SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number 0-17581
GEOTEK COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 22-2358635
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
102 Chestnut Ridge Road, Montvale, New Jersey 07645
(Address of Principal Executive Office) (Zip Code)
(201) 930-9305
(Registrant's Telephone Number Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
COMMON STOCK OUTSTANDING AT October 31, 1998: 198,800,000 SHARES
<PAGE>
GEOTEK COMMUNICATIONS, INC.
(Operating as Debtor in Possession)
FORM 10-Q
TABLE OF CONTENTS
PART I: Financial Information
Item 1: Financial Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II: Other Information
Item 3. Defaults Upon Senior Securities
Item 6: Exhibits and Reports on Form 8-K
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain "forward-looking" statements 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 Company's
ability to develop and obtain confirmation of a plan of reorganization to emerge
from bankruptcy, (ii) the Company's ability to obtain the necessary financing to
continue operating in Chapter 11, (iii) the Company's ability to perform an
orderly liquidation of its assets, (iv) the risks of international business, and
(v) 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 and contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 as such factors in some cases
have affected, and in the future (together with other factors) could affect, the
ability of the Company to achieve its projected results and may cause actual
results to differ materially from those expressed herein.
2
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
(See Note 1 and Note 2)
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,730 $ 13,393
Restricted cash 35,181 16,140
Accounts receivable trade, net 3,163 7,097
Inventories, net 306 21,477
Assets held for sale -- 27,121
Prepaid expenses and other
current assets 2,300 6,667
Advances to related parties -- 11,500
--------- ---------
Total current assets 45,680 103,395
Investments in affiliates 829 15,923
Property, plant and equipment, net 3,299 112,983
Intangible assets, net 69,751 80,867
Advances to related parties 11,500
Other assets, principally debt
issuance costs 5,007 18,582
--------- ---------
Total Assets $ 136,066 $ 331,750
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 5,314 $ 25,170
Accrued expenses and other 7,978 53,951
Borrowings under debtor in
possession facility 10,000 --
Current portion of long term debt -- 42,664
--------- ---------
Total current liabilities 23,292 121,785
--------- ---------
Liabilities subject to compromise 346,833 --
Long-term Debt -- 243,422
Other non current liabilities -- 5,364
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, issued 189,676,000
and 73,874,000 shares, respectively,
outstanding 189,343,000 and 73,450,000
shares, respectively 1,898 739
Capital in excess of par value 477,733 476,145
Accumulated other comprehensive loss (139) (145)
Accumulated deficit (752,176) (554,185)
Treasury stock, at cost (424,000
common shares) (1,386) (1,386)
--------- ---------
Total Shareholders' deficit (274,059) (78,821)
--------- ---------
Total Liabilities and Shareholders' deficit $ 136,066 $ 331,750
========= =========
See notes to consolidated financial statements.
3
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
(See Note 1 and Note 2)
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales $ 1,032 $ 17,171 $ 7,723 $ 30,729
Service income 1,380 8,749 8,270 24,726
------------- ------------ ------------- ------------
Total revenues 2,412 25,920 15,993 55,455
------------- ------------ ------------- ------------
Costs and expenses:
Cost of goods sold 541 23,404 16,213 41,456
Cost of services 4,175 7,888 15,609 20,526
Engineering and development 600 13,730 9,811 29,451
Selling and marketing 2,211 8,321 16,344 21,086
General and administrative 7,355 11,649 22,810 29,159
Depreciation expense 4,812 5,396 16,871 13,867
Amortization of intangibles 1,612 1,069 5,395 3,175
Interest expense 386 8,230 24,179 26,980
Interest income (718) (346) (1,962) (3,629)
Equity in losses of investees 10,136 1,024 13,606 4,633
Restructuring charge 133,459 -- 134,859 --
Other (income) expenses (225) (11) (1,422) (89)
------------- ------------ ------------- ------------
Total costs and expenses 164,344 80,354 272,313 186,615
------------- ------------ ------------- ------------
Loss from operations before gain
on sale of subsidiary (161,932) (54,434) (256,320) (131,160)
Gain on sale of subsidiary -- -- 58,638 --
------------- ------------ ------------- ------------
Loss from continuing operations
before taxes on income and
discontinued operations (161,932) (54,434) (197,682) (131,160)
Taxes on income -- (194) (309) (796)
------------- ------------ ------------- ------------
Loss from continuing operations (161,932) (54,628) (197,991) (131,956)
Income from discontinued operations (net
of $0.5 million and $1.2 million,
respectively, for taxes) -- 908 -- 1,930
------------- ------------ ------------- ------------
Total discontinued operations -- 908 -- 1,930
------------- ------------ ------------- ------------
Net loss before preferred stock dividends (161,932) (53,719) (197,991) (130,026)
Preferred stock dividends (1) (5,614) (3,804) (16,325)
------------- ------------ ------------- ------------
Net loss applicable to common shares $ (161,933) $ (59,333) $ (201,795) $ (146,351)
============= ============ ============= ============
Weighted average number of common
shares outstanding 135,643,000 68,373,000 152,543,000 63,724,000
============= ============ ============= ============
Basic and Diluted Loss per Share:
Loss from continuing operations $ (1.19) $ (0.88) $ (1.32) $ (2.33)
Income from discontinued operations -- $ .01 -- $ 0.03
Net loss applicable to common shares $ (1.19) $ (0.87) $ (1.32) $ (2.30)
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
for the Nine months ended September 30, 1998
(in thousands)
(Unaudited)
(See Note 1 and Note 2)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Capital in Other
---------------- --------------- Excess of Comprehensive Comprehensive Accumulated Treasury
Shares Amount Shares Amount Par Value (Loss) income (Loss) Income Deficit Stock
------ ------ ------ ------ --------- ------------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 1,119 $11 73,874 $ 739 $476,145 $(145) $(554,185) $(1,386)
Issuance of common stock for:
Preferred Stock dividends 2,736 27 2,536
Conversion of preferred stock 106,781 1,068 (1,068)
Management consulting
agreement 75 1 98
Conversion of note payable 3,000 30 1,684
Conversion of note payable 2,200 22 1,353
Settlement of litigation 1,100 11 789
Preferred stock dividends (3,804)
Comprehensive income
Net income $(197,991)
Other comprehensive income, net
of tax 6
Foreign currency translation
adjustments 6
---------
Other comprehensive income 6
Net loss (197,991)
----- --- ------- ------ -------- --------- ----- --------- -------
Balance, September 30, 1998 1,119 $11 189,766 $1,898 $477,733 $(197,985) $(139) $(752,176) $(1,386)
===== === ======= ====== ======== ========= ====== ========= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
(See Note 1 and Note 2)
Nine months ended
September 30,
--------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss $(197,991) $(130,026)
Adjustments to reconcile net
loss to net cash used
in operating activities:
Discontinued operations:
Income from operations -- (1,930)
Depreciation and amortization 22,267 17,511
Adjustments to inventory
for replacement cost -- 1,099
Restructuring charge 134,859
Non cash interest expense 18,480 23,678
Equity in losses of investees 13,606 4,633
Gain on sale of subsidiary (58,638) --
Issuance of stock for management
consulting fee 99 --
Other, net (1,644) (28)
Changes in working capital,
net of liabilities subject
to compromise 8,378 (2,733)
--------- ---------
Net cash used in operating activities (60,584) (87,796)
--------- ---------
Cash flows from investing activities:
Acquisition of, and deposits for,
spectrum licenses -- (708)
Change in restricted cash (19,041) 1,469
Proceeds from sale of subsidiaries 87,098 --
Contract deposits -other
current assets 1,359 481
Change in cash for net assets of
discontinued operations -- 269
Acquisitions of property, plant
and equipment (16,680) (39,562)
Capitalized interest on construction
in progress & pre-commercial
spectrum licenses (2,618) (6,895)
Proceeds from swap/sale of
spectrum licenses 3,162 --
Cash invested in unconsolidated
subsidiaries, net (170) (5,830)
Other, net 175 274
--------- ---------
Net cash provided by (used in)
investing activities 53,285 (50,502)
--------- ---------
See notes to consolidated financial statements.
6
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in thousands)
(Unaudited)
(See Note 1 and Note 2)
Nine months ended
September 30,
-------------------
1998 1997
---- ----
Cash flows from financing activities:
Borrowings under DIP Facility 10,000
Repayments under line-of-credit agreements -- (3,247)
Repayment of Senior Secured Discount Notes (16,196)
Borrowings under credit facility -- 20,000
Proceeds from issuance of convertible
preferred stock -- 55,000
Proceeds from drawdown of vendor
financing agreement 6,536 --
Payments for preferred dividends (1,265) (3,839)
Repayment of capital lease obligations (361) (164)
Proceeds from the exercise of warrants
and options -- 212
Other, net (95) 20
-------- ---------
Net cash (used in) provided by
financing activities (1,381) 67,982
-------- ---------
Effect of exchange rate changes on cash 17 187
-------- ---------
(Decrease) in cash and cash equivalents (8,663) (70,129)
Cash and cash equivalents, beginning of period 13,393 102,720
-------- ---------
Cash and cash equivalents, end of period $ 4,730 $ 32,591
======== =========
Supplemental cash flow information:
Interest paid in cash $ 6,683 $ 11,608
Supplemental schedule of noncash investing
and financing activities:
Summary of Bogen Communications
International ("BCI") sale:
Assets of discontinued operations -- 25,042
Liabilities, including foreign currency,
of discontinued operations -- (11,547)
Acquisition of assets under capital lease -- 2,840
Issuance of common shares for
preferred dividends 2,563 9,388
Deemed dividend on convertible preferred
stock -- 3,098
Issuance of Common Stock for the acquisition
of Minority Interest in GTIL -- 265
Issuance of Common Stock on conversion of
Note Payable and accrued interest 1,718 --
Issuance of Common Stock on conversion of
Note Payable and accrued interest 1,397 --
Issuance of Common Stock for payment
of litigation settlement 800 --
Management consulting fees paid
in common stock 99 --
See notes to consolidated financial statements.
7
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Petition For Reorganization Under Chapter 11:
On June 29, 1998 (the "Filing Date"), Geotek Communications, Inc.
("Geotek") and 73 of its direct and indirect domestic subsidiaries
(collectively referred to as "the Company") filed voluntary petitions
under Chapter 11 (the "Chapter 11 Cases") of the United States Bankruptcy
Code ("Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware ("Bankruptcy Court"). Since June 29, 1998, the
Company has been operating as a Debtor in Possession ("DIP").
Pursuant to section 362 of the Bankruptcy Code, during the Chapter 11
Cases, creditors and other parties in interest may not, without Bankruptcy
Court approval: (a) commence or continue judicial, administrative or other
proceedings against the Company which were or could have been commenced
prior to commencement of the Chapter 11 Cases, or recover a claim that
arose prior to commencement of the Chapter 11 Cases; (b) enforce any
prepetition judgments against the Company; (c) take any action to obtain
possession of or exercise control over property of the Company or its
estate; (d) create, perfect or enforce any lien against property of the
Company; (e) collect, assess, or recover claims against the Company that
arose prior to the Filing Date; or (f) set off any debt owing to the
Company that arose prior to the Filing Date against a claim of such
creditor or party in interest against the Company that arose prior to the
Filing Date.
At the commencement of the Chapter 11 Cases, the Company obtained a $10
million Debtor in Possession Financing Facility (the "DIP Facility") from
S-C Rig Investments III, L.P., an affiliate of the Soros Group, a related
party, to allow the Company to continue to fund its short term working
capital needs in the Chapter 11 Cases (See Note 3). In order to satisfy
certain requirements under its DIP Facility, the Company developed a short
term business plan and budget pursuant to which the Company, among other
things, discontinued its sales activities in 10 of its 11 commercial
markets, ceased construction of additional transmission sites in all of
its markets and substantially reduced the size of the Company's support
organization including its marketing and administrative personnel. As part
of this short term business plan and budget, the Company was focusing all
of its sales resources in its Miami market. Pursuant to the Company's
short term business plan, the Company continued to provide product support
to existing customers in each of its 11 markets.
In the period subsequent to the Filing Date, the Debtors engaged in
negotiations with its principal creditor constituencies and potential
strategic partners and equity investors. Despite extensive efforts that
included the development of a new long-term business plan, the Debtors
were unable to obtain sufficient creditor support or to raise the
necessary capital for the new long-term business plan and proposed plan of
reorganization.
In September 1998, faced with the impending exhaustion of the DIP
Facility and the inability to gain support for their plan from the
principal creditor constituencies, the Company determined that on October
1, 1998, the Company would announce that on October 18, 1998 the Company
would be blacking-out its U.S. based digital wireless networks ("FHMA
Networks") and would cease to provide its wireless mobile logistics
systems in each of its 11 commercial markets. Additionally, in October
1998, the Company terminated substantially all of its employees and
terminated all dealer and customer contracts.
To meet its financing needs, the Company made a motion to obtain a
bankruptcy court order permitting the use of funds held in a cash
collateral account ("Cash Collateral" or "Cash Collateral Account") (See
Note 2 -- Restricted Cash). The use of the Cash Collateral, which was
supported by the majority holder of the Company's 15% Senior Secured
Discounts Notes ("Discount Notes") and Hughes Network Systems, Inc.
("HNS"), a secured creditor, is subject to certain terms and conditions,
which include but are not limited to, the pursuit of the sale and
liquidation of the Debtors' assets and filing of a plan of reorganization
in accordance with a predetermined liquidation timetable, restoration of
the Cash Collateral Account, adherence to a budget and the granting of a
8
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
replacement lien. The Company obtained initial court approval on October
21, 1998 and obtained final approval on November 13, 1998.
Currently, the Company is pursuing two alternatives: the orderly
liquidation of its assets which includes the auctioning of its FCC
licenses (see Note 4); and, a transaction which, if consummated, would
restructure the Company's indebtedness and ultimately could result in the
Company continuing as a going concern with a new operating plan utilizing
the Company's FCC licenses with a different technology platform. At this
time any anticipated transaction or plan of reorganization is not expected
to provide for any recovery by any class of equity security holders. Under
either alternative, substantially all the property, plant and equipment
and inventory used in connection with the FHMA Networks, which utilitize
the Company's proprietary digital FHMA Technology, would not be used and
thus, would be sold for salvage value, if any, or abandoned.
Since the Company is pursuing various alternatives, the Company has not
adopted the liquidation basis of accounting and thus, has prepared the
consolidated financial statements on a going concern basis. The
preparation of financial statements on a going concern basis does not
purport to show (a) the realizable value of assets on a liquidation basis
or their availability to satisfy liabilities; (b) ultimate pre-petition
liability amounts that may be allowed for claims or contingencies or the
status and priority thereof; (c) the effect of any changes that may be
made to the capitalization of the Company; or (d) the effect of any
changes that may be made in the Company's business operations as the
outcome of these matters is not currently determinable. In any event, as a
result of the decision to black-out of its FHMA Networks and the terms and
conditions of the use of Cash Collateral, in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"), the Company recorded a
restructuring charge to write-down the carrying value of the Company's
FHMA Network assets and related tangible and intangible assets (See Note
4).
As debtors-in-possession, the Company is authorized to operate its
business, but may not engage in transactions outside of the normal course
of business without approval, after notice and hearing, of the Bankruptcy
Court. The United States Trustee for the District of Delaware has
appointed an Official Committee of Unsecured Creditors (the "Committee")
for the Chapter 11 Cases. The role of the Committee includes, among other
things: (a) consultation with the Company concerning the administration of
the Chapter 11 Cases; (b) investigation of the acts, conduct, assets,
liabilities, financial condition and operations of the Company; and (c)
participation in the formulation of a plan of reorganization. In
discharging these responsibilities, the Committee has standing to raise
issues with the Bankruptcy Court relating to the business of the Company
and the conduct and course of the Chapter 11 Cases. The Company is
required to pay certain expenses of the Committee, including professional
fees, to the extent allowed by the Bankruptcy Court.
As of June 29, 1998, actions to collect pre-petition indebtedness were
stayed and other contractual obligations could not be enforced against the
Company. In the Chapter 11 Cases, substantially all liabilities as of the
Filing Date are subject to resolution under a plan of reorganization to be
voted upon by the Company's creditors and stockholders and confirmed by
the Bankruptcy Court. As a result, the adjustment of the total liabilities
of the Company remains subject to a Bankruptcy Court approved plan of
reorganization, and, accordingly, the amount of such liabilities is not
presently determinable. Certain pre-petition liabilities are subject to
approval by the Bankruptcy Court for payment in the ordinary course of
business. The Bankruptcy Court has authorized the debtors to pay certain
pre-petition creditors. These permitted pre-petition payments included
employee salary and wages, certain employee benefits and expenses, sales
and use taxes, payroll taxes, and property taxes.
As debtors-in-possession, the Company has the right, subject to Bankruptcy
Court approval and certain other limitations, to assume or reject
executory, prepetition contracts and unexpired leases. In this context,
"assumption" requires the Company to perform their obligations and cure
all existing defaults under the assumed
9
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
contract or lease and "rejection" means that the Company is relieved from
its obligation to perform further under the rejected contract or lease,
but is subject to a claim for damages for the breach thereof subject to
certain limitations contained in the Bankruptcy Code. Any damages
resulting from rejection are treated as general unsecured claims in the
Chapter 11 Cases. The Company continues to review executory contracts and
cannot presently determine or reasonably estimate the ultimate outcome of,
or liability resulting from, this review.
Under the Bankruptcy Code, a creditor's claim is treated as secured only
to the extent of the value of such creditor's collateral, and the balance
of such creditor's claim is treated as unsecured. Generally, unsecured and
undersecured debt do not accrue interest after the Filing Date.
For 120 days after the date of the filing of a voluntary Chapter 11
petition, a debtor has the exclusive right to propose and file a plan of
reorganization with the Bankruptcy Court and an additional 60 days within
which to solicit acceptances to any plan so filed (the "Exclusive
Period"). The Company motioned the Bankruptcy Court to increase the
Exclusive Period for 90 days from October 27, 1998. This motion was
approved on November 13, 1998. As long as the Exclusive Period continues,
no other party may file a plan of reorganization.
If a Chapter 11 debtor fails to file its plan during the Exclusive Period
or after such plan has been filed fails to obtain acceptance of such plan
from impaired classes of creditors and equity security holders during the
exclusive solicitation period, any party in interest, including a
creditor, an equity security holder or a committee of creditors or equity
security holders, may file a plan of reorganization for such Chapter 11
debtor.
Inherent in a successful plan of reorganization is a capital structure
which permits the Company to generate sufficient cash flow after
reorganization to meet its restructured obligations and fund the current
obligations of the Company. Under the Bankruptcy Code, the rights and
treatment of pre-petition creditors and stockholders may be substantially
altered. At this time it is not possible to predict the outcome of the
Chapter 11 case, in general, or the effects of the Chapter 11 case on the
business of the Company or on the interests of creditors. At this time, it
is not expected that such a plan would provide for any recovery by any
class of equity security holders.
Generally, after a plan has been filed with the Bankruptcy Court, it will
be sent, with a Disclosure Statement approved by the Bankruptcy Court
following a hearing, to members of all classes of impaired creditors and
equity security holders for acceptance or rejection. Following acceptance
or rejection of any such plan by impaired classes of creditors and equity
security holders, the Bankruptcy Court, after notice and a hearing, would
consider whether to confirm the plan. Among other things, to confirm a
plan the Bankruptcy Court is required to find that (i) each impaired class
of creditors and equity security holders will, pursuant to the plan,
receive at least as much as the class would have received in a liquidation
of the debtor and (ii) confirmation of the plan is not likely to be
followed by the liquidation or need for further financial reorganization
of the debtor or any successor to the debtor, unless the plan proposes
such liquidation or reorganization.
To confirm a plan, the Bankruptcy Court generally is also required to find
that each impaired class of creditors and equity security holders has
accepted the plan by the requisite vote. If any impaired class of
creditors or equity security holders does not accept a plan but all of the
other requirements of the Bankruptcy Code are met, the proponent of the
plan may invoke the so-called "cram down" provisions of the Bankruptcy
Code. Under these provisions, the Bankruptcy Court may confirm a plan
notwithstanding the non-acceptance of the plan by an impaired class of
creditors or equity security holders if certain requirements of the
Bankruptcy Code are met, including that (i) at least one impaired class of
claims has accepted the plan, (ii) the plan "does not discriminate
unfairly" and (iii) the plan "is fair and equitable with respect to each
class of claims or interests that is impaired
10
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
under, and has not accepted, the plan." As used by the Bankruptcy Code,
the phrases "discriminate unfairly" and "fair and equitable" have narrow
and specific meanings unique to bankruptcy law.
The Company filed an initial Plan of Reorganization in accordance with the
terms set forth in the DIP Facility on July 21, 1998. In accordance with
the terms and conditions for the use of Cash Collateral, the Company
anticipates filing a revised Plan of Reorganization.
The Plan is subject to modifications which may be material based on
negotiations with creditor and stockholder constituencies. There can be no
assurance that the Plan as filed or as may be modified will be accepted by
creditors and/or stockholders or confirmed by the Bankruptcy Court.
A hearing to approve the Disclosure Statement is scheduled for December 2,
1998.
As of September 30, 1998, the liabilities of the Company's subsidiaries,
which are not a party to the Chapter 11 Cases and which are not guaranteed
by the Company, are included in accounts payable and accrued expenses.
The principal categories of claims classified as "Liabilities subject to
compromise" are identified below and are presented net of additional offer
discounts (in thousands):
Senior Secured Discount Notes, due July 15, 2005,
interest at 15% due semi-annually beginning
January 15, 2001 $153,501
Senior Subordinated Convertible Notes,
due February 2001 interest at 12% , due
semi-annually February 15 and August 15 75,000
HNS Convertible note due October 2, 1998,
interest at 12% due quarterly 24,500
S-C Rig credit facility, interest at 8%
due semi-annually 40,000
Vendor financing due beginning July 10, 1999
in ten equal installments of aggregate principal,
interest at 11% due semi-annually 17,678
Debenture (see Note 9) 248
Note payable (see Note 9) 611
Obligations under capital lease 2,368
Accounts payable and accrued expenses 63,218
--------
Gross liabilities subject to compromise 377,124
Less Additional offer discount:
Warrants - Senior Secured Discount Notes 20,282
Warrants - HNS Vendor Credit 6,559
Warrants - S-C Rig Credit Facility 3,450
--------
Liabilities subject to compromise $346,833
========
Additional offer discounts (approximately $30.3 million) and debt issuance
costs (approximately $5.0 million) which are reflected in other assets,
will be adjusted accordingly upon the plan of reorganization. As discussed
in Note 9, while operating during the Chapter 11 Cases, the Company is
stayed from paying interest on pre-petition indebtedness. During such time
as the Company is operating under Chapter 11, it will only report interest
expense to the extent that such interest will be paid during the Chapter
11 Proceedings at the direction of the Bankruptcy Court.
11
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reorganization expenses, which primarily represent professional fees,
incurred from the Filing Date through September 30, 1998 totaled
approximately $1.5 million and are included in general and administrative
expenses.
International Proceedings
On June 30, 1998, the Company's subsidiary in Israel, Geotek Technologies
Israel (1992) Ltd., f/k/a PowerSpectrum Technologies, ("GTI-Israel") filed
an application for an order freezing all proceedings against GTI-Israel
and for the convening of a meeting of GTI-Israel's creditors for the
purpose of reaching an arrangement of creditors in the Courts of the State
of Israel. GTI-Israel's application was rejected. On or about July 16,
1998, two of GTI-Israel's creditors filed applications for the liquidation
of GTI-Israel. The Company expects the applications to be heard, absent a
settlement, in November 1998. Pursuant to an agreement reached with one of
its creditors, and as approved by the Israeli court, all proceedings
against GTI-Israel have been stayed pending the hearing on the liquidation
applications. Pursuant to the court ordered settlement, GTI-Israel may not
sell any of its assets or take any actions outside of the ordinary course
without first a obtaining court order. GTI-Israel ceased operations during
the third quarter of 1998.
2. Basis of Presentation and Summary of Significant Accounting Policies:
Basis of Presentation and Principles of Consolidation
The consolidated unaudited balance sheet of the Company as of December 31,
1997 has been derived from the audited consolidated balance sheet
contained in the Company's Form 10-K and is presented for comparative
purposes. The consolidated financial statements of the Company include all
wholly-owned, majority-owned and controlled subsidiaries. The Company
accounts for 20%-50% owned entities by the equity method. In the opinion
of management, except for any remaining effect of the uncertainty
described in Note 1 and Note 4 and any other effect of the Chapter 11
Cases, all significant adjustments, including normal recurring adjustments
necessary to present fairly the financial position, results of operations
and cash flows for all periods presented, have been made. The results of
operations for interim periods are not necessarily indicative of the
operating results for the full year.
Certain amounts in the 1997 financial statements and notes have been
reclassified to conform to the 1998 presentation.
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 (See Note 1 and
Note 4). Estimates are used for, among other things: revenue recognition,
allowance for doubtful accounts; inventory valuation and the reserve for
the lower of cost or market; product warranty reserves; depreciation and
amortization; the estimated lives of assets and recoverability of long
lived assets, including intangibles and the related asset impairment and
restructuring charge. Liabilities arising from the rejection of executory
contracts and leases are estimated using the protection afforded the
Company under the Bankruptcy Code.
Restricted Cash
Restricted cash includes proceeds from the sale of certain assets
including the Company's European Assets (see Note 5 below) and
compensating balances under letter of credit arrangements.
At September 30, 1998, the balance of the net proceeds from the sale of
the Company's European Assets
12
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
included in restricted cash was $32.5 million. This amount includes the
five percent of the purchase price of National Band Three, Ltd.,
approximately $4.2 million (the "NB3 Proceeds"), which was placed in
escrow at the time of the sale and was released to the Company in August
1998. The Company has asserted that the NB3 Proceeds are not collateral
for the Discount Notes and the holders of the Discount Notes dispute this
assertion.
The restricted cash held in the Cash Collateral Account (approximately
$28.3 million) is collateral for the Company's Discount Notes and can only
be accessed by the Company under the terms and conditions for the use of
Cash Collateral or by further order of the Bankruptcy Court. Prior to the
entry of an order of the Bankruptcy Court, the Cash Collateral could only
be accessed by the Company in accordance with the terms of the Indenture
governing the Discount Notes. The Indenture required the Company to make
certain certifications, including but not limited to representation that
there are no defaults or Events of Defaults under the Indenture governing
the Discount Notes and required the holders of the Discount Notes
acceptance to be evidenced by the Trustee's approval. As discussed in Note
9, the Commencement of the Chapter 11 Cases constituted an Event of
Default under the Indenture governing the Discount Notes.
In the fourth quarter of 1998, the Company received a Bankruptcy Court
order permitting the use of funds held in the Cash Collateral Account (See
Note 1 and Note 3).
During the quarter ended September 30, 1998, approximately $1.1 million in
compensating balances under letter of credit agreements was released to
the Debtors upon the expiration of letters of credit
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing
earnings per share. In 1998 and 1997, basic and diluted loss per share are
computed by dividing the net income or loss, after preferred stock
dividend requirements, by the weighted average number of common shares
outstanding during the period as common stock equivalents are excluded
since the effect would be anti-dilutive.
The impact on basic and dilutive loss per share due to the Commencement of
the Chapter 11 Cases is neither determinable nor estimable.
Comprehensive Income
In 1998, the Company adopted 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. The Company has displayed comprehensive income in the
Consolidated Statement of Changes in Shareholders' Equity. The adoption of
SFAS No. 130 had no significant impact on the Company's consolidated
results of operations, financial position or cash flows.
Segment Disclosure
In 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. As
discussed previously, the Company has ceased substantially all its
operations and thus, the adoption of SFAS No. 131 will have no impact on
the Company's consolidated results of operations, financial position or
cash flows of the Company.
13
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Debtor In Possession Financing:
On October 21, 1998, the Bankruptcy Court gave approval on an interim
basis for the use of Cash Collateral to fund the Company subsequent to the
exhaustion of the initial DIP Facility as described below. The use of the
Cash Collateral, which was supported by the majority holder of the
Company's Discounts Notes and HNS, a senior creditor, is subject to
certain terms and conditions, which include but are not limited to, the
pursuit of the sale and liquidation of the Debtors' assets and filing of a
plan of reorganization in accordance with a predetermined liquidation
timetable, restoration of the Cash Collateral Account, adherence to a
budget and the granting of a replacement lien. The Company obtained final
approval on November 13, 1998. All borrowings bear interest at the rate
equal to the average interest rate earned on investments in the Cash
Collateral Account, approximately 5.25% and is payable upon the
restoration of the Cash Collateral. The budget currently allows for the
use of approximately $4.8 million of the Cash Collateral. As of November
13, 1998, approximately $2.3 million from the Cash Collateral Account has
been released to the Debtors.
On June 29, 1998, the Bankruptcy Court gave approval on an interim basis
for a $10 million DIP financing facility ("DIP Financing" or "DIP
Facility") with S-C Rig Investments III, L.P., an affiliate of the Soros
Group, a related party. The Bankruptcy Court gave final approval of the
facility on July 23, 1998.
Under the terms of the DIP Facility (Credit Agreement, as amended), there
are two tranches. The first tranche, consisting of $7 million, was fully
committed to the Company upon the interim court approval. The second
tranche, consisting of $3 million was fully committed with the entry of
the final order of the court and the satisfaction of certain conditions
including the filing of the Chapter 11 Plan of Reorganization and related
Disclosure Statement on or before July 21, 1998 and the scheduling of a
hearing on or before August 18, 1998 to approve the Disclosure Statement.
The Company filed the Chapter 11 Plan of Reorganization and related
Disclosure Statement on July 21, 1998 (See Note 1). Fundings under the DIP
Facility, to the extent the funds were committed, were effectuated in
accordance with the approved budget, payable two weeks in advance of
anticipated needs. Interest accrues at a rate of 12% per annum (or at a
default rate of 14%) and is payable monthly. Amounts borrowed under the
DIP Facility were due on the earliest of (i) October 15, 1998, (ii) the
occurrence and continuation of an Event of Default as defined in the
Credit Agreement, or (iii) the effective date of a Plan of Reorganization.
As of September 30, 1998, the Company had borrowed $10.0 million under the
DIP Facility. In October 1998, the Company repaid $7 million with the
proceeds resulting from the swap of certain FCC Licenses (See Note 8).
Pursuant to the terms and conditions for the use of Cash Collateral and
the DIP Facility, amounts outstanding under the DIP Facility and accrued
interest will be paid from the proceeds from the sale of the collateral
underlying the DIP Facility with the balance, if any, to be paid as a
super priority administrative claim.
The DIP Facility is secured by a first lien on all unencumbered assets of
the Company and a second lien on all assets that are encumbered by a
permitted lien.
4. Asset Impairment and Restructuring Charge:
As discussed in Note 1, concurrent with the commencement of the Chapter 11
Cases, the Company eliminated its sales activities in 10 of its 11 markets
in addition to other operational changes including the cessation of the
construction of new transmission sites and substantially reducing the size
of the Company's support organization including its marketing and
administrative personnel. In connection with the cessation of
construction, the Company wrote-off approximately $1.4 million related to
abandoned sites. During the period subsequent to the
14
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Filing Date, the Company continued to provide service and product support
to its existing customers in each of its 11 markets.
In September 1998, faced with the impending exhaustion of the DIP Facility
and the inability to gain support for their plan of reorganization from
the principal creditor constituencies, the Company determined that on
October 1, 1998, the Company would announce that on October 18, 1998 the
Company would be blacking-out its FHMA Networks and would cease to provide
its wireless mobile logistics systems in each of its 11 commercial
markets. Additionally, in October 1998, the Company terminated
substantially all of its employees and terminated all dealer and customer
contracts. Due to the limitations imposed by the budget which is a term
and condition to the use of Cash Collateral, the Company anticipates
abandoning substantially all assets on lessors sites as the cost to raze
these assets exceeds the potential return of doing so. Liabilities subject
to compromise does not include the possible liability that may result from
the rejection of executory contracts and leases.
In accordance with SFAS 121, upon the decision to cease operations and
black-out its FHMA Networks, the Company wrote-down the carrying value of
certain long-lived assets to their estimated fair value. The restructuring
charge was approximately $133.5 million and $134.9 million for the three
and nine months ended September 30, 1998, respectively, and represented
the write-off of all FHMA related equipment including, but not limited to,
telephone peripherals and network equipment of approximately $16.7 million
and $55.7 million, respectively. Concurrently with the decision to cease
operations, the Company closed all of its sales offices and thus,
wrote-off related leasehold improvements of approximately $0.5 million. In
addition, the Company requested and on November 13, 1998, was granted
Bankruptcy Court approval of procedures to sell substantially all its
office furniture and equipment, computers, network test equipment, and
Non-FHMA related network equipment. The Company also rejected nearly half
of its 190 site leases in October 1998 and anticipates rejecting the
remaining leases and abandoning certain assets on these sites, including
the shelters which housed the network equipment. As a result of this plan,
the Company has written-down the net carrying value of its Non-FHMA
related network assets by $52.8 million to their estimated salvage value.
Assets under capital lease have not been written-down and the related
liability is presented in Liabilities subject to compromise. It is
anticipated that the liability will be satisfied by the return of the
related assets to the lessor. To the extent the liability is not
satisfied, the balance, if any, would become an unsecured claim.
The summary of the asset impairment and restructuring charge is as follows
(dollars in thousands):
Property, plant and equipment $110,408
Inventory 16,709
Severance charges 1,000
Other asset impairment charges 6,742
--------
Total $134,859
========
Due to the limitations imposed by the budget that is a term and condition
of the use of Cash Collateral, the Company made the decision to
discontinue support of its Korean joint venture, Anam Telecommunications
Ltd. ("Anam Telecom"). Accordingly, the Company wrote-off its net
investment in Anam Telecom.
In October 1998, the Company announced that while it is evaluating other
strategic alternatives, it is pursuing the sale, through an auction
process, of its 900 MHz FCC licenses, 188 Major Trading Area ("MTA")
licenses and three Designated Frequency Area ("DFA") licenses, it
currently holds (See Note 8 and Note 10). The Company has not adjusted the
carrying value of these licenses as of September 30, 1998 as it is
currently anticipated that the auction process will result in bids and
proceeds in excess of the carrying value of these licenses.
15
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additional adjustments may be required upon the approval of the final Plan
of Reorganization; however, it is not possible at this time to determine
such amounts or if it is material to the net carrying value of such
assets.
5. Disposed of Operations and Segments:
Discontinuation of Communication Products Segment / Sale of Bogen
Communications Inc. ("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 were subsequently released. The Company has
reclassified BCI in its financial statements for 1997 and has accounted
for it as a discontinued operation. The net assets of the discontinued
operations at September 30, 1997 were $13.5 million, principally
consisting of $0.6 million in cash, $6.4 million in receivables, $7.4
million in inventory, goodwill of $8.0 million, $6.1 million in accounts
payable and accrued expenses and $4.1 million in notes payable to banks.
The table below sets forth certain information with respect to the results
of operations of BCI, as consolidated (in thousands).
For the Three Months For the Nine months
Ended September 30, 1997 Ended September 30, 1997
------------------------ ------------------------
Net products sales $13,090 $37,135
Cost of goods sold 7,091 20,045
Operating and other
expenses 3,204 13,293
Net Income $ 908 $ 1,930
Sale of European Assets / Assets Held for Sale
In connection with its strategic initiative to focus its efforts on
marketing its Driver Logistic System 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
$82.0 million in cash. Five percent of the purchase price was held in
escrow to satisfy the Company's indemnity obligations, if any, under the
agreement. As discussed in Note 2, the escrow (approximately $4.2 million)
was released in August 1998, six months after closing and is included in
Restricted Cash. The transaction resulted in a gain of $58.6 million to
the Company which was recognized during 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. The results
of operations of NB3 as consolidated by the Company through the date of
sale, February 1998, consisted of $2.5 million in revenues and $0.3
million of net income.
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
16
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
network, in December 1996, for DM7 million (approximately $3.8 million) in
cash. The investment in Terrafon at December 31, 1997 was presented as an
asset held for sale and, as such, the Company reduced the carrying value
of the investment to fair market value, resulting in a loss of $12.9
million recognized at December 31, 1997. 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.
6. Inventories:
At September 30, 1998, the Company wrote-off all of its FHMA related
inventory, approximately $16.7 million, which is included as a
restructuring charge (See Note 1 and Note 4). Prior to the decision to
cease operations, the Company did not adjust inventory values for sales
promotions and thus, the Company had neither provided an accrual nor
adjusted the carrying value of its FHMA related inventory. The results of
promotions were recorded commensurate with the sale.
7. Investments in Affiliates:
As discussed in Note 4, the Company wrote-off its investment in Anam
Telecom concurrently with its decision to pursue the use of Cash
Collateral.
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 900MHz
licenses previously granted to Geotek Communications Canada Inc. ("Geotek
Canada"), 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 $2.1 million representing their investment from the restricted
cash account. During the first quarter, subsequent to the withdrawal of
the partners, $1.9 million of the cash remaining in the joint venture was
released to the Company. In addition, during the fourth quarter of 1998,
the balance of the funds in the joint venture, approximately $0.3 million
was released to the Company. The withdrawal of the Canadian partners
resulted in the loss of the Canadian license. The Company is in the
process of dissolving Geotek Canada and GeoNet Canada.
8. Intangible Assets, net:
The Company is currently pursuing the sale of its FCC licenses through a
auction process while evaluating other strategic alternatives (See Note
4). As permitted by the FCC, in January 1998, the Company subsumed its
Designated Frequency Area ("DFA") licenses which were acquired prior to
the 1996 FCC auctions with the Company's MTA licenses so that, together,
they are regulated as a single MTA license. The Company is also
considering a transaction which, if consummated, would restructure the
Company's indebtedness and ultimately could result in the Company
continuing as a going concern with a new operating plan utilizing the
Company's FCC licenses with a different technology platform. Thus, these
assets are not classified as "Assets held for Sale."
17
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In September 1998, the Company sold two MTA licenses for approximately
$1.1 million which resulted in a gain of approximately $0.2 million which
is included in other income.
In 1997, the Company entered into an agreement to swap certain 900 MHz
licenses for additional 900 MHz licenses subject to certain conditions
including but not limited to FCC approval. Under the agreement, the
Company was to receive $9 million in cash of which $2.0 million was
received in January 1998 upon partial closing and transfer of certain
licenses. The Company did not record a receivable or gain on this
transaction at September 30, 1998 as the entire transaction was not
complete. Under the DIP Facility, the Company pledged the remaining
proceeds from this agreement to the DIP lender. The Company obtained
bankruptcy court order authorizing it to assume, and perform under, this
contract and closed the transaction in October 1998. Concurrent with the
closing, the Company received $7.0 million in cash which was remitted to
S-C Rig III, L.P., the holder of the Company's DIP Facility. The Company
expects to record a gain of approximately $6.9 million in the fourth
quarter of 1998 in connection with the completion of the transaction.
9. Liabilities Subject to Compromise/Long-Term Debt:
Since the commencement of the Chapter 11 Cases, the Company did not make
its scheduled interest payments of approximately $0.7 million on each of
June 30 and September 30, 1998 on its $24.5 million Loan agreement with
HNS ("HNS Loan Agreement"), $4.5 million on August 15, 1998 on its Senior
Subordinated Convertible Notes ("Convertible Notes") nor did it make $1.6
million interest payment on its $40 million line of credit facility with
S-C Rig III L.P. ("S-C Rig Loan Facility"). The commencement of the
Chapter 11 Cases and missed interest payments constitute events of default
under the agreements governing the HNS Loan Agreement, Convertible Notes
and S-C Rig Loan Facility. Additionally, the Chapter 11 Cases and defaults
under these agreements constitute an event of default under the Indenture
governing the Company's Senior Secured Discount Notes. As a result of the
commencement of the Chapter 11 Cases, all debt has been accelerated, but
payments are stayed and are not currently being made. The entire amounts
outstanding at June 29, 1998 have been classified as "Liabilities subject
to compromise."
While operating during the Chapter 11 Cases, the Company is stayed from
paying interest on pre-petition indebtedness. During such time as the
Company is operating under Chapter 11, it will only report interest
expense to the extent that such interest will be paid during the Chapter
11 Proceedings at the direction of the Bankruptcy Court. The amount of
interest in conjunction with its Indebtedness including its Senior Secured
Discount Notes which has not been accrued or expensed as a result of the
commencement of the Chapter 11 Cases was approximately $10.1 million for
the period from the Filing Date through September 30, 1998.
In December 1997, the Indenture governing the Company's Discount Notes was
amended allowing the Company to utilize the net 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
permitted the Company's use of net proceeds from the sale of NB3 and
Terrafon, approximately $85.8 million, as follows: 20% to repay the
Discount Notes; 40% for working capital; and 40% for replacement assets
defined as qualifying capital expenditures.
The Indenture governing the Discount Notes placed restrictive convenants
on the Company, the most restrictive of which were related to making
certain investments in assets other than telecommunications assets,
incurring additional debt, use of proceeds from possible future assets
sales, and paying dividends on common shares. The voluntary bankruptcy
petition constituted an Event of Default under the Indenture governing the
Discount Notes.
18
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In March 1998, under the terms of the amended Indenture, the Company made
an offer to purchase a pro-rata portion of the accreted value of the
Company's Discount Notes in the aggregate $16.2 million. In May 1998, the
accreted value, $723.23 per unit, of 22,206 units of the Discount Notes
were repaid to the Holders of the Discount Notes. Additionally, the
Company accelerated the amortization of the Warrants and the related debt
issuance costs of approximately $2.2 million and $0.3 million,
respectively, in connection with the Discount Notes tendered.
In September 1996, in connection with the HNS Vendor Credit Facility, the
Company entered into an agreement with HNS, whereby HNS agreed to
manufacture at least 50% of certain components utilized by the Company in
its 900 MHz infrastructure equipment through June 1999. During the first
six months of 1998, the Company drew down $6.5 million and, at June 29,
1998, $17.7 million was outstanding under the vendor credit facility,
which includes the accrued interest for the six month period ended June
15, 1998 of approximately $0.8 million which, in accordance with the
Vendor Credit Facility, was added to the principal value.
In 1996, in connection with the HNS Vendor Credit Facility, the Company
issued HNS warrants to purchase 2.5 million shares of the Company's Common
Stock at $8.63 to $12.63 ("HNS Warrants"). The HNS Warrants, which were
valued at approximately $8.7 million and are being amortized over seven
years, were recorded as Other assets. At September 30, 1998, the
unamortized portion of approximately $6.6 million was reclassed to
Liabilities subject to compromise as additional offer discount.
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 were registered. In April 1998, 3.0 million shares were issued upon
registration. Due to the decline in the Company's stock price, the 3.0
million shares did not satisfy the entire obligation. Approximately $0.6
million remains outstanding and is included in Liabilities subject to
compromise.
In April 1998, the Company entered into an agreement to repay a loan for
CD$2.0 million (USD$1.4 million) plus accrued interest, which the Company
guaranteed, at a rate of 115% to the former owner of its subsidiary in
Canada, GMSI, Inc., in shares of the Company's Common Stock. The
conversion rate was based upon the stock price at the time of conversion.
The Company registered 2.2 million shares of Common Stock to satisfy this
obligation. However, due to the decline in the price of the Company's
Common Stock, the issuance of these shares in May 1998 did not satisfy the
entire obligation. Approximately $0.2 million remains outstanding and is
included in Liabilities subject to compromise.
10. Commitments and Contingent Liabilities:
Manufacturing Commitments
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 agreed to 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 which is
included in Liabilities subject to compromise. During 1996 the Company
made advances on account of production of $11.5 million to HNS, which is
included in Advances to Related Parties. Concurrently with the
commencement of the Chapter 11 Cases, the Company has reclassed this
advance to non current assets as it was uncertain whether or not this
amount would be used to offset production costs within the next 12 months
due to the aforementioned uncertainty. HNS has sought to offset this
amount
19
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
against certain pre-petition unsecured liabilities which arose under this
agreement and are currently included in Liabilities subject to compromise.
Employee Retention
On November 13, 1998, the Company received a Bankruptcy Court order
allowing for the payment of bonuses ("Retention Bonuses") to certain
employees who remain with the Company based on a timetable approved by the
Bankruptcy Court. These Retention Bonuses have not been accrued by the
Company as they are not earned unless the employee remains with the
Company through their specific termination date. The total amount of the
Retention Bonuses are $1.0 million and will be paid as an administrative
claim.
FCC Build-out Requirements
Under the terms of the MTA licenses, an MTA will be deemed "constructed'
if one-third of the market's population is serviced 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
holder of the license may elect to request that the FCC waive the
requirements for August 12, 1999 and agree to provide substantial service
to the MTA by August 12, 2001. There can be no assurance that the holder
of the license will be granted such waiver by the FCC. As discussed in
Note 4, in October 1998, the Company announced that the Company is selling
its FCC licenses through an auction process.
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.
On or about May 1994, creditors placed Harris into bankruptcy. In response
to the Company's lawsuit, Harris and its subsidiaries filed a lawsuit
against the Company in the courts of the State of Israel requesting a
declaratory judgment that the Company entered into a binding agreement for
the purchase by the Company of a significant interest in certain wireless
communication business assets owned by Adacom Technologies Ltd., ("ATL"),
an affiliate of Harris and an Israeli publicly traded company, and
subsequently breached such agreement. In July 1997, the plaintiffs filed a
motion with the court seeking to amend the Statement of Claim to assert a
claim for monetary damages of approximately $27 million arising out of the
same transaction. In addition, the plaintiffs' motion also sought to add
Yaron Eitan, formerly the Company's Chairman of the Board and CEO, 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 plaintiffs' motion was granted on November 15, 1998.
The Company may elect to appeal the court order. Although, the Company
believes that the plaintiffs' claims are primarily an attempt to delay
efforts to collect Harris's debt to the Company and the Company has
meritorious defense, the Company may not defend this action due to its
lack of Financial resources. If the Company does not defend the claim and
if a default judgment is entered or Adacom otherwise prevails, the Company
believes the resulting amount would be a prepetition claim.
The Company developed and utilized technology for substantially all of the
services and products it offered 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 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 arising in
the ordinary course of business, which may or may not be covered by
insurance. 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.
20
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Bar Date for Filing
Pursuant to an order of the Bankruptcy Court, October 30, 1998 was fixed
as the last date for creditors to file a proof of claim against the
Debtors in the Chapter 11 Cases. As of November 11, 1998, the Debtors'
claims agent received approximately 800 proof of claims totaling
approximately $566.0 million. The Company is in the process of reviewing
these claims to ascertain their validity and to the extent that the claims
are in excess of the amounts the Company believes are due and owing, the
Company will file objections to the allowance of such claims.
11. Stockholders' Equity
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 in shares of Series O and Q
Preferred Stock 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 $15.9 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 $12.4 million of Series O and Q Stock into Common Stock at $1.00
per share. Dividends paid in Common Stock on Series R Stock and Series S
Stock in 1998 and prior to the commencement of the Chapter 11 Cases were
142,000 and 52,000 shares, respectively.
On May 15, 1998, the Company and the holders of its Series Q, Series R and
Series S Stock, excluding one Series Q investor, reached an agreement
pursuant to which approximately $13 million face amount of the Series Q, R
and S Stock converted into an aggregate of approximately 16 million shares
of Common Stock, valued at $.80 per share. The 16 million shares of Common
Stock issued upon conversion and exercise are currently covered by a
registration statement that is effective under the Securities Act of 1933,
as amended. The remaining approximately $11 million value of the Series Q,
R and S Stock was exchanged for shares in the Company's new Preferred
Stock Series T ("Series T Stock"). The Series T Stock are convertible into
Common Stock valued at a price of $1.25 per share and do not include
rights to exchange or participate in any New Financings as provided in the
Series R and S agreements. Pursuant to the terms of the Series R and S
Exchange Agreement, the holders would have had the right on May 15, 1998
to make an Election for the Series R and S Preferred Stock to convert into
common stock at a discount to market price at the time of conversion.
The Company did not declare or pay dividends on its Series H, I, K, L, M,
N, O, P, Q, and T Preferred Stock in the second and third quarters of
1998.
During the nine months ended September 30, 1998, 418 shares of Series O
Cumulative Convertible Preferred Stock ("Series O Stock"), including
accrued dividends, were converted into 24,807,000 shares of Common Stock
and the Company paid dividends of approximately 236,000 shares of Common
Stock with a value of approximately $0.2 million.
During the nine months ended September 30, 1998, the Company paid
dividends to the holders of Series P Cumulative Convertible Preferred
Stock ("Series P Stock") of approximately 84,000 shares of Common Stock
with a value of approximately $0.1 million. Additionally, during the first
quarter of 1998, holders of the Series P Stock agreed to convert $7.5
million plus accrued dividends into 7.5 million shares of the Company's
Common
21
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock. These shares were issued upon their registration.
During the nine months ended September 30, the Company paid dividends to
the holders of Series Q Cumulative Convertible Preferred Stock ("Series Q
Stock") of approximately 268,000 shares of Common Stock with a value of
approximately $0.4 million and approximately 165.5 shares of Series Q
Stock, including accrued dividends, were converted into 58,821,000 shares
of Common Stock.
In April 1998, the Company settled an action brought against the Company
by its former advisors for $0.8 million in 1.1 million shares of the
Company's Common Stock.
In May 1998, a holder of the Company's Series N Cumulative Convertible
Preferred Stock converted 950 shares, face value $950,000 into 86,363
shares of the Company's Common Stock.
12. Certain Other Related Party Transactions:
The Company incurred expenses of $150,000 in the first six months of 1998
and $225,000 during the nine months ended September 30, 1997, pursuant to
its consulting agreement with a company affiliated with George Soros. At
the commencement of the Chapter 11 Cases, $225,000 payable under this
agreement remained unpaid and is included in Liabilities subject to
compromise. Entities affiliated with George Soros also hold the DIP
Facility, 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 Discount Notes due 2005, and S-C Rig Credit Facility. As
described in Note 9, the Company completed a tender offer for $16.2
million of the accreted value of the Discount Notes. Holders of the
Discount Notes were repaid the prorata portion of the Discount Notes
Tendered. Accordingly, entities affiliated with George Soros received
approximately $1.5 million.
GTI-Israel entered into a subcontractor agreement with Rafael under which
Rafael participated in the development of the digital wireless network
deployed by the Company and its subsidiaries in the United States and
Korea. Engineering and development expense for the three and nine months
ended September 30, 1998 includes approximately $0.6 and $6.6 million,
respectively, for research performed by Rafael. GTI-Israel has also
entered into agreements with Rafael under which Rafael manufactured 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. At the
commencement of the Chapter 11 Cases, GTI-Israel had a $21.0 million
payable to Rafael which is reflected in Liabilities subject to compromise.
13. NASDAQ and Pacific Stock Exchange:
The NASDAQ Stock Market, Inc. ("NASDAQ") advised the Company that it was
reviewing the Company's eligibility for continued listing on NASDAQ
because the Company did not meet certain of the requirements for continued
listing of its Common Stock. As part of NASDAQ's review process, the
Company submitted to NASDAQ a response demonstrating the Company's plans
to achieve compliance with the listing maintenance standards. On April 23,
1998, the Company received a letter from NASDAQ stating that the Company's
securities were scheduled to be delisted from NASDAQ effective with the
close of business on April 30, 1998. The Company requested a hearing on
that decision, which under NASDAQ's rules automatically stayed any
delisting pending a ruling by the hearing panel. This hearing occurred on
June 4, 1998 and on June 29, 1998 the Company was informed that it would
be delisted.
22
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Additionally, in July 1998, the Company was informed by the Pacific Stock
Exchange that a hearing would be set to evaluate the continued listing of
the Company on the Pacific Stock Exchange. The Company declined the
opportunity to appear before the hearing. The Pacific Stock Exchange
delisted and suspended trading of the Company's Common Stock on August 5,
1998.
14. Subsequent Events:
In October 1998, the Company honored a conversion notice from a holder of
the Company's Series Q Stock which resulted in the issuance of
approximately 9.1 million shares of Common Stock. At October 31, 1998, the
Company has issued all shares of Common Stock authorized by the Company's
Board of Directors and Shareholders.
On October 1, 1998, the Company announced that on October 18, 1998 the
Company would be blacking-out its U.S. based digital wireless networks and
cease to provide its wireless mobile logistics systems in each of its 11
commercial markets. Additionally, the Company terminated substantially all
of its employees and terminated all dealer and customer contracts.
As discussed in Note 4, in October 1998, the Company announced that the
Company is pursuing the sale of its FCC licenses through an auction
process while evaluating other strategic alternatives.
As discussed in Note 1, on November 13, 1998, the Company received a final
order from the Bankruptcy Court authorizing the Debtors to utilize Cash
Collateral to fund the Chapter 11 Cases.
15. 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 GmbH Holding Corporation and BCI. As discussed in
Note 5, the Company sold NB3 and BCI.
The Guarantor Information of Geotek Communications, Inc. and Subsidiaries
has been presented on pages 25 through 30 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.
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:
23
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 and
reflects the entities which are not a
party to the Chapter 11 Cases. NB3 and
the Company's investment in Terrafon, at
December 31, 1997, were 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.
24
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm. Inc Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,409 $ 264 $ 57 $ 4,730
Restricted cash 35,133 -- 48 35,181
Accounts receivable trade, net -- 976 2,187 3,163
Inventories, net -- 189 117 306
Prepaid expenses and other assets 980 1,185 135 2,300
--------- --------- --------- ---------
Total current assets 40,522 2,614 2,544 45,680
--------- --------- --------- ---------
Inter-company account 514,902 53,319 -- $(568,221)
Investments in affiliates 829 -- -- -- 829
Property, plant and equipment, net 2,349 423 527 -- 3,299
Intangible assets, net 1,667 68,084 -- -- 69,751
Advance to related party -- 11,500 -- -- 11,500
Other assets 7,459 423 -- (2,875) 5,007
Investments in Subsidiaries, at cost 47,918 -- -- (47,918) --
--------- --------- --------- --------- ---------
$ 615,646 $ 136,363 $ 3,071 $(619,014) $ 136,066
========= ========= ========= ========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 1,043 $ 1,261 $ 3,010 $ 5,314
Accrued expenses and other 1,648 864 5,466 7,978
Borrowings under debtor in possession
facility 10,000 -- -- 10,000
--------- --------- --------- ---------
Total current liabilities 12,691 2,125 8,476 23,292
--------- --------- --------- ---------
Inter-company account -- 489,320 78,901 $(568,221) --
Liabilities subject to compromise 259,085 67,581 20,167 346,833
Long-term debt -- -- 1,574 (1,574) --
Other non-current liabilities -- -- 2,875 (2,875) --
Redeemable preferred stock 40,000 -- -- -- 40,000
Shareholders' equity:
Preferred stocks, $.01 par value 11 -- -- -- 11
Common stock, $.01 par value 1,898 -- -- -- 1,898
Capital in excess of par value 448,195 40,621 35,261 (46,344) 477,733
Foreign currency translation
adjustment (139) -- (139)
Accumulated deficit (144,848) (463,284) (144,044) -- (752,176)
Treasury stock, at cost (1,386) (1,386)
--------- --------- --------- --------- ---------
$ 303,870 $(422,663) $(108,922) $ (46,344) $(274,059)
--------- --------- --------- --------- ---------
$ 615,646 $ 136,363 $ 3,071 $(619,014) $ 136,066
========= ========= ========= ========= =========
</TABLE>
25
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. 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
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,413 $ 23 $ 1,957 $ 13,393
Restricted cash 16,140 16,140
Accounts receivable 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
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
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>
26
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine months ended September 30, 1998
(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 $ -- $ 1,971 $ 9,408 $ (3,656) $ 7,723
Service income -- 4,425 3,845 -- 8,270
-------- --------- -------- -------- ---------
Total revenues -- 6,396 13,253 (3,656) 15,993
-------- --------- -------- -------- ---------
Costs and expenses:
Cost of goods sold -- 10,163 8,512 (2,462) 16,213
Cost of services -- 14,152 1,457 15,609
Engineering and development -- 3,394 6,392 25 9,811
Marketing 150 14,747 1,447 -- 16,344
General and administrative 10,689 6,402 5,719 -- 22,810
Interest expense 21,585 2,309 468 (183) 24,179
Interest income (1,861) (273) (11) 183 (1,962)
Depreciation 517 15,076 2,566 (1,288) 16,871
Amortization of intangibles 4,347 770 278 -- 5,395
Equity in losses of investees 14,858 -- -- (1,252) 13,606
Restructuring charge 12,026 128,374 11,633 (17,174) 134,859
Other expenses (income) (2,329) 459 448 -- (1,422)
-------- --------- -------- -------- ---------
Total costs and expenses 59,982 195,573 38,909 (22,151) 272,313
-------- --------- -------- -------- ---------
Loss on operations before gain
on sale of subsidiary (59,982) (189,177) (25,656) 18,495 (256,320)
Gain on sale of subsidiary 58,638 -- -- -- 58,638
-------- --------- -------- -------- ---------
Income (loss) from continuing
operations before taxes on
income and discontinued
operations (1,344) (189,177) (25,656) 18,495 (197,682)
Taxes on income -- -- (309) -- (309)
-------- --------- -------- -------- ---------
Net income (loss) $ (1,344) $(189,177) $(25,965) $ 18,495 $(197,991)
======== ========= ======== ======== =========
</TABLE>
27
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine months ended September 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Geotek
Geotek Guarantor Non-Guarantor Reclassifications Comm., Inc.
Comm. Inc Subsidiaries Subsidiaries & Eliminations & Subsidiaries
--------- ------------ ------------ -------------- --------------
(1) (2) (3) (4)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales $ 3,191 $ 49,022 ($21,484) $ 30,729
Service income 1,042 23,755 (71) 24,726
-------- -------- -------- ---------
Total revenues 4,233 72,777 (21,555) 55,455
-------- -------- -------- ---------
Costs and expenses:
Cost of goods sold 18,411 39,536 (16,491) 41,456
Cost of services 13,397 7,488 (359) 20,526
Engineering and development 8,165 21,083 203 29,451
Marketing $ 225 15,131 5,730 21,086
General and administrative 6,711 8,981 13,467 29,159
Interest expense 24,242 2,216 1,009 (487) 26,980
Interest income (3,025) (1,091) 487 (3,629)
Depreciation 250 9,173 5,295 (851) 13,867
Amortization of intangibles 1,558 627 1,527 (537) 3,175
Equity in losses of investees 1,230 3,403 4,633
Other income (289) (638) 4 834 (89)
-------- -------- -------- -------- ---------
Total Costs and expenses 30,902 75,463 97,451 (17,201) 186,615
-------- -------- -------- -------- ---------
Loss from continuing operations
before taxes on income and
discontinued operations (30,902) (71,230) (24,674) (4,354) (131,160)
Taxes on income -- -- (796) -- (796)
-------- -------- -------- -------- ---------
Loss from continuing operations
before discontinued operations (30,902) (71,230) (25,470) (4,354) (131,956)
Discontinued operations:
Income from discontinued
operations -- -- 1,930 -- 1,930
-------- -------- -------- -------- ---------
Net loss $(30,902) $(71,230) $(23,450) $ (4,354) $(130,026)
======== ======== ======== ======== =========
</TABLE>
28
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine months ended September 30, 1998
(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 income (loss) $ (1,344) $(189,177) $(25,965) $ 18,495 $(197,991)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation & amortization 5,283 15,603 2,669 (1,288) 22,267
Equity in losses of investees 14,858 -- -- (1,252) 13,606
Non-cash interest expense 17,738 742 -- -- 18,480
Restructuring charge 12,026 128,374 11,633 (17,174) 134,859
Issuance of Common Stock for management
consulting fee 99 -- -- -- 99
Gain on sale of subsidiary (58,638) -- -- -- (58,638)
Other, net (1,194) (450) -- -- (1,644)
Changes in working capital, net of
liabilities subject to compromise 3,883 2,285 2,210 -- 8,378
-------- --------- -------- -------- ---------
Net cash used in operating activities (7,289) (42,623) (9,453) (1,219) (60,584)
-------- --------- -------- -------- ---------
Cash flows from investing activities:
Cash invested in unconsolidated
subsidiaries, net (170) -- -- -- (170)
Proceeds from swap/sale of licenses -- 3,162 -- -- 3,162
Acquisitions of property, plant & equipment (409) (15,677) (1,633) 1,039 (16,680)
Capitalized interest on construction
in progress and pre-commercial
spectrum licenses -- (2,618) -- -- (2,618)
Change in restricted cash (18,993) -- (48) -- (19,041)
Contract deposits - other current assets -- 727 632 -- 1,359
Proceeds from sale of subsidiary 87,098 -- -- -- 87,098
Other -- 175 -- -- 175
-------- --------- -------- -------- ---------
Net cash provided by investing activities 67,526 (14,231) (1,049) 1,039 53,285
-------- --------- -------- -------- ---------
Cash flows from financing activities:
Borrowings under DIP Facility 10,000 10,000
Draw down of vendor financing agreements -- 6,536 -- -- 6,536
Repayment of Senior Secured Notes (16,196) -- -- -- (16,196)
Repayment of capital lease obligation (361) -- -- -- (361)
Payment of preferred dividends (1,265) -- -- -- (1,265)
Other (95) -- -- -- (95)
Intercompany financing (59,324) 50,559 8,585 180 --
-------- --------- -------- -------- ---------
Net cash provided by financing activities (67,241) 57,095 8,585 -- 1,381
-------- --------- -------- -------- ---------
Effect of exchange rate changes on cash -- -- 17 -- 17
-------- --------- -------- -------- ---------
Increase (decrease) in cash & cash equivalents (7,004) 241 (1,900) -- (8,663)
Cash & cash equivalents, beginning of period 11,413 23 1,957 -- 13,393
-------- --------- -------- -------- ---------
Cash & cash equivalents, end of period $ 4,409 $ 264 $ 57 $ -- $ 4,730
======== ========= ======== ======== =========
</TABLE>
29
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. Condensed Consolidating Financial Information For Guarantors ("Guarantor
Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine months ended September 30, 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>
Cash Flows From Operating Activities:
Net loss $ (30,902) $ (71,230) $(23,540) $ (4,354) $(130,026)
Adjustments to reconcile net loss to net
cash used in operating activities:
Discontinued operations:
(Income) from operations -- -- (1,930) -- (1,930)
Depreciation & amortization 1,807 10,834 5,055 (185) 17,511
Equity in losses of investees 1,230 3,403 4,633
Provision for inventory reserve for the
lower of cost or market 1,099 1,099
Non cash interest expense 21,432 2,246 23,678
Other 30 (130) 72 (28)
Change in working capital (3,800) (1,837) 2,489 415 (2,733)
--------- --------- -------- --------- ---------
Net cash used in operating activities (10,203) (59,018) (14,451) (4,124) (87,796)
--------- --------- -------- --------- ---------
Cash flows from investing activities:
Acquisition of licenses (708) (708)
Acquisitions of property & equipment (892) (37,963) (4,854) 4,147 (39,562)
Decrease in contract deposits 481 481
Change in cash for net assets of
discontinued operations 269 269
Interest capitalized on construction
in progress and precommercial
spectrum licenses (1,256) (5,639) (6,895)
Cash invested in unconsolidated
subsidiaries, net (3,246) (2,584) (5,830)
Decrease in restricted cash (155) 1,624 1,469
Other 274 274
--------- --------- -------- --------- ---------
Net cash (used in) provided by
investing activities (5,549) (44,036) (5,064) 4,147 (50,502)
--------- --------- -------- --------- ---------
Cash flows from financing activities:
Net repayments under line of
credit agreements (3,247) (3,247)
Borrowings under credit facility 20,000 20,000
Proceeds from issuance of convertible
preferred stock 55,000 55,000
Repayment of capital lease obligation (164) (164)
Proceeds from exercise of warrants
& options 212 212
Payment of preferred dividends (3,839) (3,839)
Capital contributed from parent (127,142) 103,524 23,641 (23)
Other -- -- 20 -- 20
--------- --------- -------- --------- ---------
Net cash (used in) provided by
financing activities (55,933) 103,524 20,414 (23) 67,982
--------- --------- -------- --------- ---------
Effect of exchange rate changes on cash 187 187
(Decrease) increase in cash &
cash equivalents (71,685) 470 1,086 (70,129)
Cash & cash equivalents, beginning
of period 94,218 364 8,138 102,720
--------- --------- -------- --------- ---------
Cash & cash equivalents, end of period $ 22,533 $ 834 $ 9,224 -- $ 32,591
========= ========= ======== ========= =========
</TABLE>
30
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and
the notes thereto, included elsewhere in this report and the 1997 Annual
Report on Form 10-K. The Company has not adopted the liquidation basis of
accounting and thus, has prepared the consolidated financial statements on
a going concern basis which contemplates the realization of assets and
liquidation of liabilities in the ordinary course of business (See Below
and Note 1 to the consolidated unaudited financial statements).
Results of Operations
General
On June 29, 1998 (the "Filing Date"), Geotek Communications, Inc.
("Geotek") and 73 of its direct and indirect domestic subsidiaries
(collectively referred to as "the Company") filed voluntary petitions
under Chapter 11 (the "Chapter 11 Cases") of the United States Bankruptcy
Code ("Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware ("Bankruptcy Court"). Since June 29, 1998, the
Company has been operating as a Debtor in Possession ("DIP").
At the commencement of the Chapter 11 Cases, the Company obtained a $10
million Debtor in Possession Financing Facility (the "DIP Facility") from
S-C Rig Investments III, L.P., an affiliate of the Soros Group, a related
party, to allow the Company to continue to fund its short term working
capital needs in the Chapter 11 Cases (See Note 3). In order to satisfy
certain requirements under its DIP Facility, the Company developed a short
term business plan and budget pursuant to which the Company, among other
things, discontinued its sales activities in 10 of its 11 commercial
markets, ceased construction of additional transmission sites in all of
its markets and substantially reduced the size of the Company's support
organization including its marketing and administrative personnel. As part
of this short term business plan and budget, the Company was focusing all
of its sales resources in its Miami market. Pursuant to the Company's
short term business plan, the Company continued to provide product support
to existing customers in each of its 11 markets.
In the period subsequent to the Filing Date, the Debtors engaged in
negotiations with its principal creditor constituencies and potential
strategic partners and equity investors. Despite extensive efforts that
included the development of a new long-term business plan, the Debtors
were unable to obtain sufficient creditor support or to raise the
necessary capital for the new long-term business plan and proposed plan of
reorganization.
In September 1998, faced with the impending exhaustion of the DIP Facility
and the inability to gain support for their plan from the principal
creditor constituencies, the Company determined that on October 1, 1998,
the Company would announce that on October 18, 1998 the Company would be
blacking-out its U.S. based digital wireless networks ("FHMA Networks")
and would cease to provide its wireless mobile logistics systems in each
of its 11 commercial markets. Additionally, in October 1998, the Company
terminated substantially all of its employees and terminated all dealer
and customer contracts.
To meet its financing needs, the Company made a motion to obtain a
bankruptcy court order permitting the use of funds held in a cash
collateral account ("Cash Collateral" or "Cash Collateral Account") (See
Note 2 -- Restricted Cash). The use of the Cash Collateral, which was
supported by the majority holder of the Company's 15% Senior Secured
Discounts Notes ("Discount Notes") and Hughes Network Systems, Inc.
("HNS"), a secured creditor, is subject to certain terms and conditions,
which include but are not limited to, the pursuit of the sale and
liquidation of the Debtors' assets and filing of a plan of reorganization
in accordance with a predetermined liquidation timetable,
31
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
restoration of the Cash Collateral Account, adherence to a budget and the
granting of a replacement lien. The Company obtained initial court
approval on October 21, 1998 and obtained final approval on November 13,
1998.
Currently, the Company is pursuing two alternatives: the orderly
liquidation of its assets which includes the auctioning of its FCC
licenses (see Note 4); and, a transaction which, if consummated, would
restructure the Company's indebtedness and ultimately could result in the
Company continuing as a going concern with a new operating plan utilizing
the Company's FCC licenses with a different technology platform. At this
time any anticipated transaction or plan of reorganization is not expected
to provide for any recovery by any class of equity security holders. Under
either alternative, substantially all the property, plant and equipment
and inventory used in connection with the FHMA Networks, which utilitize
the Company's proprietary digital FHMA Technology, would not be used and
thus, would be sold for salvage value, if any, or abandoned.
Since the Company is pursuing various alternatives, the Company has not
adopted the liquidation basis of accounting and thus, has prepared the
consolidated financial statements on a going concern basis. The
preparation of financial statements on a going concern basis does not
purport to show (a) the realizable value of assets on a liquidation basis
or their availability to satisfy liabilities; (b) ultimate pre-petition
liability amounts that may be allowed for claims or contingencies or the
status and priority thereof; (c) the effect of any changes that may be
made to the capitalization of the Company; or (d) the effect of any
changes that may be made in the Company's business operations as the
outcome of these matters is not currently determinable. In any event, as a
result of the decision to black-out of its FHMA Networks and the terms and
conditions of the use of Cash Collateral, in accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"), the Company recorded a
restructuring charge to write-down the carrying value of the Company's
FHMA Network assets and related tangible and intangible assets (See Note 4
to the consolidated unaudited financial statements).
As debtors-in-possession, the Company is authorized to operate its
business, but may not engage in transactions outside of the normal course
of business without approval, after notice and hearing, of the Bankruptcy
Court. The United States Trustee for the District of Delaware has
appointed an Official Committee of Unsecured Creditors (the "Committee")
for the Chapter 11 Cases.
On June 30, 1998, the Company's subsidiary in Israel, Geotek Technologies
Israel (1992) Ltd., f/k/a PowerSpectrum Technologies, ("GTI-Israel") filed
an application for an order freezing all proceedings against GTI-Israel
and for the convening of a meeting of GTI-Israel's creditors for the
purpose of reaching an arrangement of creditors in the Courts of the State
of Israel. GTI-Israel's application was rejected. On or about July 16,
1998, two of GTI-Israel's creditors filed applications for the liquidation
of GTI-Israel. The Company expects the applications to be heard, absent a
settlement, in November 1998. Pursuant to an agreement reached with one of
its creditors, and as approved by the Israeli court, all proceedings
against GTI-Israel have been stayed pending the hearing on the liquidation
applications. Pursuant to the court ordered settlement, GTI-Israel may not
sell any of its assets or take any actions outside of the ordinary course
without first a obtaining court order. GTI-Israel ceased operations during
the third quarter of 1998.
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 were engaged in
marketing and enhancing its Driver Logistics System in the United States.
Additionally, the wireless communications subsidiaries were involved in:
enhancing the proprietary FHMA 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
32
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
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 Networks in the
provinces of Ontario, Quebec and British Columbia utilizing 900MHz
licenses previously granted to Geotek Communications Canada Inc. ("Geotek
Canada"), 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 $2.1 million representing their investment from the restricted
cash account. During the first quarter, subsequent to the withdrawal of
the partners, $1.9 million of the cash remaining in the joint venture was
released to the Company. In addition, during the fourth quarter of 1998,
the balance of the funds in the joint venture, approximately $0.3 million
was released to the Company. The withdrawal of the Canadian partners
resulted in the loss of the Canadian license. The Company is in the
process of dissolving Geotek Canada and GeoNet 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
system on an 800MHz frequency. Due to the limitations imposed by the
budget that is a term and condition of the use of Cash Collateral, the
Company made the decision to discontinue support of its Korean joint
venture, Anam Telecom. Accordingly, the Company wrote-off its net
investment in Anam Telecom.
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 Network equipment and to supervise
network construction. HEI, in turn, will sell such equipment to the Korean
regional operators. All contracts were denominated in dollars.
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 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.
Due to the limitations imposed by the budget that is a term and condition
of the use of Cash Collateral, the Company made the decision to
discontinue support of Geotek Argentina.
In connection with its strategic initiative to focus its efforts on
marketing the Driver Logistics 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 $82.0 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").
33
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
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. For purposes of the following discussions, year to
date represents the nine months ended September 30.
Consolidated
Concurrent with the commencement of the Chapter 11 Cases, the Company
eliminated its sales activities in 10 of its 11 markets in addition to
other operational changes including cessation of the construction of new
transmission sites and substantially reducing the size of the Company's
support organization including its marketing and administrative personnel.
During the period subsequent to the Filing Date, the Company continued to
provide service and product support to its existing customers in each of
its 11 markets.
In September 1998, faced with the impending exhaustion of the DIP Facility
and the inability to gain support for their plan of reorganization from
the principal creditor constituencies, the Company determined that on
October 1, 1998, the Company would announce that on October 18, 1998 the
Company would be blacking-out its FHMA Networks and would cease to provide
its wireless mobile logistics systems in each of its 11 commercial
markets. Additionally, in October 1998, the Company terminated
substantially all of its employees and terminated all dealer and customer
contracts. Due to the limitations imposed by the budget which is a term
and condition to the use of Cash Collateral, the Company anticipates
abandoning substantially all assets on lessors sites as the cost to raze
these assets exceeds the potential return of doing so. Liabilities subject
to compromise does not include the possible liability that may result from
the rejection of executory contracts and leases.
In accordance with SFAS 121, upon the decision to cease operations and
black-out its FHMA Networks, the Company wrote-down the carrying value of
certain long-lived assets to their estimated fair value. The restructuring
charge was approximately $134.9 million and represented the write-off of
all FHMA related equipment including, but not limited to, telephone
peripherals and network equipment of approximately $16.7 million and $55.7
million, respectively. Concurrently with the decision to cease operations,
the Company closed all of its sales offices and thus, wrote-off related
leasehold improvements of approximately $0.5 million. In addition, the
Company requested and on November 13, 1998, was granted Bankruptcy Court
approval for procedures to sell substantially all its office furniture and
equipment, computers, network test equipment, and Non-FHMA related network
equipment. The Company also rejected nearly half of its 190 site leases in
October 1998 and anticipates rejecting the remaining leases and abandoning
certain assets on these sites, including the shelters which housed the
network equipment. As a result of this plan, the Company has written-down
the net carrying value of its Non-FHMA related network assets by $54.2
million to their estimated salvage value. Assets under capital lease have
not been written-down and the related liability is presented in
Liabilities subject to compromise. It is anticipated that the liability
will be satisfied by the return of the related assets to the lessor.
The summary of the asset impairment and restructuring charge is as follows
(dollars in thousands):
Property, plant and equipment $110,408
Inventory 16,709
Severance charges 1,000
Other asset impairment charges 6,742
--------
Total $134,859
========
Due to the limitations imposed by the budget that is a term and condition
of the use of Cash Collateral, the Company made the decision to
discontinue support of its Korean joint venture, Anam Telecom.
Accordingly, the Company wrote-off its net investment in Anam Telecom.
34
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
In October 1998, the Company announced that while it is evaluating other
strategic alternatives, it is pursing the sale, through an auction
process, of its 900 MHz FCC licenses, 188 Major Trading Area ("MTA")
licenses and three Designated Frequency Area ("DFA") licenses, it
currently holds (See Note 8 and Note 10). The Company has not adjusted the
carrying value of these licenses as of September 30, 1998 as it is
currently anticipated that the auction process will result in bids and
proceeds in excess of the carrying value of these licenses.
While operating during the Chapter 11 Cases, the Company is stayed from
paying interest on pre-petition indebtedness. During such time as the
Company is operating under Chapter 11, it will only report interest
expense to the extent that such interest will be paid during the Chapter
11 Proceedings at the direction of the Bankruptcy Court.
Wireless Communications Activities
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 DM7
million, respectively. These sales were consummated in February 1998. This
transaction resulted in a gain of $58.6 million which was 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 at
December 31, 1997. The loss, which was included in Equity in loss of
investees at December 31, 1997, was $12.9 million.
Below is a summary of financial data related to NB3 and Terrafon (dollars
in thousands):
January 1, 1998
through date Three months ended Nine months ended
of sale September 30, 1997 September 30, 1997
------- ------------------ ------------------
Net total revenue $2,543 $ 7,838 $ 23,293
Gross margin 1,683 4,948 15,099
66% 63% 65%
General & administrative
expense 474 1,900 4,571
Sales and marketing 446 2,591 4,216
Equity in loss of
investees 0 815 3,404
Income before interest,
taxes, depreciation
& amortization 763 973 2,908
Depreciation &
amortization 419 1,633 4,640
Income (loss) before
interest
and taxes 344 (710) (1,732)
Net income (loss) $ 290 $ (666) $ (1,883)
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 placed
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.
35
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
Liquidity and Capital Resources
The following discussion of liquidity and capital resources, among other
things, compares the Company's financial and cash position as of September
30, 1998 to the Company's financial and cash position as of December 31,
1997 (See Note 1 to the consolidated unaudited financial statements).
As described above in Results of Operations - General, On June 29, 1998,
the Company filed a voluntary petition for bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code. See also Note 1 to the notes consolidated
unaudited financial statements.
On October 21, 1998, the Bankruptcy Court gave approval on an interim
basis for the use of Cash Collateral to fund the Company subsequent to the
exhaustion of the initial DIP Facility as described below. The use of the
Cash Collateral, which was supported by the majority holder of the
Company's Discounts Notes and HNS, a senior creditor, is subject to
certain terms and conditions, which include but are not limited to, the
pursuit of the sale and liquidation of the Debtors' assets and filing of a
plan of reorganization in accordance with a predetermined liquidation
timetable, restoration of the Cash Collateral Account, adherence to a
budget and the granting of a replacement lien. The Company obtained final
approval on November 13, 1998. All borrowings bear interest at the rate
equal to the average interest rate earned on investments in the Cash
Collateral Account, approximately 5.25% and is payable upon the
restoration of the Cash Collateral. The budget currently allows for the
use of approximately $4.8 million of the Cash Collateral. As of November
13, 1998, approximately $2.3 million from the Cash Collateral Account has
been released to the Debtors.
On June 29, 1998, the Bankruptcy Court gave approval on an interim basis
for a $10 million DIP financing facility ("DIP Financing" or "DIP
Facility") with S-C Rig Investments III, L.P., an affiliate of the Soros
Group, a related party. The Bankruptcy Court gave final approval of the
facility on July 23, 1998.
Under the terms of the DIP Facility (Credit Agreement, as amended), there
are two tranches. The first tranche, consisting of $7 million, was fully
committed to the Company upon the interim court approval. The second
tranche, consisting of $3 million was fully committed with the entry of
the final order of the court and the satisfaction of certain conditions
including the filing of the Chapter 11 Plan of Reorganization and related
Disclosure Statement on or before July 21, 1998 and the scheduling of a
hearing on or before August 18, 1998 to approve the Disclosure Statement.
The Company filed the Chapter 11 Plan of Reorganization and related
Disclosure Statement on July 21, 1998 (See Note 1). Fundings under the DIP
Facility, to the extent the funds were committed, were effectuated in
accordance with the approved budget, payable two weeks in advance of
anticipated needs. Interest accrues at a rate of 12% per annum (or at a
default rate of 14%) and is payable monthly. Amounts borrowed under the
DIP Facility were due on the earliest of (i) October 15, 1998, (ii) the
occurrence and continuation of an Event of Default as defined in the
Credit Agreement, or (iii) the effective date of a Plan of Reorganization.
As of September 30, 1998, the Company had borrowed $10.0 million under the
DIP Facility. In October 1998, the Company repaid $7 million with the
proceeds resulting from the swap of certain FCC Licenses (See Note 8).
Pursuant to the terms and conditions for the use of Cash Collateral and
the DIP Facility, amounts outstanding under the DIP Facility and accrued
interest will be paid from the proceeds from the sale of the collateral
underlying the DIP Facility with the balance, if any, to be paid as a
super priority administrative claim.
The DIP Facility is secured by a first lien on all unencumbered assets of
the Company and a second lien on all assets that are encumbered by a
permitted lien.
In 1997, The Company entered into two agreements to sell its interests in
NB3 and Terrafon for approximately $82 million and DM7 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, in May
36
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
1998, the Company repaid the pro-rata portion of the accreted value of the
Discount Notes in the aggregate of 20% of the net proceeds, approximately
$16.2 million. In addition, 40% of the net proceeds must be used for the
purchase of qualifying capital expenditures. The balance of the net
proceeds, 40%, could be used for general corporate purposes and working
capital with funds accessible under certain time restrictions beginning in
February 1998. The Company drew down the entire amount available for
general corporate purposes and working capital prior to September 30,
1998.
At September 30, 1998, the balance of the net proceeds from the sale of
the Company's European Assets included in restricted cash was $32.5
million. This amount includes the five percent of the purchase price of
National Band Three, Ltd., approximately $4.2 million (the "NB3
Proceeds"), which was placed in escrow at the time of the sale and was
released to the Company in August 1998. The Company has asserted that the
NB3 Proceeds is not collateral for the Discount Notes and the holders of
the Discount Notes dispute this assertion.
The restricted cash held in the Cash Collateral Account (approximately
$28.3 million) is collateral for the Company's Discount Notes and can only
be accessed by the Company under the terms and conditions for the use of
Cash Collateral or by further order of the Bankruptcy Court. Prior to
entry of an order of the Bankruptcy Court, the Cash Collateral could only
be accessed by the Company in accordance with the terms of the Indenture
governing the Discount Notes. The Indenture required the Company to make
certain certifications, including but not limited to representation that
there were no defaults or Events of Defaults under the Indenture governing
the Discount Notes and required the holders of the Discount Notes
acceptance to be evidenced by the Trustee's approval. As discussed in Note
9, the Commencement of the Chapter 11 Cases constituted an Event of
Default under the Indenture governing the Discount Notes.
During the quarter ended September 30, 1998, approximately $1.1 million in
compensating balances under letter of credit agreements was released to
the Debtors upon the expiration of letters of credit
During the nine months ended September 30, 1998, cash and cash equivalents
decreased by $8.6 million to $4.7 million.
Operating Activities
Cash utilized in connection with operating activities for the nine months
ended September 30, 1998 amounted to $60.6 million. This included changes
in operating assets and liabilities, net of liabilities subject to
compromise of $8.4 million.
Investing Activities
Cash provided by investing activities was $53.0 million for the nine
months ended September 30, 1998. In February 1998, the Company completed
the sale of its European Assets for approximately $87.1 million. In
accordance with the Indenture governing the Company's Discount Notes, the
net proceeds were restricted. During the first six months of 1998, $45.6
million was released from the restricted cash account in accordance with
the terms of the Indenture including $9.2 million from the sale of BCI.
In September 1998, the Company sold two MTA licenses for approximately
$1.1 million which resulted in a gain of approximately $0.2 million which
is included in other income.
In 1997, the Company entered into an agreement to swap certain 900 MHz
licenses for additional 900 MHz licenses subject to certain conditions
including but not limited to FCC approval. Under the agreement, the
Company was to receive $9 million in cash of which $2.0 million was
received in January 1998 upon partial closing and transfer of certain
licenses. The Company did not record a receivable or gain on this
transaction at September 30, 1998 as the
37
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
entire transaction was not complete. Under the DIP Facility, the Company
pledged the remaining proceeds from this agreement to the DIP lender. The
Company obtained bankruptcy court order authorizing it to assume, and
perform under, this contract and closed the transaction in October 1998.
Concurrent with the closing, the Company received $7.0 million in cash
which was remitted to S-C Rig III, L.P., the holder of the Company's DIP
Facility. The Company expects to record a gain of approximately $6.9
million in the fourth quarter of 1998 in connection with this transaction.
The Company expended $16.7 million to acquire equipment during 1998 and
capitalized $2.6 million in interest on construction in progress and
pre-commercial FCC licenses.
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 900MHz
licenses previously granted to Geotek Canada, a wholly-owned subsidiary of
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 $2.1 million representing their investment from the restricted cash
account. During the first quarter, subsequent to the withdrawal of the
partners, $1.9 million of the cash remaining in the joint venture was
released to the Company. In addition, during the fourth quarter of 1998,
the balance of the funds in the joint venture, approximately $0.3 million
was released to the Company. The withdrawal of the Canadian partners
resulted in the loss of the Canadian license. The Company is in the
process of dissolving Geotek Canada and GeoNet Canada.
Financing Activities
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 in shares of Series O and Q
Preferred Stock 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 $15.9 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 $12.4 million of Series O and Q Stock into Common Stock at $1.00
per share. Dividends paid in Common Stock on Series R Stock and Series S
Stock in 1998 and prior to the voluntary petition for bankruptcy, were
142,000 and 52,000 shares, respectively.
On May 15, 1998, the Company and the holders of its Series Q, Series R and
Series S Stock, excluding one Series Q investor, reached an agreement
pursuant to which approximately $13 million face amount of the Series Q, R
and S Stock converted into an aggregate of approximately 16 million shares
of Common Stock, valued at $.80 per share. The 16 million shares of Common
Stock issued upon conversion and exercise are currently covered by a
registration statement that is effective under the Securities Act of 1933,
as amended. The remaining approximately $11 million value of the Series Q,
R and S Stock was exchanged for shares in the Company's new Preferred
Stock Series T ("Series T Stock"). The Series T Stock are convertible into
Common Stock valued at a price of $1.25 per share and do not include
rights to exchange or participate in any New Financings as provided in the
Series R and S agreements. Pursuant to the terms of the Series R and S
Exchange Agreement, the holders would have had the right on May 15, 1998
to make an Election for the Series R and S Preferred Stock to convert into
common stock at a discount to market price at the time of conversion.
38
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
In April 1998, the Company settled an action brought against the Company
by its former advisors for $0.8 million in 1.1 million shares of the
Company's Common Stock.
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 were registered. In April 1998, 3.0 million shares were issued upon
registration. Due to the decline in the Company's stock price, the 3.0
million shares did not satisfy the entire obligation. At June 29, 1998,
approximately $0.6 million remained outstanding and is included in
Liabilities subject to compromise.
In April 1998, the Company entered into an agreement to repay a loan for
CD$2.0 million (USD$1.4 million) plus accrued interest, which the Company
guaranteed, at a rate of 115% to the former owner of its subsidiary in
Canada, GMSI in shares of the Company's Common Stock. The conversion rate
was based upon the stock price at the time of conversion. The Company
registered 2.2 million shares of Common Stock to satisfy this obligation.
However, due to the decline in the price of the Company's Common Stock,
the issuance of these shares in May 1998 did not satisfy the entire
obligation. At June 29, 1998, approximately $0.2 million remained
outstanding and is included in Liabilities subject to compromise.
During the first six months of 1998, in connection with the receipt of
infrastructure equipment from Hughes Network Systems, Inc. ("HNS"), the
Company drew down $6.4 million on its $100 million vendor credit facility,
the last $50 million of which is subject to satisfaction of certain
conditions. At June 29, 1998, approximately $16.9 million was drawn down
on this facility and is included in Liabilities subject to compromise.
During the period subsequent to the commencement of the Chapter 11 Cases,
there were no draw downs on this facility.
The Company paid cash dividends totaling approximately $1.3 million on its
outstanding preferred stocks during the three months ended March 31, 1998.
The Company did not declare nor pay dividends on outstanding preferred
stock in the second or third quarters of 1998.
39
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
Part II. Other Information
Item 3. Defaults Upon Senior Securities
The Company did not make its scheduled interest payment of approximately
$725,000 on June and September 30, 1998 on its $24.5 million Loan
agreement with Hughes Network Systems ("HNS Loan Agreement"), $4.5 million
in interest on August 15, 1998 on its Senior Subordinated Convertible
Notes ("Convertible Notes"), nor did it make $1.6 million interest payment
on its $40 million line of credit facility with S-C Rig III L.P. ("S-C Rig
Loan Facility"). The commencement of the Chapter 11 Cases and missed
interest payment constitute events of default under the Indentures
governing the HNS Loan Agreement and Convertible Notes. Additionally, the
Chapter 11 Cases and defaults under these agreements constitute an Event
of Default under the Indenture governing the Company's Senior Secured
Discount Notes and the $40 million S-C Rig Loan Facility. As a result of
the commencement of the Chapter 11 Cases, all debt has been accelerated,
but payments are stayed and are not currently being made. While operating
during the Chapter 11 Cases, the Company is stayed from paying interest on
pre-petition indebtedness. During such time as the Company is operating
under Chapter 11, it will only report interest expense to the extent that
such interest will be paid during the Chapter 11 Proceedings at the
direction of the Bankruptcy Court. The entire amount outstanding as of
June 29, 1998 have been classified as "Liabilities subject to compromise"
at September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 12 - Computation of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Company in the
third quarter of 1998:
(i) Current Report on Form 8-K filed July 2, 1998, Geotek
Communications, Inc. (the "Company") issued a press release
announcing that the Nasdaq Listing Qualifications Panel had
determined to delist the Company's securities from Nasdaq
effective with the close of business on June 30, 1998. As
previously reported, Nasdaq had earlier informed the Company
that its securities were scheduled to be delisted and that the
action was stayed pending a hearing on that decision which was
subsequently held on June 4, 1998.
Also on June 30, 1998, the Company issued a press release
announcing several changes among its executive officers and
directors, including the resignation of Yaron Eitan as Chief
Executive Officer and Director of the Company.
(ii) Current Report on Form 8-K filed July 21, 1998, Geotek
Communications, Inc. and its domestic subsidiaries (the
"Company") filed a Plan of Reorganization (the "Plan") and
related Disclosure Statement in the Bankruptcy Court for the
District of Delaware, as required under the Company's
Debtor-in-Possession financing agreement. Pursuant to the
Plan, there would be no distribution to the Company's Common
Stock holders and outstanding shares of Common Stock would be
canceled. Under the Plan, the current holders of the Company's
Common Stock and Preferred Stock may be offered a contingent
right, subject to the prior rights of the Company's current
unsecured creditors,
40
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
to purchase shares of the new Common Stock of the Company upon
the Company's emergence from bankruptcy.
(iii) Current Report on Form 8-K filed July 23, 1998, Geotek
Communications, Inc. (the "Company") has received a letter
from the Pacific Stock Exchange (the "Exchange") stating that
the Company is subject to the initiation of delisting
proceedings for failure to maintain the Exchange's net
tangible asset requirement.
(iv) Current Report on Form 8-K filed August 5, 1998, As previously
reported, Geotek Communications, Inc. (the "Company") was
notified by the Pacific Stock Exchange (the "Exchange") that
the Company was subject to the initiation of delisting
proceedings for failure to maintain the Exchange's net
tangible asset requirement. On August 6, 1998, the Exchange
notified the Company that on August 4, 1998, the Equity
Listings Committee of the Exchange voted to delist the
Company's Common Stock, based on the Company's failure to
satisfy various of the Exchange's listing maintenance
requirements related primarily to the Company's impaired
financial condition. The Company's Common stock was suspended
from trading effective on August 5, 1998. The Company's Common
Stock continues to be traded on The OTC Bulletin Board.
(v) Current Report on Form 8-K filed October 2, 1998, On October
1, 1998, Geotek Communications, Inc. (the "Company") issued a
press release announcing that on October 18, 1998 the Company
will shut down its U.S. based digital wireless networks and
cease to provide its wireless mobile logistics systems.
41
<PAGE>
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
(Operating as Debtor in Possession)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GEOTEK COMMUNICATIONS, INC.
Date: November 17, 1998 /s/ Anne E. Eisele
-----------------------------------
Anne E. Eisele
Senior Vice President and Chief
Financial Officer
/s/ Valerie E. DePiro
-----------------------------------
Valerie E. DePiro
Vice President, Chief Accounting
Officer and Corporate Controller
42
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). While
operating during the Chapter 11 Cases, the Company is stayed from paying
interest on pre-petition indebtedness. During such time as the Company is
operating under Chapter 11, it will only report interest expense to the extent
that such interest will be paid during the Chapter 11 Proceedings at the
direction of the Bankruptcy Court. Additionally, the Company intends to reject
certain operating leases during the Chapter 11 Cases and thus, rent expense will
be reduce using the protection afforded to the Company under the Bankruptcy
Code. Therefore, operating as a debtor in possession, the dollar deficiency in
earnings to fixed charges would be approximately $197.7 million for the period
ended September 30, 1998. If the Company was not operating as a debtor in
possession under Chapter 11 of the US Bankruptcy Code, the dollar deficiency in
earnings to fixed charges would be approximately $207.7 million for the period
ended September 30, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,730
<SECURITIES> 0
<RECEIVABLES> 3,163
<ALLOWANCES> 0
<INVENTORY> 306
<CURRENT-ASSETS> 45,680
<PP&E> 3,299
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,066
<CURRENT-LIABILITIES> 23,292
<BONDS> 0
40,000
11
<COMMON> 1,418
<OTHER-SE> (274,968)
<TOTAL-LIABILITY-AND-EQUITY> 136,066
<SALES> 15,993
<TOTAL-REVENUES> 15,993
<CGS> 31,822
<TOTAL-COSTS> 251,518
<OTHER-EXPENSES> (1,422)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,179
<INCOME-PRETAX> (197,682)
<INCOME-TAX> 309
<INCOME-CONTINUING> (197,991)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (197,991)
<EPS-PRIMARY> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
