,664 256
--------- ---------
Total current liabilities 121,785 67,008
--------- ---------
Long-term debt 243,422 215,060
Other non current liabilities 5,364 883
Commitments and contingent liabilities
Redeemable preferred stock 40,000 40,000
Shareholders' (deficit) equity:
Preferred stocks, $.01 par value: 11 11
Common stock, $.01 par value:
Authorized 200,000,000 and 135,000,000 shares, respectively,
issued 73,874,000 and 60,026,000 shares, respectively,
outstanding 73,450,000 and 59,602,000 shares, respectively 739 600
Capital in excess of par value 476,145 429,483
Foreign currency translation adjustment (145) 968
Accumulated deficit (554,185) (334,606)
Treasury stock, at cost (424,000 common shares 1997 and 1996) (1,386) (1,386)
--------- ---------
(78,821) 95,070
--------- ---------
$ 331,750 $ 418,021
========= =========
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net product sales $ 31,921 $ 12,599 $ 8,095
Service income 33,589 33,926 27,666
------------ ------------ ------------
Total revenues 65,510 46,525 35,761
------------ ------------ ------------
Costs and expenses:
Cost of goods sold 55,459 15,899 5,034
Cost of services 29,491 29,289 16,694
Engineering and development 39,609 34,520 33,272
Selling and Marketing 30,975 29,728 18,063
General and administrative 45,045 35,522 22,609
Depreciation expense 25,645 14,924 5,326
Amortization of intangibles 4,880 3,746 3,556
Interest expense 35,709 29,876 15,935
Interest income (3,866) (5,834) (5,147)
Equity in losses of investees 21,748 79 4,895
Other (income) expenses 4,683 (1,952) (2,361)
------------ ------------ ------------
Total costs and expenses 289,378 185,797 117,876
------------ ------------ ------------
Loss from continuing operations before taxes
on income and discontinued operations (223,868) (139,272) (82,115)
Taxes on income (1,820) (1,048) (960)
------------ ------------ ------------
Loss from continuing operations (225,688) (140,320) (83,075)
Discontinued operations:
Gain on disposition of discontinued operations 3,754 - -
Income (loss) from discontinued operations (net
of taxes: $1.5 million in 1997, $.6 million in
1996, and $1.3 million in 1995) 2,355 2,098 (4,124)
------------ ------------ ------------
Total discontinued operations 6,109 2,098 (4,124)
------------ ------------ ------------
Net loss before preferred stock dividends (219,579) (138,222) (87,199)
Preferred stock dividends (22,842) (8,058) (4,132)
------------ ------------ ------------
Net loss applicable to common shares $ (242,421) $ (146,280) $ (91,331)
============ ============ ============
Weighted average number of common
shares outstanding 65,817,000 58,305,000 52,329,000
============ ============ ============
Basic and Diluted (Loss) Earnings per Share:
Loss from continuing operations $ (3.77) $ (2.55) $ (1.67)
Income (loss) from discontinued operations $ .09 $ .04 $ (.08)
Net loss applicable to common shares $ (3.68) $ (2.51) $ (1.75)
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
as of and for the years ended December 31, 1997, 1996 and 1995
(in Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in
----------------------- ----------------------- Excess of
Shares Amount Shares Amount Par Value
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1 ,1995 0 $ 0 50,869 $ 509 $ 186,651
Issuance of common stock and warrants:
Exercise of warrants and options 466 5 1,158
Issuance of common stock in connection with the
acquisition of minority interest in GTIL 1,800 18 8,550
Issuance of common stock to RDC 338 3 2,997
Issuance of common stock to Vanguard pursuant to
management consulting agreement 300 3 2,436
Issuance of common stock in connection with
engineering and development project 250 3 2,029
Issuance of common stock in connection with debt
conversion 1,228 12 8,008
Issuance of warrants in connection with note payable 1,800
Issuance of warrants in connection with bonds payable 32,107
Issuance of Series K Preferred Stock 10,000
Issuance of Series L Preferred Stock 1,062 $ 11 9,692
Issuance of Series M Preferred Stock 1 11,160
Preferred stock dividends (4,132)
Changes in currency translation adjustment
Net Loss
--------- --------- --------- --------- ---------
Balance, December 31, 1995 1,063 $ 11 55,251 $ 553 $ 272,456
========= ========= ========= ========= =========
<CAPTION>
Foreign
Currency
Translation Accumulated Treasury
Adjustment Deficit Stock
---------- --------- ---------
<S> <C> <C> <C>
Balance, January 1 ,1995 $ 687 $(109,185) $ (1,386)
Issuance of common stock and warrants:
Exercise of warrants and options
Issuance of common stock in connection with the
acquisition of minority interest in GTIL
Issuance of common stock to RDC
Issuance of common stock to Vanguard pursuant to
management consulting agreement
Issuance of common stock in connection with
Engineering and development project
Issuance of common stock in connection with debt
conversion
Issuance of warrants in connection with note payable
Issuance of warrants in connection with bonds payable
Issuance of Series K Preferred Stock
Issuance of Series L Preferred Stock
Issuance of Series M Preferred Stock
Preferred stock dividends
Changes in currency translation adjustment 98
Net Loss (87,199)
--------- --------- ---------
Balance, December 31, 1995 $ 785 $(196,384) $ (1,386)
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F - 5
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY, Continued
as of and for the years ended December 31, 1997, 1996 and 1995
(in Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in
----------------------- ----------------------- Excess of
Shares Amount Shares Amount Par Value
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,063 $ 11 55,251 $ 553 $ 272,456
Issuance of common stock and warrants:
Exercise of warrants and options 644 6 2,662
Issuance of common stock to Vanguard
pursuant to management consulting
agreement 199 2 2,059
Issuance of common stock in connection with
the acquisition of SMR License 191 2 1,998
Issuance of common stock in connection with
senior note conversion 3,261 32 26,869
Issuance of common stock in connection with
note conversion 102 1 849
Issuance of common stock for preferred dividend 353 4 2,917
Issuance of common stock on conversion of
preferred stock 25 - -
Issuance of warrants in connection with long-term
credit facility 13,400
Issuance of warrants in connection with vendor
credit facility 8,745
Issuance of warrants in connection organization
of joint venture 2,236
Issuance of Series N Preferred Stock 55 53,350
Issuance of Series O Preferred Stock 1 50,000
Preferred stock dividends (8,058)
Changes in currency translation adjustment
Net Loss
--------- --------- --------- --------- ---------
Balance, December 31, 1996 1,119 $ 11 60,026 $ 600 $ 429,483
========= ========= ========= ========= =========
<CAPTION>
Foreign
Currency
Translation Accumulated Treasury
Adjustment Deficit Stock
---------- --------- ---------
<S> <C> <C> <C>
Balance, January 1, 1996 $ 785 $(196,384) $ (1,386)
Issuance of common stock and warrants:
Exercise of warrants and options
Issuance of common stock to Vanguard
pursuant to management consulting
agreement
Issuance of common stock in connection with
the acquisition of SMR License
Issuance of common stock in connection with
senior note conversion
Issuance of common stock in connection with
note conversion
Issuance of common stock for preferred dividend
Issuance of common stock on conversion of
preferred stock
Issuance of warrants in connection with long-term
credit facility
Issuance of warrants in connection with vendor
credit facility
Issuance of warrants in connection organization
of joint venture
Issuance of Series N Preferred Stock
Issuance of Series O Preferred Stock
Preferred stock dividends
Changes in currency translation adjustment 183
Net Loss (138,222)
--------- --------- ---------
Balance, December 31, 1996 $ 968 $(334,606) $ (1,386)
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F - 6
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY, Continued
as of and for the years ended December 31, 1997, 1996 and 1995
(in Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Capital in
----------------------- ----------------------- Excess of
Shares Amount Shares Amount Par Value
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,119 $ 11 60,026 $ 600 $ 429,483
Issuance of common stock:
Exercise of warrants and options 150 2 250
Issuance of common stock for preferred
dividends 3,291 33 12,480
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 10,350 103 (103)
Issuance of Series P Convertible Preferred Stock 25,000
Issuance of Series Q Convertible Preferred Stock 30,000
Deemed interest/dividend on convertible preferred
stock and convertible debt 7,609
Amendment to value of warrants issued with the
S-C Rig credit facility (5,996)
Preferred stock dividends, including $5,158 in deemed
dividends (22,842)
Changes in currency translation adjustment
Net loss
--------- --------- --------- --------- ---------
Balance, December 31, 1997 1,119 $ 11 73,874 $ 739 $ 476,145
========= ========= ========= ========= =========
<CAPTION>
Foreign
Currency
Translation Accumulated Treasury
Adjustment Deficit Stock
---------- --------- ---------
<S> <C> <C> <C>
Balance, January 1, 1997 $ 968 $(334,606) $ (1,386)
Issuance of common stock:
Exercise of warrants and options
Issuance of common stock for preferred
dividends
Issuance of common stock in connection
with the acquisition of minority interest
in GTIL
Issuance of common stock on conversion
of preferred stock
Issuance of Series P Convertible Preferred Stock
Issuance of Series Q Convertible Preferred Stock
Deemed interest/dividend on convertible preferred
stock and convertible debt
Amendment to value of warrants issued with the
S-C Rig credit facility
Preferred stock dividends, including $5,158 in deemed
dividends
Changes in currency translation adjustment (1,113)
Net loss (219,579)
--------- --------- ---------
Balance, December 31, 1997 $ (145) $(554,185) $ (1,386)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F - 7
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(219,579) $(138,222) $ (87,199)
Adjustments to reconcile net loss to net cash
used in operating activities:
Discontinued operations:
(Income) loss from operations (2,355) (2,098) 4,124
Gain on disposal (3,754) - -
Depreciation and amortization 30,525 18,670 8,882
Adjustments inventory for replacement cost 9,299 5,226 295
Post acquisition adjustment for utilization of acquired
net operating loss carryforwards - 357 950
Non cash interest expense 31,133 26,595 11,901
Non cash acquisition of minority interest of a subsidiary,
assigned to an engineering and development project - 1,861 -
Deferred taxes - 614 -
Equity in losses of investees 21,748 79 4,895
Issuance of stock for management consulting fee - 2,061 2,439
Issuance of shares in connection with
engineering and development project - - 2,032
Other 4,623 (179) (363)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,372) (2,660) (106)
(Increase) in inventories (9,643) (23,716) (3,356)
(Increase) in prepaid expenses and other assets (2,941) (12,527) (93)
Increase in accounts payable and accrued expenses 24,878 34,010 11,245
Other, net 328 900 (1,005)
--------- --------- ---------
Net cash used in operating activities (117,110) (89,029) (45,359)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of, and deposits for, spectrum licenses (433) (30,192) (13,055)
Decrease in temporary investments - 7,945 14,015
Non cash transaction expense for BCI - - 740
Change in restricted cash (6,722) 27,553 (34,416)
Proceeds from sale of subsidiaries 18,500 - 7,000
Contract deposits -other current assets 1,971 (2,261) (1,227)
Change in cash for net assets of discontinued operations 370 (391) 406
Cash included in assets held for sale (4,485) - -
Acquisitions of property, plant and equipment (61,720) (49,029) (32,456)
Capitalized interest on construction in progress &
pre-commercial spectrum licenses (8,615) (7,168) (487)
Proceeds from sale of property, plant and equipment - 103 250
Cash invested in unconsolidated subsidiaries, net (5,830) (8,798) (9,732)
Other, net - - 2,106
--------- --------- ---------
Net cash used in investing activities (66,964) (62,238) (66,856)
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F - 8
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayments under line-of-credit agreements (3,247) - -
Repayments of debt (1,965) (1,706) (2,028)
Proceeds from issuance of convertible notes - 75,000 -
Proceeds from drawdown of credit agreement 40,000 24,500 -
Proceeds from issuance of common stock 212 - 3,000
Proceeds from issuances of convertible preferred stock 55,000 103,350 30,863
Proceeds from drawdown of vendor financing agreement 10,307 - -
Deferred financing costs - (3,300) (4,692)
Financing costs - (1,080) -
Proceeds from issuance of senior secured note & related warrants - - 36,000
Repayments of secured note - - (25,000)
Proceeds from issuance of senior secured notes & related warrants - - 110,079
Proceeds from exercise of warrants and options - 2,568 1,073
Payments for preferred dividends (5,131) (5,138) (4,132)
Repayment of capital lease obligations (359) (498) (617)
Other, net - 71 -
--------- --------- ---------
Net cash provided by financing activities 94,817 193,767 144,546
--------- --------- ---------
Effect of exchange rate changes on cash (70) 69 436
Increase (decrease) in cash and cash equivalents (89,327) 42,569 32,767
Cash and cash equivalents, beginning of year 102,720 60,151 27,384
--------- --------- ---------
Cash and cash equivalents, end of year $ 13,393 $ 102,720 $ 60,151
========= ========= =========
Supplemental cash flow information:
Interest paid $ 12,346 $ 6,902 $ 5,094
Income taxes paid - 265 -
Supplemental schedule of noncash investing and financing activities:
Summary of acquired subsidiaries:
Assets acquired in purchase transactions - 133 14,840
Liabilities assumed in purchase transactions - 257 13,466
Summary of contribution to joint venture:
Assets contributed - 10,298 -
Liabilities assumed - 7,703 -
Summary of Bogen Communications International ("BCI") sale:
Assets deconsolidated - 25,085 24,797
Liabilities, including foreign currency, deconsolidated - (12,100) (14,144)
Summary of assets held for sale:
Assets reclassified 39,089 - -
Liabilities, including foreign currency, reclassified (11,968) - -
Management consulting fees paid in common stock - 2,061 2,439
Issuance of common shares in connection with an engineering &
development project - - 2,032
Non cash transaction expense for BCI - - 740
Issuance of common shares in connection with senior note conversion - 27,981 8,020
Conversion of debenture by related party into shares of subsidiary - - 812
Issuance of common shares for acquisition of minority interest
in Geotek Technologies Israel Ltd ("GTI-Israel") 265 - 8,568
Acquisition of assets under capital lease 2,628 - 986
Issuance of convertible note for minority interest in GTI-Israel - 800 -
Issuance of common shares in connection with acquisition of SMR license - 2,000 -
Issuance of common shares for preferred dividends 12,512 2,920 -
Issuance of note payable to acquire remaining 50% interest in MIS - 2,000 -
Deemed dividend on convertible preferred stock 5,158 - -
</TABLE>
See notes to consolidated financial statements.
F - 9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies:
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Geotek Communications, Inc.
("the Company") include all wholly-owned, majority-owned and controlled
subsidiaries. The Company accounts for 20%-50% owned entities by the
equity method. All significant intercompany accounts and transactions
have been eliminated.
Certain amounts in the 1996 and 1995 financial statements and notes have
been reclassified to conform to the 1997 presentation.
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 at December 31, 1997, proceeds from
the sale of non-strategic assets (see Note 2), lines of credit
facilities (see Note 8) and expected cash flow from operations will be
insufficient to fund its current operations and the implementation of
the Company's business plan in the short and long term. The Company's
short term business plan is to add customers and customer revenues and
market its Driver Logistic(TM) Systems in its existing eleven markets.
The Company's long term business plan includes: the rollout of the U.S.
Network in over 40 markets; the ongoing deployment of existing
international wireless networks; the repayment of convertible debt and
redeemable preferred stock (if such are not converted into equity); and
the repayment of the Company's line of credit and vendor credit
facilities and Discount Notes. Further, under terms of the Indenture
governing the Company's 15% Senior Secured Discount Notes ("Discount
Notes") and other contractual commitments, the Company is limited in the
use of proceeds from the sale of assets and indebtedness as the
indenture restricts the availability of cash for general corporate
purposes (see Note 2).
The Company is in various stages of operations in eleven markets in
Philadelphia, Washington D.C./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, a portion of which must be raised
beginning in the second quarter fiscal 1998, to fund current operating
losses, working capital, debt service and capital expenditures. The
Company does not intend to construct additional markets in the U.S. or
expand into new international FHMA(R) Networks until such time as it
obtains sufficient additional financing to do so. Additionally, the
Company expects to re-negotiate certain cash commitments by deferring
payments or making payments in shares of the Company's common stock to
decrease its short and long term cash requirements. In addition to cash
receipts from anticipated customer growth in the current year, the
Company will attempt to obtain additional financing 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, or a combination thereof. The Company
also expects to impact cash flow through stringent cost control and
expenditure reductions. There can be no assurance that the Company will
be able to obtain any such financing on acceptable terms or at all. Any
additional equity or debt financing may involve substantial dilution to
the interest of holders of the Company's debt and equity securities. The
failure to obtain the requisite additional capital would prevent the
Company from executing its short (fiscal 1998) and long term business
plans, would result in the Company violating certain contractual and
debt covenants (see Note 8) and raises substantial doubt about the
Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities which might result from this uncertainty.
F - 10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Risks and Uncertainties
The Company's Driver Logistics(TM) System using the Company's FHMA(R)
digital wireless network involves a complex integration of sophisticated
voice and data applications. The implementation of the FHMA(R) System to
date has raised numerous technical difficulties. Additional technical
difficulties may arise from time to time as the Company continues to
make hardware and software modifications, add new functionality to the
Driver Logistics(TM) System and increase the number of customers in a
particular market. The introduction of additional services is expected
to require testing and hardware and software modifications in order to
integrate such services with the existing FHMA(R) System services, which
may present technical problems. During the fourth quarter of 1997, the
Company began introducing new operating system software in its current
U.S. markets. Integration of such software required modification to the
network and the hardware utilized by the Company's customers, as well as
testing. The success and timing of the integration of new services and
new software and/or the negative impact, if any, to the Company's
customers from an interruption of service cannot be predicted. In
addition, new software may be required to solve technical difficulties
that may arise in the operation and performance of the FHMA(R) System as
additional users are added in a particular market or as the coverage
area in any market is increased. Furthermore, each of the Company's
United States target markets could present unique technical issues due
to differences in geography and topography, which may also require new
system software. Delays in the integration of new services and new
system software, or an adverse reaction from the Company's customers,
could have a material adverse effect on the Company's ability to
successfully market its Driver Logistics(TM) System and on the financial
position, cash flow and results of operations.
The Company may eventually need additional spectrum in certain of its
more populated markets, beyond what it has already. Because spectrum is
a finite resource, there can be no assurance that the Company will be
able to obtain additional spectrum to meet its possible needs.
Additionally, acquisition of additional spectrum may require significant
capital resources. The inability of the Company to obtain additional
spectrum could limit its ability to expand its services and increase the
number of customers on its system in a given market.
There are only a limited number of existing communications towers
capable of providing the Company with sufficient coverage for its radio
transmissions and support its transmission equipment. If the Company
cannot obtain leases for existing towers, it may be required to purchase
sites, obtain necessary permits and build such towers which could take
up to one year for each tower. If the Company is required to build new
towers, additional financing may be required and the deployment of the
FHMA(R) System in one or more of its target U.S. markets could be
delayed.
Additionally, the Company's joint venture in Korea (see Note 4) is
currently deploying an 800MHz FHMA(R) System in Korea. The Company also
sells FHMA(R) System infrastructure to unrelated parties in Korea. The
deployment of such a network is subject to the same risks and estimates
attendant to the U.S. network rollout in addition to currency exchange
rate fluctuation, international incidents, economic downturn and changes
in government policy.
The Company is dependent upon a relatively small number of manufacturers
for its products. Rafael Armament Development Authority, a related party
and a division of the Israeli Ministry of Defense ("Rafael"), and Hughes
Network Systems ("HNS"), a related party and a unit of GM Hughes
Electronics, currently are manufacturing the base station equipment for
the U.S. wireless network on a schedule that is intended to enable the
Company to meet its projected roll-out. Other third parties, including
HNS and Farbell Electronics ("Farbell") currently are manufacturing
customer units and certain other components of the system hardware for
the U.S. wireless network on a schedule to meet anticipated customer
demand. There can be no assurance that such third parties will deliver
such equipment on a timely basis. Although the Company believes that it
F - 11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
can obtain all components necessary to build the digital wireless system
and Driver Logistics(TM) System from other sources, it may encounter
delays in the event of a component shortage due to the time needed to
identify alternative sources and manufacture substitute components.
Failure to obtain hardware components on a timely basis or at
satisfactory prices could result in delays or cost overruns in the
implementation of the U.S. digital wireless system and Driver
Logistics(TM) System.
Many of the target customers for the Company currently use one or more
wireless communications services. In order to compete effectively, the
Company must attract a portion of its target customers from their
existing providers. The Company's marketing strategy emphasizes its
Driver Logistics(TM) System, an integrated package of voice and data
services, which the Company believes differentiates it from wireless
communications and logistics providers. However, there can be no
assurance that potential customers will perceive the Company's services
to be superior to those offered by wireless communications providers.
Long-Lived Assets
In 1996, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". This statement requires that long-lived
assets and certain identifiable intangibles be periodically reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell (see Note 2). Pursuant to SFAS
No. 121, the Company periodically reviews long-lived assets, including
its property, plant and equipment, intangible assets and investments in
affiliates, whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. When such
circumstances occur, the Company evaluates the possible effects on the
carrying amount of such assets. The adoption of this Statement did not
have a significant effect on the Company's financial position, results
of operations, or liquidity.
The Company's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both,
could be reduced in the future due to changes in, among other things,
technology, government regulation, available financing or competition.
The Company's estimate of future gross revenues and operating cash flows
assumes that the Company will successfully implement its short and long
term business plan and achieve the growth in market penetration and
customers and will continue as a going concern (see Basis of
Presentation above). There is no assurance that the Company can
successfully implement its plan or that it will be able to achieve
positive cash flow from any operating activities. As a result, the
carrying amounts of long-lived assets could be reduced by an amount
which may be material to the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of
the financial statements and revenues and expenses during the period
reported. Actual results could differ from those estimates and have a
material adverse effect on the financial position of the Company.
Estimates are used for, among other things: revenue recognition,
allowance for doubtful accounts; inventory reserve for the lower of cost
or market; product warranty reserves; depreciation and amortization; and,
the estimated lives of assets and recoverability of long lived assets,
including intangibles.
F - 12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Product sales related to handsets and telephone peripherals are
recognized on shipment. Revenues for service income are recognized when
services are provided. Deferred revenues are recognized when the
customer is billed in advance and are recorded in income in the period
to which the advance billing relates.
Revenues and estimates of profit for the Company's Geotek Technologies,
Inc. ("GTI") and GMSI, Inc. ("GMSI") subsidiaries relating to long term
construction contracts for the sale of digital wireless networks and
wireless dispatch products 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
and circumstances. Any losses on contracts are recognized immediately.
Inventories
Inventories, which include handsets and telephone peripherals, are
stated at the lower of cost (first-in, first-out method) or market. The
carrying value of handsets held for resale to the Company's subscribers
are not adjusted to reflect promotional discounts which are recognized
upon the sale to the customer.
Cash Equivalents
Cash equivalents are highly liquid debt instruments purchased with an
original maturity of three months or less, and are considered to be cash
equivalents for cash flow reporting purposes.
Restricted Cash
Restricted cash includes certain proceeds from the sale of certain
assets and compensating balances under Letters of Credit. Under the
terms and conditions of the Indenture governing the Company's Discount
Notes, and amendments thereto, the use of proceeds from the sale of
assets are restricted. At December 31, 1997, $9.1 million from the sale
of Bogen Communications International Inc. ("BCI") was restricted and
subsequently released during the first quarter of 1998.
Concentration of Credit Risk and Off-Balance-Sheet Risks
The Company provides mobile radio services to commercial customers in
the United States, Europe (see Note 2) and Korea under contractual
arrangements. The Company performs ongoing credit evaluations of its
commercial customers and generally does not require collateral. The
Company maintains reserves for potential losses from these contractual
arrangements. Credit risk with respect to accounts receivable for the
U.S. network is limited due to the large number of customers and their
industry and geographic dispersion. The Company's Israel subsidiary,
Geotek Technologies Israel ("GTI - Israel"), has credit risk from
contracts with two customers in Korea and is prohibited from making
certain payments, including loans, to entities outside of Israel without
the Bank of Israel's approval. The subsidiaries are permitted, however,
to distribute dividends, reimburse expenses and make other specific
payments.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Property, plant and
equipment obtained through acquisition is recorded at the fair value at
the date of acquisition. Depreciation and amortization are provided
principally by the straight-line method over the estimated useful lives
of the related assets which range between 3 and 10 years, commencing
with commercial operations. Gains or losses arising from dispositions
are recorded in operations.
Interest costs incurred on borrowings during the construction phase of
the network infrastructure buildout for each market (until the assets
are substantially complete and ready for use) are capitalized and
depreciated over
F - 13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the service life of the equipment. Interest capitalized on construction
in progress amounted to $2.6 million for 1997 and 1996 and $0.5 million
in 1995.
Intangible Assets
Goodwill -The excess of cost over the fair value of net assets acquired
is amortized on a straight-line basis over ten to twenty years. At each
balance sheet date management assesses whether there has been an other
than temporary impairment in the value of goodwill by comparing
anticipated undiscounted future cash flows from operating activities
with the carrying value of goodwill. For those assets where a decision
has been made to sell or dispose, once made, management looks to the
estimated proceeds from the sale of such assets.
Federal Communications Commission ("FCC") Licenses - FCC and other
private radio licenses are recorded at cost and amortized over twenty
years. Interest costs incurred on borrowings throughout the period
during which the certain FCC licenses are being readied for use are
capitalized and amortized over the life of the license once the market
to which the license pertains becomes commercial. Interest capitalized
amounted to $4.6 million and $3.9 million in 1997 and 1996,
respectively. The factors considered by management in performing this
assessment include current operating results, trends and prospects as
well as the effects of obsolescence, demand, competition and other
economic factors.
Foreign Currency Translation
For international operations, assets and liabilities are translated at
year-end exchange rates and income statement items are translated at
average exchange rates for the period. Resulting translation adjustments
are recorded as a separate component of shareholders' equity.
Transaction gains and losses are recognized in the period incurred.
Engineering and Development
Engineering and development expenditures are expensed as incurred. All
expenses relating to engineering and development ventures are recorded,
net of grants, as engineering and development expense. Grants are
recorded once the Company receives approval reflecting the fact that all
terms and conditions relating to the expenditures have been met.
Taxes on Income
The Company provides for deferred taxes using the liability method
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards and deferred liabilities
are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that the deferred tax asset will not be realized.
The Company does not provide for taxes which would be payable if
undistributed earnings of its foreign subsidiaries were remitted because
the Company considers these earnings to be permanently invested in these
operations. Such amount of undistributed earnings is not significant at
December 31, 1997.
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 simplifies the standards for computing earnings
per share and is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Basic earnings/loss per
share is computed by dividing the net loss, after preferred stock
dividend requirements, by the weighted average number of common shares
outstanding during the year. In determining diluted EPS, Common stock
equivalents are excluded since the effect would be anti-dilutive.
F - 14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements
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 the
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 Company is in the process of determining its preferred
format. 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 areas and major customers. SFAS
No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. Financial statement disclosures for prior
periods are required to be restated. The adoption of SFAS No. 131 will
have no impact on the Company's consolidated results of operations,
financial position or cash flows; although it may impact the disclosure
of reportable segment data. The Company is currently assessing the
disclosure requirements.
2. Disposed of Operations and Segments and Acquisitions:
Discontinuation of Communication Products Segment / Sale of BCI
On November 26, 1997, the Company disposed of its communication products
segment with the sale of its 64% interest in BCI for $18.5 million in
cash resulting in a gain of $3.8 million. In accordance with the
Company's debt covenants, at December 31, 1997, $9.1 million of the
proceeds were limited in the timing of their use and, subsequently,
these proceeds were released. The Company has reclassified BCI in its
financial statements and has accounted for it as discontinued
operations. The net assets of the discontinued operations were $12.9
million at December 31, 1996, principally consisting of $0.9 million in
cash, $6.5 million in receivables, $6.5 million in inventory, goodwill of
$8 million, $6.3 million in accounts payable and accrued expenses and $4.8
million in notes payable to banks.
F - 15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below sets forth certain information with respect to the
results of operations of BCI, as consolidated (in thousands).
For the period For the twelve months
January 1, 1997 to ended December 31,
November 26, 1997 1996 1995
----------------- ---- ----
Net products sales $45,136 $46,268 $44,518
Cost of goods sold 24,153 25,005 27,338
Operating and other
expenses 18,627 19,166 21,304
Net Income (loss) 2,355 2,098 (4,124)
In August 1995, the Company transferred its interest in Speech Design
GmbH and Bogen Communications, Inc. to BCI in exchange for $7.0 million
in cash, $3.0 million in convertible notes, approximately 64% of BCI's
common shares and warrants to purchase 200,000 shares of BCI common
stock. Effective January 1, 1996, the $3.0 million convertible notes
were reduced and restructured to a $0.5 million non-convertible
promissory note due July 1997. In connection with this restructuring,
the Company was granted an option to purchase up to $3.0 million of the
common stock of BCI at up to a 35% discount. This option expired on
October 31, 1997.
Assets Held For Sale
In connection with its strategic initiative to focus its efforts on
marketing Driver Logistic(TM) Systems in the United States, on December
18, 1997, the Company entered into two definitive agreements with
Telesystems International Wireless, Inc. ("Telesystems") and affiliates
to sell the Company's interest in its German joint venture ("Terrafon")
and the Company's wholly-owned subsidiary in the United Kingdom,
National Band Three Ltd. ("NB3"). These transactions closed in February
1998.
The Company sold all of the issued and outstanding shares of capital
stock of NB3, a wholly-owned subsidiary and provider of analog public
access mobile radio ("PAMR") service in the United Kingdom, for
approximately $82 million in cash. Five percent of the purchase price
will be held in escrow to satisfy the Company's indemnity obligations,
if any, under the agreement and will be released within six months after
the closing of the transaction. NB3 assets and liabilities were
reclassified and are considered an asset held for sale. The transaction
resulted in a pre tax gain of approximately $60.2 million to the Company
which will be recognized in the first quarter of 1998. At December 31,
1997, the total assets and liabilities of NB3 were $33.8 million and
$10.5 million, respectively. Assets principally included approximately
$4.5 million in cash, $3.2 million in accounts receivable, $5.2 million
in goodwill and $18.5 million in property, plant and equipment.
Liabilities consisted principally of accounts payable and accrued
expenses incurred in the ordinary course of business.
F - 16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NB3's revenues have been significant to the consolidated revenues. The
table below sets forth certain information with respect to the results
of operations of NB3 for the years ended December 31 (in thousands).
1997 1996 1995
---- ---- ----
Total Revenues $31,308 $28,410 $24,985
Earnings before interest
and taxes 3,332 3,740 2,402
Net income 1,664 2,552 1,194
The Company sold its interest in Terrafon, the Company's 50/50 joint
venture in Germany, which was formed through the merger of the Company's
German networks with RWE Telliance A.G. ("RWE"), a mobile radio network
in December 1996, for DM7 million (approximately $3.9 million) in cash.
The investment in Terrafon at December 31, 1997 is presented as an asset
held for sale and, as such, the Company reduced the carrying value of
the investment to fair market value. Accordingly, the Company recognized
a loss of $12.9 million on the investment balance of $18.0 million. The
loss is included in equity in loss of subsidiaries. DM0.5 million of the
purchase price is currently being held in escrow to satisfy the
Company's indemnity obligations, if any, under the agreement and will be
released within fifteen months after the closing of the transaction.
Acquisitions
During 1997, the Company issued approximately 57,000 shares of common
stock to purchase a minority interest in the Company's subsidiary Geotek
Technologies Israel ("GTI-Israel"). The shares were valued at $265,000.
In July 1996, in a private transaction, the Company issued a Convertible
Promissory Note ("Promissory Note") in the amount of $800,000 due
December 31, 1996 in exchange for shares, held by a minority
shareholder, in GTI-Israel. In October 1996, the holder converted the
Promissory Note and accrued interest into approximately 102,000 shares
of the Company's common stock. As of December 31, 1997, the Company owns
98% of GTI-Israel.
The Company purchased the remaining 50% ownership interest in software
developer M.I.S. Information Systems Holdings Ltd. ("MIS") effective
July 1, 1996. MIS was formed in 1994 as a 50/50 joint venture between
the Company and Decision Systems Israel Ltd. The remaining 50% interest
was acquired for a $2.0 million promissory note which bears interest at
8.25% per annum and is due July 1, 1998. The Company attributed the
excess of consideration paid over the fair value of net the assets
acquired, approximately $1.9 million, to an acquired engineering and
development project and expensed this amount at the time of the purchase
as the acquisition primarily related to ongoing software development
projects in process. In February 1998, the Company entered into an
agreement to repay the $2.0 million note plus accrued interest in shares
of the Company common stock (see Notes 8 and 17).
F - 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories:
Inventories at December 31, 1997 and 1996 consist of the following (in
thousands):
1997 1996
---- ----
Raw materials $4,511 $1,740
Work-in-process 1,199 1,367
Finished goods 16,767 23,677
------- -------
22,477 26,784
Reserve for lower of cost or market 1,000 5,153
------- -------
$21,477 $21,631
======= =======
In January 1997, the Company adjusted inventory standard costs to more
accurately reflect replacement value of finished goods.
4. Investments in Affiliates:
In July 1997, the Company entered into a joint venture agreement with
two Canadian partners for the purpose of deploying FHMA(R) Networks in
the provinces of Ontario, Quebec and British Columbia utilizing 900MHz
licenses previously granted to Geotek Communications Canada Inc., a
wholly-owned subsidiary of GeoNet Communications Canada Inc. ("GeoNet
Canada") by Industry Canada, the regulatory agency responsible for
spectrum allocation in Canada. 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. Additionally, the Company
deposited $2.3 million in a restricted cash account as collateral for
the Canadian partner's investment. The parties reserved the right to
withdraw from the venture. In the first quarter of 1998, the partners
notified the Company and subsequently withdrew from the joint venture.
The investors were repaid their investment from the restricted cash
account. The withdrawal of the Canadian partners resulted in the loss of
the Canadian license although the Company may reapply for licenses at
such time that the Company obtains sufficient financing to pursue the
deployment of networks in Canada.
In July 1997 and 1996, the Company contributed approximately $4.7
million and $7.7 million, respectively, to Anam Telecommunications Co.
Ltd. ("Anam Telecom") in which the Company holds a 21% interest,
representing of the Company's portion of the capital requirements. Anam
Telecom holds a license to operate a nationwide trunked radio system in
Korea. Additionally, the Company paid the Korean Ministry of Information
and Communications $1.8 million in 1996, representing the Company's
portion of the fee for the Korean nationwide license. Interest costs
incurred by the Company during the development period prior to Anam
Telecom commencing commercial service were capitalized. The amount
capitalized in 1997 and 1996 was approximately $1.4 million and $0.6
million, respectively, and has been included in investments in
affiliates. In October 1997, commercial service began. The costs for the
capitalized interest and nationwide license are being amortized over a
twenty year period which began in October 1997. Amortization expense for
1997 was not material. At December 31, 1997, the Company's investment in
Anam Telecom was approximately $13.6 million and equity in loss was
approximately $2.4 million in 1997 and was not material in 1996.
As part of the joint venture agreement, in 1996, upon obtaining a
national license in Korea, the Company granted the joint venture partner
and other related parties options to purchase 800,000 shares of the
Company's common stock for $10.00 per share. The Company estimated the
fair value of the options granted at approximately $2.2 million. The
Company recorded this amount as an additional investment in Anam Telecom
and is amortizing this amount over a two year period.
F - 18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 1996, the Company entered into an agreement with Anam
Telecom pursuant to which the Company will provide Anam Telecom with up
to $13.3 million ($10.5 million after the elimination of intercompany
revenues) of 800 MHz infrastructure equipment. Additionally, the Company
entered into a separate agreement to sell customer subscriber units to
Anam Telecom. In connection with these agreements, the Company received
advance payments of approximately $9.5 million in 1996 which were
included in accrued liabilities. At December 31, 1997, the Company,
after the elimination of inter-company revenues, recognized
approximately $8.8 million on its sale of digital wireless
infrastructure equipment to Anam Telecom, a related party, and no
advance payment remained outstanding.
During 1996, the Company contributed the net operating assets of their
two wireless networks in Germany to a joint venture, Terrafon, with RWE
and entered into an agreement in 1997 with Telesystems to sell its
interest in Terrafon as described in Note 2. In March 1997, the Company
contributed approximately $2.6 million to Terrafon, which represented
the Company's portion of the estimated 1997 operating budget.
The Company acquired, in August 1993, a 25% equity interest in Cumulous
Communications Company ("Cumulous") for an aggregate consideration of
$1.5 million. Cumulous is a provider of SMR services in the San Joaquin
Valley of California. The Company's investment exceeds its share of the
underlying net assets of Cumulous by approximately $940,000 which amount
is being amortized over 20 years. The carrying value of this investment
as of December 31, 1997 and 1996 was $1.0 million and $1.1 million,
respectively.
5. Property, Plant and Equipment:
Property, Plant and Equipment consists of the following at December 31,
1997 and 1996 (in thousands):
1997 1996
---- ----
Property, Plant and Equipment
Machinery and equipment $109,916 $100,661
Furniture and fixtures 2,709 2,713
Leasehold improvements 787 299
Construction in progress 29,992 25,133
-------- --------
143,404 128,806
Capital Leases
Equipment under capital lease 3,606 978
-------- --------
147,010 129,784
Less: accumulated depreciation
Property, Plant and Equipment 33,713 38,298
Capital leases 314 35
-------- --------
34,027 38,333
-------- --------
$112,983 $ 91,451
======== ========
F - 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Intangible Assets:
Intangible Assets consists of the following at December 31, 1997 and
1996 (in thousands):
1997 1996
---- ----
Excess of cost over fair value
of net assets acquired $12,728 $12,463
FCC and other private mobile radio licenses
acquired and related intangibles 73,775 75,595
Other 620 620
-------- --------
87,123 88,678
Less accumulated amortization 6,256 5,179
-------- --------
$ 80,867 $ 83,499
======== ========
The decrease in 1997 in private mobile radio licenses is due to
reclassification of NB3 to net assets held for sale (see Note 2) offset
by capitalized interest of $4.6 million.
7. Notes Payable, Banks and Other:
The Company had a line of credit for $3.2 million, bearing interest at
5.3% per annum, which was collateralized by $3.2 million restricted
cash. This line of credit was repaid by the Company in January 1997.
8. Long-Term Debt:
Long-Term Debt consists of the following at December 31, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Senior secured discount notes, due July 15, 2005, interest
at 15% due semi-annually beginning January 15, 2001 (a) $158,030 $136,756
Senior subordinated convertible notes, due February 2001
at 12% , interest due semi-annually February 15 and August 15 (b) 75,000 75,000
Notes payable due in various installments through 1998
interest at 10% (c) 50 155
Convertible note due October 2, 1998, interest at 12% due quarterly (d) 24,500 24,500
S-C Rig credit facility, interest at 8% semi-annually (e) 40,000 -
HNSvendor financing due beginning July 10, 1999 in ten equal
installments of aggregate principal, interest at 11% due
semi-annually (f) 10,355 -
Debenture, interest at 5% due in quarterly payments,
principal due March 31, 1998 1,399 1,460
Note payable, due July 1, 1998 interest at 8.25% payable at maturity 2,000 2,000
Note payable, bearing interest at 8% - 2,273
Obligations under capital lease 2,731 462
-------- --------
314,065 242,606
Less, current portion of long term debt, net of warrants 42,664 256
Additional offer discount:
Warrants - senior secured discount notes (a) 24,079 27,290
Warrants - S-C Rig Credit Facility (e) 3,900 -
-------- --------
Total long-term debt $243,422 $215,060
======== ========
</TABLE>
(a) In July 1995, the Company issued, in a private offering, $207.0 million
aggregate principal amount at maturity of the Discount Notes due July 15,
2005. Gross proceeds of the Discount Notes were approximately $100.0
F - 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million. Interest accretes semi-annually at 15% until January 15, 2001 at
which time the carrying value will equal the principal amount. The
Discount Notes were issued with 6,210,000 detachable warrants ("the
Warrants"). Each Warrant entitles the holder to purchase one share of the
Company's common stock at an exercise price of $9.90 per share. The
Warrants, which were valued at $29.2 million, were recorded as a
reduction of the Discount Notes and are being accreted over the ten year
life of the Discount Notes. The Discount Notes accrue interest until
maturity at a rate of 15% per annum. Interest on the Discount Notes will
be payable semi-annually, in cash, on July 15 and January 15, commencing
January 15, 2001. The Discount Notes are fully and unconditionally
guaranteed, jointly and severally on a senior basis, by certain
subsidiaries of the Company.
In August 1996, in connection with the original issuance of the Discount
Notes, investors affiliated with George Soros purchased approximately
$21.0 million principal amount of additional units consisting of 15%
Senior Secured Discount Notes due 2005 and 621,000 ten year warrants to
purchase shares of Company common stock at $9.90 per share. The warrants,
which were valued at $2.9 million, were recorded as a reduction on the
Discount Notes and are being accreted over the ten year life of the
Discount Notes. Gross proceeds to the Company were approximately $10.0
million, bringing total gross proceeds from the issuance of the Discount
Notes to approximately $110.0 million.
The Company recorded in other assets approximately $4.3 million of
deferred financing costs relating to this transaction which are being
amortized, using the interest method, over the ten year life of the
Discount Notes. Accumulated amortization as of December 31, 1997 and 1996
was approximately $1.1 million and $0.6 million, respectively.
In accordance with the terms of the Indenture governing the Discount
Notes, the proceeds from the sale of assets collateralizing the Discount
Notes (See Note 2) are limited in their use (see Debt Compliance Matters
below). In accordance with an amendment to the Indenture, the Company is
required to use 20% of the net proceeds from the sale of its European
Assets (estimated at $85 million) to tender the pro-rata share of the
accreted value of the Discount Notes. At December 31, 1997, the Company
has reclassified the estimated tender offer amount of $17.2 million to
the current portion of long-term debt. Additionally, under the amendment
to the Indenture, the Company granted the Discount Note holders a
security interest in certain assets.
In November 1995, the Company registered the Discount Notes and the
Warrants through an exchange offer under the Securities Act of 1933, as
amended.
(b) In March 1996, the Company issued $75.0 million aggregate principal
amount of Senior Subordinated Convertible Notes due 2001 ("Convertible
Notes"). Each Convertible Note is in the principal amount of $1,000 and,
beginning on March 5, 1997, are convertible by the holders into shares of
the Company's common stock, par value $0.01, at a conversion price equal
to $9.50 per share. Cash interest on the Convertible Notes accrues at a
rate of 12% per annum and is payable semi-annually on each February 15
and August 15. The Convertible Notes are unsecured senior subordinated
obligations of the Company. Beginning October 1997, the Convertible Notes
can be converted at the option of the Company if the closing price of the
Company's common stock for 20 of the 30 trading days and for the five
trading days before the conversion is at least $15.20 per share. The
Company has reserved 7,894,737 shares of the Company's $0.01 par value
Common Stock which are issuable upon conversion of the Convertible Notes.
In connection with the issuance of the Convertible Notes, the Company
incurred approximately $2.3 million in financing costs which have been
recorded in other assets and are being amortized over the five year term
of the
F - 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Convertible Notes. Accumulated amortization as of December 31, 1997 and
1996 was approximately $0.8 and $0.4 million, respectively.
(c) These notes were assumed in connection with the purchase of certain SMR
licenses in various cities in the US. Certain analog SMR equipment as
well as revenues generated by the systems is pledged as collateral for
the notes.
(d) In December 1995, the Company and HNS, the Company's strategic partner in
the development of the Company's portable subscriber unit, entered into
an agreement whereby HNS extended the Company a two year, $24.5 million
line of credit for the Company to acquire additional 900 MHz spectrum in
the United States. In October 1996, the Company borrowed $24.5 million
under the line of credit agreement. Under the terms of the agreement, the
two year loan bears interest at 12%, payable quarterly, and is
convertible by the holder, beginning 181 days after drawdown, at the
lower of 90% of the average sale price of the Company's common stock for
the 10 days preceding conversion or $9.75. In connection with this
agreement, the Company has reserved 16,333,333 shares of the Company's
$.01 per value Common Stock which are issuable upon conversion of the
note. The original $24.5 million loan agreement was collateralized by the
pledge of the capital stock of the Company's subsidiary which holds the
Company's Major Trading Area ("MTA") licenses. In conjunction with the
amendment to the Indenture governing the Discount Notes, (see Debt
Compliance Matters below) the MTA licenses were reallocated between the
subsidiary pledged to HNS and the subsidiary pledged to the Discount Note
Holders.
(e) In April 1996, the Company and S-C Rig Investments - III, L.P. ("S-C
Rig"), a significant stockholder of the Company and an investment group
affiliated with George Soros, entered into a Senior Loan Agreement
whereby S-C Rig made a $40.0 million unsecured credit facility ("S-C Rig
Credit Facility") available to the Company beginning June 1996. In April
1997, the Company and S-C Rig modified the terms of the S-C Rig Credit
Facility. Under the modified terms, all of the 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 in five years from the date of the final borrowings
thereunder. The Company is obligated to pay S-C Rig a fee equal to 3% of
each borrowing under the S-C Rig Credit Facility at the time of such
borrowing. Borrowings under the S-C Rig Credit Facility constitute senior
indebtedness of the Company.
In connection with the establishment of the credit facility, the Company
issued to S-C Rig a five year warrant ("S-C Rig Warrant") to purchase
approximately 4.2 million shares of Common Stock (subject to adjustment
in certain circumstances) at an exercise price of $9.50 per share
(subject to adjustment in certain circumstances). With the modification
of the S-C Rig Credit Facility, the exercise price of the warrants was
lowered to $6.00 per share and the warrant termination date was extended
from April 2001 to April 2003. This warrant is exercisable at any time
during the warrant period. The S-C Rig Warrant, which was originally
valued in 1996 at $13.4 million, was revalued in 1997 at $4.5 million due
to the modification of terms. The $6.0 million excess of net book value
of the S-C Rig Warrant over the new valuation was recorded by the Company
in 1997 as a decrease in additional paid in capital. The S-C Rig Warrant
is being amortized over the term of the underlying credit facility,
approximately five years. In connection with the drawdown of $40.0
million under the S-C Rig Credit Facility, the remaining valuation of the
S-C Rig Warrants, $3.9 million was reclassified to long-term debt and is
reflected as a discount on the issuance of loans made under the facility.
(f) In September 1996, the Company, through its wholly owned subsidiary
Geotek Financing Corporation ("GFC"), entered into a series of agreements
with HNS under which HNS agreed to manufacture at least 50% of certain
components utilized by the Company in its 900 MHz infrastructure
equipment and to provide the Company with up to $100 million in vendor
credit financing, the last $50 million of which is subject to the
F - 22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
satisfaction of certain conditions. Under the terms of the vendor credit
financing agreement, the Company will finance 90% of its purchases of
infrastructure related equipment from HNS until June 1999. All borrowings
made under the agreement bear interest at a rate of 11% per annum which
is not payable until December 1999, unless there is an event of default,
at which time interest would be payable quarterly. Beginning December
1999, principal and interest are to be paid semi-annually in equal
installments over a five year period. The HNS Vendor Credit Facility is
collateralized by the pledge of the capital stock of the Company's
subsidiary which holds certain of the Company's MTA licenses.
In connection with the above agreement, the Company issued HNS seven year
warrants ("HNS Warrants") to purchase 2,500,000 shares of the Company's
common stock. The HNS Warrants allow HNS to purchase 1,000,000 shares at
$8.625 per share, 1,000,000 shares at $10.78 per share, and 500,000
shares at $12.94 per share. These warrants are exercisable at any time,
and from time to time, after September 27, 1997. The HNS Warrants, which
have been classified as debt issuance costs and were valued at
approximately $8.7 million, were recorded as other assets and are being
amortized over the life of the facility and the debt payback period,
approximately seven years. Accumulated amortization as of December 31,
1997 and 1996 was approximately $1.6 million and $0.3 million,
respectively.
Debt Compliance Matters
The Discount Notes are collateralized by a pledge of substantially all
subsidiary capital stock owned by the Company. In December 1997, the
Indenture governing the Discount Notes was amended allowing the Company
to utilize the proceeds of the sale of the stock of BCI and portions of
the proceeds of the sale of the stock of NB3 and Terrafon for working
capital purposes. Specifically, the amendment permits the Company's use
of net proceeds from the sale of NB3 and Terrafon, approximately as $85
million as follows: 20% to repay the Discount Notes; 40% for working
capital; and 40% for replacement assets defined as qualifying capital
expenditures. Additionally, the Company increased its ability to utilize
the proceeds from future debt issuances for working capital by (i) $40
million, including the proceeds from the sale of BCI; (ii) an additional
$2.00 for every $1.00 of equity raised by the Company up to $40.0
million; and (iii) an additional $1.00 for every $1.00 in equity raised
thereafter up to a total of $30.0 million.
The covenants place generally more stringent limitations, the most
restrictive of which are related to making certain investments in assets
other than telecommunication assets, incurring additional debt, use of
proceeds from possible future asset sales, and paying dividends on common
shares. There was no event of default at December 31, 1997. In the event
that the Company does not obtain additional financing or successfully
renegotiate the terms of certain indebtedness, it may be in default of
certain covenants.
F - 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum Annual Repayments
Minimum annual principal repayments of long-term debt, assuming no
conversions or renegotiation of terms, and capital lease obligations
(which are not material), during the next five years and thereafter, are
as follows (dollars in thousands):
Year In Thousands
---- ------------
1998 45,131
1999 2,875
2000 3,010
2001 77,071
2002 42,071
Thereafter 212,876
---------
Total $ 383,034
=========
9. Income Taxes:
The source of loss from continuing operations before provision for
income taxes for the years ended December 31, 1997, 1996, and 1995 is as
follows (dollars in thousands):
1997 1996 1995
---- ---- ----
United States $(163,082) $ (99,684) $ (60,988)
Foreign (60,786) (39,588) (21,127)
--------- --------- ---------
Loss before income taxes $(223,868) $(139,272) $ (82,115)
========= ========= =========
The provision for income taxes, solely attributable to foreign taxes,
consists of the following for the years ended December 31, 1997, 1996
and 1995 (dollars in thousands):
1997 1996 1995
---- ---- ----
Current foreign $1,195 $434 $960
Deferred foreign 625 614
------ ------ ----
Total provision for taxes $1,820 $1,048 $960
====== ====== ====
Included in the current foreign tax provision in 1996 and 1995 is
$357,000 and $950,000, respectively, related to the utilization of
pre-acquisition net operating losses of a subsidiary which had a full
valuation allowance established at the time of the acquisition by the
Company and has been recorded as a reduction to intangible assets. The
pre-acquisition net operating loss was fully utilized in 1996. The
Company has not provided deferred U.S. income taxes which would be
payable if the undistributed earnings of its foreign subsidiaries, which
totaled $3.5 million, $3.6 million and $2.1 million at December 31,
1997, 1996 and 1995, respectively, were remitted because the Company
considers these earnings to be permanently reinvested in these
operations.
F - 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1997 and 1996, temporary differences and
carryforwards that give rise to deferred tax assets and liabilities are
as follows (dollars in thousands):
1997 1996
---- ----
Current deferred tax assets:
Net operating loss carryforwards $ - $ 72
Allowance for doubtful accounts 1,732 341
Inventory reserve 724 -
Capital loss carryforward 982 -
Investment in foreign subsidiaries 15,037 -
Other 1,194 -
Valuation allowance (19,669) (177)
--------- ---------
Total current deferred tax assets $ - $ 236
========= =========
Long-term deferred tax assets:
Net operating loss carryforwards $ 121,622 $ 82,937
Property, plant and equipment 3,205 -
Other 2,029 10,280
Valuation allowances (121,560) (93,217)
--------- ---------
Total long-term deferred tax assets $ 5,296 $ -
========= =========
Long-term deferred tax liabilities
Other $ - $ 850
Licenses 5,296 -
--------- ---------
Total long-term deferred tax liabilities $ 5,296 $ 850
========= =========
The Company has established a valuation allowance substantially
offsetting the tax benefit of current and long term deferred tax assets
as it is more likely than not that the tax benefit will not be realized.
The Company has domestic net operating loss carryforwards ("NOL") for
tax purposes of approximately $301.1 million and $169.7 million as of
December 31, 1997 and 1996, respectively, which expire between the years
2001 through 2011. Additionally, the Company had foreign NOL
carryforwards of approximately $7.1 million and $35.9 million in 1997
and 1996, respectively. The NOL's are subject to certain limitations on
their utilization as a result of various changes in control which have
occurred.
10. Commitments and Contingent Liabilities:
F - 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating
The Company leases facilities under noncancellable operating leases,
some of which include escalation clauses. Future minimum rental
commitments under noncancellable operating leases, including $13.4
million for NB3, as of December 31, 1997 are as follows (dollars in
thousands):
Year
----
1998 $ 12,328
1999 8,512
2000 7,404
2001 5,707
2002 4,227
Thereafter 7,189
--------
$ 45,367
========
Rent expense included in continuing operations was $9.6 million, $7.7
million, and $6.3 million in 1997, 1996 and 1995, respectively.
Government Participation in Engineering and Development Project
The Chief Scientist of the Israeli Ministry of Industry and Commerce
("Chief Scientist") has agreed to fund certain eligible expenditures
related to the development of the digital wireless communication system
by GTI-Israel. Funding received from the Chief Scientist is repayable
without interest based on 3% of revenues generated by the product being
developed by GTI-Israel up to 120% of the grant received which may be
increased to 150% if certain manufacturing milestones are not met. Such
participation amounted to $0.3 million and $5.9 million for 1996 and
1995, respectively, and has been reported in the statement of operations
as a reduction of engineering and development expenses. Accumulated
grants under this program, subject to repayment under certain
conditions, are $12.0 million.
Manufacturing and Sales Commitments
In 1994, the Company contracted with Mitsubishi Consumer Electronics of
America ("MCEA") to manufacture mobile radios on behalf of the Company.
This agreement was terminated by MCEA in 1998 and MCEA reserved any
rights, if any, it had under the contract claiming defaults and
deficiencies by the Company.
In March 1995, the Company and HNS, a related party, formed a strategic
partnership to develop a portable unit. Under the terms of the
agreement, HNS and the Company will share equally in the cost of
developing the portable unit. During 1995, the Company included as
engineering and development expense approximately $6.0 million paid to
HNS under the terms of this development contract. Additionally, during
the year ended December 31, 1997, the Company accrued $3.2 million in
engineering and development expense relative to final development costs
under the contract. During 1996 the Company made advances on account of
production of $11.5 million to HNS, which is included in Advances to
Related Parties. The Company has included all advances made to HNS which
will be applied against future purchases in advances to related parties.
In June 1997, the Company entered into an agreement with HNS for HNS to
produce a docking station for the Company's portable unit.
In September 1996, in connection with the HNS Vendor Credit Facility,
the Company entered into an
F - 26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement with HNS, whereby HNS will manufacture at least 50% of certain
components utilized by the Company in its 900 MHz infrastructure
equipment through June 1999. The Company made a 10% or approximately
$0.9 million advance to HNS for production. At December 31, 1997, $7.3
million in purchase orders were placed with HNS.
In 1996, the Company entered into a manufacturing agreement with
Farbell, whereby Farbell will produce Drive Station(TM) for the
Company's digital wireless system. At December 31, 1997 and 1996, the
Company placed $2.5 million and $2.2 million into a restricted cash
account to fund these purchases.
In 1996, the Company entered into an agreement with Anam Telecom (see
Note 4) whereby the Company will provide the Company's digital wireless
system infrastructure equipment and subscriber units to Anam Telecom. In
connection with these agreements, the Company received advance payments
of approximately $5.0 million and $9.5 million which is included in
accrued expenses as of December 31, 1997 and 1996, respectively.
Guarantees of Debt of a Subsidiary
The Company has guaranteed the repayment of certain indebtedness of its
subsidiary, GMSI, to its former owner in the amount of CDN $2.0 million
(approximately $1.4 million).
FCC Waiver
As permitted by the FCC, the Company subsumed its Designated Frequency
Area ("DFA") licenses which were acquired prior to the 1996 auctions
with the Company's MTA licenses so that, together, they are regulated as
a single MTA license. Under the terms of the MTA licenses the Company
acquired during the auctions, a MTA will be "constructed' if one-third
of the market's population is served within three years of the grant,
August 12, 1999, and two-thirds of the population are served within five
years of the grant, August 12, 2001. As an alternative, the Company may
elect for the FCC to waive the requirements for August 12, 1999 and
agree to provide substantial service to the MTA by August 12, 2001. At
December 31, 1997, approximately $39.4 million of the Company's $72.7
million (cost basis) of licenses were commercial.
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. This motion is pending. In addition, the plaintiffs are
seeking to add Yaron Eitan, the Company's Chairman of the Board, and
Yoram Bibring, who, prior to the Company's reorganization in December
1997, was President and CEO of Geotek International Networks, Inc., as
party defendants. The Company believes that the plaintiffs' claims and
such actions are primarily an attempt to delay efforts to collect
Harris's debt to the Company and the Company has meritorious defense.
The Company intends to defend this action vigorously.
The Company develops and utilizes technology for substantially all of
the services and products it offers and intends to offer and has, from
time to time, been the subject of infringement claims related thereto.
It is often difficult to predict the outcome of such litigation and the
amount of damages that may be awarded. The
F - 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company does not believe that any pending or threatened litigation
related to the Company's technology or use thereof will have a material
adverse effect on its business.
The Company also is, from time to time, a party to litigation, which may
or may not be covered by insurance, arising in the ordinary course of
business. The Company does not believe that results of such litigation,
even if the outcome were unfavorable to the Company, would have a material
adverse effect on the financial position and results of operations.
11. Redeemable Preferred Stock
In December 1993, the Company issued to investors affiliated with George
Soros, a related party, 444,445 shares of Series H Cumulative Redeemable
Preferred Stock ("Series H Stock") at a price of $90 per share. The
shares bear a dividend for five years, at a rate of five percent per
year, payable quarterly. The shares are redeemable, at stated value, on
October 31, 2000 only if the Company's common stock has not closed at an
average price of $18 for any 20 consecutive trading days after the third
anniversary of the date of issuance of the preferred shares. In the
event that the shares are redeemed, the Company may elect to pay the
redemption price in shares of its common stock, provided that the common
shares will have an aggregate market value equal to 150% of the
redemption value of the Series H shares being redeemed. The shares are
convertible into common shares at any time at a ratio (adjusted for
splits) of ten common shares for each preferred share. The Company has
reserved 4,444,450 shares of its $.01 par value Common Stock issuable
upon conversion of the Series H Stock. The holders of the Series H Stock
are entitled to vote on all matters voted on by common shareholders as
if the Series H Stock were converted to common stock. The Company has
paid cash dividends of $2.0 million during each of the years ended
December 31, 1997, 1996 and 1995.
12. Stockholders' Equity
Preferred Stock
The following table outlines the outstanding preferred stock at December
31, 1997 and 1996 (dollars in thousands):
As of December 31, 1997 As of December 31, 1996
Number of Number of
Preferred Outstanding Preferred Outstanding
Shares Face Shares Face
Series Outstanding Value Outstanding Value
------ ----------- ----- ----------- -----
I (a) 20 $10,000 20 $10,000
K (b) 20 10,000 20 10,000
L (c) 1,062,926 10,000 1,062,926 10,000
M (d) 1,150 11,500 1,163 11,625
N (e) 54,725 54,725 54,725 54,725
O (f) 539 26,950 1,000 50,000
P (g) 250 12,500 - -
Q (h) 568 28,392 - -
(a) Issued in 1994 to investors associated with George Soros, the Series I
Cumulative Convertible Preferred Stock ("Series I Stock") bear a
dividend, payable quarterly in either cash or common shares, for five
years at a rate of 7% per annum and carry a conversion premium. The
Company has the option to retire the shares, in either
F - 28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cash or common shares, if the price of the Company's common stock
exceeds 150% of the conversion price for any 20 days within a period of
30 consecutive days. The Company has reserved 851,064 shares of its $.01
par value Common Stock issuable upon conversion of the Series I Stock.
The Company has paid cash dividends of $0.7 million during each of the
years ended December 31, 1997, 1996 and 1995.
(b) Issued in April 1995 to an affiliate of the Company's joint venture
partner in Korea, the Series K Cumulative Convertible Preferred Stock
("Series K Stock") pays a dividend of 7% per annum for five years, carry
a Common Stock conversion premium and can be redeemed by the Company in
certain circumstances. The Company has reserved 851,064 shares of the
Company's $.01 par value Common Stock issuable upon conversion of the
Series K Stock. The Company has paid cash dividends of $0.7 million
during each of the years ended December 31, 1997 and 1996 and $0.5
million in 1995.
(c) In May 1995, the Company sold 531,463 shares of Series L Cumulative
Convertible Preferred Stock ("Series L Stock") to Toronto Dominion
Investments, Inc. ("TDI") for an aggregate purchase price of $5.0
million. In connection with this transaction, Vanguard Cellular Systems,
Inc. ("Vanguard"), a stockholder of the Company, purchased an additional
531,463 shares of Series L Stock in September 1995 for aggregate
purchase price of $5.0 million. The shares pay a dividend of 7.5% per
annum, contain a Common Stock conversion premium and can be redeemed by
the Company in certain circumstances. The Company has reserved 1,062,926
shares of its $.01 par value Common Stock issuable upon conversion of
the Series L Stock. The Company has paid cash dividends of $0.8 million
during each of the years ended December 31, 1997 and 1996 and $0.4
million in 1995.
(d) Issued in May 1995 to a group of investors, the shares of Series M
Cumulative Convertible Preferred Stock ("Series M Stock") pay a dividend
of 8.5% per annum, contain a Common Stock conversion premium and can be
redeemed by the Company in certain circumstances. The Company has
reserved 1,223,684 shares of the Company's $.01 par value Common Stock
issuable upon conversion of Series M Stock. During 1997, 12.5 shares of
Series M Stock was converted into 13,203 shares of common stock. The
Company has paid cash dividends of $1.0 million during the years ended
December 31, 1997 and 1996 and $0.6 million in 1995.
(e) In June 1996, Series N Cumulative Convertible Preferred Stock ("Series N
Stock") shares were issued to entities affiliated with the Charles R.
Bronfman Family Trust, the Kolber Trust, The Renaissance Fund and
certain existing shareholders of the Company. The Series N Stock pays
dividends in Common Stock at a rate of 10% per annum. Additionally, the
Series N Stock is immediately convertible into shares of the Company's
Common Stock at $11.00 per share. In connection with this transaction,
the Company issued five year warrants to purchase approximately 1.65
million shares of the Company's Common Stock at $11.00 per share. The
Company has reserved 6,650,000 shares of its $.01 par value Common Stock
issuable upon conversion of the Series N Stock and upon exercise of the
warrants. In addition, the Company incurred financing fees equal to 3%
of the aggregate purchase price, and has recorded this as a reduction to
the net proceeds of the issuance. During 1997 and 1996, the Company paid
dividends of approximately 1,343,000 and 353,000 shares of common stock,
respectively, with a value of approximately $5.5 million and $2.9
million, respectively.
(f) Issued on December 31, 1996, the Series O Cumulative Convertible
Preferred Stock ("Series O Stock") pays dividends in either shares of
the Company's Common Stock or cash at a rate of 10% per annum (12% per
annum after a dividend payment failure) at the option of the Company. In
connection with this transaction, the Company issued warrants to
purchase 1.7 million shares of the Company's Common Stock at $9.2625 per
share (subject to adjustment in certain circumstances). The warrants are
exercisable at any time, and from time to time, before June 30, 2000.
Additionally, commencing April 1, 1997, each share of Series O Stock is
convertible by the holder into the number of shares of the Company's
Common Stock as obtained by dividing
F - 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 began at 100%, became 95% and 90% on June 29,
1997 and December 31, 1997, respectively, and becomes 88% on June 29,
1998). The holders could only convert up to a maximum of 20% prior to
June 30, 1997; however, in exchange for an agreement by the holders of
Series O Stock to convert additional shares of Series O Stock beyond the
20% limitation prior to July 1, 1997, holders agreed to a higher
conversion price than what otherwise would have been in effect, at the
time of conversion. An additional 30% could have been converted prior to
December 31, 1997, 30% convertible prior to June 29, 1998 and the
remainder thereafter. During 1997, 461 shares of Series O Stock,
including accrued dividends, were converted into 6,448,185 shares of
Common Stock and the Company paid dividends of approximately 922,000
shares of Common Stock with a value of approximately $3.7 million and
recognized deemed dividends (see below). At December 31, 1997, the
Company has reserved 28,400,000 shares issuable upon the conversion of
Series O Stock.
(g) The Company issued 500 shares of Series P Cumulative Convertible
Preferred Stock ("Series P Stock") in January 1997 which pay dividends
in either shares of the Company's Common Stock or cash at the rate of
10% per annum (12% per annum after a dividend payment failure) at the
option of the Company. Currently, each share of Series P Stock is
convertible by the holder into the number of shares of the Company's
Common Stock is 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 (this factor began at 100%, became 95% and 90%
on June 1, 1997 and December 31, 1997, respectively, and will be 88% on
June 29, 1998). However, the holder was only able to convert up to a
maximum of 20% prior to June 30, 1997, an additional 30% prior to
December 31, 1997 and will be able to convert 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. During 1997, the Company paid
dividends of approximately 398,000 shares of Common Stock with a value
of approximately $1.5 million and 250 shares of Series P Stock,
including accrued dividends, were converted into 3,319,355 shares of
Common Stock and recognized deemed dividends (see below). At December 31,
1997, the Company has reserved 10,000,000 shares issuable upon the
conversion of Series P Stock.
(h) Issued in August 1997, the shares of Series Q Cumulative Convertible
Preferred Stock ("Series Q Stock") pay dividends in either shares of the
Company's Common Stock or cash at the rate of 10% per annum (12% per
annum after a dividend payment failure) at the option of the Company.
Currently, 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
(this factor began at 100% and becomes 95% and 90% on January 1, 1998
and April 1, 1998, respectively). However, the holder was only able to
convert up to a maximum of 25% prior to January 1, 1998 and can convert
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. During 1997, the Company
paid dividends of approximately 423,000 shares of Common Stock with a
value of approximately $1.2 million, 32 shares of Series Q Stock,
including accrued dividends, were converted into 773,448 shares of
Common Stock and deemed dividends were recognized (see below). At December
31, 1997, the Company has reserved 18,200,000 shares issuable upon the
conversion of
F - 30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series Q Stock.
A portion of the Series O Stock and Series Q Stock was exchanged for
shares in the Company's Preferred Stock Series R ("Series R Stock") and
Preferred Stock Series S ("Series S Stock") in February 1998 (See Note
17). Additionally, a portion of Series O Stock, Series P Stock and
Series Q Stock was converted subsequent to December 31, 1997 (see Note
17).
Common Stock
In April 1996, the Company purchased 100% of the outstanding stock of
MacDermott Communications, Inc., a private company whose only asset was
an SMR License, for 190,988 shares of the Company's Common Stock. The
value of the Common Stock issued was approximately $2.0 million. This
amount was ascribed to the SMR license, which is included in intangible
assets, and is being amortized over twenty years.
The Company has reserved approximately 124.9 million shares of the
Company's $.01 par value Common Stock issuable upon the conversion of
redeemable preferred stocks; convertible preferred stock; exercise of
warrants; and options and convertible indebtedness.
Deemed Dividends and Interest
The staff of the Securities and Exchange Commission clarified their
position on accounting for convertible preferred stock and convertible
debt containing 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 the 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 year ended December 31, 1997, the Company
recognized approximately $5.2 million as a deemed dividend on Series O
Stock, Series P Stock, and Series Q Stock which resulted in a $0.08
increase in net loss applicable to common shares. As discussed in Note
17, Series O Stock and Series Q Stock was exchanged for Series R Stock
and Series S Stock which is convertible at a fixed cost greater than the
market price at the time of the exchange. 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 $2.5 million
in deemed interest on its $24.5 million convertible note with HNS during
the year ended December 31, 1997.
F - 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants and Options
A summary of the compensatory warrants and options issued for other than
employee benefit purposes during the years ended December 31, 1997, 1996
and 1995 is as follows (shares in thousands):
<TABLE>
<CAPTION>
1997
- ---- Exercise
Outstanding Outstanding Price
Name January 1, Granted Exercised Canceled December 31, Per Share
- ---- ---------- ------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Loan warrants and options (a) 14,542 14,542 $6.00-$12.94
Warrants issued with
preferred stocks (b) 3,350 2,650 6,000 $8.00-$11.00
PSI merger 718 (42) 676 $0.61-$5.06
Private Placements 11 (11) - $1.85-$4.81
Other warrants and options (d) 2,343 2,343 $0.59-$13.87
------- ------- ------- ------- -------
Total Outstanding 20,964 2,650 (53) 23,561
======= ======= ======= ======= =======
<CAPTION>
1996
- ---- Exercise
Outstanding Outstanding Price
Name January 1, Granted Exercised Canceled December 31, Per Share
- ---- ---------- ------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Loan warrants and options 7,831 6,711 14,542 $8.13-$12.94
Warrants issued with 3,350 3,350 $9.26-$11.00
preferred stocks
Vanguard options (c) 7,000 (7,000) $15.00-$17.00
PSI merger 865 (147) 718 $0.61-$5.06
Private Placements 19 (5) (3) 11 $1.85-$4.81
Other warrants and options (d) 1,626 800 (76) (7) 2,343 $0.59-$13.87
------- ------- ------- ------- -------
Total Outstanding 17,341 10,861 (228) (7,010) 20,964
======= ======= ======= ======= =======
<CAPTION>
1995
- ---- Exercise
Outstanding Outstanding Price
Name January 1, Granted Exercised Canceled December 31, Per Share
- ---- ---------- ------- --------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Loan warrants and options 381 7,531 (8) (73) 7,831 $1.25-$9.90
Vanguard options 10,000 (3,000) 7,000 $15.00-$17.00
PSI Merger 973 (95) (13) 865 $0.61-$5.06
Private Placements 67 (10) (38) 19 $1.85-$4.98
Other warrants and options (d) 1,365 493 (220) (12) 1,626 $0.59-$14.00
------- ------- ------- ------- -------
Total Outstanding 12,786 8,024 (333) (3,136) 17,341
======= ======= ======= ======= =======
</TABLE>
All warrants and options outlined above are vested upon issuance, except
those issued in September 1996 pursuant the Company's vendor financing
agreement with HNS which were exercisable beginning September 27, 1997.
a) Loan Warrants and Options - In connection with the issuance of the
Discount Notes, the Convertible Notes, S-C
F - 32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rig Credit Facility, and HNS vendor financing, the Company issued
approximately 6.8 million, 1.0 million, 4.2 million and 2.5 million
warrants to purchase Common Stock, respectively. In April 1997, the S-C
Rig Credit Facility was modified and the warrant price was lowered from
$9.50 to $6.00. In connection with the issuance of Series N Stock and
Series O Stock, the Company issued 1.65 million and 1.7 million warrants
at $11.00 and $8.00 respectively. In 1998, the warrants on Series O
Stock were repriced (see Note 17).
b) Preferred Stock - During 1997, in connection with the issuance of Series
P Stock and Series Q Stock, the Company issued warrants to purchase .85
million and 1.8 million shares of the Company's common stock at $9.2625
and $8.00 per share, respectively (see Note 17 for discussion regarding
the adjustment to warrant strike price).
c) Vanguard Options - In 1994, the Company issued Vanguard options to
purchase 10 million shares of the Company's Common Stock ("Series A
Options") at an exercise price of $15.00 to $17.00 per share. In
connection with the issuance of the Series L Stock to Vanguard and TDI,
the terms of the Series A Options were modified whereby the total number
of Series A Options were decreased from 10 million to 7 million and TDI
held approximately 1.8 million of the Series A Options. In September
1996, the Series A Options expired. Additionally, the Company's
management consulting contract with Vanguard was terminated (See Note
15).
d) Other Warrants and Options - In July 1996, in accordance with the terms
of the Company's joint venture agreement with Anam Industrial Co., Ltd.
and other related agreements, which required the Company to grant options
to its joint venture partner and other related parties upon receipt of a
regional or national license in Korea (see Note 4), the Company granted
options to purchase a total of 800,000 shares of the Company's common
stock at $10 per share.
13. Stock Compensation Plans
The Company issues employee and director options to purchase shares of
the Company's $.01 par value Common Stock under non-qualified stock
option plans adopted in 1989 and 1994. The plans were combined and
amended in July 1997. The amended 1994 plan allows the Company to issue
10.0 million shares and to replenish the plan for options expired or
canceled. Under the plan, employees and directors are granted ten year
options to purchase shares of the Company's Common Stock at the greater
of the closing price of the Company's Common Stock on the NASDAQ Stock
Market(SM) on the date of grant or a price per share designated by the
compensation committee of the Board of Directors. Employees vest over a
period of three to five years from the date of grant.
In September 1997, the Company offered a voluntary repricing plan to its
employees and directors under which the strike price of outstanding
grants would be reduced to $4.19. If the repricing was elected, any
options vested would be required to revest annually in equal
installments over a two year period commencing on the repricing date.
The vesting period for unvested options, scheduled to vest in the
subsequent 24 months, was extended six months. If an employee terminates
prior to revesting, all terms, including price, revert back to the
original terms. Approximately 360 employees and directors holding 3.5
million options elected to reprice their options in accordance with the
voluntary repricing plan. The repricing resulted in no compensation
expense in the current year.
The Company has adopted the disclosure only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123") but applies
the recognition criteria under Accounting Principles Board Opinion No.
25 ("APB No. 25") and related interpretations in accounting for its
plans. Compensation expense
F - 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related to the Company's stock option activity in accordance with APB
No. 25 was insignificant to the Company's results of operations in 1997,
1996 and 1995. If the Company elected to recognize compensation costs
for stock option plans based on the fair value at the date of grant for
awards under these plans, consistent with methods prescribed by SFAS No.
123, net loss and loss per share would have been the following pro forma
amounts for the years ended December 31 (in thousands):
1997 1996 1995
---- ---- ----
Net loss
As reported $(219,579) $(138,222) $(87,199)
Pro forma (224,458) $(142,564) $(89,957)
Loss per share
As reported $ (3.68) $ (2.51) $ (1.75)
Pro forma (3.76) $ (2.58) $ (1.80)
The pro forma net loss and loss per share for 1996 and 1995 are not
necessarily representative of the net loss and loss per share in future
years because the 1996 and 1995 amounts do not include the incremental
fair value of non-vested stock options granted prior to the adoption of
SFAS No. 123.
The fair value of the Company's stock options used to compute pro forma
net income and loss per share disclosures is the estimated present value
at grant date using the Black Scholes option-pricing model with the
following assumptions for 1997:
1997 1996 1995
---- ---- ----
Dividend yield 0% 0% 0%
Volatility 66.7% 51.4% 53.3%
Average Risk free interest rate 6.1% 6% 5.9%
Term from date of vesting 1.5 years 1.5 years 1.5 years
Presented below is a summary of the status of the Company's stock
options held by the Company's employees and directors and the related
transactions for the years ended December 31 (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of year 5,629 $8.76 4,902 $8.26 2,465 $6.54
Granted 6,148 $4.90 1,345 $9.25 2,666 $9.53
Exercised (98) $1.70 (412) $4.47 (129) $2.18
Canceled (4,506) $8.4 (206) $8.63 (100) $7.89
------- ------- -------
Balance, end of year 7,173 $5.78 5,629 $8.76 4,902 $8.26
======= ======= =======
Exercisable, end of year 1,880 2,199 1,593
</TABLE>
F - 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant-date fair value of options granted during the
years ended December 31 are (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Average Weighted Average Weighted Average
Exercise Fair Exercise Fair Exercise Fair
Shares Price Value Shares Price Value Shares Price Value
------ ----- ----- ------ ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares granted:
below market price 244 $4.43 $2.21 200 $9.97 $5.30 435 $ 8.15 $ 3.74
at market price 47 $6.05 $3.28 283 $10.01 $4.12 1,058 $ 8.60 $ 3.76
above market price 5,857 $4.91 $1.78 862 $8.84 $3.69 1,173 $10.88 $ 3.48
------ ------ ------
6,148 1,345 2,666
====== ====== ======
</TABLE>
The following table sets forth the status of the Company's fixed stock
options outstanding and exercisable at December 31, 1997 (shares in
thousands):
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Price Shares Contractual Life Price Shares Price
-------------- ------ ---------------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.00-$1.30 112 1.13 $1.00 112 $1.00
$1.33-$4.38 4,459 8.19 $4.13 380 $3.52
$4.44-$14.00 2,602 7.42 $8.81 1,388 $8.24
------ ------
$1.00-$14.00 7,173 7.80 $5.79 1,880 $6.85
====== =====
</TABLE>
14. Fair Value of Financial Instruments
The recorded amount of cash, cash equivalents, temporary investments and
notes payable banks and other, approximates fair value due to the short
term maturities of these assets and liabilities.
Investments in affiliates are accounted for by the equity method and
pertain to equity investments in privately held companies and joint
ventures for which fair values are not readily available. The fair value
of the Company's cash and cash equivalents, restricted cash, and notes
payable are considered to be equal to their carrying amount as they are
short-term in nature. The value of the Company's Convertible Notes and
Discount Notes was determined using the market price of the debt
instrument at December 31. The Company determines the fair value of its
warrants using the Black Scholes option pricing model.
F - 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The asset and liability amounts recorded in the balance sheet (carrying
amount) and the estimated fair values of financial instruments at
December 31, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $13,393 $13,393 $102,720 $102,720
Restricted cash 16,140 16,140 9,418 9,418
Notes payable - - 3,247 3,247
Long term debt, including
current portion 314,065 233,054 242,606 252,328
Warrants 27,979 6,918 27,290 26,919
</TABLE>
In connection with the Company's HNS vendor financing agreement, the
Company issued 2.5 million warrants to purchase shares of the Company's
Common Stock. At December 31, 1997 and 1996, the HNS Warrants were
carried at $7.2 million and $8.4 million, respectively, and have a fair
value of $1.5 million and $5.7 million , respectively.
15. Certain Other Related Party Transactions:
In connection with the expiration of the Vanguard Options in September
1996, the Company's five-year management consulting agreement with
Vanguard, pursuant to which Vanguard provided operational and marketing
support to the Company for an aggregate of 1.5 million shares of common
stock, was terminated. For the years ended December 31, 1996 and 1995,
Vanguard earned approximately 199,000 and 300,000 shares, respectively
pursuant to this agreement. The fair market value of these shares were
recorded as marketing expenses in 1996 and 1995 at approximately $2.1
million and $2.4 million, respectively.
The Company incurred expenses of $300,000 in 1997, 1996 and 1995,
pursuant to its consulting agreement with a company affiliated with
George Soros. Entities affiliated with George Soros also hold the
Company's Series H Redeemable Preferred Shares, Series I Convertible
Preferred Shares, $5.0 million of the Company's Series N Convertible
Preferred Stock, Series P Convertible Preferred Stock, 10% of the
Company's Senior Secured Discount Notes due 2005, and S-C Rig Credit
Facility.
See Note 4, Investment in Affiliates, Note 8, Long-Term Debt and Note
10, Commitments and Contingencies for description of transactions with
Anam Telecom and HNS.
GTI-Israel has entered into a subcontractor agreement with Rafael under
which Rafael will partake in the development of the digital wireless
network to be deployed by the Company and its subsidiaries in the United
States and Korea. Engineering and development expense for the years
ended December 31, 1997, 1996 and 1995 includes approximately $7.2
million, $11.7 million, and $12.5 million, respectively, for research
performed by Rafael under this agreement. Included in the 1995 expense
is $2.0 million related to 250,000 shares of common stock issued to
Rafael in connection with the development of the digital wireless
network. GTI-Israel has also entered into agreements with Rafael under
which Rafael manufactures the infrastructure equipment to be used by the
Company in its U.S. network and for the sale of such equipment by the
Company to third parties. Through December 31, 1997 and 1996, the
Company had placed firm orders for equipment and engineering totaling
$18.5 million and $24.0 million, respectively, and had made an advance
payment (recorded in other current assets) of $2.5 million to Rafael
under these orders as of December 31, 1996. At December 31, 1997, the
Company had an $18.0 million payable to Rafael.
In July 1996, the Company issued a Convertible Promissory Note in the
amount of $0.8 million due December 31, 1996, for additional shares held
by a minority shareholder, in the Company's subsidiary GTI-Israel (see
Note 2). The Convertible Promissory Note was converted into 57,000
shares of common stock during 1997.
F - 36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1995, Rafael converted all the principal and interest issued to it by
GTI-Israel under convertible debentures into shares of GTI-Israel
representing its 38% interest in GTI-Israel. The Company issued to
Rafael 1.8 million shares of unregistered Company Common Stock in
exchange for RDC's shares of GTI-Israel. The Company valued the
unregistered shares at $8.6 million and recorded the excess of the value
of the shares over the fair value of the underlying assets of GTI-Israel
of $7.8 million as goodwill. As part of the arrangement, Rafael was
granted an option to purchase up to 10% of GTI-Israel in certain
circumstances. Additionally, in October 1995, RDC purchased 338,000
shares of Company common stock for $3.0 million.
During the twelve months ended December 31, 1997, the Company provided
certain senior executive officers $0.5 million in loans.
16. Segment Information:
Prior to November 1997, the Company's operations were classified into
two business segments: wireless communications and communications
products. The wireless communications group is engaged in the commercial
roll-out and enhancement of its digital wireless network in the United
States, principally through its subsidiary Geotek USA, Inc. ("Geotek
USA"), formerly PowerSpectrum Inc., and GTI-Israel subsidiaries, sale of
digital wireless infrastructure equipment, provision of mobile radio
services in the United States (Geotek USA and MetroNet), analog mobile
radio service in the United Kingdom (NB3) and Germany, prior to the sale
of these activities (see Note 2) and the development of certain mobile
data applications (GMSI and MIS). The development associated with the
enhancement of the Company's digital wireless network is primarily
taking place in Israel. GMSI is located in Canada and markets its
products in Canada, the United States and the United Kingdom. In 1997,
$9.1 million and $10.8 million of revenues for GTI - Israel were derived
from its Korean customers, Anam Telecom, a related party, and Hyundai
Electronics. These amounts represent a substantial portion of the work
anticipated to be performed under the contracts with these customers.
In November 1997, the Company disposed its communication products
segment with the sale of BCI. BCI was engaged in the development,
manufacturing and marketing of telephone and facsimile peripheral
products and commercial audio and paging equipment in the United States
and Germany (see Note 2).
Information about the Company's geographic segment in 1997, 1996 and
1995 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Geographic Segments:
Revenues:
United States $ 5,823 $ 5,510 $ 4,878
Europe 31,308 32,631 25,692
Other foreign 56,836 37,085 17,027
Other elimination of intercompany revenues (28,457) (28,701) (11,836)
--------- --------- ---------
$ 65,510 $ 46,525 $ 35,761
========= ========= =========
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loss from continuing operations:
United States $(106,480) $ (80,390) $ (47,414)
Europe 8,726 2,065 4,132
Other foreign (29,129) (17,186) (10,275)
Interest and other income (expense), net (90,620) (42,729) (24,611)
Corporate and other (300) (5,965) (1,317)
Elimination of intercompany income (loss) (7,885) (8,046) (3,590)
--------- --------- ---------
Loss from continuing operations $(225,688) $(140,320) $ (83,075)
========= ========= =========
</TABLE>
F - 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Identifiable assets:
United States $ 182,556 $ 130,854 $ 62,475
Europe 27,286 41,129 71,671
Foreign 78,421 96,689 27,814
Discontinued operations - 12,985 10,835
Corporate and other 43,487 136,364 105,625
--------- --------- ---------
$ 331,750 $ 418,021 $ 278,420
========= ========= =========
</TABLE>
The Company is subject to the risks inherent in conducting business
across national boundaries, including currency exchange rate
fluctuations, international incidents, military outbreaks, economic
downturns, government instability, nationalization of foreign assets,
government protectionism and changes in governmental policy, any of
which could adversely affect the Company's business in one or more of
its international markets or in the U.S. In addition, the licensing and
other operational risks attendant upon commencing and maintaining
wireless communications networks in foreign countries are similar to
those in the U.S., including availability of spectrum capacity and
transmission sites, competition and government regulation. Development
of the Company's business in international markets may impose a
significant burden on the Company's financial, managerial and personnel
resources. There can be no assurance that the Company will be successful
in developing its business in any of these markets or that any such
expansion of the Company's business will be profitable.
17. Subsequent Events:
As discussed in Note 2, the Company entered into two definitive
agreements with Telesystems to sell the Company's interest in its German
joint venture ("Terrafon") and the Company's wholly-owned subsidiary in
the United Kingdom, National Band Three Ltd. ("NB3"). Both transactions
were completed in February 1998.
In February 1998, the Company completed an exchange of Series O Stock and
Series Q Stock into new fixed price preferred instruments, Series R and
Series S. Under the restructuring, the Series O Stock and Q Stock
preferred holders have agreed to immediately convert approximately $12.4
million of Series O Stock and Series Q Stock into common stock at $1.00
per share and exchange a total of $22.4 million for new Series R Stock and
S Stock ($15.9 million for Series R Stock and $6.5 million for Series S).
The remaining $12.5 million will continue to be subject to a floating
conversion rate and may be converted into common stock in increments over
the next six months. Of the $12.5 million, $4.2 million has been converted
since the exchange date leaving $8.3 million unconverted and subject to
floating conversion rates. For each of the Series O Stock and Series Q
Stock exchanged, the holders will receive 1.1111 shares of Series R Stock
or 1 share of Series S Stock. The Company has also agreed to reset the
exercise price of the approximately 3.2 million warrants issued in
connection with the Series O Stock and Series Q Stock transactions at the
same pricing terms of Series S Stock.
The terms of the Series R Stock provide for the conversion at the option
of the holder at any time into shares of the Company's Common Stock at a
fixed price of $2.00 while Series S Stock provides for a conversion at
$4.00 per share. Under the terms of Series S, if after six months the
market price of the Company's common stock is less than $4.00 per share,
the conversion price will adjust to $3.00 per share. If after twelve
months, the market price is below $2.73 per share, the conversion price
will adjust to 110% of the then prevailing market price. In addition,
both Series R Stock and Series S Stock will continue to pay dividends
quarterly at the 10% per annum rate that existed prior to the exchange.
F - 38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The terms of the exchange require the Company to meet certain financing
milestones, including the closing of the European asset sale mentioned
above and the raising of an additional $50 million in financing by
September 15, 1998 of which $25 million must be raised before May 15, 1998
and which can immediately be applied for general working capital purposes.
In addition, the Company must enter into agreements to exchange the
remaining Series P preferred stock, currently with a floating conversion
rate, into a fixed rate instrument or, alternatively, push back the right
to convert the Series P until September 1998. Currently, Series P may be
converted beginning in June 1998. In the event any of these milestones are
not met, the investors will have the right to exchange the Series R Stock
and Series S Stock for securities with a floating conversion rate. The
Series R Stock and Series S Stock investors will also be given the
opportunity to participate in new offerings of the Company's securities
issued in connection with new financing.
During the months of January and February 1998, shareholders of Series O
Stock converted 418 shares, valued at $20.9 million, into 24,807,144
shares of common stock, excluding accrued dividends; shareholders of
Series P Stock converted 150 shares valued at $7.5 million into
7,083,000 shares of common stock, excluding accrued dividends;
shareholders of Series Q Stock converted 68 shares valued at $3.4 million
into 3,419,000 shares of common stock, excluding accrued dividends.
In January 1998, the Company repaid the initial investors in its joint
venture in Canada upon their request to terminate the joint venture (see
Note 4).
In February, 1998, the Company entered into an agreement to repay the
$2.0 million note payable due July 1, 1998 plus accrued interest in
shares of the Company's Common Stock based upon the stock price at the
time the shares are registered.
F - 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Select Quarterly Financial Data (Unaudited):
A summary of financial data for each quarter of 1997 and 1996 as follows
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenue $11,183 $18,352 $25,920 $10,055 $65,510
Total costs 46,766 60,097 80,548 103,787 291,198
Net loss from continuing operations (35,583) (41,745) (54,628) (93,732) (225,688)
Income from discontinued operations 350 671 909 4,179 6,109
Net loss before preferred stock dividends (35,233) (41,074) (53,719) (89,553) (219,579)
Preferred stock dividends (5,285) (6,373) (5,614) (5,570) (22,842)
Net loss applicable to common shares (40,518) (47,447) (59,333) (95,123) (242,421)
Basic and diluted
Net loss per share from continuing operations $(0.68) $(0.77) $(0.88) $(1.44) $(3.77)
Income from discontinued operations per share 0.01 0.01 0.01 0.06 0.09
Net loss per share applicable to common shares (0.67) (0.76) (0.87) (1.38) (3.68)
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenue $10,195 $12,032 $11,556 $12,742 $46,525
Total costs 36,751 43,807 46,849 59,438 186,845
Net loss from continuing operations (26,556) (31,775) (35,293) (46,696) (140,320)
Income from discontinued operations 124 500 792 682 2,098
Net loss before preferred stock dividends (26,432) (31,275) (34,501) (46,014) (138,222)
Preferred stock dividends (1,278) (1,428) (2,683) (2,669) (8,058)
Net loss applicable to common shares (27,710) (32,703) (37,184) (48,683) (146,280)
Basic and diluted
Net loss per share from continuing operations $(0.49) $(0.57) $(0.64) $(0.85) $(2.55)
Income from discontinued operations per share - - 0.02 0.02 0.04
Net loss per share applicable to common shares (0.49) (0.57) (0.62) (0.83) (2.51)
The selected quarterly financial data has been restated
to reflect the sale of BCI segment (See Note 2).
</TABLE>
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"):
In July and August 1995, the Company issued, in a private offering,
$227.7 million aggregate principal amount at maturity of 15% 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, 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 NB3, Geotek USA, Inc. and
Subsidiaries, MetroNet Systems, Inc., Geotek
F - 40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GmbH Holding Corporation and BCI. As discussed in Note 2, the Company
entered into agreements to sell NB3 and BCI.
The Guarantor Information of Geotek Communications, Inc. and
Subsidiaries has been presented on pages F-42 through F-49 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, permitting liens,
paying dividends and incurring additional debt.
Notes to Guarantor Information:
Basis of Presentation - To conform with the terms and conditions of the
Notes, the condensed consolidating financial information of the
Guarantor Subsidiaries are presented on the following basis:
(1) Geotek Communications, Inc. -Investments in consolidated subsidiaries
(Parent Company) are accounted for by the Parent Company
on the cost basis for purposes of the
Guarantor Information. Operating results
of Subsidiaries are therefore not
reflected in the Parent's investment
accounts or earnings.
(2) Guarantor Subsidiaries -For purposes of the Guarantor
Information, Guarantor Subsidiaries
includes all U.S. wireless subsidiaries
of Geotek USA combined with Geotek
Financing Corporation, Geotek License
Holding Inc., MetroNet Systems, Inc. and
ANSA Communications, Inc., all 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, 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, and NB3 which
at December 31, 1997 was reclassified to
assets held for sale.
(4) Reclassifications and -Certain reclassifications were made to
Eliminations conform all of the Guarantor Information
to the financial presentation of the
Company's consolidated financial
statements. The principal elimination
entries eliminate investments in
subsidiaries and intercompany balances
and transactions.
F - 41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 1997
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm. Inc Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
ASSETS (1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,413 $ 23 $ 1,957 $ 13,393
Restricted cash 16,140 16,140
Accounts receivables trade, net 2,430 4,667 7,097
Inventories, net 1,389 11,727 8,361 21,477
Assets held for sale 27,121 27,121
Prepaid expenses and other assets 1,417 2,691 2,559 6,667
Advances to related parties 11,500 11,500
--------- --------- --------- ---------
Total current assets 30,359 28,371 44,665 103,395
--------- --------- --------- ---------
Inter-company account 465,250 86,206 3,039 $(554,495)
Investments in affiliates 17,175 (1,252) 15,923
Property, plant and equipment, net 4,373 115,422 10,431 (17,243) 112,983
Intangible assets, net 8,742 71,118 1,007 80,867
Other assets 32,402 5,661 (17,918) (1,563) 18,582
Investments in Subsidiaries, at cost 47,893 (47,893)
--------- --------- --------- --------- ---------
$ 606,194 $ 306,778 $ 41,224 $(622,446) $ 331,750
========= ========= ========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 3,895 $ 13,250 $ 8,025 $ 25,170
Accrued expenses and other 10,099 17,657 26,195 53,951
Notes payable, banks and other
Current maturities, long-term debt 16,715 24,550 1,399 42,664
--------- --------- --------- ---------
Total current liabilities 30,709 55,457 35,619 121,785
--------- --------- --------- ---------
Inter-company account 469,157 85,338 (554,495)
Long-term debt 233,068 10,354 1,574 (1,574) 243,422
Other non-current liabilities 5,296 1,631 (1,563) 5,364
Minority interest
Redeemable preferred stock 40,000 40,000
Shareholders' equity:
Preferred stocks, $.01 par value 11 11
Common stock, $.01 par value 739 739
Capital in excess of par value 446,557 40,621 35,286 (46,319) 476,145
Foreign currency translation adjustment (145) (145)
Accumulated deficit (143,504) (274,107) (118,079) (18,495) (554,185)
Treasury stock, at cost (1,386) (1,386)
--------- --------- --------- --------- ---------
302,417 (233,486) (82,938) (64,814) (78,821)
--------- --------- --------- --------- ---------
$ 606,194 $ 306,778 $ 41,224 $(622,446) $ 331,750
========= ========= ========= ========= =========
</TABLE>
F - 42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 1996
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm. Inc Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
ASSETS (1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 94,218 $ 364 $ 8,138 $ 102,720
Restricted cash 7,794 1,624 9,418
Accounts receivables trade, net 620 8,299 8,919
Net assets of discontinued operations 12,985 12,985
Inventories, net 15,915 5,716 21,631
Prepaid expenses and other assets 4,514 593 5,998 11,105
Advances to related parties 11,500 11,500
--------- --------- --------- ---------
Total current assets 106,526 28,992 42,760 178,278
--------- --------- --------- ---------
Inter-company account 307,606 76,303 $(383,909)
Investments in affiliates 11,954 25,226 (163) 37,017
Property, plant and equipment, net 1,155 70,297 30,623 (10,624) 91,451
Intangible assets, net 12,492 66,064 4,943 83,499
Other assets 28,862 217 111 (1,414) 27,776
Investments in Subsidiaries, at cost 90,421 (90,421)
--------- --------- --------- --------- ---------
$ 559,016 $ 241,873 $ 103,663 $(486,531) $ 418,021
========= ========= ========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 761 $ 6,993 $ 9,499 $ 17,253
Accrued expenses and other 6,546 11,319 28,387 46,252
Notes payable, banks and other 3,247 3,247
Current maturities, long-term debt 101 155 256
--------- --------- --------- --------- ---------
Total current liabilities 7,408 18,467 41,133 67,008
--------- --------- --------- --------- ---------
Inter-company account 316,716 67,193 $(383,909)
Long-term debt 186,823 24,500 5,311 (1,574) 215,060
Other non-current liabilities 2,297 (1,414) 883
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 74,605 (88,846) 429,483
Foreign currency translation adjustment 968 968
Accumulated deficit (77,543) (158,431) (87,844) (10,788) (334,606)
Treasury stock, at cost (1,386) (1,386)
--------- --------- --------- --------- ---------
324,785 (117,810) (12,271) (99,634) 95,070
--------- --------- --------- --------- ---------
$ 559,016 $ 241,873 $ 103,663 $(486,531) $ 418,021
========= ========= ========= ========= =========
</TABLE>
F - 43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year ended December 31, 1997
(Dollars in thousands)
<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 $ 3,619 $ 56,688 $ (28,386) $ 31,921
Service income 465 33,124 33,589
--------- --------- --------- --------- ---------
Total revenues 4,084 89,812 (28,386) 65,510
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 30,950 44,253 (19,744) 55,459
Cost of services 19,781 10,347 (637) 29,491
Engineering and development 10,071 29,350 188 39,609
Marketing $ 300 23,177 7,498 30,975
General and administrative 12,149 12,697 20,199 45,045
Interest expense 32,353 3,052 852 (548) 35,709
Interest and other income (3,514) (3) (897) 548 (3,866)
Depreciation 467 18,986 7,314 (1,122) 25,645
Amortization of intangibles 2,900 887 1,093 4,880
Equity in losses of investees 21,748 21,748
Other expenses (income) (612) 162 4,496 637 4,683
--------- --------- --------- --------- ---------
Total costs and expenses 65,791 119,760 124,505 (20,678) 289,378
--------- --------- --------- --------- ---------
Loss from continuing operations
before taxes on income and
discontinued operations (65,791) (115,676) (34,693) (7,708) (223,868)
Taxes on income (1,820) (1,820)
--------- --------- --------- --------- ---------
Loss from continuing operations
before discontinued operations (65,791) (115,676) (36,513) (7,708) (225,688)
Discontinued operations:
Income from discontinued
operations 6,109 6,109
--------- --------- --------- --------- ---------
Net loss $ (65,791) $(115,676) $ (30,404) $ (7,708) $(219,579)
========= ========= ========= ========= =========
</TABLE>
F - 44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
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 $ 806 $ 40,333 $ (28,540) $ 12,599
Service income 481 33,445 33,926
--------- --------- --------- --------- ---------
Total revenues 1,287 73,778 (28,540) 46,525
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 6,875 29,807 (20,783) 15,899
Cost of services 12,855 16,605 (171) 29,289
Engineering and development 1,861 9,148 23,575 (64) 34,520
Marketing 300 21,280 8,148 29,728
General and administrative 9,596 10,328 15,598 35,522
Interest expense 28,315 886 1,595 (920) 29,876
Interest and other income (6,185) (165) (404) 920 (5,834)
Depreciation 96 4,977 10,347 (496) 14,924
Amortization of intangibles 1,385 804 1,557 3,746
Equity in losses of investees 79 79
Other expenses (income) (1,031) (635) (457) 171 (1,952)
--------- --------- --------- --------- ---------
Total costs and expenses 34,416 66,353 106,371 (21,343) 185,797
--------- --------- --------- --------- ---------
Loss from continuing operations
before taxes on income and
discontinued operations (34,416) (65,066) (32,593) (7,197) (139,272)
Taxes on income (1,048) (1,048)
--------- --------- --------- --------- ---------
Loss from continuing operations
before discontinued operations (34,416) (65,066) (33,641) (7,197) (140,320)
Discontinued operations:
Income from discontinued
operations 2,098 2,098
--------- --------- --------- --------- ---------
Net loss $ (34,416) $ (65,066) $ (31,543) $ (7,197) $(138,222)
========= ========= ========= ========= =========
</TABLE>
F - 45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
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 $ 83 $ 19,848 $ (11,836) $ 8,095
Service income 2,020 25,646 27,666
--------- --------- --------- --------- ---------
Total revenues 2,103 45,494 (11,836) 35,761
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of goods sold 46 13,234 (8,246) 5,034
Cost of services 5,256 11,438 16,694
Engineering and development 15,805 17,467 33,272
Marketing 300 9,513 8,250 18,063
General and administrative 5,692 10,078 6,839 22,609
Depreciation 37 673 4,616 5,326
Amortization of intangibles 920 1,065 1,571 3,556
Interest expense 15,383 316 1,256 (1,020) 15,935
Interest income (5,562) (74) (531) 1,020 (5,147)
Equity in losses of investees 1,563 3,332 4,895
Other expenses (income) (2,121) (240) (2,361)
--------- --------- --------- --------- ---------
Total costs and expenses $ 18,333 $ 40,557 $ 67,232 $ (8,246) $ 117,876
--------- --------- --------- --------- ---------
Loss from continuing
operations before taxes
on income and discontinued
operations (18,333) (38,454) (21,738) (3,590) (82,115)
Taxes on income (960) (960)
--------- --------- --------- --------- ---------
Loss before discontinued
operations (18,333) (38,454) (22,698) (3,590) (83,075)
Discontinued operations:
Loss from operations (4,124) (4,124)
--------- --------- --------- --------- ---------
Net loss $ (18,333) $ (38,454) $ (26,822) $ (3,590) $ (87,199)
========= ========= ========= ========= =========
</TABLE>
F - 46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries & Elimination's & Subsidiaries
--------- ------------ ------------ --------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss (59,682) (115,676) (36,513) (7,708) (219,579)
Adjustments to reconcile net loss to net cash
used in operating activities:
Discontinued operations:
(Income) from operations (2,355) (2,355)
Gain on disposal (3,754) (3,754)
Depreciation & amortization 3,368 19,873 8,407 (1,123) 30,525
Post acquisition adjustment for utilization of
acquired net operating loss carry forward
Equity in losses of investees 21,748 21,748
Adjustment to inventory for replacement costs 8,299 1,000 9,299
Non-cash interest expense 31,086 47 31,133
Other, net 40 90 4,493 4,623
Changes in operating assets and
liabilities (net of effect from acquisitions):
(Increase) decrease in accounts receivable (1,810) 438 (1,372)
(Increase) in inventories (1,389) (4,111) (4,143) (9,643)
(Increase) in prepaid expenses and other assets (403) (2,253) (285) (2,941)
Increase in accounts payable & accrued expenses 6,687 12,595 5,596 24,878
Other, net 29 299 328
--------- --------- --------- --------- ---------
Net cash used in operating activities (4,654) (82,917) (20,708) (8,831) (117,110)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of, and deposits for, licenses (433) (433)
Acquisitions of property, plant & equipment (1,057) (62,765) (5,358) 7,460 (61,720)
Capitalized interest on construction in progress and
pre-commercial spectrum licenses (1,435) (7,180) (8,615)
Proceeds from sale of Bogen 18,500 18,500
Change in cash for net assets of discontinued operations 370 370
Cash invested in unconsolidated subsidiaries, net (3,246) (2,584) (5,830)
Change in restricted cash (8,346) 1,624 (6,722)
Contract deposits - other current assets 130 1,841 1,971
Cash included in assets held for sale (4,485) (4,485)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities 4,416 (70,248) (8,592) 7,460 (66,694)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayments under line of credit agreements (3,247) (3,247)
Repayments of debt (1,965) (1,965)
Draw down of vendor financing agreements 10,307 10,307
Proceeds from issuance
of convertible preferred stock 55,000 55,000
Proceeds from drawdown of credit agreement 40,000 40,000
Repayment of capital lease obligation (359) (359)
Proceeds from exercise of warrants & options 212 212
Payment of preferred dividends (5,131) (5,131)
Intercompany financing (172,289) 142,517 28,401 1,371
Other, net
--------- --------- --------- --------- ---------
Net cash provided by financing activities (82,567) 152,824 23,189 1,371 94,817
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash (70) (70)
Increase (decrease) in cash & cash equivalents (82,805) (341) (6,181) (89,327)
Cash & cash equivalents, beginning of year 94,218 364 8,138 102,720
--------- --------- --------- --------- ---------
Cash & cash equivalents, end of year $ 11,413 $ 23 $ 1,957 $ $ 13,393
========= ========= ========= ========= =========
</TABLE>
F - 47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries & Elimination's & Subsidiaries
--------- ------------ ------------ --------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (34,416) $ (65,066) $ (31,543) $ (7,197) $(138,222)
Adjustments to reconcile net loss to net cash
used in operating activities:
Discontinued operations:
(Income) from operations (2,098) (2,098)
Depreciation & amortization 1,480 5,782 11,904 (496) 18,670
Post acquisition adjustment for utilization of
acquired net operating loss carry forward 357 357
Equity in losses of investees 79 79
Deferred taxes 614 614
Adjustment to inventory for replacement costs 5,226 5,226
Issuance of stock in connection with engineering
and development project 1,861 1,861
Issuance of stock for management consulting contract 2,061 2,061
Non-cash interest expense 26,458 137 26,595
Other, net 100 (279) (179)
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (599) (2,061) (2,660)
(Increase) in inventories (19,813) (3,903) (23,716)
(Increase) decrease in prepaid expenses and other assets (2,448) (11,776) 1,697 (12,527)
Increase in accounts payable & accrued expenses 5,550 10,030 18,430 34,010
Other, net (834) 1,734 900
--------- --------- --------- --------- ---------
Net cash (used in) operating activities (2,170) (74,297) (4,869) (7,693) (89,029)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of, and deposits for, spectrum licenses (30,192) (30,192)
Net decrease in temporary investments 7,945 7,945
Proceeds from sale of property, plant & equipment 103 103
Acquisitions of property, plant & equipment (162) (45,048) (11,512) 7,693 (49,029)
Capitalized interest on construction in progress and
pre-commercial spectrum licenses (599) (6,569) (7,168)
Change in cash for net assets of discontinued operations (391) (391)
Cash invested in unconsolidated subsidiaries, net (8,531) (267) (8,798)
Change in restricted cash 27,553 27,553
Contract deposits - other current assets (1,015) (1,246) (2,261)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities 25,191 (81,809) (13,313) 7,693 (62,238)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayments of debt (1,706) (1,706)
Proceeds from issuances of convertible notes 75,000 75,000
Proceeds from issuance
of convertible preferred stock 103,350 103,350
Deferred financing costs (3,300) (3,300)
Proceeds from drawdown of credit agreement 24,500 24,500
Repayment of capital lease obligations (60) (438) (498)
Financing costs (1,080) (1,080)
Proceeds from exercise of warrants & options 2,568 2,568
Payment for preferred dividends (5,138) (5,138)
Intercompany financing (153,271) 133,154 20,117
Other, net 71 71
--------- --------- --------- --------- ---------
Net cash provided by financing activities 18,069 155,948 19,750 193,767
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash 69 69
Increase (decrease) in cash & cash equivalents 41,090 (158) 1,637 42,569
Cash & cash equivalents, beginning of year 53,128 522 6,501 60,151
--------- --------- --------- --------- ---------
Cash & cash equivalents, end of year $ 94,218 $ 364 $ 8,138 $ $ 102,720
========= ========= ========= ========= =========
</TABLE>
F - 48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm.Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (18,333) $ (38,454) $ (26,822) $ (3,590) $ (87,199)
Adjustments to reconcile net loss to net
cash used in operating activities:
Discontinued operations:
Loss from operations 4,124 4,124
Depreciation & amortization 957 1,738 6,187 8,882
Adjustment to inventory for replacement costs 73 222 295
Non cash interest expense 11,631 270 11,901
Post acquisition adjustment for utilization
of acquired net operating loss carryforward 950 950
Equity in losses of investees 1,563 3,332 4,895
Issuance of stock for management consulting fee 2,439 2,439
Issuance of shares in connection with
engineering and development project 2,032 2,032
Other, net 45 (658) 250 (363)
Changes in operating assets and liabilities
(net of effect from acquisitions):
Decrease (increase) in accounts receivable 58 (164) (106)
(Increase) in inventories (1,284) (1,911) (161) (3,356)
Decrease (increase) in prepaid expenses
and other assets (112) (143) (689) 851 (93)
Increase in accts payable & accrued expenses 826 6,597 2,805 1,017 11,245
Other, net (1,005) (1,005)
--------- --------- --------- --------- ---------
Net cash (used in) operating activities (3,423) (27,332) (12,721) (1,883) (45,359)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of, and deposits for, spectrum licenses (3,500) (9,555) (13,055)
Net decrease in temporary investments 14,015 14,015
Change in restricted cash (32,675) (1,741) (34,416)
Contract deposits-other current assets (1,227) (1,227)
Change in cash for net assets of discontinued operations 406 406
Acquisitions of property, plant & equipment (84) (27,616) (8,183) 3,427 (32,456)
Capitalized interest on construction in progress
and pre-commercial spectrum licenses (487) (487)
Proceeds from sale of property, plant & equipment 45 205 250
Proceeds from sale of BCI 7,000 7,000
Non-cash transaction expense for BCI 740 740
Cash invested in unconsolidated subsidiaries, net (9,732) (9,732)
Other, net 2,106 2,106
--------- --------- --------- --------- ---------
Net cash (used in) provided by investing activities (22,870) (37,613) (9,800) 3,427 (66,856)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuances of convertible
preferred stock 30,863 30,863
Repayments of debt (850) (510) (668) (2,028)
Deferred financing costs (4,692) (4,692)
Repayments of capital lease obligation (400) (217) (617)
Repayment of secured notes (25,000) (25,000)
Proceeds from issuance of senior secured
notes and related warrants 36,000 36,000
Proceeds from issuance of senior secured
discount notes & related warrants 110,079 110,079
Proceeds from issuance of common stock 3,000 3,000
Proceeds from exercise of warrants & options 1,073 1,073
Payment of preferred dividends (4,132) (4,132)
Intercompany financing (87,742) 65,559 23,727 (1,544)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 58,199 65,049 22,842 (1,544) 144,546
--------- --------- --------- --------- ---------
Effect of exchange rates on cash 436 436
Increase in cash & cash equivalents 31,906 104 757 32,767
Cash & cash equivalents, beginning of year 21,222 418 5,744 27,384
--------- --------- --------- --------- ---------
Cash & cash equivalents, end of year $ 53,128 $ 522 $ 6,501 -- $ 60,151
========= ========= ========= ========= =========
</TABLE>
F - 49
<PAGE>
Registered no: 2672488
NATIONAL BAND THREE LIMITED
Annual report for the year
ended 31 December 1997
F-50
<PAGE>
NATIONAL BAND THREE LIMITED
Annual report
for the year ended 31 December 1997
Registered no: 2672488
Pages
Directors and advisors F-52
Directors' report F-53-55
Report of the auditors F-56
Profit and loss account F-57
Balance sheet F-58
Cash flow statement F-59
Notes to the financial statements F- 60 - 72
F-51
<PAGE>
NATIONAL BAND THREE LIMITED
Directors and advisors
- -------------------------------------------------------------------------------
Directors Y Marois
E W Beddoes
J A G M Godin
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Secretary and registered office G R Darsley
Wren House
Hedgerows Business Park
Colchester Road
Springfield
CHELMSFORD
Essex
CM2 5PF
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Register Auditors Coopers & Lybrand
1 Embankment Place
LONDON
WC2N 6NN
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Bankers National Westminster Bank Plc
21 Lombard Street
LONDON
EC3P 3AR
- --------------------------------------------------------------------------------
===============================================================================
F-52
<PAGE>
NATIONAL BAND THREE LIMITED
Directors' report
for the year ended 31 December 1997
The directors present their report and the audited financial statements for the
year ended 31 December 1997.
Principal activities
The profit and loss account for the year is set out on page F- 57.
The principal activity of the company is the operation of regional and national
mobile communications networks, under licences granted by the Department of
Trade and Industry under the Telecommunications Act 1984 and the Wireless
Telegraphy Act 1949 and the marketing and sale of products and services for use
on the networks.
Review of business and future developments
During the year the company continued the operation of the networks and invested
in and strengthened its sales and marketing capability. This helped the
continued growth in the subscriber base during the year and provided new
products and services. Both the level of business and the year end financial
position were satisfactory, and the directors expect the level of activity to
continue for the foreseeable future.
Dividends
The directors do not recommend the payment of a dividend. The profit for the
period ?1,248,000 (1996: ?2,490,000) has been taken to reserves.
Post balance sheet event
In December the parent company, Geotek Inc (formerly Geotek Industries, Inc)
entered into an agreement to sell the entire share capital of the company to an
indirect, wholly-owned subsidiary of Telesystem International Wireless Inc. This
transaction was completed on 12 February 1998.
Research and development activities
During the year the company continued with the development of the digital
business and data products for use on the analogue networks.
Changes in fixed assets
The movements in fixed assets during the year are set out in note 9 to the
financial statements.
F-53
<PAGE>
NATIONAL BAND THREE LIMITED
Directors
The directors of the company during the year ended 31 December 1997 were:
A D Robb
G M Calhoun
Y Eitan
Y Bibring
E J Watts
R Conroy
D Henson
M Davey
S A Style (resigned 31 January 1997)
G Darsley was appointed to the board on 17 February 1997.
In accordance with the provisions of the sale agreement between Geotek GMbH
Holding Corporation and TIWC Holdings (UK) Limited all the above directors
resigned on 12 February 1998 and were replace by:
Y Marios
E W Beddoes
J A G M Godin
Directors' interests
None of the directors held any interest in the shares of the company at 31
December 1997 (1996: None).
At the year end the directors held options over the shares of National Bank
Three's ultimate parent company, Geotek Inc. These options lapsed following the
sale of the company.
Directors' responsibilities
The directors are required by UK company law to prepare financial statements for
each financial year that give a true and fair view of the state of affairs of
the company and the group as at the end of the financial year and of the profit
or loss of the group for that period.
The directors confirm that suitable accounting policies have been used and
applied consistently and reasonable and prudent judgements and estimates have
been made in the preparation of the financial statements for the year ended 31
December 1997. The directors also confirm that applicable accounting standards
have been followed and that the financial statements have been prepared on the
going concern basis.
The directors are responsible for keeping proper accounting records, for taking
reasonable steps to safeguard the assets of the company and the group and to
prevent and detect fraud and other irregularities.
F-54
<PAGE>
NATIONAL BAND THREE LIMITED
Auditors
The company's auditors are Coopers & Lybrand. Under an elective resolution the
company has dispensed with the need to reappoint auditors on an annual basis.
However, in accordance with the provisions of the sales agreement between Geotek
GMbH Holding Corporation and TIWC Holdings (UK) Limited whereby the ownership of
the company has changed Coopers & Lybrand has agreed to resign as auditors on
completion of the audit for the year ended 31 December 1997.
By order of the board
G Darsley
Secretary
13 March 1998
F-55
<PAGE>
NATIONAL BAND THREE LIMITED
Report of the auditors to the members of
NATIONAL BAND THREE LIMITED
We have audited the financial statements on pages F - 57 to F- 72.
Respective responsibilities of directors and auditors
As described on page F - 53 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
Opinion
In our opinion the financial statements give a true and fair view of the state
of the company's affairs at 31 December 1997 and of its profit and cash flows
for the year then ended and have been properly prepared in accordance with the
Companies Act 1985.
Coopers & Lybrand
Chartered Accountants and Registered Auditors
London
13 March 1998
F-56
<PAGE>
NATIONAL BAND THREE LIMITED
Profit and loss account
for the year ended 31 December 1997
- -------------------------------------------------------------------------------
Notes 1997 1996
- -------------------------------------------------------------------------------
'000 '000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Turnover 2 19,101 18,164
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Cost of sales (9,283) (9,522)
- -------------------------------------------------------------------------------
)))))) ))))))
- -------------------------------------------------------------------------------
Gross profit 9,818 8,642
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net operating expenses 3 (5,918) (5,703)
- -------------------------------------------------------------------------------
Net exceptional operating expenses 3 (1,655) (312)
- -------------------------------------------------------------------------------
)))))) ))))))
- -------------------------------------------------------------------------------
Total net expenses (7,573) (6,015)
- -------------------------------------------------------------------------------
)))))) ))))))
- -------------------------------------------------------------------------------
Operating profit 2,245 2,627
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Interest receivable and similar income 282 120
- -------------------------------------------------------------------------------
Interest payable and similar charges 6 (182) (217)
- -------------------------------------------------------------------------------
)))))) ))))))
- -------------------------------------------------------------------------------
Profit on ordinary activities
before taxation 7 2,345 2,530
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Tax on profit on ordinary activities 8 (1,097) (40)
- -------------------------------------------------------------------------------
)))))) ))))))
- -------------------------------------------------------------------------------
Retained profit for the financial year 15 1,248 2,490
- -------------------------------------------------------------------------------
444444 444444
- -------------------------------------------------------------------------------
All figures in the profit and loss account relate to continuing operations.
There is no difference between the profit on ordinary activities before taxation
and the profit for the year as stated above, and their historical cost
equivalents.
There have been no other gains and losses in the year.
F-57
<PAGE>
NATIONAL BAND THREE LIMITED
Balance sheet
at 31 December 1997
- ----------------------------------------------------------------------------
Notes 1997 1996
- ----------------------------------------------------------------------------
'000 '000
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Fixed assets
- ----------------------------------------------------------------------------
Tangible assets 9 11,219 12,522
- ----------------------------------------------------------------------------
)))))) ))))))
- ----------------------------------------------------------------------------
Current assets
- ----------------------------------------------------------------------------
Stocks 10 303 411
- ----------------------------------------------------------------------------
Debtors 11 3,026 3,246
- ----------------------------------------------------------------------------
Cash at bank and in hand 2,716 3,553
- ----------------------------------------------------------------------------
)))))) ))))))
- ----------------------------------------------------------------------------
Total current assets 6,045 7,210
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Creditors: amounts falling due
within one year 12 (5,656) (9,748)
- ----------------------------------------------------------------------------
)))))) ))))))
- ----------------------------------------------------------------------------
Net current assets/(liabilities) 389 (2,538)
- ----------------------------------------------------------------------------
)))))) ))))))
- ----------------------------------------------------------------------------
Total assets less current liabilities 11,608 9,984
- ----------------------------------------------------------------------------
Provisions for liabilities and charges
- ----------------------------------------------------------------------------
Deferred taxation 13 (376) -
- ----------------------------------------------------------------------------
)))))) ))))))
- ----------------------------------------------------------------------------
Net assets 11,232 9,984
- ----------------------------------------------------------------------------
444444 444444
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Capital and reserves
- ----------------------------------------------------------------------------
Called up share capital 14 9,000 9,000
- ----------------------------------------------------------------------------
Share premium account 15 8,800 8,800
- ----------------------------------------------------------------------------
Goodwill reserve 15 - (9)
- ----------------------------------------------------------------------------
Profit and loss account 15 (6,568) (7,807)
- ----------------------------------------------------------------------------
)))))) ))))))
- ----------------------------------------------------------------------------
Total equity shareholders' funds 16 11,232 9,984
- ----------------------------------------------------------------------------
444444 444444
- ----------------------------------------------------------------------------
The financial statements on pages F - 57 to F -72 were approved by the board of
directors on 13 March 1998 and were signed on its behalf by:
J A G M Godin
Director
F-58
<PAGE>
NATIONAL BAND THREE LIMITED
Cash flow statement
for the year ended 31 December 1997
- ------------------------------------------------------------------------------
Notes 1997 1996
- ------------------------------------------------------------------------------
'000 '000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net cash inflow from operating activities 17 871 5,243
- ------------------------------------------------------------------------------
))))) )))))
- ------------------------------------------------------------------------------
Returns on investments and servicing of finance
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest received 282 120
- ------------------------------------------------------------------------------
Interest paid (182) (217)
- ------------------------------------------------------------------------------
))))) )))))
- ------------------------------------------------------------------------------
Net cash outflow from returns on
investments and servicing of finance 100 (97)
- ------------------------------------------------------------------------------
))))) )))))
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Taxation
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
United Kingdom corporation tax paid (40) -
- ------------------------------------------------------------------------------
)))))) )))))
- ------------------------------------------------------------------------------
Capital expenditure and financial investment
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Purchase of tangible fixed assets (1,888) (3,470)
- ------------------------------------------------------------------------------
Sale of tangible fixed assets 120 60
- ------------------------------------------------------------------------------
)))))) )))))
- ------------------------------------------------------------------------------
(1,768) (3,410)
- ------------------------------------------------------------------------------
)))))) )))))
- ------------------------------------------------------------------------------
(Decrease)/increase in cash in the period 18 (837) 1,736
- ------------------------------------------------------------------------------
444444 44444
- ------------------------------------------------------------------------------
F-59
<PAGE>
NATIONAL BAND THREE LIMITED
Notes to the financial statements
for the year ended 31 December 1997
1 Principal accounting policies
The financial statements have been prepared in accordance with applicable
Accounting Standards in the United Kingdom. A summary of the more important
accounting policies, which have been applied consistently, is set out below.
Basis of accounting
The financial statements are prepared in accordance with the historical cost
convention.
Goodwill
Goodwill arising on the acquisition of businesses is written off directly to an
unrealised goodwill reserve. It is amortised to the profit and loss account
reserve over five years, the directors' estimate of its useful economic life.
Tangible fixed assets
The cost of tangible fixed assets is their purchase cost, together with any
incidental expenses of acquisition.
Depreciation is calculated so as to write off the cost of tangible fixed assets,
less their estimated residual values, on a straight line basis over the expected
useful economic lives of the assets concerned.
The estimated useful lives used for this purpose are:
Short term leasehold improvements Over the term of the lease
Plant and machinery Between three and ten years
Fixtures and fittings Between three and five years
Motor vehicles Four years
No depreciation is charged on assets in the course of construction.
Stocks
Stocks are stated at the lower of cost and net realisable value. Provision is
made where necessary for obsolete, slow moving and defective stocks.
Turnover
Turnover, which excludes value added tax, represents the invoiced value of goods
and services supplied.
F-60
<PAGE>
NATIONAL BAND THREE LIMITED
Operating leases
Costs in respect of operating leases are charged on a straight line basis over
the lease term.
Deferred taxation
Provision is made for deferred taxation, using the liability method, on all
material timing differences to the extent that it is probable that a liability
or asset will crystallise.
Pension costs
The company operates a "money purchase" pension scheme for the benefit of its
employees.
The company provides no other post retirement benefits to its employees.
Related party transactions
The company has taken advantage of the exemptions under Financial Reporting
Standard 8 not to disclose any transactions with entities that are part of the
group qualifying as related parties.
2 Turnover
Turnover consists entirely of sales in one class of business made in the United
Kingdom.
3 Net operating expenses
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
'000 '000
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Selling and distribution costs 3,547 3,440
- -------------------------------------------------------------------------
Administrative expenses 2,371 2,263
- -------------------------------------------------------------------------
))))))) )))))))
- -------------------------------------------------------------------------
5,918 5,703
- -------------------------------------------------------------------------
Exceptional operating expenses -
expenditure relating to the
implementation of the digital business 1,655 312
- -------------------------------------------------------------------------
))))))) )))))))
- -------------------------------------------------------------------------
Total net expenses 7,573 6,015
- -------------------------------------------------------------------------
4444444 4444444
=========================================================================
F-61
<PAGE>
NATIONAL BAND THREE LIMITED
4 Directors emoluments
- --------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------
'000 '000
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Aggregate emoluments and benefits 499 532
- --------------------------------------------------------------------------
Company pension contributions to
money purchase schemes 35 35
- --------------------------------------------------------------------------
4444444 4444444
==========================================================================
The above disclosures do not include the current period bonus provisions
referred to below. However, the amounts are inclusive of the cash payments made
in respect of the previous period's bonuses.
Five directors were entitled to receive share options in the ultimate parent
company, Geotek Inc. These options lapsed following the sale of the company.
Retirement benefits are also accruing to five directors under money purchase
pension schemes.
Highest paid director
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
'000 '000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Aggregate emoluments and benefits 157 167
- -----------------------------------------------------------------------------
Company pension contributions to
money purchase schemes 12 10
==========================================================-------------------
444444 4444444
==========================================================-------------------
Directors' bonus provisions
A provision of 160,000 (1996: 80,000) has been made in these financial
statements in respect of bonus payments which may be made to the directors at
the company's discretion in respect of their performance during 1997.
Under a bonus scheme implemented in 1997, a bonus is payable to directors during
the period of the development of the proposed digital business. In the event of
a change in ownership of the company these bonuses crystallise in full. As a
result of the change of ownership referred to in note 20, 442,000 including
national insurance contributions was paid by Geotek Inc directly to the
directors after the year end.
F-62
<PAGE>
NATIONAL BAND THREE LIMITED
5 Employee information
The average monthly number of persons (including executive directors) employed
by the company during the year was:
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
Number Number
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
By activity
- -----------------------------------------------------------------------------
Administration 28 28
- -----------------------------------------------------------------------------
Technical 47 42
- -----------------------------------------------------------------------------
Marketing 48 40
- -----------------------------------------------------------------------------
))))) )))))
- -----------------------------------------------------------------------------
123 110
- -----------------------------------------------------------------------------
44444 44444
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
'000 '000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Staff costs (for the above persons)
- -----------------------------------------------------------------------------
Wages and salaries 3,461 2,994
- -----------------------------------------------------------------------------
Social security costs 352 310
- -----------------------------------------------------------------------------
Other pension costs 191 160
- -----------------------------------------------------------------------------
))))) )))))
- -----------------------------------------------------------------------------
4,004 3,464
- -----------------------------------------------------------------------------
44444 44444
- -----------------------------------------------------------------------------
6 Interest payable and similar charges
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
'000 '000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Interest payable on sums owed to parent undertaking 182 217
- -----------------------------------------------------------------------------
444 444
- -----------------------------------------------------------------------------
F-63
<PAGE>
NATIONAL BAND THREE LIMITED
7 Profit on ordinary activities before taxation
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
'000 '000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The profit on ordinary activities before
taxation is stated after
charging/(crediting):
- ------------------------------------------------------------------------------
Exceptional cost of sales (53) 340
- ------------------------------------------------------------------------------
Depreciation 3,108 2,815
- ------------------------------------------------------------------------------
Auditors' remuneration 52 20
- ------------------------------------------------------------------------------
Auditors' remuneration for non-audit services 6 11
- ------------------------------------------------------------------------------
Rentals under operating leases on
land and buildings 1,226 1,242
- ------------------------------------------------------------------------------
Hire of equipment under operating leases 1,602 1,562
- ------------------------------------------------------------------------------
Profit on disposal of fixed assets (37) (38)
- ------------------------------------------------------------------------------
444444 44444
- ------------------------------------------------------------------------------
The exceptional cost of sales related to a provision for costs to be incurred in
moving one of the company's switching sites, presently located in Manchester.
8 Tax on profit on ordinary activities
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
'000 '000
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
United Kingdom corporation tax at 31.5% (1996: 33%)
- ----------------------------------------------------------------------------
Current tax 721 40
- ----------------------------------------------------------------------------
Deferred 376 -
- ----------------------------------------------------------------------------
))) )))
- ----------------------------------------------------------------------------
1,097 40
- ----------------------------------------------------------------------------
444 444
- ----------------------------------------------------------------------------
9 Tangible fixed assets
F-64
<PAGE>
NATIONAL BAND THREE LIMITED
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Short term Plant Fixtures
leasehold and and Motor
improvements machinery fittings vehicles Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
'000 '000 '000 '000 '000
- -----------------------------------------------------------------------------------------------------------
Cost
- -----------------------------------------------------------------------------------------------------------
At 1 January 1997 5 26,848 641 935 28,429
- -----------------------------------------------------------------------------------------------------------
Additions - 1,418 99 371 1,888
- -----------------------------------------------------------------------------------------------------------
Disposals - (346) (22) (307) (675)
- -----------------------------------------------------------------------------------------------------------
))) )))))) ))) ))) ))))))
- -----------------------------------------------------------------------------------------------------------
At 31 December 1997 5 27,920 718 999 29,642
- -----------------------------------------------------------------------------------------------------------
))) )))))) ))) ))) ))))))
- -----------------------------------------------------------------------------------------------------------
Depreciation
- -----------------------------------------------------------------------------------------------------------
At 1 January 1997 3 15,132 414 358 15,907
- -----------------------------------------------------------------------------------------------------------
Charge for year - 2,727 140 241 3,108
- -----------------------------------------------------------------------------------------------------------
Disposals - (331) (18) (243) (592)
- -----------------------------------------------------------------------------------------------------------
))) )))))) ))) ))) ))))))
- -----------------------------------------------------------------------------------------------------------
At 31 December 1997 3 17,528 536 356 18,423
- -----------------------------------------------------------------------------------------------------------
))) )))))) ))) ))) ))))))
- -----------------------------------------------------------------------------------------------------------
Net book value
- -----------------------------------------------------------------------------------------------------------
At 31 December 1997 2 10,392 182 643 11,219
- -----------------------------------------------------------------------------------------------------------
444 444444 444 444 444444
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
At 31 December 1996 2 11,716 227 577 12,522
- -----------------------------------------------------------------------------------------------------------
444 444444 444 444 444444
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Included in the plant and machinery above are assets under construction to the
value of 841,000 (31 December 1996: 1,303,000) which did not incur
depreciation during the year.
10 Stocks
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
'000 '000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Goods for resale 303 411
- -------------------------------------------------------------------------------
4444 444
- -------------------------------------------------------------------------------
11 Debtors
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
'000 '000
- -------------------------------------------------------------------------------
Amounts falling due within one year
- -------------------------------------------------------------------------------
Trade debtors 1,934 2,123
- -------------------------------------------------------------------------------
Amounts owed by fellow subsidiary undertakings - 94
- -------------------------------------------------------------------------------
Other debtors 19 33
- -------------------------------------------------------------------------------
Prepayments and accrued income 1,073 996
- -------------------------------------------------------------------------------
)))))) )))))
- -------------------------------------------------------------------------------
3,026 3,246
- -------------------------------------------------------------------------------
444444 44444
- -------------------------------------------------------------------------------
F-65
<PAGE>
NATIONAL BAND THREE LIMITED
12 Creditors: amounts falling due within one year
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
'000 '000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Trade creditors 1,026 2,821
- -------------------------------------------------------------------------------
Amount owed to parent undertaking 60 3,112
- -------------------------------------------------------------------------------
Corporation tax 721 40
- -------------------------------------------------------------------------------
Other taxes and social security 381 273
- -------------------------------------------------------------------------------
Accruals and deferred income 3,468 3,502
- -------------------------------------------------------------------------------
))))) )))))
- -------------------------------------------------------------------------------
5,656 9,748
- -------------------------------------------------------------------------------
44444 44444
- -------------------------------------------------------------------------------
13 Deferred taxation
The total liability to deferred taxation is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Amount provided Amount unprovided
- ------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
'000 '000 '000 '000
- ------------------------------------------------------------------------------------------------------------
Excess of capital allowances over
depreciation 479 - - 549
- ------------------------------------------------------------------------------------------------------------
Other (103) - - (294)
- ------------------------------------------------------------------------------------------------------------
))) ))) )))) )))
- ------------------------------------------------------------------------------------------------------------
376 Nil Nil 255
- ------------------------------------------------------------------------------------------------------------
444 444 4444 444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
F-66
<PAGE>
NATIONAL BAND THREE LIMITED
14 Called up share capital
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<C> <C> <C>
'000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Authorised
- ------------------------------------------------------------------------------------------------------------
12,000,000 ordinary shares of .1 each 12,000 12,000
- ------------------------------------------------------------------------------------------------------------
444444 444444
- ------------------------------------------------------------------------------------------------------------
Allotted, called up and fully paid
- ------------------------------------------------------------------------------------------------------------
9,000,000 ordinary shares of ?1 each 9,000 9,000
- ------------------------------------------------------------------------------------------------------------
444444 444444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
15 Share premium account and reserves
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Share Profit
premium Goodwill and loss
account reserve account
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
'000 '000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
At 1 January 1997 8,800 (9) (7,807)
- ------------------------------------------------------------------------------------------------------------
Transfer in respect of
amortisation of goodwill - 9 (9)
- ------------------------------------------------------------------------------------------------------------
Profit for the financial year - - 1,248
- ------------------------------------------------------------------------------------------------------------
))))) ))) ))))))
- ------------------------------------------------------------------------------------------------------------
At 31 December 1997 8,800 - (6,568)
- ------------------------------------------------------------------------------------------------------------
44444 444 444444
============================================================================================================
</TABLE>
Total goodwill written off amounted to 243,500.
16 Reconciliation of movements in shareholders' funds
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
'000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Profit for the financial year 1,248 2,490
- ------------------------------------------------------------------------------------------------------------
Opening shareholders' funds 9,984 7,494
- ------------------------------------------------------------------------------------------------------------
))))) )))))
- ------------------------------------------------------------------------------------------------------------
Closing shareholders' funds 11,232 9,984
- ------------------------------------------------------------------------------------------------------------
44444 44444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
F-67
<PAGE>
NATIONAL BAND THREE LIMITED
17 Reconciliation of operating profit/(loss)
to net cash inflow from operating activities
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
'000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Operating profit 2,245 2,627
- ------------------------------------------------------------------------------------------------------------
Profit on sale of tangible fixed assets (37) (38)
- ------------------------------------------------------------------------------------------------------------
Depreciation of tangible fixed assets 3,108 2,815
- ------------------------------------------------------------------------------------------------------------
Amounts written off fixed assets - -
- ------------------------------------------------------------------------------------------------------------
(Decrease)/increase in stocks 108 (218)
- ------------------------------------------------------------------------------------------------------------
Decrease in debtors 220 76
- ------------------------------------------------------------------------------------------------------------
Decrease in creditors (4,773) (19)
- ------------------------------------------------------------------------------------------------------------
))))) )))))
- ------------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 871 5,243
- ------------------------------------------------------------------------------------------------------------
44444 44444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
18 Reconciliation of net cashflow to movements in net funds
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
'000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
(Decrease)/increase in cash in period (837) 1,736
- ------------------------------------------------------------------------------------------------------------
Net funds at 1 January 1997 3,553 1,817
- ------------------------------------------------------------------------------------------------------------
)))))) )))))
- ------------------------------------------------------------------------------------------------------------
Net funds at 31 December 1997 2,716 3,553
- ------------------------------------------------------------------------------------------------------------
444444 44444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
'000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Analysis of balances
- ------------------------------------------------------------------------------------------------------------
Cash at bank and in hand 2,716 3,553
- ------------------------------------------------------------------------------------------------------------
44444 44444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
19 Cash flow relating to exceptional items
The operating cash flows include an outflow of .1,591,000 which relates to the
1,727,000 (72,000 of which was capitalised) for implementation of the digital
business.
20 Post balance sheet events
Details of post balance sheet events are given in the directors' report.
F-68
<PAGE>
NATIONAL BAND THREE LIMITED
21 Financial commitments
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Capital commitments 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
'000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Contracted for but not provided 488 790
- ------------------------------------------------------------------------------------------------------------
44444 44444
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Authorised but not yet contracted for - 13
- ------------------------------------------------------------------------------------------------------------
44444 44444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Operating lease commitments
At 31 December 1997 the company had annual commitments under non-cancellable
operating leases, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
Other Other
Land and operating Land and operating
buildings leases buildings leases
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
'000 '000 '000 '000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Leases which expire:
- ------------------------------------------------------------------------------------------------------------
Within one year 423 1,343 305 80
- ------------------------------------------------------------------------------------------------------------
Within two to five years 197 455 323 1,604
- ------------------------------------------------------------------------------------------------------------
After five years 659 - 590 -
- ------------------------------------------------------------------------------------------------------------
))))) ))))) ))))) )))))
- ------------------------------------------------------------------------------------------------------------
1,269 1,798 1,218 1,684
- ------------------------------------------------------------------------------------------------------------
44444 44444 44444 44444
- ------------------------------------------------------------------------------------------------------------
</TABLE>
22 Ultimate parent company
At 31 December 1997 the directors regarded Geotek Inc (formerly Geotek
Industries, Inc), a company incorporated in the United States of America, as the
ultimate parent company. Copies of the parent's consolidated financial
statements may be obtained from The Secretary, Geotek Communications, Inc. 102
Chestnut Road, Montvale, New Jersey 07645, United States of America. On 12
February 1998 the company was sold to Dolphin Corporation Limited (formerly TIWC
Holdings (UK) Limited). The directors now regard the ultimate parent company as
Telesystem International Wireless Inc, a company incorporated in Canada. Copies
of the parent's consolidated financial statements may be obtained from The
Secretary, Telesystem International Wireless Inc. 1250 RenJ-LJvesque Blvd. West,
Suite 1110, Montreal,Quebec, H3B 4W8.
F-69
<PAGE>
NATIONAL BAND THREE LIMITED
23 Summary of differences between UK GAAP and US GAAP
These financial statements on pages 1 to 17 are prepared in British
pounds and presented in accordance with UK GAAP which differs in
certain significant respects from US GAAP. These differences, which
have a significant effect on consolidated net income and shareholders'
equity, are discussed and quantified in a table of adjustments below.
While this is not a comprehensive summary of all differences between UK
GAAP and US GAAP, other differences are immaterial.
Significant differences between UK GAAP and US GAAP
(a) Deferred income taxes
Under UK GAAP, deferred taxes are only provided on timing
differences where it is considered probable that such taxes
will become payable in the foreseeable future. Under SFAS No
109, "Accounting for Income Taxes", US GAAP requires deferred
taxes to be provided in full under the liability method. There
is no net adjustment recorded to the deferred income tax
accounts for them to comply with US GAAP. Taxes on income
presented in 1996 reflect the utilisation of 630,000
pre-acquisition net operating loss, which had a full valuation
allowance established at the time of acquisition by the
company. The utilisation of this net operating loss has been
recorded in 1995 as a reduction to intangible assets. In 1997
full provision has been made for deferred taxation in the UK
financial statements.
(b) Goodwill
Under UK GAAP, the company eliminates goodwill against
reserves in the year in which it arises. US GAAP requires that
goodwill is capitalised and amortised through the income
statement over the estimated period of benefit. Additionally,
under applicable rules of "push-down accounting" goodwill
associated with the parent company's acquisition of the
company was "pushed-down" onto the books of the company at the
time of the acquisition. The parent company's policy is to
amortise goodwill on a straight line basis over 20 years.
Amortisation expense relating to goodwill was 200,000 and
227,000 for 31 December 1997 and 1996 respectively. The
carrying value of goodwill at 31 December 1997 after the
adjustment for utilisation of pre-acquisition net operating
loss (see (a)) and amortisation was 3,553,000.
F-70
<PAGE>
NATIONAL BAND THREE LIMITED
(c) Statements of cash flows
The company prepares its consolidated statements of cash flows
under United Kingdom Financial Reporting Standard No 1, "Cash
Flow Statements" ("FRS1"). Its objectives and principles are
similar to those set out in the US Statement of Financial
Accounting Standards No 95, "Statement of Cash Flows"
("SFAS95"). The principal differences between the standards
relate to classification. Under FRS1, the company presents its
cash flows as (a) operating activities; (b) returns on
investments and servicing of finance; (c) taxation; (d)
investing activities; and (e) financing activities. SFAS95
requires only three categories of cash flow activity; (a)
operating; (b) investing; and (c) financing. Cash flows from
taxation and returns on investments and servicing of finance
shown under FRS1 would be included as operating activities in
SFAS95.
Statements of income
The following is a summary of significant items which
reconcile the statements of income from that reported under UK
GAAP to that which would be reported had US GAAP been applied.
- -------------------------------------------------------------------------------
Year ended 31 Year ended 31
December 1997 December 1996
- -------------------------------------------------------------------------------
'000 '000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income (loss) as shown in the
financial statements 1,248 2,490
- -------------------------------------------------------------------------------
US GAAP adjustments:
- -------------------------------------------------------------------------------
Amortisation of goodwill (200) (227)
- -------------------------------------------------------------------------------
Tax on income 361 (630)
- -------------------------------------------------------------------------------
))))) )))))
- -------------------------------------------------------------------------------
Net income under US GAAP 1,409 1,633
- -------------------------------------------------------------------------------
44444 44444
- -------------------------------------------------------------------------------
F-71
<PAGE>
NATIONAL BAND THREE LIMITED
Shareholders' funds
The following is a summary of the significant items which
reconcile shareholders' funds from that reported under UK GAAP
to that which would be reported had US GAAP been applied.
- --------------------------------------------------------------------------------
31 December 1997 31 December 1996
- --------------------------------------------------------------------------------
'000 '000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shareholders' funds shown in
the financial statements 11,232 9,984
- --------------------------------------------------------------------------------
US GAAP adjustments:
- --------------------------------------------------------------------------------
Goodwill 3,553 3,753
- --------------------------------------------------------------------------------
Deferred income tax - (361)
- --------------------------------------------------------------------------------
)) ))))))
- --------------------------------------------------------------------------------
14,785 13,376
- --------------------------------------------------------------------------------
444 44444
- --------------------------------------------------------------------------------
F-72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GEOTEK COMMUNICATIONS, INC.
By: /s/ Yaron Eitan
---------------------------------
Yaron Eitan, Chairman of the Board,
Chief Executive Officer, and Director
Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on March 16, 1998 by the following persons on behalf
of the registrant in the capacities indicated.
/s/ Yaron Eitan
- ------------------------ Chairman of the Board, Chief Executive
Yaron I. Eitan Officer and Director (Principal Executive Officer)
/s/ Walter E. Auch
- ------------------------ Director
Walter E. Auch
/s/ George Calhoun
- ------------------------ Senior Vice President, Strategic Marketing, and
George Calhoun Director
/s/ Purnendu Chatterjee
- ------------------------ Director
Purnendu Chatterjee
/s/ Winston Churchill
- ------------------------ Director
Winston Churchill
/s/ Haynes Griffin
- ------------------------ Director
Haynes Griffin
<PAGE>
/s/ Richard Krants
- ------------------------ Director
Richard Krants
/s/ Richard T. Liebhaber
- ------------------------ Director
Richard T. Liebhaber
/s/ William Spier
- ------------------------ Director
William Spier
/s/ Anne E. Eisele Senior Vice President, Chief Financial Officer
- ------------------------ (Principal Financial Officer)
Anne E. Eisele
/s/ Valerie E. DePiro
- ------------------------ Vice President, Chief Accounting Officer and
Valerie E. DePiro Corporate Controller
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
10.13 First Amendment dated as of December 1, 1997 to Indenuter
dated as of June 30, 1995 between Geotek Communications, Inc.
and IBJ Schroder Bank & Trust Company, as Trustee
10.14 First Amendment dated as of December 1, 1997 to Pledge
Agreement dated as of July 6, 1995 between Geotek
Communications, Inc. and IBJ Schroder Bank & Trust Company,
as Collateral Agenet
10.15 Geonet System Security Agreement dated as of December 1, 1997
among Geotek Communications, Inc. and Geoteck USA, Inc. and
IBJ Schroder Bank & Trust Company, as Collateral Agent
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Company
23.1 Consent of Coopers & Lybrand L.L.P. -
Geotek Communications, Inc.
23.2 Consent of Shachak Peer Reznick & Co. -
Geotek Technologies Israel (1992) Ltd.
23.3 Consent of Coopers & Lybrand -
National Band Three Limited
27 Financial Data Schedule
<PAGE>
FIRST AMENDMENT
DATED AS OF DECEMBER 1, 1997
TO INDENTURE
DATED AS OF JUNE 30,1995
BETWEEN
GEOTEK COMMUNICATIONS, INC.
AND
IBJ SCHRODER BANK & TRUST COMPANY, AS TRUSTEE
FIRST AMENDMENT, dated as of December 1, 1997, to INDENTURE, dated as
of June 30, 1995 (the "Indenture"), between GEOTEK COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), and IBJ SCHRODER BANK & TRUST COMPANY, a
banking company organized under the laws of the State of New York, as trustee
(the "Trustee").
BACKGROUND:
The parties hereto entered into the Indenture as of June 30, 1995,
which governs the Company's 15% Senior Secured Discount Notes due 2005 (the
"Securities"). The Company and holders of a majority of the outstanding
aggregate principal amount of the Securities have agreed to amend certain
provisions of the Indenture as set forth herein.
Accordingly, the parties hereto agree as follows:
AGREEMENT:
1. Definitions. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to such terms in the
Indenture.
2. New Definitions. Section 1.01 of the Indenture is hereby
amended to add the following new definitions in alphabetical order among the
existing definitions:
"Assumed Obligations" has the meaning set forth in
Section 4.12(a).
"Bogen Sale" means the sale by the Company of its
interest in Bogen Communications International, Inc. on
November 26, 1997.
"Bogen Sale Northeast Reinvestment Credit" means the
amount of the Bogen Sale Proceeds that the Company applies to
the purchase of Northeast Replacement Collateral pursuant to
Section 4.20(f).
<PAGE>
"Bogen Sale Other Reinvestment Credit" means the
amount of the Bogen Sale Proceeds that the Company applies to
the purchase of Other Replacement Collateral pursuant to
Section 4.20(f).
"Bogen Sale Proceeds" means the Net Cash Proceeds
from the Bogen Sale.
"Bogen Sale Reinvestment Credit" means the sum of
Bogen Sale Northeast Reinvestment Credit and the Bogen Sale
Other Reinvestment Credit.
"Collateral Sale" means any Asset Sale (other than a
Permitted Foreign Asset Sale) involving the sale, conveyance,
transfer, lease or other disposition of any Collateral
(including Replacement Collateral) or any Reallocated License
(other than a Permitted License Transfer).
"Custody Account" means the "Custody Account" as
defined in the Custody Account Pledge Agreement.
"Custody Account Collateral" means the "Collateral"
as defined in the Custody Account Pledge Agreement.
"Custody Account Pledge Agreement" means the Custody
Account Pledge Agreement dated as of December 1, 1997 between
the Company, Geotek USA and the other Subsidiaries of the
Company party thereto and the Trustee, as collateral agent for
the holders of the Securities, as the same may be amended,
modified or supplemented from time to time.
"Exempt Subsidiary" shall have the meaning set forth
in Section 4.18(c).
"GEONET System Security Agreement" means the Security
Agreement dated as of December 1, 1997 between the Company,
Geotek USA and the other Subsidiaries of the Company party
thereto, and the Trustee, as collateral agent for the holders
of the Securities, as the same may be amended, modified or
supplemented from time to time.
"Geotek USA" means Geotek USA, Inc., a Delaware
corporation formerly known as PowerSpectrum, Inc., which is a
Wholly-Owned Subsidiary of the Company.
"License Holding Company" has the meaning set forth
in the U.S. Pledge Agreement.
2
<PAGE>
"License Reallocation" has the meaning set forth in
the U.S. Pledge Agreement.
"Northeast Licensed Area" has the meaning set forth
in the U.S. Pledge Agreement.
"Northeast Licenses" has the meaning set forth in
the U.S. Pledge Agreement.
"Northeast Replacement Collateral" means (i)
equipment and fixed assets which are acquired by the Company
or Geotek USA for installation and use in any GEONET system
located within the Northeast Licensed Area and which are
subject to a first priority perfected Lien in favor of the
Trustee under the GEONET System Security Agreement, and (ii)
Licenses for the use of radio channels in the Northeast
Licensed Area which are acquired and held by the License
Holding Company, all of the capital stock of which is subject
to a first priority perfected Lien in favor of the Trustee
under the U.S. Pledge Agreement.
"Other Replacement Collateral" means (i) equipment
and fixed assets which are acquired by the Company or Geotek
USA for installation and use in any GEONET system located
within an area covered by a Reallocated License held by the
License Holding Company (other than a Northeast License or a
Releasable License) and which are subject to a first priority
perfected Lien in favor of the Trustee under the GEONET System
Security Agreement, and (ii) Licenses for the use of radio
channels in areas in the United States other than the
Northeast Licensed Area which are acquired and held by the
License Holding Company, all of the capital stock of which is
subject to a first priority perfected Lien in favor of the
Trustee under the U.S. Pledge Agreement.
"Permitted Asset Sale" means any Asset Sale
(including the Bogen Sale, but excluding any other Collateral
Sale or any Permitted Foreign Asset Sale) occurring after
November 1, 1997, all or a portion of the Net Cash Proceeds of
which constitute Working Capital Proceeds; provided, however,
that such Working Capital Proceeds, when aggregated with the
Working Capital Proceeds of all other Permitted Asset Sales,
shall not exceed (i) $40,000,000 (less the amount of the Bogen
Sale Reinvestment Credit, if any, that is included in the
Working Capital Share of the Net Cash Proceeds from a
Permitted Foreign Asset Sale), minus (ii) the aggregate amount
of Indebtedness incurred by
3
<PAGE>
the Company or any of its Subsidiaries pursuant to Section
4.08(n).
"Permitted Foreign Asset Sale" means any Asset Sale
(i) that involves (A) the Capital Stock or assets of National
Band Three Limited or (B) the Capital Stock or other ownership
interest in, or assets of, Geotek Communications GmbH,
Terrafon Bundelfunk GmbH & Co. KG or Terrafon Bundelfunk
Geschaftsfuhrungsgesellschaft mbH, and (ii) all or a portion
of the Net Cash Proceeds of which constitute Working Capital
Proceeds; provided, however, that the Working Capital Proceeds
from any Permitted Foreign Asset Sale shall be subject to the
limitations set forth in Section 10.08(b).
"Permitted License Transfer" has the meaning set
forth in the U.S. Pledge Agreement.
"Reallocated License" has the meaning set forth in
the U.S. Pledge Agreement.
"Releasable License" has the meaning set forth in
the U.S. Pledge Agreement.
"Replacement Collateral" means Northeast Replacement
Collateral and Other Replacement Collateral.
"Security Agreement Collateral" means the
"Collateral" as defined in the GEONET System Security
Agreement.
"Working Capital Proceeds" means the portion of the
Net Cash Proceeds from any Permitted Asset Sale or Permitted
Foreign Asset Sale that are applied or are designated by the
Company to be applied to the working capital needs and general
corporate purposes of the Company or any of its Subsidiaries,
provided that (i) the Working Capital Proceeds from all
Permitted Asset Sales shall not exceed in the aggregate the
limit set forth in the definition of Permitted Asset Sale, and
(ii) the Working Capital Proceeds from any Permitted Foreign
Asset Sale shall not exceed the limit set forth in the
definition of Permitted Foreign Asset Sale.
"Working Capital Share" has the meaning set forth
in Section 10.08(b).
4
<PAGE>
3. Amended Definitions.
(a) The definition of "Collateral" contained in
Section 1.01 of the Indenture is hereby amended and restated to read in its
entirety as follows:
"Collateral" means the Pledged Collateral, the
Intercompany Notes, the Custody Account Collateral, the
Security Agreement Collateral and any other collateral to
secure the obligations of the Company hereunder and under the
Securities.
(b) The definition of "Collateral Arrangements"
contained in Section 1.01 of the Indenture is hereby amended and restated to
read in its entirety as follows:
"Collateral Arrangements" means the Pledge
Agreements, the Guarantees, the Note Pledge Agreements, the
Custody Account Pledge Agreement, the Security Agreements and
any other liens, encumbrances, security interests or similar
arrangements created hereby, described or referred to herein
or therein, or otherwise contemplated by the terms hereof or
thereof.
(c) The definition of "Permitted Liens" contained in
Section 1.01 of the Indenture is hereby amended to amend and restate clause (k)
to read in its entirety as follows:
(k) Liens securing Indebtedness, other than
Indebtedness that is subordinated in right of payment to the
Securities, in the aggregate principal amount of up to
$20,000,000 at any time outstanding, provided that such
Indebtedness is permitted to be incurred under the terms of
this Indenture, and provided further that such Liens shall not
cover any Collateral or any Reallocated License (other than a
Releasable License following a Permitted License Transfer
thereof or the Capital Stock of the entity holding a
Releasable License following such a Transfer);
(d) The definition of "Security Agreement" contained
in Section 1.01 of the Indenture is hereby amended and restated to read in its
entirety as follows:
"Security Agreements" means the GEONET System
Security Agreement and any other document pursuant to which a
security interest (other than by way of a pledge) is granted
hereunder, including any security interest in any cash
pursuant to the Pledge Agreements.
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4. Limitation on Indebtedness.
(a) Section 4.08(n) is hereby renumbered to be
Section 4.08(p) and is amended and restated in its entirety to read as follows:
(p) (i) Indebtedness of the Company the proceeds of
which are used solely to refinance (whether by amendment,
renewal, substitution, replacement, extension or refunding)
Indebtedness (plus reasonable fees and expenses directly
associated with such financing) of the Company or any of its
Subsidiaries and (ii) Indebtedness of any Subsidiary of the
Company the proceeds of which are used solely to refinance
(whether by amendment, renewal, substitution, replacement,
extension or refunding) Indebtedness (plus reasonable fees and
expenses directly associated with such financing) of such
Subsidiary, in each case other than Indebtedness refinanced,
redeemed or retired under clause (j), (k), (m), (n) or (o) of
this Section 4.08; provided, however, that (A) the principal
amount of Indebtedness incurred pursuant to this clause (p)
(or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a
declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness) shall not exceed
the sum of the principal amount of Indebtedness so refinanced,
plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of such
Indebtedness or the amount of any premium reasonably
determined by the Board of Directors as necessary to
accomplish such refinancing by means of a tender offer or
privately negotiated purchase, plus the amount of expenses in
connection therewith and (B) in the case of Indebtedness
incurred by the Company pursuant to this clause (p) to
refinance Indebtedness subordinated in right of payment to the
Securities, such Indebtedness (I) has an Average Life to
Stated Maturity equal to or greater than the remaining Average
Life to Stated Maturity of the Indebtedness being refinanced
and (II) is subordinated to the Securities in the same manner
and to the same extent that the Indebtedness being refinanced
is subordinated to the Securities.
For purposes of determining compliance with this Section 4.08,
in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described in the
above clauses, the Company in its sole discretion,
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shall classify such item of Indebtedness and only shall be
required to include the amount and type of such Indebtedness
in one of such clauses.
Each reference in the Indenture to Section 4.08(n) is hereby amended to refer to
Section 4.08(p).
(b) Section 4.08 of the Indenture is hereby further
amended to add the following clauses after clause (m) and before clause (p):
(n) unsecured Indebtedness of the Company or any
Subsidiary of the Company, in addition to that described in
clauses (a) through (m) above and clause (o) below, in an
aggregate principal amount outstanding at any time not
exceeding (i) $40,000,000 (less the amount of the Bogen Sale
Reinvestment Credit, if any, that is included in the Working
Capital Share of the Net Cash Proceeds from a Permitted
Foreign Asset Sale), minus (ii) the Working Capital Proceeds
from all Permitted Asset Sales occurring after November 1,
1997;
(o) unsecured Indebtedness of the Company or any
Subsidiary of the Company, in addition to that described in
clauses (a) through (n) above, in an aggregate principal
amount outstanding at any time not exceeding (i) two times the
net cash proceeds received by the Company from the issuance
and sale of Capital Stock (other than Redeemable Capital
Stock) by the Company or any of its Subsidiaries after
November 1, 1997, provided that the aggregate principal amount
of Indebtedness permitted by this clause (i) shall not exceed
$40,000,000, plus (ii) the net cash proceeds received by the
Company from the issuance and sale of Capital Stock (other
than Redeemable Capital Stock) by the Company or any of its
Subsidiaries after November 1, 1997 in excess of the amount of
cash proceeds utilized for purposes of incurring Indebtedness
permitted by clause (i) above, provided that the aggregate
principal amount of Indebtedness permitted by this clause (ii)
shall not exceed $30,000,000; provided, however, that if the
Capital Stock referred to in clause (i) or (ii) above is
issued by a Subsidiary of the Company, then any Indebtedness
based on the issuance of such Capital Stock shall be incurred
only by such Subsidiary and its direct and indirect
subsidiaries and not by the Company or any of its other
Subsidiaries;
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5. Asset Sales.
(a) Section 4.12(a) of the Indenture is hereby
amended and restated in its entirety to read as follows:
(a) (i) The Company will not, and will not permit any
of its Subsidiaries to, make any Asset Sale (including without
limitation a Permitted Asset Sale) unless (A) the Company or
such Subsidiary, as the case may be, receives consideration at
the time of such Asset Sale at least equal to the Fair Market
Value of the shares or assets sold or otherwise disposed of,
and (B) at least 85% of such consideration consists of cash or
Cash Equivalents or the assumption of Indebtedness of the
Company or such Subsidiary or other obligations relating to
such assets ("Assumed Obligations") and release from all
liability on such Assumed Obligations, unless, in the case of
clause (B), the remainder of such consideration consists of
(x) property or assets that will be owned by the Company or a
Subsidiary of the Company and are to be used in a
telecommunications business or related activities or services
that thereafter will be conducted by the Company or such
Subsidiary or (y) Capital Stock or other securities issued by
a party to the transaction or an Affiliate thereof, which
Capital Stock or other securities are freely tradeable and
which are sold for cash within 90 days of the consummation of
the Asset Sale in connection with which they were acquired,
provided that any such cash (net of any expenses related to
such sale or provisions for taxes payable as a result thereof)
shall constitute Net Cash Proceeds from the Asset Sale for
purposes of this Indenture (including without limitation
Section 10.08).
(ii) The Company or its Subsidiary, as the
case may be, may, within 180 days of an Asset Sale, apply the
Net Cash Proceeds therefrom (or enter into a binding agreement
within such 180-day period to apply such Net Cash Proceeds
within 45 days of the date of such agreement) to (A) an
investment in properties and assets that replace the
properties and assets that were the subject of such Asset Sale
or in properties and assets that will be used in the business
of the Company and its Subsidiaries existing on the Issue Date
or in businesses reasonably related thereto ("Replacement
Assets") or (B) in the case of an Asset Sale by a Subsidiary
of the Company, the repayment of any Indebtedness of such
Subsidiary; provided, however, that so long as no Default or
Event of Default has occurred and is continuing,
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the Company or such Subsidiary, as the case may be, may apply any
Working Capital Proceeds received from a Permitted Asset Sale to
the working capital needs and general corporate purposes of the
Company or any Subsidiary of the Company. Any Net Cash Proceeds
from any Asset Sale (other than Working Capital Proceeds from a
Permitted Asset Sale) that are not invested in Replacement Assets
(or in the case of an Asset Sale by a Subsidiary of the Company
used to repay Indebtedness of such Subsidiary) within the 180-day
period described above shall constitute "Excess Proceeds" subject
to disposition as provided in Section 4.12(b). Notwithstanding
the foregoing, the application of the Bogen Sale Proceeds shall
be governed by Section 4.20 and the application of the Net Cash
Proceeds of a Permitted Foreign Asset Sale or a Collateral Sale
(other than the Bogen Sale) shall be governed by Section 10.08.
(iii) The Company will not, and will not
permit any of its Subsidiaries to, make any Permitted Asset
Sale, a Permitted Foreign Asset Sale or a Collateral Sale if a
Default or an Event of Default has occurred and is continuing.
6. Subsidiary Guarantees. Sections 4.18(c) and (d) of the
Indenture are hereby amended and restated in their entirety to read as follows:
(c) To the extent that, after the date of this
Indenture, the Company establishes or acquires any additional
wholly owned direct and indirect subsidiaries which are
organized under the laws of a state of the United States or
the District of Columbia and which do business in the United
States, the Company shall promptly, but in no case later than
30 days after the date of such establishment or acquisition,
cause each such subsidiary to jointly and severally guarantee
the obligations of the Company under the Securities, this
Indenture, the Pledge Agreements, the Note Pledge Agreements,
the Security Agreements and any other security arrangements
pursuant to a Guarantee in form and substance satisfactory to
the Trustee, to the fullest extent provided herein and shall
be accompanied by an Opinion of Counsel as to the
enforceability thereof and such other matters as the Trustee
may reasonably request. Notwithstanding the foregoing, no
subsidiary of the Company (other than the Pledged Companies as
defined in the U.S. Pledge Agreement and their direct and
indirect Subsidiaries) shall be required to guarantee any of
the above-referenced
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<PAGE>
obligations if the only material assets of such subsidiary
consist of Licenses and rights related thereto (including
rights under license agreements with respect to such Licenses)
and if all of the Capital Stock of such subsidiary is pledged
to secure Indebtedness (other than Indebtedness in respect of
the Securities) permitted to be incurred by the Company or one
of its Subsidiaries hereunder (an "Exempt Subsidiary").
(d) To the extent that any wholly-owned subsidiary of
the Company that is organized under the laws of a state of the
United States or the District of Columbia (other than Cumulous
if it is not a Guarantor and other than an Exempt Subsidiary)
is not required to execute and deliver a Guarantee as
contemplated above, the Company hereby covenants that such
subsidiary shall not engage in any business activities in the
United States or hold any License. To the extent any such
subsidiary engages in such business activities or holds any
License at such time, the Company shall cause such business
activities to be ceased promptly and/or such Licenses to be
transferred (and the Company will use its best efforts to
cause any Licenses to be so transferred), as soon as
practicable to a Guarantor.
7. Bogen Sale Proceeds; Restrictions Pending License
Reallocation; Quarterly Compliance Certificate. Article Four of the Indenture is
hereby further amended to add the following sections after Section 4.19:
4.20 Application of Bogen Sale Proceeds.
(a) Upon the First Amendment to this Indenture
becoming effective, and so long as no Default or Event of
Default has occurred and is continuing, the Company may use up
to $5,000,000 of the Bogen Sale Proceeds for the working
capital needs and general corporate purposes of the Company
and its Subsidiaries. The balance of the Bogen Sale Proceeds
shall be deposited in the Custody Account and shall be applied
as provided in this Section 4.20.
(b) Upon delivery to the Trustee of an Officers'
Certificate that (i) the License Reallocation has been
approved by an order of the FCC (the finality of which is
subject to the expiration of a 45-day period for objections or
appeals), (ii) Hughes Network Systems, Inc. has consented to
the License Reallocation, and (iii) no person has objected to
the License Reallocation
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<PAGE>
or attempted to intervene in the FCC proceedings relating to
the License Reallocation, the Company may withdraw from the
Custody Account up to an additional $5,000,000 of the Bogen
Sale Proceeds for the working capital needs and general
corporate purposes of the Company and its Subsidiaries.
(c) On or after the later of (i) February 1, 1998,
and (ii) the delivery of the Officers' Certificate referred to
in Section 4.20(b), the Company may withdraw from the Custody
Account up to an additional $4,000,000 of the Bogen Sale
Proceeds for the working capital needs and general corporate
purposes of the Company and its Subsidiaries.
(d) On or after the expiration of 45 days from the
date of the FCC's order approving the License Reallocation and
the delivery to the Trustee of the Officers' Certificate and
opinion of counsel referred to in Section 4.1.11 of the U.S.
Pledge Agreement, the Company may withdraw the balance of the
Bogen Sale Proceeds from the Custody Account for the working
capital needs and general corporate purposes of the Company
and its Subsidiaries.
(e) No Bogen Sale Proceeds shall be withdrawn from
the Custody Account for the working capital needs and general
corporate purposes of the Company and its Subsidiaries if a
Default or Event of Default has occurred and is continuing,
and the Company shall deliver to the Trustee an Officers'
Certificate to such effect at the time of any such withdrawal.
Any Bogen Sale Proceeds which are applied to the working
capital needs and general corporate purposes of the Company
and its Subsidiaries shall constitute Working Capital Proceeds
from a Permitted Asset Sale occurring after November 1, 1997.
(f) The Company may at any time apply all or any part
of the Bogen Sale Proceeds remaining in the Custody Account to
purchase Replacement Collateral or to pay outstanding invoices
for previously purchased Replacement Collateral, provided that
not less than 33 % of the Bogen Sale Proceeds so applied shall
be used to purchase Northeast Replacement Collateral or to pay
outstanding invoices for previously purchased Northeast
Replacement Collateral. The Company may withdraw the Bogen
Sale Proceeds from the Custody Account for the purchase of (or
payment of outstanding invoices for) Replacement Collateral
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<PAGE>
upon delivery to the Trustee of (i) an Officers' Certificate
certifying (A) the type of Replacement Collateral to be
purchased (or paid for), the locations where such Collateral
will be (or has been) installed or used, and the fact that
such Replacement Collateral will meet the requirements of the
Indenture relating to Replacement Collateral, and (B) that no
Default or Event of Default has occurred and is continuing,
and (ii) an opinion of independent counsel that such
Replacement Collateral will be subject to a first priority
perfected Lien in favor of the Trustee under the GEONET System
Security Agreement or will be Licenses held by the License
Holding Company, all of the capital stock of which is subject
to a first priority perfected Lien in favor of the Trustee
under the U.S. Pledge Agreement; provided, however, that no
such opinion shall be required with respect to (A) Northeast
Replacement Collateral which will be installed in
jurisdictions (both state and local) containing Collateral
with respect to which an opinion of independent counsel was
previously furnished to the Trustee (provided that in such
case the next annual Opinion of Counsel furnished to the
Trustee under Section 10.02(c) shall expressly cover such
newly installed Northeast Replacement Collateral), or (B)
Other Replacement Collateral if the cost thereof, when added
to the cost of all other Other Replacement Collateral being
installed in the same state, does not exceed $1,000,000,
except that if Other Replacement Collateral will be installed
in a state with respect to which no opinion of independent
counsel has been previously furnished to the Trustee, such
opinion of independent counsel shall nevertheless be required
if the cost of such Other Replacement Collateral, when added
to the cost of all other Other Replacement Collateral being
installed or previously installed in such state, will exceed
$1,000,000; and further provided, that upon the First
Amendment to this Indenture becoming effective, the Company
may make an initial withdrawal of Bogen Sale Proceeds of up to
$2,750,000 for the purchase of (or payment of outstanding
invoices for) Other Replacement Collateral without delivering
such opinion of independent counsel provided that such opinion
is delivered to the Trustee within thirty (30) days
thereafter. Nothing contained in this Section 4.20 shall amend
or modify the obligation of the Company to furnish to the
Trustee the annual Opinion of Counsel required under Section
10.02(c).
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(g) Any Bogen Sale Proceeds that are not withdrawn
for working capital needs and general corporate purposes or
invested in Replacement Collateral as required by this Section
4.20 within 18 months of the Bogen Sale shall constitute
"Excess Proceeds" subject to disposition as provided in
Section 4.12(b) (but without regard to the $10,000,000
threshold set forth therein).
4.21 Restrictions Pending License Reallocation.
Unless and until the Company has completed the
License Reallocation and the Trustee has received the
Officers' Certificate and opinion of counsel referred to in
Section 4.1.11 of the U.S. Pledge Agreement, the Company will
not, and will not permit any of its Subsidiaries to, (i) use
any Net Cash Proceeds from a Permitted Asset Sale or a
Permitted Foreign Asset Sale for the working capital needs and
general corporate purposes of the Company or any of its
Subsidiaries, except as permitted by Section 4.20, (ii) incur
or permit to exist any Indebtedness under Section 4.08(n) or
4.08(o) of the Indenture, or (iii) grant or permit to exist
any Lien under clause (k) of the definition of Permitted Liens
which, together with all other Liens granted or permitted to
exist under such clause, in the aggregate secure more than
$10,000,000 of Indebtedness.
4.22 Quarterly Compliance Certificate Regarding Custody
Account
The Company will deliver to the Trustee, within 15
days after the end of each fiscal quarter, a statement setting
forth the following information as of the end of such fiscal
quarter, in each case for the Custody Account as a whole and
for the amounts in the Custody Account derived from the Bogen
Sale, Permitted Foreign Asset Sales and Collateral Sales: (i)
the amount in the Custody Account, (ii) any additional Net
Cash Proceeds deposited in the Custody Account since the end
of the prior fiscal quarter, indicating the source of such Net
Cash Proceeds, (iii) any funds withdrawn from the Custody
Account and the use to which such funds were applied, (iv) the
total amounts withdrawn from the Custody Account to date for
working capital needs and general corporate purposes, (v) the
total amounts withdrawn from the Custody Account to date for
investment in Northeast Replacement Collateral and Other
Reinvestment Collateral, (vi) the total amounts withdrawn from
the Custody Account to date for use as Excess Proceeds, (vii)
the total amount
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of Working Capital Proceeds generated to date by all other
Permitted Asset Sales (the Net Cash Proceeds of which were not
deposited in the Custody Account), and (viii) the total amount
of Working Capital Proceeds generated to date by Indebtedness
incurred under Section 4.08(n).
8. Events of Default. Section 6.01 of the Indenture is hereby
amended to amend and restate clause (c) in its entirety to read as follows:
(c) a failure to perform or observe any other term,
covenant or agreement contained in the Securities, this
Indenture, the Custody Account Pledge Agreement or any of the
Pledge Agreements or Security Agreements (other than a default
specified in clause (a) or (b) above), which failure continues
for a period of 30 days after written notice thereof requiring
the Company to remedy the same shall have been given (i) to
the Company by the Trustee or (ii) to the Company and the
Trustee by Holders of at least 25% aggregate principal amount
of the Securities then outstanding; or
9. Release of Collateral. Section 10.03(a) of the Indenture is
hereby amended to amend and restate the proviso in the second sentence of such
Section as follows:
provided, that if such sale, conveyance or disposition
constitutes an Asset Sale, the Company shall apply the Net
Cash Proceeds in accordance with Sections 4.12 (Asset Sales
generally), 4.20 (the Bogen Sale) and 10.08 (Permitted Foreign
Asset Sales and Collateral Sales) and any such agreements, to
the extent applicable.
10. Permitted Foreign Asset Sales; Collateral Sales. Section
10.08 of the Indenture is hereby amended and restated in its entirety to read as
follows:
(a) The Company will not, and will not permit any of
its Subsidiaries to, make any Permitted Foreign Asset Sale or
any Collateral Sale unless the requirements of Section
4.12(a)(i) and (iii) and this Section 10.08 are satisfied.
(b) The Company or its Subsidiary, as the case may
be, shall apply the Net Cash Proceeds from a Permitted Foreign
Asset Sale as follows: (i) not less than 20% of such Net Cash
Proceeds shall constitute "Excess Proceeds" (the "Excess
Proceeds Share"), which the Company shall use within 30 days
after such Sale to make an Asset Sale Offer in accordance with
Section 4.12(b) (but
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without regard to the $10,000,000 threshold set forth
therein); (ii) within 18 months after such Sale, the Company
or such Subsidiary shall apply not less than 40% of such Net
Cash Proceeds (less the amount of any Bogen Sale Reinvestment
Credit) (the "Reinvestment Share") to purchase Northeast
Replacement Collateral, provided that the Company may use up
to $10,000,000 of the Reinvestment Share (less the amount of
any Bogen Sale Other Reinvestment Credit) for investment in
Other Replacement Collateral; and (iii) so long as no Default
or Event of Default has occurred and is continuing, the
Company or such Subsidiary may apply up to 40% of such Net
Cash Proceeds (plus the amount of any Bogen Sale Reinvestment
Credit) (the "Working Capital Share") to the working capital
needs and general corporate purposes of the Company and its
Subsidiaries; provided, however, that if the consideration for
a Permitted Foreign Asset Sale does not consist entirely of
cash and Cash Equivalents or the assumption of Assumed
Obligations, then (x) the Working Capital Share shall be
reduced (on a dollar-for-dollar basis, but not less than zero)
by the amount of the consideration which is not cash or Cash
Equivalents or Assumed Obligations, (y) the Excess Proceeds
Share shall be increased by one-third of the amount of such
reduction and the Reinvestment Share shall be increased by
two-thirds of the amount of such reduction, and (z) the amount
of the Reinvestment Share that would otherwise be available
for investment in Other Replacement Collateral under the
foregoing allocation shall be reduced by the percentage that
the noncash consideration bears to the total consideration for
such Sale. If within 18 months after a Permitted Foreign Asset
Sale, the Company has not invested the Reinvestment Share in
Replacement Collateral, the uninvested amount of the
Reinvestment Share shall constitute Excess Proceeds and shall
be used to make an Asset Sale Offer in accordance with Section
4.12(b) (but without regard to the $10,000,000 threshold set
forth therein). The Company shall cause any noncash proceeds
(including securities) from a Permitted Foreign Asset Sale to
immediately become subject to a first priority perfected Lien
in favor of the Trustee. If such noncash proceeds are
subsequently sold for cash, the Company may, so long as no
Default or Event of Default has occurred and is continuing,
apply the Net Cash Proceeds from such sale to the working
capital needs and general corporate purposes of the Company
and its Subsidiaries; provided, however, that the amount of
such Net Cash Proceeds that are
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<PAGE>
applied to working capital needs and general corporate
purposes, when taken together with all other Net Cash Proceeds
from the Permitted Foreign Asset Sale that are so applied,
shall not exceed the Working Capital Share that would have
resulted if all of the consideration from such Asset Sale had
been cash.
(c) The Company or its Subsidiary, as the case may
be, shall apply the Net Cash Proceeds from a Collateral Sale
(other than the Bogen Sale) to the purchase of Replacement
Collateral; provided, however, that if the Collateral Sale
involves any Collateral which is part of or used in connection
with any GEONET system located in the Northeast Licensed Area,
the Net Cash Proceeds therefrom shall be applied solely to the
purchase of Northeast Replacement Collateral; and provided
further, that if the Collateral Sale involves the sale of a
Northeast License as permitted by Section 10.08(e)(ii)(B), the
cash proceeds therefrom shall be applied solely to the
purchase of Licenses that will constitute Northeast
Replacement Collateral. Any Net Cash Proceeds from a
Collateral Sale that are not invested in Replacement
Collateral as required by this Section 10.08(c) within 18
months of such Sale shall constitute "Excess Proceeds" subject
to disposition as provided in Section 4.12(b) (but without
regard to the $10,000,000 threshold set forth therein). Except
for the use of the Bogen Sale Proceeds as permitted by Section
4.20, the Net Cash Proceeds from a Collateral Sale shall not
be used for the working capital needs and general corporate
purposes of the Company and its Subsidiaries. The Company
shall cause any noncash proceeds (including securities) from a
Collateral Sale to immediately become subject to a first
priority perfected Lien in favor of the Trustee.
Notwithstanding the foregoing, in the event of a sale of
Collateral which is subject to a Release Condition Senior Lien
(as defined in the U.S. Pledge Agreement), the application of
the proceeds of such sale pursuant to this Section 10.08(c)
shall be subject to the prior application of such proceeds to
any Indebtedness secured by such Release Condition Senior
Lien.
(d) Subject to the provisions of Section 10.08(e),
any Liens in favor of the Trustee on the assets (including
stock) sold in a Permitted Foreign Asset Sale or a Collateral
Sale will be released upon (i) the deposit of the Net Cash
Proceeds from such Sale in the Custody Account subject to a
first priority perfected Lien in
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favor of the Trustee, and (ii) the delivery to the Trustee of
an Officers' Certificate and opinion of independent counsel
that any noncash proceeds from such Sale are subject to a
first priority perfected Lien in favor of the Trustee. The Net
Cash Proceeds shall continue to be held in the Custody Account
until such Proceeds have been applied in the manner set forth
in Section 10.08(b) (in the case of a Permitted Foreign Asset
Sale) or Section 10.08(c) (in the case of a Collateral Sale).
So long as no Default or Event of Default has occurred and is
continuing, the Company may withdraw such Net Cash Proceeds
from the Custody Account upon its delivery to the Trustee and
the custodian of (A) an Officers' Certificate certifying (1)
the purpose for which the withdrawn funds will be used, (2)
the amount of the requested withdrawal, (3) in the case of
withdrawals for working capital needs and general corporate
purposes, the total amount of Working Capital Proceeds
previously withdrawn from the Custody Account and the amount
of available Working Capital Proceeds remaining in the Custody
Account (prior to the requested withdrawal), (4) in the case
of withdrawals for investment in Replacement Collateral, the
type of Collateral to be purchased, the locations where such
Collateral will be installed or used, and the fact that such
Replacement Collateral will meet the requirements of the
Indenture relating to Replacement Collateral, and (5) that no
Default or Event of Default has occurred and is continuing,
and (B) in the case of withdrawals for investment in
Replacement Collateral, an opinion of independent counsel that
such Replacement Collateral will be subject to a first
priority perfected Lien in favor of the Trustee under the
GEONET System Security Agreement or will be Licenses held by
the License Holding Company, all of the capital stock of which
is subject to a first priority perfected Lien in favor of the
Trustee under the U.S. Pledge Agreement; provided, however,
that no such opinion shall be required with respect to (A)
Northeast Replacement Collateral which will be installed in
jurisdictions (both state and local) containing Collateral
with respect to which an opinion of independent counsel was
previously furnished to the Trustee (provided that in such
case the next annual Opinion of Counsel furnished to the
Trustee under Section 10.02(c) shall expressly cover such
newly installed Northeast Replacement Collateral), or (B)
Other Replacement Collateral if the cost thereof, when added
to the cost of all other Other Replacement Collateral being
installed in the same state, does not exceed $1,000,000,
except that if
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Other Replacement Collateral will be installed in a state with
respect to which no opinion of independent counsel has been
previously furnished to the Trustee, such opinion of
independent counsel shall nevertheless be required if the cost
of such Other Replacement Collateral, when added to the cost
of all other Other Replacement Collateral being installed or
previously installed in such state, will exceed $1,000,000.
Nothing contained in this Section 10.08(d) shall amend or
modify the obligation of the Company to furnish to the Trustee
the annual Opinion of Counsel required under Section 10.02(c).
The funds in the Custody Account shall not be released except
pursuant to the withdrawal procedure set forth above (or in
Section 4.20) or until the obligations of the Company under
this Indenture and the Securities have been discharged.
(e) Notwithstanding any provision to the contrary
contained in this Indenture, the Securities, the Collateral
Arrangements or any other document, the Company will not, and
will not permit any of its Subsidiaries to, directly or
indirectly -
(i) sell, convey, transfer, lease or
otherwise dispose of any Collateral which constitutes part of
or is used in connection with any GEONET system located within
the Northeast Licensed Area, except (A) transactions in the
normal and ordinary course of business for value received, (B)
the disposition of obsolete assets, (C) the sale, trade-in or
other disposition of such Collateral in connection with
upgrades, enhancements or other modifications to such GEONET
systems, and (D) the sale, conveyance, transfer, lease or
other disposition of Collateral which is subject to a Release
Condition Senior Lien (as defined in the U.S. Pledge
Agreement); provided, however, that the proceeds of any sale,
conveyance, transfer, lease or other disposition of Collateral
pursuant to the exceptions in clauses (B), (C) and (D) above
shall be deposited in the Custody Account subject to Section
10.08(c) and (d); or
(ii) sell, convey, transfer, lease or
otherwise dispose of, or grant any rights or interest in, any
Northeast License, except (A) the transfer of a Releasable
License pursuant to a Permitted License Transfer thereof or
any sale, conveyance, transfer, lease or otherwise disposition
of, or grant of any rights or interest in, such Releasable
Licenses following a Permitted
18
<PAGE>
License Transfer thereof, and (B) the sale of a Northeast
License to a purchaser who is not an Affiliate of the Company
for consideration (which shall be not less than the Fair
Market Value of such Northeast License) consisting entirely of
cash and/or Licenses that will constitute Northeast
Replacement Collateral; provided, however, that the cash
proceeds of any sale of a Northeast License pursuant to the
exception in clause (B) above shall be deposited in the
Custody Account and shall be subject to Section 10.08(c) and
(d).
(f) The Company shall not withdraw any funds from the
Custody Account for the working capital needs and general
corporate purposes of the Company or any of its Subsidiaries
(except for withdrawals of the Bogen Sale Proceeds permitted
by Section 4.20) unless and until the expiration of 45 days
from the date of the FCC's order approving the License
Reallocation and the Trustee has received the Officers'
Certificate and opinion of counsel referred to in Section
4.1.11 of the U.S. Pledge Agreement. Thereafter, the Company's
withdrawals from the Custody Account for working capital needs
and general corporate purposes shall not exceed $12,000,000 in
any one month or $30,000,000 in any period of three
consecutive months.
11. Conditions Precedent. The amendment of the Indenture
pursuant to this First Amendment shall not be effective unless and until each of
the following conditions precedent have been satisfied:
(a) The Company shall have delivered the following
documents to the Trustee, in form satisfactory to the Trustee:
(i) This First Amendment, duly executed by
the Company;
(ii) The First Amendment to the U.S. Pledge
Agreement, duly executed by the Company, together with the stock certificates,
stock powers and any other documents required to be delivered by the Company
thereunder;
(iii) The GEONET System Security Agreement,
which shall be substantially in the form of Exhibit A hereto, duly
executed by the Company, Geotek USA and Geotek America, Inc. ("Geotek America"),
together with the UCC-1 financing statements and any other documents required to
be delivered by the Company, Geotek USA and Geotek America thereunder;
(iv) The Custody Account Pledge Agreement,
which shall be substantially in the form of Exhibit B hereto, duly
19
<PAGE>
executed by the Company and Geotek USA, together with an acknowledgment and
agreement of the custodian, in form and substance satisfactory to the Trustee,
and any other documents required to be delivered by the Company and Geotek USA
thereunder;
(v) A certified copy of resolutions of the
board of directors of the Company, Geotek USA and Geotek America authorizing
the execution, delivery and performance of this First Amendment, the First
Amendment to the Pledge Agreement, the GEONET System Security Agreement, the
Custody Account Pledge Agreement and any other documents required to be
delivered by the Company, Geotek USA and Geotek America hereunder or thereunder
(collectively, the "Amendment Documents");
(vi) A certificate of the corporate
secretary of the Company, Geotek USA, Geotek America and the License Holding
Company as to their charter documents and bylaws and (in the case of the
Company, Geotek USA and Geotek America) the incumbency and signatures of their
officers;
(vii) Certificates from the Secretaries of
State (or comparable officials) of Delaware, Maryland, Massachusetts, New
Jersey, New York, Pennsylvania, Virginia and the District of Columbia as to the
good standing of Geotek USA (in all such jurisdictions) and the Company, Geotek
America and the License Holding Company (in Delaware only); and
(viii) An opinion of independent counsel
to the Company with respect to such matters as may be requested by the Trustee
or by the Holder or Holders of at least 25% aggregate principal amount of the
Securities then outstanding, including without limitation the receipt of all
consents and taking of all actions required under, and the compliance with, the
Indenture and the TIA, the enforceability of the Amendment Documents, the
perfection and priority of the security interests granted to the Trustee under
the GEONET System Security Agreement and the Custody Account Pledge Agreement,
and related intellectual property and licensing issues.
(b) There shall not exist any Default or Event of
Default (as defined in the Indenture, as amended hereby).
(c) The Company shall have reimbursed the Trustee for
all fees and expenses (including reasonable legal fees) incurred by it in
connection with the Amendment Documents and the transactions contemplated
thereby.
12. Counterparts. This First Amendment may be signed in any
number of counterpart copies, each of which shall constitute an original, with
the same effect as if the signatures thereon and hereon were upon the same
instrument.
13. Governing Law. This First Amendment shall be construed, interpreted
and governed by the laws of the State of
20
<PAGE>
New York, without giving effect to the principles of conflicts of law.
14. No Other Amendments. Except as to the matters referred to
in this First Amendment, the Indenture shall remain in full force and effect in
accordance with its terms.
[SIGNATURE PAGES IMMEDIATELY FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the Company and the Trustee have executed this
First Amendment as of the day first written above.
GEOTEK COMMUNICATIONS, INC.
By:
------------------------------
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY,
as trustee
By: /s/ Stephen J. Giurlando
------------------------------
Name: Stephen J. Giurlando
Title: Assistant Vice President
/u1n/woodrf/ml.geotek.amendind.1226 21449/62674
20
<PAGE>
FIRST AMENDMENT
DATED AS OF DECEMBER 1, 1997
TO PLEDGE AGREEMENT
DATED AS OF JULY 6,1995
BETWEEN
GEOTEK COMMUNICATIONS, INC.
AND
IBJ SCHRODER BANK & TRUST COMPANY, AS COLLATERAL AGENT
FIRST AMENDMENT, dated as of December 1, 1997, between GEOTEK
COMMUNICATIONS, INC., a Delaware corporation ("Geotek" or the "Pledgor"), and
IBJ SCHRODER BANK & TRUST COMPANY, a banking company organized under the laws of
the State of New York, as collateral agent (the "Collateral Agent").
BACKGROUND:
The parties hereto entered into a Pledge Agreement as of July 6, 1995
(as amended to date, the "Pledge Agreement"), in connection with the Indenture,
dated as of June 30, 1995, between the parties hereto, which governs Geotek's
15% Senior Secured Discount Notes due 2005 (the "Securities"). Geotek and
holders of a majority of the outstanding aggregate principal amount of
Securities have agreed to amend certain provisions of the Pledge Agreement as
set forth herein.
Accordingly, the parties hereto agree as follows:
AGREEMENT:
1. Definitions. Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to such terms in the Pledge
Agreement.
2. Additional Pledged Securities. Schedule I to the Pledge
Agreement is hereby amended and restated as set forth in Schedule I to this
Agreement. Geotek shall deliver to the Collateral Agent the share certificates
evidencing all of the Capital Stock of Geotek U.S. Networks, Inc., duly endorsed
in blank or accompanied by proper instruments of assignment or transfer
(including without limitation undated stock powers executed in blank with
signatures appropriately guaranteed).
3. Amended Recital. The first Recital on page 1 of the Pledge
Agreement is hereby amended and restated in its entirety to read as follows:
A. Geotek and the Collateral Agent are parties to an
Indenture dated as of June 30, 1995
<PAGE>
(as the same may be amended, modified, extended or replaced
from time to time, the "Indenture").
4. New Definitions. Section 1.2 of the Pledge Agreement is
hereby amended to add the following new definitions in alphabetical order among
the existing definitions (and to delete the letters in parentheses preceding the
existing definitions):
"License Holding Company" means [Geotek U.S.
Networks, Inc.], a Delaware corporation which is a
Wholly-Owned Subsidiary of Geotek and is one of the Pledged
Companies.
"License Reallocation" means the transfer of the
Reallocated Licenses by Geotek or the Subsidiaries of Geotek
which own such Licenses to the License Holding Company.
"License Restriction" has the meaning set forth in
Section 4.1.15.
"Northeast Licensed Area" means the geographic area
covered by the Northeast Licenses.
"Northeast Licenses" means the Licenses listed in
Schedule V hereto and any other License constituting Northeast
Replacement Collateral.
"Permitted License Transfer" means the transfer of
any Releasable License by the License Holding Company to
Geotek or another Subsidiary of Geotek, provided that each of
the applicable Release Conditions have been satisfied.
"Reallocated Licenses" means the Licenses listed in
Schedule II hereto.
"Releasable Licenses" means the Licenses listed in
Schedules III-(i) and III-(ii) hereto.
"Release Condition Senior Lien" means a lien senior
to the third priority lien or second priority lien granted to
the Collateral Agent under the Release Condition set forth in
clause (i)(B)(2) or (ii)(C), respectively, of the definition
thereof; provided, however, that such senior lien shall not
cover any Collateral other than the Capital Stock or
Releasable License specified in such clauses of the definition
of Release Condition.
"Release Conditions" means (i) with respect to a
Permitted License Transfer of any of the Releasable Licenses
listed in Schedule III-(i) hereto, (A) as of the date of such
Transfer,
2
<PAGE>
Geotek and its Subsidiaries that are organized under
the laws of any state of the United States or the District of
Columbia and do business in the United States (the "Domestic
Geotek Subsidiaries") shall have not less than 100,000
Qualified GEONET Subscribers in the aggregate, or (B)(1) as of
the date of such Transfer, Geotek and the Domestic Geotek
Subsidiaries shall have not less than 50,000 Qualified GEONET
Subscribers in the aggregate and (2) Geotek shall have caused
Geotek Financing Corporation to enter into a Pledge Agreement
granting to the Collateral Agent for the benefit of the
holders of the Securities a third priority lien on the Capital
Stock of Geotek License Holdings, Inc., which is pledged to
Hughes Network Systems, Inc. ("HNS"), subject only to the
existing liens in favor of HNS under the Amended and Restated
Borrower Pledge Agreement dated September 27, 1996, between
Geotek Financing Corporation and HNS, and shall have provided
to the Collateral Agent an opinion of independent counsel
regarding the perfection and priority of such lien, which
opinion shall be in form and substance reasonably satisfactory
to the Collateral Agent; provided, however, that the Release
Conditions under this clause (i)(B) shall only be effective if
the Licenses listed on Schedule IV hereto are then owned by
Geotek License Holdings, Inc.; and (ii) with respect to a
Permitted License Transfer of any of the Releasable Licenses
listed in Schedule III-(ii) hereto, (A) as of the date of such
Transfer, Geotek and the Domestic Geotek Subsidiaries shall
have not less than 30,000 Qualified GEONET Subscribers in the
aggregate, (B) following such Transfer, such Releasable
Licenses will be utilized to secure (whether by a pledge of
the Capital Stock of the holder of such Releasable Licenses or
a pledge of such Releasable Licenses) Indebtedness permitted
to be incurred under the Indenture, and (C) Geotek shall have
entered into a Pledge Agreement or Security Agreement granting
to the Collateral Agent for the benefit of the holders of the
Securities a second priority lien on the Capital Stock of the
holder of such Releasable Licenses or on such Releasable
Licenses, as the case may be, subject only to the pledge
referred to in clause (ii)(B) above, and shall have provided
to the Collateral Agent an opinion of independent counsel
regarding the perfection and priority of such lien, which
opinion shall be in form and substance reasonably satisfactory
to the Collateral Agent; and (iii) with respect to a Permitted
License Transfer of
3
<PAGE>
any Releasable License, no Default or Event of Default
shall have occurred and is continuing.
5. Amended Definitions.
(a) Clause (i) of the definition of "Permitted
Pledge Agreement Indebtedness" in Section 1.2 of the Pledge Agreement is hereby
amended and restated in its entirety to read as follows:
(i) Indebtedness permitted to be incurred pursuant to
clauses (b), (c), (e), (f), (g), (h) and (p) of the second
paragraph of Section 4.08 of the Indenture entitled
"Limitation on Indebtedness";
(b) The definition of "Permitted Pledge Agreement
Liens" in Section 1.2 of the Pledge Agreement is hereby amended to add, after
clause (iv) thereof, "and (v) Release Condition Senior Liens."
(c) The definition of "Pledged Companies" in Section
1.2 of the Pledge Agreement is hereby amended to add, after clause (f) thereof,
"and (g) Geotek U.S. Networks, Inc."
(d) The definition of "Qualified GEONET Subscriber"
in Section 1.2 of the Pledge Agreement is hereby amended and restated in its
entirety to read as follows:
"Qualified GEONET Subscriber" means a user of GEONET
services who has generated at least $28.00 in monthly billings
for the two most recently completed consecutive billing months
and who has paid at least one of such monthly billings.
6. Permitted Prior Liens. Section 3.3 of the Pledge Agreement
is hereby amended to add, at the end of such Section, "or the Release Condition
Senior Liens."
7. No Pari Passu Liens. Section 4.1.2 of the Pledge Agreement
is hereby amended to delete the last sentence thereof.
8. Additional Subsidiary Pledges. Sections 4.1.10(a) and (b)
of the Pledge Agreement are hereby amended and restated in their entirety to
read as follows:
(a) The sale, transfer or other disposition of any
Pledged Collateral or any property or assets of any Pledged
Company shall be subject to Section 4.1.12, 4.1.13 and 4.1.14
of this Agreement and Sections 4.12 and 10.08 of the
Indenture.
(b) [Intentionally deleted]
4
<PAGE>
9. Covenants. The Pledge Agreement is hereby amended to add
the following Sections after Section 4.1.10:
4.1.11 License Reallocation. Geotek and its
Subsidiaries will promptly and diligently take the steps
necessary to carry out the License Reallocation, and shall
complete the License Reallocation on or before April 30, 1998.
Upon the completion of the License Reallocation, Geotek will
deliver to the Collateral Agent an Officers' Certificate and
an opinion of independent counsel to Geotek to the effect that
(a) the Reallocated Licenses are valid and in full force and
effect for their specified terms, (b) there are no pending or
(to the best of such counsel's knowledge) threatened
proceedings before the FCC relating to the Pledged Companies
or any of the Reallocated Licenses, (c) the License Holding
Company owns the Reallocated Licenses free and clear of any
encumbrances or restrictions, except those listed on Schedule
II hereto, (d) the License Reallocation has been approved by a
final order of the FCC, and no other order, approval,
authorization or consent of, or filing or registration with,
any other person (as defined in the Indenture) is necessary or
required in connection with the License Reallocation, and (e)
the Collateral Agent has a first priority perfected security
interest, for the benefit of the holders of the Securities, in
all of the issued and outstanding capital stock of the License
Holding Company and Geotek USA.
4.1.12 Prohibitions Pending License Reallocation.
Unless and until Geotek has completed the License Reallocation
and the Trustee has received the Officers' Certificate and
opinion of counsel referred to in Section 4.1.11 hereof,
Geotek will not, and will not permit any of its Subsidiaries
to, (i) use any Net Cash Proceeds from any Asset Sale for the
working capital needs and general corporate purposes of Geotek
or any of its Subsidiaries, except for the use of the Bogen
Sale Proceeds to the extent permitted by Section 4.20 of the
Indenture, or (ii) make a Permitted License Transfer.
4.1.13 No Sales or Encumbrances. Notwithstanding any
provision to the contrary contained in this Agreement
(including without limitation Sections 4.1.10 and 7.14) or in
the Indenture or any other document, Geotek will not (a) sell,
transfer or otherwise dispose of, or grant any rights or
interest in, any Capital Stock of the License Holding Company
or Geotek USA or
5
<PAGE>
permit either of such Pledged Companies to issue or have
outstanding any Capital Stock other than Pledged Securities,
or (b) create, incur, permit to exist, pledge or grant a
security interest in or lien (including without limitation
Permitted Pledge Agreement Liens) on any of the Capital Stock
of the License Holding Company or Geotek USA, except in favor
of the Collateral Agent.
4.1.14 Restrictions on License Holding Company.
Notwithstanding any provision to the contrary contained in
this Agreement (including without limitation Sections 4.1.10
and 7.14) or in the Indenture or any other document, Geotek
will not permit the License Holding Company to (a) create,
incur, issue, assume, Guarantee or in any manner become
directly or indirectly liable (contingently or otherwise) for
any Indebtedness (including without limitation Permitted
Pledge Agreement Indebtedness), other than guarantees with
respect to the Securities, (b) own or acquire any material
assets or properties other than the Reallocated Licenses or
other Licenses used in connection with the GEONET systems, (c)
create, incur, permit to exist, pledge or grant a security
interest in or lien (including without limitation Permitted
Pledge Agreement Liens) on any of the Reallocated Licenses,
except for a Release Condition Senior Lien on a Releasable
License following a Permitted License Transfer thereof, (d)
transact any business or engage in any activities other than
holding the Reallocated Licenses and activities that are
necessary or incidental thereto, or (e) sell, convey,
transfer, lease or otherwise dispose of, or grant any rights
or interest in, any Northeast License, except as permitted by
Section 10.08(e)(ii) of the Indenture.
4.1.15 License Restrictions. In the event that Geotek
at any time becomes aware of any encumbrance or restriction
(operational or otherwise) imposed on any Reallocated License
by any 900 MHz Designated Frequency Area Specialized Mobile
Radio License held by any person (a "License Restriction"),
other than the License Restrictions described on Schedule II
attached hereto, Geotek shall use all commercially reasonable
best efforts to cause the removal of such License Restriction
as soon as practicable after its discovery thereof. If,
despite such commercially reasonable best efforts, Geotek is
unable to cause the removal of any such License Restriction,
Geotek shall take all actions necessary to provide the
Collateral Agent with
6
<PAGE>
additional tangible or intangible assets having a Fair Market
Value equivalent to the diminution of the Fair Market Value
of the restricted Licenses caused by such License Restriction.
10. Release of Collateral. The penultimate paragraph of
Section 7.14 of the Pledge Agreement is hereby amended and restated in its
entirety to read as follows, and the last paragraph of Section 7.14 of the
Pledge Agreement is deleted:
In addition, in the event that any Pledged Collateral
is sold or transferred in a transaction permitted by this
Agreement and the Indenture, the Collateral Agent shall
release the Liens in favor of the Collateral Agent in the
Pledged Collateral so sold or transferred on the terms and
conditions set forth in Section 10.08 of the Indenture.
11. Conditions Precedent. The amendment of the Pledge
Agreement pursuant to this First Amendment shall not be effective unless and
until the First Amendment to the Indenture has been executed and delivered by
Geotek and the Trustee and each of the conditions precedent to the effectiveness
thereof have been satisfied.
12. Counterparts. This First Amendment may be signed in any
number of counterpart copies, each of which shall constitute an original, with
the same effect as if the signatures thereon and hereon were upon the same
instrument.
13. Governing Law. This First Amendment shall be construed, interpreted
and governed by the laws of the State of New York, without giving effect to the
principles of conflicts of law.
14. No Other Amendments. Except as to the matters referred to
in this First Amendment, the Pledge Agreement shall remain in full force and
effect in accordance with its terms.
7
<PAGE>
IN WITNESS WHEREOF, the Pledgor and the Collateral Agent have executed
this First Amendment as of the date first written above.
GEOTEK COMMUNICATIONS, INC.
By: /s/
---------------------------
Name:
Title:
IBJ SCHRODER BANK & TRUST COMPANY,
as collateral agent
By:/s/
---------------------------
Name: Stephen J. Giurlando
Title: Assistant Vice President
8
<PAGE>
================================================================================
GEONET SYSTEM SECURITY AGREEMENT
Dated as of December 1, 1997
among
GEOTEK COMMUNICATIONS, INC. and
GEOTEK USA, INC.
and
IBJ SCHRODER BANK & TRUST COMPANY,
as Collateral Agent
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1. DEFINITIONS.................................................................................. 2
1.1 Defined Terms................................................................................ 2
1.2 UCC Definitions.............................................................................. 9
ARTICLE 2. SECURITY INTERESTS........................................................................... 10
2.1 Grant of Security Interests.................................................................. 10
2.2 Continuing Liability of the Company.......................................................... 11
2.3 Sales and Collections........................................................................ 12
2.4 Release of Collateral........................................................................ 12
2.5 Certain Assurances Regarding Subsidiaries and Collateral..................................... 14
2.6 Consents Regarding Licenses and Leases....................................................... 15
ARTICLE 3. REPRESENTATIONS AND WARRANTIES............................................................... 16
3.1 Validity of Security Agreement; Consents..................................................... 16
3.2 Title to Collateral.......................................................................... 17
3.3 Validity, Perfection and Priority of Security Interests...................................... 18
3.4 Enforceability of Intangibles................................................................ 19
3.5 Place of Business; Location of Collateral.................................................... 20
3.6 Trade Names.................................................................................. 20
3.7 Patents and Trademarks....................................................................... 21
ARTICLE 4. COVENANTS.................................................................................... 21
4.1 Perfection of Security Interests............................................................. 21
4.2 Further Actions.............................................................................. 21
4.3 Change of Name, Identity or Structure........................................................ 24
4.4 Place of Business and Collateral............................................................. 25
4.5 Fixtures..................................................................................... 25
4.6 Maintenance of Records....................................................................... 26
4.7 Compliance with Laws, etc.................................................................... 27
4.8 Payment of Taxes, etc........................................................................ 27
4.9 Compliance with Terms of Accounts, Contracts and Licenses.................................... 28
4.10 Limitation on Liens on Collateral............................................................ 28
4.11 Limitations on Modifications of Intangibles; No Waivers or Extensions........................ 28
4.12 Maintenance of Insurance..................................................................... 29
4.13 Limitations on Dispositions of Collateral.................................................... 30
4.14 Further Identification of Collateral......................................................... 30
4.15 Notices...................................................................................... 30
4.16 Right of Inspection.......................................................................... 31
4.17 Maintenance of Equipment..................................................................... 31
4.18 Covenants Regarding Patent and Trademark Collateral.......................................... 32
4.19 Reimbursement Obligation..................................................................... 34
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE 5. REMEDIES; RIGHTS UPON DEFAULT................................................................ 35
5.1 UCC Rights................................................................................... 35
5.2 Payments on Collateral....................................................................... 36
5.3 Possession of Collateral..................................................................... 37
5.4 Sale of Collateral........................................................................... 37
5.5 Rights of Purchasers......................................................................... 39
5.6 Intellectual Property........................................................................ 40
5.7 Additional Rights of the Collateral Agent.................................................... 41
5.8 Remedies Not Exclusive....................................................................... 42
5.9 Waiver and Estoppel.......................................................................... 43
5.10 Power of Attorney............................................................................ 44
5.11 Application of Proceeds...................................................................... 47
ARTICLE 6. MISCELLANEOUS................................................................................ 47
6.1 Notices...................................................................................... 47
6.2 No Waivers................................................................................... 48
6.3 Compensation and Expenses of the Collateral Agent............................................ 48
6.4 Indemnification.............................................................................. 49
6.5 Amendments, Supplements and Waivers.......................................................... 50
6.6 Successors and Assigns....................................................................... 50
6.7 Limitation of Law; Severability.............................................................. 51
6.8 Governing Law................................................................................ 52
6.9 Counterparts; Effectiveness.................................................................. 52
6.10 Termination; Survival........................................................................ 52
6.11 Entire Agreement............................................................................. 52
6.12 Controlling Terms............................................................................ 53
</TABLE>
ii
<PAGE>
GEONET SYSTEM SECURITY AGREEMENT
This GEONET SYSTEM SECURITY AGREEMENT dated as of December 1, 1997, by
and between GEOTEK COMMUNICATIONS, INC., a Delaware corporation ("Geotek"),
GEOTEK USA, INC., a Delaware corporation ("Geotek USA"), and GEOTEK AMERICA,
INC., a Delaware corporation ("Geotek America"), together with any other
Subsidiaries of Geotek listed on the attached Schedule 1, as such Schedule may
be amended from time to time (jointly and severally, individually and
collectively, the "Company"), and IBJ SCHRODER BANK AND TRUST COMPANY, a New
York banking corporation, and its successors or nominees, as collateral agent
(the "Collateral Agent").
W I T N E S S E T H :
WHEREAS, Geotek and the Collateral Agent are parties to a First
Amendment dated as of December 1, 1997 (hereinafter, the "First Amendment") to
the Indenture dated as of June 30, 1995, as supplemented, between Geotek
Communications, Inc. and IBJ Schroder Bank & Trust Company, as Trustee (such
Indenture, as amended by the First Amendment, and as it may hereafter be
amended, replaced, extended or otherwise modified from time to time hereinafter,
the "Indenture"); and
WHEREAS, in consideration of the benefits to be realized by the Company
under the First Amendment, the Company has agreed to enter into this Security
Agreement to grant to the Collateral Agent, for the benefit of the holders of
the Securities, a security interest in the Collateral referred to herein; and
WHEREAS, it is a condition precedent to the effectiveness of the First
Amendment that the Company shall have granted to the Collateral Agent a
perfected first priority security interest in the Collateral covered by this
Security Agreement.
NOW, THEREFORE, for good and valuable consideration received by the
Company, the receipt and sufficiency of which is hereby acknowledged, and in
order to induce the Collateral Agent to enter into the First Amendment, the
parties, intending to be legally bound, hereby agree as follows:
ARTICLE 1. DEFINITIONS
1.1 Defined Terms.
Capitalized terms used in this Security Agreement without definition
have the meanings ascribed to them in the Indenture, and the following terms
shall have the following meanings:
<PAGE>
"Collateral" has the meaning specified in Section 2.1 hereof.
"Equipment" means all equipment now owned or hereafter acquired by the
Company, or any of them, or any Subsidiary, wherever located, including all
items of machinery, equipment, furnishings and fixtures of every kind (exclusive
of furniture and fixtures at the Company's corporate headquarters), whether
affixed to real property or not, and all handling and delivery equipment,
computers, computer upgrades and other data-processing equipment and all other
office equipment, including without limitation, to the extent it does not
constitute inventory, all software, telephone systems, shelters and antennae,
test equipment, tooling and machinery, demo equipment, FHMA equipment, FHMA
Common, FHMA Sector, UPS, PBX, IMACS & Router, DSX, Echo Canceler, Port Manager,
Protek, TSS & TVSS, generators, DACF and any and all additions to, substitutions
for, replacements of or accessions to any of the foregoing, together with all
attachments, components, parts (including spare parts) and accessories whether
installed thereon or affixed thereto. In addition, each item of Equipment shall
be deemed to include such rights and licenses as (i) are reasonably required to
use such item of Equipment in the manner and for the purposes intended by the
manufacturer thereof, and (ii) the manufacturer of the foregoing, by agreement
or operation of law, may have granted to the Company, or any of them, or any
Subsidiary.
"FCC Licenses" means Licenses (as that term is defined in the
Indenture).
"Intangibles" means all contract rights and general intangibles now
owned or hereafter acquired by the Company, or any of them, or any Subsidiary,
including, without limitation, all customer lists, permits, Trademarks, Patents,
Licenses, copyrights and other rights in intellectual property (including
without limitation, rights in technology and computer software), other than
accounts receivables; provided, however, that an Intangible shall only
constitute Collateral if it is used by the Company primarily in connection with
the Northeast Licensed Area or is listed on the attached Schedule 2, as such
Schedule may be amended from time to time. If an Intangible used in connection
with the Northeast Licensed Area does not constitute Collateral, such Intangible
shall be subject to the Company's obligations under Section 5.6 hereof.
"Leases" means all contracts and agreements, whether now existing or
hereafter entered into, pursuant to which the Company, or any of them, or any
Subsidiary, leases or otherwise occupies or uses property (whether realty or
personalty) as lessee, together with all rights and interests of the lessee
thereunder.
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"License" means, with respect to any patent, any agreement granting any
right to practice any invention covered by any patent and, with respect to any
trademark, any agreement granting any right to use any trademark, and any other
license of intellectual property (including, without limitation, licenses of
technology and computer software); provided, however, that a License shall only
constitute Collateral if (i) such License is used by the Company primarily in
connection with the Northeast Licensed Area or is listed on the attached
Schedule 2, as such Schedule may be amended from time to time, and (ii) the
applicable license agreement does not preclude the Company, or any of them, from
assigning its rights in such License to the Collateral Agent and its assigns, or
the licensor under such License consents to such assignment. If a License used
in connection with the Northeast Licensed Area does not constitute Collateral,
such License shall be subject to the Company's obligations under Section 5.6
hereof.
"Obligations" means (a) all amounts now or hereafter payable by the
Company, or any of them, or any Subsidiary, to the Securityholders in respect of
the Securities and pursuant to the Indenture, (b) all other obligations or
liabilities now or hereafter payable by the Company, or any of them, or any
Subsidiary, pursuant to the Indenture, (c) all obligations and liabilities now
or hereafter payable by the Company, or any of them, or any Subsidiary, under,
arising out of or in connection with this Security Agreement, the Indenture, the
U.S. Pledge Agreement, the Custody Account Pledge Agreement or any other
document, and (d) all other indebtedness, obligations and liabilities of the
Company, or any of them, or any Subsidiary, to the Securityholders or to the
Collateral Agent for the benefit of the Securityholders arising under the
Indenture, now existing or hereafter arising or incurred, whether or not
evidenced by notes or other instruments, and whether such indebtedness,
obligations and liabilities are direct or indirect, fixed or contingent,
liquidated or unliquidated, due or to become due, secured or unsecured, joint,
several or joint and several. Notwithstanding the foregoing, Obligations shall
not include any indebtedness, debts, obligations, agreements, liabilities,
covenants and performance of Geotek under, arising out of or in connection with
(i) the Warrant Agreement dated as of June 30, 1995 by and between Geotek and
IBJ Schroder Bank & Trust Company, as warrant agent, or the Warrants issued
pursuant thereto, (ii) the Registration Rights Agreement, or (ii) the Warrant
Share Registration Rights Agreement dated as of June 30, 1995 by and between
Geotek and the Initial Purchaser.
"Patent" means any and all letters patent of the United States or any
other country, and all applications for letters patent pending in the United
States or any other country, and all reissues, continuations,
continuations-in-part or extensions thereof, which the Company, or any of them,
or any Subsidiary,
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may now or hereafter own; provided, however, that a Patent shall only constitute
Collateral if it is used by the Company primarily in connection with the
Northeast Licensed Area or is listed on the attached Schedule 2, as such
Schedule may be amended from time to time. If a Patent used in connection with
the Northeast Licensed Area does not constitute Collateral, such Patent shall be
subject to the Company's obligations under Section 5.6 hereof.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, charitable
foundation, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"PowerSpectrum Subsidiaries" means PowerSpectrum of Boston, Inc.,
PowerSpectrum of New York, Inc., PowerSpectrum of Philadelphia, Inc. and
PowerSpectrum of Washington, Inc., each of which is a Delaware corporation and a
wholly-owned Subsidiary of Geotek USA.
"Proceeds" means all proceeds, including (a) whatever is received upon
any collection, exchange, sale or other disposition of any of the Collateral and
any property into which any of the Collateral is converted, whether cash or
noncash, (b) any and all payments or other property (in any form whatsoever)
made or due and payable on account of any insurance, indemnity, warranty or
guaranty payable to the Company, or any of them, or any Subsidiary, with respect
to any of the Collateral, (c) any and all payments (in any form whatsoever) made
or due and payable in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
governmental body, authority, bureau or agency (or any person, corporation,
agency, authority or other entity acting under color of any governmental
authority), (d) any claim of the Company, or any of them, or any Subsidiary,
against third parties for past, present or future infringement of any Patent
constituting a Qualifying Asset or for past, present or future infringement or
dilution of any Trademark constituting a Qualifying Asset or for injury to the
goodwill associated with any such Trademark or for the breach of any License and
(e) any and all other amounts from time to time paid or payable in consideration
for any of the Collateral.
"Qualifying Asset" means any asset (including without limitation all
property interests and other rights) whatsoever of the Company, or any of them,
or any Subsidiary, whether now existing or hereafter acquired, which either (i)
constitutes part of or is used in connection with or otherwise relates to the
Northeast Licensed Area or any FCC License related thereto, or (ii) is acquired
(either by purchase or lease) or paid for by the Company, or any of them, or any
Subsidiary, pursuant to Geotek's obligations to acquire or pay for Replacement
Collateral under
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Section 4.20 or 10.08 of the Indenture, including without limitation any asset
listed on the attached Schedule 2 as such Schedule may be amended from time to
time in accordance with the terms of this Security Agreement, the Indenture, the
U.S. Pledge Agreement or any other document, or by mutual agreement of the
parties.
"Real Estate" means all real property and all buildings, plants,
furnishing or fixtures or other improvements to or construction on real property
now owned or hereafter acquired by the Company, or any of them, or any
Subsidiary, and all leasehold interests now owned or hereafter acquired by the
Company, or any of them, or any Subsidiary, in real property, including without
limitation, shelters and antennae, DACF and generators.
"Security Agreement" means this GEONET System Security Agreement, as
the same may from time to time be amended, modified or supplemented and shall
refer to this Security Agreement as in effect on the date such reference becomes
operative.
"Trademark" means all right, title or interest which the Company, or
any of them, or any Subsidiary, may now or hereafter have in any or all
trademarks, trade names, corporate names, company names, business names,
fictitious business names, trade styles, service marks, logos, other source of
business identifiers, prints and labels on which any of the foregoing have
appeared or appear, designs and general intangibles of like nature, now existing
or hereafter adopted or acquired, all registration and recordings thereof and
all applications in connection therewith, including without limitation,
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or political subdivision thereof and all
reissues, extensions or renewals thereof; provided, however, that a Trademark
shall only constitute Collateral if it is used by the Company primarily in
connection with the Northeast Licensed Area or is listed on the attached
Schedule 2, as such Schedule may be amended from time to time. If a Trademark
used in connection with the Northeast Licensed Area does not constitute
Collateral, such Trademark shall be subject to the Company's obligations under
Section 5.6 hereof.
"UCC" means at any time the Uniform Commercial Code as the same may
from time to time be in effect in the State of New York, provided that, if, by
reason of mandatory provisions of law, the validity or perfection of any
security interest granted herein is governed by the Uniform Commercial Code as
in effect in a jurisdiction other than New York then, as to the validity or
perfection of such security interest, "UCC" shall mean the Uniform Commercial
Code in effect in such other jurisdiction.
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1.2 UCC Definitions.
The uncapitalized terms "account," "account debtor," "chattel paper,"
"contract right," "document," "warehouse receipt," "bill of lading," "document
of title," "instrument," "inventory," "equipment," "general intangible,"
"fixture," "money," "proceeds" and "purchase money security interest" as used in
Section 1.1 or elsewhere in this Security Agreement have the meanings of such
terms as defined in the UCC.
ARTICLE 2. SECURITY INTERESTS
2.1 Grant of Security Interests.
To secure the full and punctual payment of all Obligations, and in
order to induce the Collateral Agent to enter into the First Amendment and any
other related amendments and agreements, the Company hereby collaterally assigns
to the Collateral Agent for the benefit of the Securityholders, and grants to
the Collateral Agent a security interest in, all right, title and interest of
the Company, or any of them, or any Subsidiary, in, to and under the following
assets, whether now existing or hereafter acquired, to the extent and only to
the extent any such asset is a Qualifying Asset (all of which are herein
collectively referred to as the "Collateral"):
(a) all Intangibles;
(b) all Equipment;
(c) all Leases;
(d) to the extent not included in the foregoing, all
books, ledgers and records and all computer programs, tapes, discs,
punch cards, data processing software, transaction files, master files
and related property and rights (including computer and peripheral
equipment) necessary or helpful in enforcing, identifying or
establishing any item of Collateral (subject to Section 5.3 hereof);
and
(e) to the extent not otherwise included, all Proceeds and
products of any or all of the foregoing, whether existing on the date
hereof or arising hereafter.
2.2 Continuing Liability of the Company.
Anything herein to the contrary notwithstanding, the Company shall
remain liable to observe and perform all the terms and conditions to be observed
and performed by it under any contract,
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lease, agreement, warranty or other obligation with respect to the Collateral,
and shall do nothing to impair the security interests herein granted. The
Collateral Agent shall not have any obligation or liability under any such
contract, agreement, warranty or obligation by reason of or arising out of this
Security Agreement or the receipt by the Collateral Agent of any payment
relating to any Collateral, nor shall the Collateral Agent be required to
perform or fulfill any of the obligations of the Company with respect to the
Collateral, to make any inquiry as to the nature or sufficiency of any payment
received by it or the sufficiency of the performance of any party's obligations
with respect to any Collateral. Furthermore, the Collateral Agent shall not be
required to file any claim or demand to collect any amount due or to enforce the
performance of any party's obligations with respect to, the Collateral.
2.3 Sales and Collections.
Except as expressly provided in the Indenture, the
Company will not, and will not permit any of its or their Subsidiaries to,
directly or indirectly sell, convey, transfer, lease or otherwise dispose of any
Collateral.
2.4 Release of Collateral.
Upon the final indefeasible payment in full in cash and performance of
the Obligations, this Agreement and the covenants contained herein shall
terminate (except for Sections 4.19, 6.3 and 6.4 hereof) and the Collateral
shall be released by the Collateral Agent to the Company and the Collateral
Agent shall have no further security interest in the Collateral. In addition,
this Agreement shall terminate (except for the Sections 4.19, 6.3 and 6.4
hereof) and the Collateral shall be released upon the prior written consent of
the holders of at least 66 2/3% of the aggregate principal amount of the
Securities then outstanding (the "Requisite Vote") pursuant to a request (a
"Collateral Release Request") made by the Company to the holders. In the event
that the Company does not receive the Requisite Vote pursuant to any such
Collateral Release Request, the Company may, at its option, within five business
days after the latest date on which such consents are required to be delivered
to the Company pursuant to the terms of the Collateral Release Request, make an
offer to purchase (a "Collateral Release Repurchase Offer") all of the
outstanding Securities at a purchase price of 101.5% of the Accreted Value
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
Upon the consummation of such Collateral Release Repurchase Offer, this
Agreement automatically shall terminate and the Collateral shall be released. If
the Company shall at any time make a Collateral Release Request, the Company
shall pay to the voting holders an amount in cash equal to .50% of the Accreted
Value on such date as provided in the Indenture. Any Collateral Release Request
shall be made as
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provided in the Indenture. Upon such termination, the Collateral Agent shall
promptly reassign and redeliver (or cause to be reassigned and redelivered) to
the Company, or to such person or persons as the Company shall designate or to
whomever may be lawfully entitled to receive such surplus, against receipt, such
of the Collateral (if any) as shall not have been sold or otherwise applied by
the Collateral Agent pursuant to the terms hereof and shall still be held by it
hereunder, together with appropriate instruments of reassignment and release.
Any such reassignment shall be without recourse upon or warranty by the
Collateral Agent (other than a warranty that the Collateral Agent has not
assigned or delivered the Collateral so reassigned and redelivered its rights
and interests hereunder to any other person) and at the expense of the Company.
Upon final indefeasible payment in full in cash and performance of the
Obligations, the Collateral Agent will (as soon as reasonably practicable after
receipt of notice from the Company requesting the same but at the expense of the
Company) send the Company, for each jurisdiction in which a UCC financing
statement is on file to perfect the security interests granted to the Collateral
Agent hereunder, a termination statement.
2.5 Certain Assurances Regarding Subsidiaries and Collateral.
In the event that it is at any time or from time to time determined
that any Subsidiary has any right, title or interest in any asset which, if
owned by Company, or any of them, would be Collateral hereunder, or if the
Company, or any of them, acquires any right, title or interest in any asset
which constitutes Collateral but which is not adequately described or included
in this Security Agreement or any applicable financing statement in the
necessary manner to grant to the Collateral Agent a valid first priority
perfected security interest in such asset, then, without notice or demand from
the Collateral Agent, the Company shall immediately furnish written notice of
such fact to the Collateral Agent and the Company shall immediately take all
necessary and appropriate action, and Company shall cause any and all such
Subsidiaries to immediately take all necessary and appropriate actions
(including without limitation, execution of or joinder to this Security
Agreement), (i) to grant to the Collateral Agent for the benefit of the
Securityholders a first priority perfected lien in such assets in accordance
with the provisions of this Security Agreement, and (ii) to bind any and all
such Subsidiaries to all of the provisions of this Security Agreement without
exception.
2.6 Consents Regarding Licenses and Leases.
To the extent that Company's right to assign to the
Collateral Agent, and to grant it a security interest in, any Licenses or Leases
is conditioned upon any third party's consent, Company shall use its
commercially reasonable efforts to expeditiously procure such
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consent; provided, however, that, unless an Event of Default shall have occurred
and be continuing, the Company shall have no obligation to comply with this
Section 2.6 with respect to (i) any Leases existing as of December 15, 1997, and
(ii) any agreements between the Company and its Subsidiaries and Raphael
Armaments Development Agency.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants that:
3.1 Validity of Security Agreement; Consents.
(a) The execution, delivery and performance of this
Security Agreement by the Company and the creation of the security interests
provided for herein (i) are within Company's (and each of their) corporate
power, (ii) have been duly authorized by all necessary corporate action,
including the consent of shareholders where required, on behalf of the Company,
and each of them, and (iii) are not in contravention of any provision of the
Company's (or any of their) articles of incorporation or bylaws.
(b) The execution, delivery and performance of this
Security Agreement by the Company, the creation of the security interests
provided for herein, and the exercise and enforcement by the Collateral Agent
(including its successors and assigns) of its rights and remedies hereunder upon
the occurrence of an Event of Default, including without limitation the
possession, use and operation of the Collateral by the Collateral Agent and the
sale of the Collateral in whole or in part by the Collateral Agent to a third
party, (i) do not and would not violate any law or regulation or any order or
decree of any court or governmental instrumentality currently applicable to the
Company, or any of them, except to the extent that FCC Licenses may be needed to
use and operate the Collateral, (ii) do not and would not conflict with or
result in a breach of, or constitute a default under, any indenture, mortgage,
deed of trust, license agreement, lease, or other agreement or instrument to
which the Company, or any of them, is a party or by which it or any of its
properties is bound, except for any such conflicts, breaches or defaults which
would not in the aggregate have a material adverse effect on the business,
assets, operations or financial condition of the Company or the value of the
Collateral or the ability of the Collateral Agent or any purchaser of the
Collateral to own, operate, use, sell or otherwise transfer the Collateral,
(iii) do not and would not result in the creation or imposition of any Lien upon
any property of the Company, or any of them, other than in favor of the
Collateral Agent, and (iv) do not and would not require the consent or approval
of any governmental authority or other person other than those that have been
obtained, except
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that (A) the transfer of the FCC Licenses needed to operate such GEONET systems
would require the approval of the FCC and (B) the assignment of Leases of Real
Estate may require the consent of the lessors, and except for any such consents
or approvals which, if not procured, would not in the aggregate have a material
adverse effect on the business, assets, operations or financial condition of the
Company or the value of the Collateral or the ability of the Collateral Agent or
any purchaser of the Collateral to own, operate, use, sell or otherwise transfer
the Collateral.
(c) This Security Agreement has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable against it, and each of them, in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting the enforceability of creditors' rights generally and
by general provisions of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
3.2 Title to Collateral; All Necessary Northeast Licensed
Area Assets.
(a) Except for the security interests granted to the
Collateral Agent pursuant to this Security Agreement, the Company is the sole
owner of each item of the Collateral, having good title thereto, free and clear
of any and all Liens exclusive of Permitted Liens (as such term is modified in
Section 3.3(b) hereof).
(b) The Collateral includes all material assets,
property interests and rights (including all intellectual property) necessary
for the operation of the Company's GEONET systems in the Northeast Licensed
Area, such that upon the occurrence of an Event of Default the Collateral Agent
or any purchaser of the Collateral could use and operate such GEONET systems in
substantially the same manner that such GEONET systems are presently operated by
the Company, without (i) violating any law or regulation or any order or decree
of any court or governmental instrumentality, except to the extent that FCC
Licenses may be needed to use and operate such GEONET systems, (ii) causing or
creating a conflict with or a breach of, or a default under, any indenture,
mortgage, deed of trust, license agreement, lease, or other agreement or
instrument to which any of the Collateral is subject, except for conflicts,
breaches or defaults which would not in the aggregate have a material adverse
effect on the ability of the Collateral Agent or such purchaser to own, operate,
use, sell or otherwise transfer the Collateral, or (iii) obtaining the consent
or approval of any governmental authority or other person, except that (A) the
transfer of the
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FCC Licenses needed to operate such GEONET systems would require the approval of
the FCC and (B) the assignment of Leases of Real Estate may require the consent
of the lessors, and except for any such consents or approvals which, if not
procured, would not in the aggregate have a material adverse effect on the
ability of the Collateral Agent or such purchaser to own, operate, use, sell or
otherwise transfer the Collateral.
(c) All of the leasehold interests and any other
rights or assets previously held by the Subsidiaries of Geotek USA (including
without limitation the PowerSpectrum Subsidiaries) which are part of, used in
connection with or otherwise relate to the Northeast Licensed Area, have been
assigned or otherwise transferred to Geotek USA, except for the leases listed on
the attached Schedule 10(a).
(d) Geotek America owns no leasehold interests or
other rights or assets which are part of, used in connection with or otherwise
relate to the Northeast Licensed Area except for the leases listed on the
attached Schedule 10(b).
3.3 Validity, Perfection and Priority of Security Interests.
(a) By complying with Section 4.1 hereof, Company
will have created a valid perfected first priority security interest in favor of
the Collateral Agent in all existing Collateral and in all identifiable Proceeds
of such Collateral subject only to Permitted Liens (as such term is modified in
Section 3.3(b) hereof). Continuing compliance by Company with the provisions of
Section 4.2 hereof will also (i) create valid security interests in all
Collateral acquired after the date hereof and in all identifiable Proceeds of
such Collateral and (ii) cause such security interests in all Collateral and in
all Proceeds which are (A) identifiable cash Proceeds of Collateral covered by
financing statements required to be filed hereunder and (B) identifiable
Proceeds in which a security interest may be perfected by such filing under the
UCC to be, in each case, prior to the claims of a trustee in bankruptcy under
the United States Federal Bankruptcy Code.
(b) The security interests of the Collateral Agent
in the Collateral, as set forth in Section 3.3(a) hereof, rank first in
priority, except that the priority of the security interests may be subject to
Permitted Liens (exclusive of those Permitted Liens described in paragraphs (g),
(h), (j), (k) and (l) of the definition of Permitted Liens contained in Section
1.01 of the Indenture and exclusive of Liens described in clauses (iii), (iv)
and (v) of the proviso set forth in Section 4.10 of the Indenture). Except as
described in the immediately preceding sentence, other than financing statements
or other similar documents perfecting the security interests or deed of trust
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liens of the Collateral Agent, no financing statements, deeds of trust,
mortgages or similar documents covering all or any part of the Collateral are on
file or of record in any government office in any jurisdiction in which such
filing or recording would be effective to perfect a security interest in such
Collateral, nor is any of the Collateral in the possession of any Person (other
than the Company) asserting any claim thereto or security interest therein.
3.4 Enforceability of Intangibles.
To the best knowledge of the Company, each Intangible is a valid and
binding obligation of the related third party in respect thereof, enforceable in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
provisions of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law), and complies with any applicable legal
requirements.
3.5 Place of Business; Location of Collateral.
The attached Schedule 3 correctly sets forth the Company's (and each of
their) chief executive office and principal place of business of the Company,
and each of them, and the offices of the Company where records concerning
Intangibles are kept. The attached Schedule 4 correctly sets forth the location
of all Equipment. Except as otherwise specified in the attached Schedule 4, all
Equipment has been located at the address(es) specified on such Schedule 4 at
all times during or acquired by the Company within the four-month period prior
to the date hereof while owned by the Company, or any of them. No amount payable
under or in connection with any of the Collateral is evidenced by promissory
notes or other instruments. The leased real estate listed in the attached
Schedule 5 includes all existing Real Estate which constitutes Qualifying
Assets. The attached Schedule 6 lists all material Leases constituting
Qualifying Assets, provided that for purposes of this Security Agreement, all
leased Real Estate shall be considered material.
3.6 Trade Names.
Any and all trade names, division names, assumed names or other names
under which the Company, or any of them, transacts, or within the four-month
period prior to the date hereof has transacted, business are specified on the
attached Schedule 7.
3.7 Patents and Trademarks.
As of the date hereof, the Company does not have any Patents, Patent
Licenses, Trademarks, Trademark Licenses or
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material Intangibles (whether or not constituting Collateral) other than as
described on the attached Schedule 8.
ARTICLE 4. COVENANTS
The Company covenants and agrees with the Collateral Agent that until
the payment in full of all Obligations, the Company will comply with the
following:
4.1 Perfection of Security Interests.
At the Collateral Agent's option, either the Collateral Agent or the
Company will, at the Company's expense, cause all filings and recordings and
other actions specified on the attached Schedule 9 to have been completed on or
about the date on which this Security Agreement is executed.
4.2 Further Actions.
(a) At all times after the date of execution of this
Security Agreement, the Company will, at its expense, comply with the following:
(i) as to all Collateral, it will cause UCC
ncing statements and continuation statements to be filed and to be
on file in all applicable jurisdictions as required to perfect the
security interests granted to the Collateral Agent hereunder, to the
extent that applicable law permits perfection of a security interest by
filing under the UCC;
(ii) as to all Proceeds, it will cause all UCC
financing statements and continuation statements filed in accordance
with clause (i) above to include a statement or a checked box
indicating that Proceeds of all items of Collateral described therein
are covered;
(iii) as to any amount payable under or in
connection with any of the Collateral which shall be or shall become
evidenced by any promissory note or other instrument, the Company will
immediately pledge and deliver such note or other instrument to the
Collateral Agent as part of the Collateral, duly endorsed in a manner
satisfactory to the Collateral Agent;
(iv) as to all Real Estate acquired after the
date hereof which constitute Qualifying Assets, the Company will
execute and record such mortgages, deeds of trust or other real estate
security documents in such form as shall be reasonably satisfactory to
the
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Collateral Agent so as to create a valid first priority perfected lien
thereon in favor of the Collateral Agent, subject only to Permitted
Liens (as such term is modified in Section 3.3(b) hereof);
and
(b) The Company will, from time to time and at its
expense, execute, deliver, file or record such financing statements pursuant to
the Uniform Commercial Code, applications for certificates of title and such
other statements, assignments, instruments, documents, agreements or other
papers and take any other action that may be reasonably necessary, or that the
Collateral Agent may otherwise reasonably request, in order to create, preserve,
perfect, confirm or validate the security interests created thereby, to enable
the Collateral Agent to obtain the full benefits of this Security Agreement or
to enable it to exercise and enforce any of its rights, powers and remedies
hereunder, including, without limitation, its right to take possession of the
Collateral, and will, to the extent required by this Security Agreement, use
commercially reasonable efforts to obtain such waivers from landlords and
mortgagees as the Collateral Agent may reasonably request.
(c) To the fullest extent permitted by law, the Company
authorizes the Collateral Agent to sign and file financing and continuation
statements and amendments thereto with respect to the Collateral without its
signature thereon.
(d) The Company will obtain such consents and approvals
and take such actions as may be required to effect the assignment and transfer
of the leases listed in the attached Schedule 10(a) from the PowerSpectrum
Subsidiaries to Geotek USA not later than January 31, 1998. If the Company
cannot obtain such consents and approvals by such date, Geotek USA will promptly
(i) cause the PowerSpectrum Subsidiaries to join in this Security Agreement and
to execute and deliver to the Collateral Agent such UCC financing statements and
take such further actions pursuant to Section 4.2 hereof as may be requested by
the Collateral Agent to create and perfect a security interest hereunder in such
leases and any other Collateral owned by the PowerSpectrum Subsidiaries, and
(ii) pledge to the Collateral Agent the capital stock of the PowerSpectrum
Subsidiaries and take such other actions as the Collateral Agent may reasonably
request to grant to the Collateral Agent a first priority perfected lien on such
capital stock.
(e) The Company will obtain such consents and approvals
and take such actions as may be required to effect the assignment and transfer
of the leases listed in the attached Schedule 10(b) from Geotek America to
Geotek USA not later than January 31, 1998. If the Company cannot obtain such
consents and approvals by such date, Geotek will promptly (i) execute and
deliver to the Collateral Agent such UCC financing statements and
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take such further actions pursuant to Section 4.2 hereof as may be requested by
the Collateral Agent to perfect its security interest in such leases and any
other Collateral owned by Geotek America, and (ii) pledge to the Collateral
Agent the capital stock of Geotek America and take such other actions as the
Collateral Agent may reasonably request to grant to the Collateral Agent a first
priority perfected lien on such capital stock.
4.3 Change of Name, Identity or Structure.
The Company, and each of them, will not change its name, identity or
corporate structure in any manner, except that the Company may, after furnishing
the Collateral Agent with at least fifteen (15) days advance written notice,
effect such a change if and only if it has no adverse impact on any Collateral
or the Collateral Agent's security interest therein; provided, however, that no
such notice shall be required if the change affects only Subsidiaries of the
Company other than Geotek USA or the License Holding Company. The Company, and
each of them, will not conduct its business under any trade, assumed or
fictitious name unless it shall have given the Collateral Agent at least thirty
days' prior written notice thereof and shall have taken all action (or made
arrangements to take such action substantially simultaneously with such change
if it is impossible to take such action in advance) reasonably necessary or
reasonably requested by the Collateral Agent to amend any financing statement or
continuation statement relating to the security interests granted hereby in
order to preserve such security interests and to effectuate or maintain the
priority thereof against all Persons, exclusive of Permitted Liens (as such term
is modified in Section 3.3(b) hereof).
4.4 Place of Business and Collateral.
The Company, and each of them, will not change the location of (a) its
places of business, (b) its chief executive office or (c) the office or other
locations where the Company, or any of them, keeps or holds any Collateral or
any records relating thereto, from the applicable location listed on the
attached Schedules to this Security Agreement unless the Company furnishes to
the Collateral Agent 30 days' prior written notice of such change, makes all UCC
filings required by Section 4.2 hereof and takes all other action necessary or
that the Collateral Agent may reasonably request to preserve, perfect, confirm
and protect the security interests granted hereby. The Company will in no event
change the location of any Collateral if such change would cause the security
interest granted hereby in such Collateral to lapse or cease to be perfected.
The Company, and each of them, will at all times maintain its chief executive
office within one of the forty-eight contiguous states (other than Maryland or
Tennessee) in which Article 9 of the UCC is in effect.
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4.5 Fixtures.
Except in the ordinary course of business, the Company will not permit
any Equipment to become a fixture unless it shall have given the Collateral
Agent at least ten days' prior written notice thereof and shall have taken all
such action and delivered or caused to be delivered to the Collateral Agent all
instruments and documents, including, without limitation, waivers and
subordination agreements by any landlords and mortgagees, and filed all
financing statements necessary or reasonably requested by the Collateral Agent,
to preserve and protect the security interest granted herein and to effectuate
or maintain the priority thereof against all Persons, subject to Permitted Liens
(as such term is modified in Section 3.3(b) hereof).
4.6 Maintenance of Records.
The Company will keep and maintain at its own cost and expense complete
books and records relating to the Collateral which are reasonably satisfactory
to the Collateral Agent including, without limitation, a record of all payments
received and all credits granted with respect to the Collateral and all of its
other dealings with the Collateral. The Company will, upon written request, mark
its books and records pertaining to the Collateral to evidence this Security
Agreement and the security interests granted hereby. For the Collateral Agent's
further security, the Company agrees that the Collateral Agent shall have a
special property interest in all of the Company's books and records pertaining
to the Collateral and Company shall, upon the occurrence of an Event of Default,
deliver and turn over copies of any such books and records to the Collateral
Agent or to its representatives at any time on demand of the Collateral Agent.
4.7 Compliance with Laws, etc.
The Company will comply, in all material respects, with all acts,
rules, regulations, orders, decrees and directions of any governmental authority
applicable to the Collateral or any part thereof or to the operation of the
Company's business except to the extent that the failure to comply would not
have a material adverse effect on the financial or other condition of the
Company, or any of them; provided, however, that the Company may contest any
act, regulation, order, decree or direction in any reasonable manner which shall
not in the reasonable opinion of the Collateral Agent materially and adversely
affect the Collateral Agent's rights hereunder or the first priority of its
security interest in the Collateral.
4.8 Payment of Taxes, etc.
The Company will pay promptly when due, all taxes, assessments and
governmental charges or levies imposed upon the
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Collateral or in respect of its income or profits therefrom, as well as all
claims of any kind (including claims for labor, materials and supplies), except
that no such charge need be paid if (a) the validity thereof is being contested
in good faith by appropriate proceedings and (b) such charge is adequately
reserved against in accordance with GAAP.
4.9 Compliance with Terms of Accounts, Contracts and Licenses.
The Company will perform and comply in all material respects with all
of its obligations under all agreements relating to the Collateral to which it
is a party or by which it is bound.
4.10 Limitation on Liens on Collateral.
The Company will not create, permit or suffer to exist, and will defend
the Collateral and the Company's rights with respect thereto against and take
such other action as is necessary to remove, any Lien, security interest,
encumbrance or claim in or to the Collateral other than the security interests
created hereunder, and except for Permitted Liens (as such term is modified in
Section 3.3(b) hereof).
4.11 Limitations on Modifications of Intangibles; No Waivers
or Extensions.
The Company will not (a) amend, modify, terminate or waive any
provision of any material Intangible in any manner which would have a materially
adverse effect on the value of such Intangible as Collateral, (b) fail to
exercise promptly and diligently each and every material right which it may have
under each Intangible or (c) fail to deliver to the Collateral Agent a copy of
each material demand, notice or document received by it relating in any way to
any Intangible. The Company will not, without the Collateral Agent's prior
written consent, grant any extension of the amounts due under any material
Intangible, compromise, compound or settle the same for less than the full
amount thereof, release, wholly or partly, any person liable for the payment
thereof or allow any credit or discount whatsoever thereon other than trade
discounts granted in the normal course of business, except such as in the
reasonable judgment of the Company are advisable to enhance the collectibility
thereof.
4.12 Maintenance of Insurance.
The Company, and each of them, will maintain with financially sound
insurance companies licensed to do business in Pennsylvania, and all other
states in which Equipment is located, insurance policies (a) insuring the
Equipment against loss by fire, explosion, theft and such other casualties as
are usually insured against by companies engaged in the same or similar business
for an amount not less than the replacement value thereof and (b) insuring the
Company and the
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Collateral Agent against liability for personal injury arising from, and
property damage relating to, such Equipment, such policies to be in amounts
customary and appropriate for companies engaged in the same or similar business,
with losses payable to the Company and the Collateral Agent as their respective
interests may appear. The Company shall deliver to the Collateral Agent annually
each December 1st an officer's certificate with respect to the adequacy of the
insurance coverage on the Equipment.
4.13 Limitations on Dispositions of Collateral.
Except as expressly provided in the Indenture, the
Company will not, and will not permit any of its or their Subsidiaries to,
directly or indirectly sell, convey, transfer, lease or otherwise dispose of any
Collateral.
4.14 Further Identification of Collateral.
The Company will annually each December 1st furnish to the Collateral
Agent statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral.
4.15 Notices.
The Company will advise the Collateral Agent promptly and in reasonable
detail (a) of any Lien, security interest, encumbrance or claim, other than a
Permitted Lien (as such term is modified in Section 3.3(b) hereof), made or
asserted against any of the Collateral, (b) of any material change in the
composition of the Collateral, and (c) of the occurrence of any other event
which would have a material and adverse effect on the aggregate value of the
Collateral or on the security interests granted to the Collateral Agent in this
Security Agreement.
4.16 Right of Inspection.
The Collateral Agent shall at all times, upon reasonable prior notice,
have full and free access during normal business hours to all the books,
correspondence and records of the Company, and the Collateral Agent or its
representatives may examine the same, take extracts therefrom, make photocopies
thereof and have such discussions with officers, employees and public
accountants of the Company as the Collateral Agent may deem necessary, and the
Company agrees to render to the Collateral Agent, at the Company's cost and
expense, such clerical and other assistance as may be reasonably requested with
regard thereto, and the Company shall be entitled to have a representative
present during such examinations. The Collateral Agent and its representatives
shall at all times, upon reasonable prior notice, also have the right to enter
into and upon any
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premises during business hours where any of the Equipment is located for the
purpose of inspecting the same, observing its use or protecting interests of the
Collateral Agent therein.
4.17 Maintenance of Equipment.
The Company will, at its expense, generally maintain the Equipment in
good operating condition, ordinary wear and tear excepted.
4.18 Covenants Regarding Patent and Trademark Collateral.
(a) At such time as the Company, or any of them,
shall acquire any Patents or Trademarks, it will comply with the terms,
covenants and warranties of this Section 4.18.
(b) The Company (either itself or through licensees)
will, unless the Company shall reasonably determine that a Trademark is of
negligible economic value to the Company, (i) continue to use each Trademark on
each and every Trademark class of goods applicable to its current products and
services as reflected in its current catalogs, brochures and price lists in
order to maintain each Trademark in full force and free from any claim of
abandonment for non-use, (ii) maintain as in the past the quality of products
and services offered under each Trademark, (iii) employ each Trademark with the
appropriate notice of registration, (iv) not adopt or use any mark which is
confusingly similar or a colorable imitation of any Trademark and (v) not (and
not permit any licensee or sublicensee thereof to) do any act or knowingly omit
to do any act whereby any Trademark may become invalidated.
(c) The Company will not, unless the Company shall
reasonably determine that a subject Patent is of negligible economic value to
the Company, do any act, or omit to do any act, whereby any Patent may be
abandoned or dedicated.
(d) The Company shall, unless the Company shall
reasonably determine that a subject Patent or Trademark is of negligible
economic value to the Company, notify the Collateral Agent immediately if it
knows, or has reason to know, that any application or registration relating to
any Patent or Trademark may become abandoned or dedicated, or of any adverse
determination or development (including, without limitation, the institution or,
or any such determination or development in any proceeding in the United States
Patent and Trademark Office or any court or tribunal in any country) regarding
the Company's ownership of any Patent or Trademark, its right to register the
same or keep and maintain the same.
(e) In the event the Company, or any of them, or any
Subsidiary, either itself or through any agent, employee,
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licensee or designee, files any application for registration of any Patent or
Trademark with the United States Patent and Trademark Office or any similar
office or agency in any other country, it shall promptly inform the Collateral
Agent.
(f) The Company will, unless the Company shall
reasonably determine that a subject Patent or Trademark is of negligible
economic value to the Company, take all reasonably necessary steps, including,
without limitation, in any proceeding before the United States Patent and
Trademark Office or any similar office or agency in any other country or any
political subdivision thereof, to maintain and pursue each application (and to
obtain the relevant registration) and to maintain each registration of the
Patents and Trademarks, including without limitation, filing of applications for
renewal, affidavits of use and affidavits of incontestability.
(g) If any Patent or Trademark is infringed,
misappropriated or diluted by a third party, the Company shall promptly notify
the Collateral Agent after it learns thereof and shall, unless the Company shall
reasonably determine that such Patent or Trademark is of negligible economic
value to the Company, promptly sue for infringement, misappropriation or
dilution, seek injunctive relief where appropriate and to recover any and all
damages for such infringement, misappropriation or dilution, or to take such
other action as the Company shall reasonably deem appropriate under the
circumstances to protect such Patent or Trademark.
4.19 Reimbursement Obligation.
Should the Company fail to comply with the provisions of this Security
Agreement, the Indenture, the U.S. Pledge Agreement, the Custody Account Pledge
Agreement or any other document such that the value of any Collateral or the
validity, perfection, rank or value of any security interest granted to the
Collateral Agent hereunder or thereunder is thereby diminished or potentially
diminished or put at risk (as reasonably determined by the Collateral Agent),
the Collateral Agent on behalf of the Company may, but shall not be required to,
effect such compliance on behalf of the Company, and the Company shall reimburse
the Collateral Agent for the cost thereof within 20 days after receipt of an
invoice from the Collateral Agent, and interest shall accrue on such
reimbursement obligation from the expiration of such 20 day period until
reimbursement thereof in full at a prevailing market rate of interest.
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ARTICLE 5. REMEDIES; RIGHTS UPON DEFAULT
5.1 UCC Rights.
If any Event of Default shall have occurred and be continuing, the
Collateral Agent may in addition to all other rights and remedies granted to it
in this Security Agreement and in any other instrument or agreement securing,
evidencing or relating to the Obligations, exercise all rights and remedies of a
secured party under the UCC and all other rights available to the Collateral
Agent at law or in equity.
5.2 Payments on Collateral.
Without limiting the rights of the Collateral Agent under any other
provision of this Security Agreement, if an Event of Default shall occur and be
continuing:
(a) all payments received by the Company under or in
connection with any of the Collateral shall be held by the Company in trust for
the Collateral Agent, shall be segregated from other funds of the Company and
shall forthwith upon receipt by the Company be turned over to the Collateral
Agent, in the same form as received by the Company (duly endorsed by the Company
to the Collateral Agent, if required to permit collection thereof by the
Collateral Agent); and
(b) all such payments received by the Collateral
Agent (whether from the Company or otherwise) may, in the sole discretion of the
Collateral Agent, be held by the Collateral Agent as collateral security for,
and/or then or at any time thereafter applied in whole or in part by the
Collateral Agent to the payment of the expenses and Obligations as set forth in
Section 5.10 hereof.
5.3 Possession of Collateral.
In furtherance of the foregoing, the Company expressly agrees that, if
an Event of Default shall occur and be continuing, the Collateral Agent may (a)
by judicial process, or without judicial process if it can be done without
breach of the peace, enter any premises where any of such Collateral is or may
be located, and without charge or liability to the Collateral Agent seize and
remove such Collateral from such premises and (b) have access to and use of the
Company's books, records, files and other documents relating to such Collateral.
The Company may retain possession of any books, records, files and other
documents that do not relate primarily to the Northeast Licensed Area, provided
that the Company provides the Collateral Agent with access to and use of all
books, records, files and other documents and furnishes to the Collateral Agent
such copies thereof as it may from time to time request.
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5.4 Sale of Collateral.
(a) The Company expressly agrees that if an Event of
Default shall occur and be continuing, the Collateral Agent, without demand of
performance or other demand or notice of any kind (except the notice specified
below of the time and place of any public or private sale) to the Company or any
other Person (all of which demands and/or notices are hereby waived by the
Company), may forthwith collect, receive, appropriate and realize upon the
Collateral and/or forthwith sell, lease, assign, give an option or options to
purchase or otherwise dispose of and deliver the Collateral (or contract to do
so) or any part thereof in one or more parcels at public or private sale, at any
exchange, broker's board or at any office of the Collateral Agent or elsewhere
in such manner as is commercially reasonable and as the Collateral Agent may
deem best, for cash or on credit or for future delivery without assumption of
any credit risk. The Collateral Agent shall have the right upon any such public
sale, and, to the extent permitted by law, upon any such private sale, to
purchase the whole or any part of the Collateral so sold. The Company further
agrees, at the Collateral Agent's request, to assemble the Collateral, and to
make it available to the Collateral Agent at places which the Collateral Agent
may reasonably select. To the extent permitted by applicable law, the Company
waives all claims, damages and demands against the Collateral Agent arising out
of the foreclosure, repossession, retention or sale of the Collateral.
(b) Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold in a recognized market, the
Collateral Agent shall give the Company twenty days' written notice of its
intention to make any such public or private sale or sale at a broker's board or
on a securities exchange. Such notice shall (i) in the case of a public sale,
state the time and place fixed for such sale, (ii) in the case of a sale at a
broker's board or on a securities exchange, state the board or exchange at which
such sale is to be made and the day on which the Collateral, or any portion
thereof being sold, will first be offered for sale and (iii) in the case of a
private sale, state the day after which such sale may be consummated. The
Collateral Agent shall not be required or obligated to make any such sale
pursuant to any such notice. The Collateral Agent may adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be made at any time
or place to which the same may be so adjourned. In the case of any sale of all
or any part of the Collateral for credit or for future delivery, the Collateral
so sold may be retained by the Collateral Agent until the selling price is paid
by the purchaser thereof, but the Collateral Agent shall not incur any liability
in case of failure of such purchaser to pay for the
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Collateral so sold and, in the case of such failure, such Collateral may again
be sold upon like notice.
5.5 Rights of Purchasers.
Upon any sale of the Collateral (whether public or private) by the
Collateral Agent as described in this Security Agreement, the Collateral Agent
shall have the right to deliver, assign and transfer to the purchaser thereof
the Collateral so sold. Each purchaser (including the Collateral Agent) at any
such sale shall hold the Collateral so sold free from any claim or right of
whatever kind, except Permitted Liens (as such term is modified in Section
3.3(b) hereof), including any equity or right of redemption of the Company, and
the Company, to the extent permitted by law, hereby specifically waives all
rights of redemption, including, without limitation, the right to redeem the
Collateral under Section 9-506 of the UCC, and any right to a judicial or other
stay or approval which it has or may have under any law now existing or
hereafter adopted.
5.6 Intellectual Property.
(a) The Company, and each of them, hereby grants to
the Collateral Agent, for the benefit of the Securityholders, upon the
occurrence and during the continuation of an Event of Default, an irrevocable
nonexclusive, royalty-free license or sublicense under all Patents, Licenses and
other Intangibles (other than Trademarks) that do not constitute Collateral to
provide wireless telecommunications services and related equipment and products
in the Northeast Licensed Area, except (in the case of Licenses and other
Intangibles) to the extent that the license agreement or other agreement
pursuant to which the Company holds such Licenses or other Intangibles requires
the consent of the licensor or other third party and the Company is not able
(after making commercially reasonable efforts to do so) to obtain such consent;
provided, however, that the Company shall not be required to use its efforts to
obtain the consent of Rafael Armaments Development Agency ("Rafael") to such a
license.
(b) The Company, and each of them, hereby authorizes,
on behalf of itself and its Subsidiaries, Rafael to grant to the Collateral
Agent, for the benefit of the Securityholders, upon the occurrence and during
the continuation of an Event of Default, and notwithstanding the exclusivity
provisions and other provisions of their respective agreements with Rafael, a
license under Rafael's patents, copyrights and other intellectual property
rights to design, develop, make and have made, market, distribute and sell
equipment and products for use in conjunction with such wireless
telecommunications services in the Northeast Licensed Area.
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(c) The Company, and each of them, hereby grants to
the Collateral Agent, for the benefit of the Securityholders, upon the
occurrence and during the continuation of an Event of Default, an irrevocable
nonexclusive royalty-free license under their intellectual property rights to
use the Trademarks that do not constitute Collateral in connection with the
provision of wireless telecommunications services and related equipment and
products in the Northeast Licensed Area, provided that all goods and services
offered, sold or provided in conjunction with the Trademarks shall meet or
exceed the quality standards reasonably imposed by Company.
(e) The Collateral Agent shall be entitled to assign
or sublicense its rights under the licenses in this Section 5.6 in whole or
relevant part in connection with any sale or other disposition of Collateral in
accordance with this Article 5.
(f) The Company, and each of them, hereby grants to
any successor of the Company, or any of them (including without limitation any
reorganized debtor under a Chapter 11 Plan of Reorganization approved by the
Securityholders) the right to use the Patents, Trademarks, copyrights, Licenses
and other Intangibles of the Company, and each of them, and its Subsidiaries,
subject to the rights of the Collateral Agent under this Agreement.
5.7 Additional Rights of the Collateral Agent.
(a) The Company expressly agrees that if an Event of
Default shall occur and be continuing, the Collateral Agent shall have the right
and power to institute and maintain such suits and proceedings as it may deem
appropriate to protect and enforce the rights vested in it by this Security
Agreement and may proceed by suit or suits at law or in equity to enforce such
rights and to foreclose upon and sell the Collateral or any part thereof
pursuant to the judgment or decree of a court of competent jurisdiction.
(b) The Collateral Agent shall, to the extent
permitted by law and without regard to the solvency or insolvency at the time of
any Person then liable for the payment of any of the Obligations or the then
value of the Collateral, and without requiring any bond from any party to such
proceedings, be entitled to the appointment of a special receiver or receivers
(who may be the Collateral Agent) for the Collateral or any part thereof and for
the rents, issues, tolls, profits, royalties, revenues and other income
therefrom, which receiver shall have such powers as the court making such
appointment shall confer, and to the entry of an order directing that the rents,
issues, tolls, profits, royalties, revenues and other income of the property
constituting the whole or any part of the Collateral be segregated, sequestered
and impounded for the benefit of the
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Collateral Agent, and the Company irrevocably consents to the appointment of
such receiver or receivers and to the entry of such order.
5.8 Remedies Not Exclusive.
(a) No remedy conferred upon or reserved to the
Collateral Agent in this Security Agreement is intended to be exclusive of any
other remedy or remedies, but every such remedy shall be cumulative and shall be
in addition to every other remedy conferred herein or now or hereafter existing
at law, in equity or by statute.
(b) If the Collateral Agent shall have proceeded to
enforce any rights, remedy or power under this Security Agreement and the
proceeding for the enforcement thereof shall have been discontinued or abandoned
for any reason or shall have been determined adversely to the Collateral Agent,
the Company and the Collateral Agent shall, subject to any determination in such
proceeding, severally and respectively be restored to their former positions and
rights under this Security Agreement, and thereafter all rights, remedies and
powers of the Collateral Agent shall continue as though no such proceedings had
been taken.
(c) All rights of action under this Security
Agreement may be enforced by the Collateral Agent without the possession of any
instrument evidencing any Obligation or the production thereof at any trial or
other proceeding relative thereto, and any suit or proceeding instituted by the
Collateral Agent shall be brought in its name and any judgment shall be held as
part of the Collateral.
5.9 Waiver and Estoppel.
(a) The Company, to the extent it may lawfully do so,
on behalf of itself and all who may claim through or under it, including without
limitation any and all subsequent creditors, vendees, assignees and lienors,
waives and releases all rights to demand or to have any marshalling of the
Collateral upon any sale, whether made under any power of sale granted herein or
pursuant to judicial proceedings or upon any foreclosure or any enforcement of
this Security Agreement and consents and agrees that all the Collateral may at
any such sale be offered and sold as an entirety.
(b) The Company, to the extent it may lawfully do so,
waives presentment, demand, protest and any notice of any kind (except notices
explicitly required hereunder) in connection with this Security Agreement and
any action taken by the Collateral Agent with respect to the Collateral.
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5.10 Power of Attorney.
The Company hereby irrevocably constitutes and appoints the Collateral
Agent, with full power of substitution, as its true and lawful attorney-in-fact
with full irrevocable power and authority in the place and stead of the Company
and in the name of the Company, or any of them, or in its own name, from time to
time in the Collateral Agent's reasonable discretion for the purpose of carrying
out the terms of this Security Agreement at any time (i) upon an occurrence of
an Event of Default and during the continuance thereof, or (ii) in the event the
Company, or any of them, fails to promptly perform any of its or their
obligations under this Security Agreement following the Collateral Agent's
demand for such performance, to take any and all appropriate action and to
execute any and all documents and instruments which may be necessary or
desirable to accomplish the purposes of this Security Agreement and, without
limiting the generality of the foregoing, hereby gives the Collateral Agent the
power and right, on behalf of the Company, without notice to or assent by the
Company to do the following:
(a) to pay or discharge taxes, liens, security
interests or other encumbrances levied or placed on the Collateral;
(b) to effect any repairs or any insurance called for
by the terms of this Security Agreement and to pay all or any part of the
premiums therefor and the costs thereof; and
(c) upon the occurrence and continuance of any Event
of Default, (i) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due and to come due thereunder
directly to the Collateral Agent or as the Collateral Agent shall direct; (ii)
to receive payment of and receipt for any and all moneys, claims and other
amounts due and to become due at any time in respect of or arising out of any
Collateral; (iii) to sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with accounts and other
documents relating to the Collateral; (iv) to commence and prosecute any suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any thereof and to enforce any other
right in respect of any Collateral; (v) to defend any suit, action or proceeding
brought against the Company, or any of them, with respect to any Collateral;
(vi) to settle, compromise and adjust any suit, action or proceeding described
above and, in connection therewith, to give such discharges or releases as the
Collateral Agent may deem appropriate; (vii) to assign any Patent or Trademark
(along with the goodwill of the business to which such Trademark pertains), for
such term or terms, on such conditions, and in such manner,
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as the Collateral Agent shall in its sole discretion determine; and (viii)
generally to sell, transfer, pledge, make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though the
Collateral Agent were the absolute owner thereof for all purposes, and to do, at
the Collateral Agent's option and the Company's expense, at any time, or from
time to time, all acts and things which the Collateral Agent deems necessary to
protect, preserve or realize upon the Collateral and the Collateral Agent's
security interest therein, in order to effect the intent of this Security
Agreement, all as fully and effectively as the Company might do.
The Company hereby ratifies all that said attorneys shall lawfully do
or cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.
5.11 Application of Proceeds.
All proceeds realized by the Collateral Agent in respect of any or all
of the Collateral, including the proceeds of any sale thereof or any cash
distributed in respect of any of the Collateral shall be applied against the
Obligations in accordance with the Indenture. To the extent permitted by
applicable law, the Company shall be liable for any deficiency, and any surplus
shall be returned by the Collateral Agent to the person or persons legally
entitled thereto.
ARTICLE 6. MISCELLANEOUS
6.1 Notices.
Unless otherwise specified herein, all notices, requests or other
communications to any party hereunder shall be in writing and shall be given to
such party at its address set forth on the signature pages hereof or any other
address which such party shall have specified for the purpose of communications
hereunder by notice to the other parties hereunder. Each such notice, request or
other communication shall be effective (a) if given by mail, three days after
such communication is deposited, certified or registered, in the mails with
first class postage prepaid, addressed as aforesaid or (b) if given by other
means, when delivered at the address specified in this Section 6.1.
6.2 No Waivers.
No failure on the part of the Collateral Agent to exercise, no course
of dealing with respect to, and no delay in exercising any right, power or
privilege under this Security Agreement or any document or agreement
contemplated hereby shall operate as a waiver thereof nor shall any single or
partial exercise of any
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such right, power or privilege preclude any other or further exercise thereof or
the exercise of any other right, power or privilege.
6.3 Compensation and Expenses of the Collateral Agent.
The Company shall pay to the Collateral Agent from time to time upon
demand, all of the fees, costs and reasonable out-of-pocket expenses incurred by
the Collateral Agent (including, without limitation, the reasonable fees and
disbursements of counsel and any amounts payable by the Collateral Agent to any
of its agents, whether on account of fees, indemnities or otherwise) (a) arising
in connection with the preparation, modification, amendment, waiver or
termination of this Security Agreement or any document or agreement contemplated
hereby or any consent or waiver hereunder or thereunder or (b) incurred in
connection with the sale or other disposition of Collateral hereunder or under
any document or agreement contemplated hereby or the preservation, protection or
defense of the rights of the Collateral Agent in and to the Collateral.
6.4 Indemnification.
The Company, and each of them, shall at all times hereafter indemnify,
hold harmless and, on demand, reimburse the Collateral Agent and its
subsidiaries, affiliates, successors, assigns, officers, directors, employees
and agents, and their respective heirs, executors, administrators, successors
and assigns (all of the foregoing parties, including, but not limited to, the
Collateral Agent, being hereinafter collectively referred to as the
"Indemnities" and individually as an "Indemnitee") from, against and for any and
all liabilities, obligations, claims, damages, actions, penalties, causes of
action, losses, judgments, suits, costs, expenses and disbursements, including,
without limitation, attorney's fees (any and all of the foregoing being
hereinafter collectively referred to as the "Liabilities" and individually as a
"Liability") which the Indemnitees, or any of them, might be or become
subjected, by reason of, or arising out of the preparation, execution, delivery,
modification, administration or enforcement of, or performance of the Collateral
Agent's rights under, this Security Agreement or any other document, instrument
or agreement contemplated hereby or executed in connection herewith; provided
that the Company shall not be liable to any Indemnitee for any Liability to the
extent caused by the gross negligence or willful misconduct of such Indemnitee.
In no event shall any Indemnitee, as a condition to enforcing its rights under
this Section 6.4 or otherwise, be obligated to make a claim against any other
Person (including, without limitation, the Collateral Agent) to enforce its
rights under this Section 6.4.
28
<PAGE>
6.5 Amendments, Supplements and Waivers.
No amendment, supplement or waiver of any provision of this Security
Agreement or of any right, power or remedy under this Security Agreement shall
be effective unless made in accordance with Article Nine of the Indenture.
6.6 Successors and Assigns.
This Security Agreement shall be binding upon and inure to the benefit
of each of the parties hereto and their respective successors and assigns and
shall inure to the benefit of the Collateral Agent's and the Securityholders'
successors and assigns. Nothing herein is intended or shall be construed to give
any Person other than the parties hereto any right, remedy or claim under, to or
in respect of this Security Agreement or any Collateral.
6.7 Limitation of Law; Severability.
(a) All rights, remedies and powers provided in this
rity Agreement may be exercised only to the extent that the exercise thereof
does not violate any applicable provision of law, and all the provisions of this
Security Agreement are intended to be subject to all applicable mandatory
provisions of law which may be controlling and to be limited to the extent
necessary so that they will not render this Security Agreement invalid,
unenforceable in whole or in part, or not entitled to be recorded, registered or
filed under the provisions of any applicable law.
(b) If any provision hereof is invalid and
forceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in order to carry out the
intentions of the parties hereto as nearly as may be possible; and (ii) the
invalidity or unenforceability of any provision hereof in any jurisdiction shall
not affect the validity or enforceability of such provisions in any other
jurisdiction.
6.8 Governing Law.
This Security Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without regard to
conflicts of laws principles.
6.9 Counterparts; Effectiveness.
This Security Agreement may be signed in any number of counterparts
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Security
29
<PAGE>
Agreement shall become effective when the Collateral Agent shall receive
counterparts executed by all parties to this Security Agreement.
6.10 Termination; Survival.
This Security Agreement shall terminate when the security interests
granted hereunder have terminated and the Collateral has been released as
provided in Section 2.4 hereof, provided that the obligations of the Company
under any of Sections 4.19, 6.3 and 6.4 hereof shall survive any such
termination.
6.11 Entire Agreement.
This Security Agreement, and the Schedules hereto, constitute the
entire understanding of the parties hereto with respect to the transactions
contemplated hereby. Any and all previous agreements and understandings between
or among the parties regarding the subject matter hereof, whether written or
oral, are superseded by this Security Agreement.
6.12 Controlling Terms.
The parties hereto agree that if any provisions of this Security
Agreement shall be more restrictive on the Company than, or conflict with any
provisions of, the Indenture, then the provisions of this Security Agreement
shall be controlling.
30
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed by their respective authorized officers as of the
day and year first written above.
Addresses:
102 Chestnut Ridge Road GEOTEK COMMUNICATIONS, INC.
Montvale, NJ 07645
Attn: General Counsel
Telecopier: 201-930-9614 By:
Telephone: 201-930-9305 --------------------------
Name:
Title:
102 Chestnut Ridge Road GEOTEK USA, INC.
Montvale, NJ 07645
Attn: General Counsel
Telecopier: 201-930-9614 By:
Telephone: 201-930-9305 --------------------------
Name:
Title:
102 Chestnut Ridge Road GEOTEK AMERICA, INC.
Montvale, NJ 07645
Attn: General Counsel
Telecopier: 201-930-9614 By:
Telephone: 201-930-9305 --------------------------
Name:
Title:
One State Street IBJ SCHRODER BANK & TRUST
New York, NY 10004 COMPANY, as Collateral Agent
New York, NY 10004
Attn: Corporate Trust and
Agency Administration
Telecopier: 212-858-2952 By:
Telephone: 212-858-2529 ----------------------------
Name: Stephen J. Giurlando
Title: Assistant Vice President
31
<PAGE>
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 $90.4 million,
$145.2 million and $240.6 million for the years ended December 31, 1995, 1996
and 1997, respectively.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF GEOTEK COMMUNICATIONS, INC.
Geotek Communications, Inc. PowerSpectrum, Inc.
- --------------------------------------------------------------
Cumulous Holding Corp., Inc. PowerSpectrum of D.C., Inc.
(Holds all interest in Cumulous PowerSpectrum of Seattle, Inc.
Communications) PowerSpectrum of Miami, Inc.
Geotek Acquisition Corp. (Shell Company) PowerSpectrum of Indianapolis, Inc.
Geotek Beteiligungs GmbH i.G. (a PowerSpectrum of Atlanta, Inc.
wholly owned subsidiary of Geotek PowerSpectrum of Jacksonville, Inc.
Communications GmbH) PowerSpectrum of Kansas City, Inc.
Geotek Communications GmbH i.G. PowerSpectrum of Philadelphia, Inc.
(Geotek Beteiligungs & Geotek Comm. PowerSpectrum of New Orleans, Inc.
are holding companies for interest in PowerSpectrum of Phoenix, Inc.
Preussag and DBF Bundelfunk) PowerSpectrum of Minneapolis, Inc.
DBF Bundelfunk GmbH PowerSpectrum of Denver, Inc.
Metro Net Systems, Inc. (Operations of PowerSpectrum of Memphis, Inc.
SMR Systems in NY Metro area) PowerSpectrum of Tampa, Inc.
National Band Three Limited (UK SMR PowerSpectrum of Rochester, Inc.
Provider) PowerSpectrum of Buffalo, Inc.
Geotek USA, Inc. (Holds all interest in PowerSpectrum of Nashville, Inc.
the license holding subsidiaries) PowerSpectrum of Orlando, Inc.
USI Venture Corp. (Shell Company) PowerSpectrum of Boston, Inc.
Geotek Asia, Inc. PowerSpectrum of Hartford, Inc.
ANSA Communications PowerSpectrum of Dallas, Inc.
CLW Communications, Inc. PowerSpectrum of New York City, Inc.
GMSI, Inc. PowerSpectrum of Chicago, Inc.
MIS Holdings Acquisition Corp. PowerSpectrum of Greensboro
Mobile Information Systems Ltd. PowerSpectrum of San Francisco
Mobile Message Service of Texas, Inc. PowerSpectrum of Salt Lake City
Oak Hill Communications, Inc. PowerSpectrum of Cincinnati
MacDermott Communications PowerSpectrum of Charlotte
Geotek Technologies Israel Ltd. Geotek GmbH Holdings Corporation
Geotek License Holdings, Inc. PowerSpectrum Microwave
Geotek Financing Corporation (All PowerSpectrum of (city) hold FCC
Geotek of America, Inc. Licenses)
Gelico, Inc.
Gelico of Chicago, Inc.
Geotek of Atlanta, Inc.
Geotek of Boston, Inc.
Geotek of Chicago, Inc.
Geotek of Washington D.C., Inc.
Geotek of Dallas, Inc.
Geotek of Houston, Inc.
Geopower, Inc.
MacDermott Communications Inc.
Bogen Acquisition Corp.
<PAGE>
EXHIBIT 21, continued
Geotek Communications, Inc.
- ---------------------------
Geotek of Miami, Inc.
Geotek of New York, Inc.
Geotek of Orlando, Inc.
Geotek of Philadelphia, Inc.
Geotek of Tampa, Inc.
Geotek Technologies, Inc.
Geotek International Networks, Inc.
Geotek U.S. Networks, Inc.
Geotek Services, Inc.
Geotek Data, Inc.
Geotek Holdings, Inc.
Geotek Subsidiary Industries, Inc.
EXHIBIT 23.1
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Geotek Communications, Inc. on Form S-3 (Nos. 33-49548, 33-55506, 33-57530,
33-61034, 33-72820, 33-78540, 33-85296, 33-62073, 33-62327, 33-64117, 33-64533,
333-2849, 333-8731 and 333-21199), on Form S-4 (No 33-62333) and on Form S-8
(No. 33-67144) of our report, which includes a reference to the report of other
auditors and includes an explanatory paragraph as to Geotek Communications,
Inc.'s ability to continue as a going concern, dated March 16, 1998, on our
audits of the consolidated financial statements and the consolidated financial
statement schedule of Geotek Communications, Inc. and Subsidiaries as of
December 31, 1997 and 1996, and for each of the years in the three year period
ended December 31, 1997, which report is included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 16, 1998
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF SHACHAK PEER REZNICK & CO.]
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements of Geotek Communications, Inc. on Form
S-3 (Nos. 33-49548, 33-55506, 33-57530, 33-61034, 33-72820, 33-78540, 33-85296,
33-62073, 33-62327, 33-64117, 33-64533, 333-2849, 333-8731 and 333-21199), Form
S-4 (No. 33-62333) and Form S-8 (No. 33-67144) of our report which includes an
explanatory paragraph as to Geotek Technologies Israel (1992) Ltd.'s ability to
continue as a going concern, dated March 16, 1998, on our audits of the
financial statements of Geotek Technologies Israel (1992) Ltd. (f/k/a
PowerSpectrum Technology Ltd.) as of December 31, 1997 and 1996, and for each of
the years in the three year period ended December 31, 1997, which report is
included in this Annual Report on Form 10-K.
/s/ SHACHAK PEER REZNICK & CO
Shachak Peer Reznick & Co.
Certified Public Accountants (Isr.)
March 16, 1998
Ramat Gan, Israel
<PAGE>
EXHIBIT 23.3
[LETTERHEAD OF COOPERS & LYBRAND]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Geotek Communications, Inc. on Form S-3 (Nos. 33-49548, 33-55506, 33-57530,
33-61034, 33-72820, 33-78540, 33-85296, 33-62073, 33-62327, 33-64117, 33-64533,
333-2849, 333-8731 and 333-21199), Form S-4 (No. 33-62333) and Form S-8 (No.
33-67144) on our audits of the financial statements of National Band Three
Limited as of 31 December 1997 and 1996, and for the years ended 31 December
1997 and 1996, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND
London, United Kingdom
16 March 1998
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