-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CjcLHo+KNig5f8RTSlNCyS6L9qKWVg1mCjsQrzwjcRh2s6mpNp7GCBo36W567qEg 9xhzAg5nq7JLou21GmgOeQ== 0000891092-97-000322.txt : 19970815 0000891092-97-000322.hdr.sgml : 19970815 ACCESSION NUMBER: 0000891092-97-000322 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEOTEK COMMUNICATIONS INC CENTRAL INDEX KEY: 0000844843 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 222358635 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11620 FILM NUMBER: 97663906 BUSINESS ADDRESS: STREET 1: 20 CRAIG RD CITY: MONTVALE STATE: NJ ZIP: 07645 BUSINESS PHONE: 2019309305 MAIL ADDRESS: STREET 1: 20 CRAIG ROAD CITY: MONTVALE STATE: NJ ZIP: 07465 FORMER COMPANY: FORMER CONFORMED NAME: GEOTEK INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ Form 10Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1997 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to __________ Commission File Number 0-17581 GEOTEK COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in Charter) DELAWARE 22-2358635 (State or other jurisdiction (I.R.S. Employer Identification) of incorporation or organization) 102 Chestnut Ridge Road, Montvale, New Jersey 07645 (Address of Principal Executive Office) (Zip Code) (201) 930-9305 (Registrant's Telephone Number Including Area Code) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ COMMON STOCK OUTSTANDING AT July 31, 1997: 66,687,000 SHARES GEOTEK COMMUNICATIONS, INC. FORM 10-Q TABLE OF CONTENTS PART I: Financial Information Item 1: Financial Statements Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations PART II: Other Information Item 4: Submission of Matters to a Vote of Security-Holders Item 6: Exhibits and Report on Form 8-K CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains certain Aforward-looking@ statements. The Company desires to take advantage of the Asafe harbor@ provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protections of such safe harbor with respect to all of such forward-looking statements. Examples of forward-looking statements contained herein include the Company=s projections with respect to: (a) the commercial implementation of its US Network and the timing of the roll-out of its US Network and growth of its subscriber base; (b ) the Company=s future financial results, capital needs and sources of financing; (c ) the Company's prospects in foreign countries and (d ) the effect of certain legislation and governmental regulations on the Company. The Company=s ability to predict any such projected results or to predict the effect of any legislation or other pending events on the Company=s operating results is inherently uncertain. Therefore, the Company wishes to caution each reader of this report to carefully consider the specific factors discussed with such forward-looking statements and contained in the Company=s Annual Report on Form 10-K for the year ended December 31, 1996 as such factors in some cases have affected, and in the future (together with other factors) could affect, the ability of the Company to achieve its projected results and may cause actual results to differ materially from those expressed herein. 2 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) (Unaudited) (See Note 1) June 30, December 31, 1997 1996 -------- ------------ ASSETS Current assets: Cash and cash equivalents $ 51,234 $ 103,605 Restricted cash 6,383 9,418 Accounts receivable, principally trade, net 17,346 15,435 Accounts receivable, related party 4,109 Inventories, net 28,792 28,150 Prepaid expenses and other current assets 23,777 23,384 --------- --------- Total current assets 131,641 179,992 Investments in affiliates 38,370 36,972 Property, plant and equipment, net 113,132 93,581 Intangible assets, net 93,504 91,508 Other assets, principally debt issuance costs 17,310 28,069 --------- --------- $ 393,957 $ 430,122 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 16,657 $ 20,587 Accrued expenses and other 51,184 49,279 Notes payable, banks and other 3,983 8,075 Current maturities, long-term debt 329 261 --------- --------- Total current liabilities 72,153 78,202 Long-term debt 245,690 215,430 Other non current liabilities 941 1,008 Minority interest 712 438 Redeemable preferred stock 40,000 40,000 Commitments and contingent liabilities Shareholders' equity: Preferred stocks, $.01 par value: 11 11 Common stock, $.01 par value: Authorized 135,000,000 shares, issued 66,321,000 and 60,026,000 shares respectively, outstanding 66,083,000 and 59,788,000 shares, respectively 663 600 Capital in excess of par value 448,390 429,483 Foreign currency translation adjustment (2,305) 942 Accumulated deficit (410,912) (334,606) Treasury stock, at cost (238,000 common shares) (1,386) (1,386) --------- --------- 34,461 95,044 --------- --------- $ 393,957 $ 430,122 ========= ========= See notes to consolidated financial statements. 3 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited) (See Note 1)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- ---------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Net product sales $ 22,884 $ 14,380 $ 37,603 $ 28,228 Service income 8,005 7,983 15,977 15,688 ------------ ------------ ------------ ------------ Total revenues 30,889 22,363 53,580 43,916 ------------ ------------ ------------ ------------ Costs and expenses: Cost of goods sold 19,445 11,173 30,985 19,933 Cost of services 6,560 6,348 12,638 12,248 Engineering and development 9,011 8,305 17,073 16,286 Marketing 9,310 8,965 17,160 15,893 General and administrative 11,628 7,025 20,373 15,985 Depreciation 4,266 2,586 8,552 4,900 Amortization of intangibles 1,168 1,320 2,313 2,518 Equity in losses of investees 2,133 584 3,609 1,020 Interest expense 9,569 8,651 18,959 15,323 Interest income (1,707) (1,709) (3,283) (3,171) Other income, net (81) (187) (112) (795) ------------ ------------ ------------ ------------ Total costs and expenses 71,302 53,061 128,267 100,140 ------------ ------------ ------------ ------------ Loss from operations before taxes on income and minority interest (40,413) (30,698) (74,687) (56,224) Taxes on income (525) (580) (1,345) (1,380) Minority interest (135) 3 (274) (103) ------------ ------------ ------------ ------------ Net loss (41,073) (31,275) (76,306) (57,707) ------------ ------------ ------------ ------------ Preferred dividends (6,373) (1,428) (10,702) (2,706) ------------ ------------ ------------ ------------ Loss applicable to common stock $ (47,446) $ (32,703) $ (87,008) $ (60,413) ============ ============ ============ ============ Weighted average number of common shares outstanding 62,798,000 57,756,000 61,527,000 57,064,000 ============ ============ ============ ============ Per common share: Net loss applicable to common shares $ (0.76) $ (0.57) $ (1.41) $ (1.06) ============ ============ ============ ============
See notes to consolidated financial statements. 4 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY for the six months ended June 30, 1997 (In Thousands) (Unaudited)
Foreign Capital in Currency Preferred Stock Common Stock Excess of Translation Accumulated Treasury Shares Amount Shares Amount Par Value Adjustment Deficit Stock ------ ------ ------ ------ --------- ----------- ----------- -------- Balances, January 1, 1997 1,119 $11 60,026 $600 $429,483 $942 $(334,606) $(1,386) Issuance of common stock: Exercise of warrants and options 151 1 230 Issuance of common stock for preferred dividends 1,278 13 6,230 Issuance of common stock in connection with the acquisition of minority interest in GTIL 52 1 239 Issuance of common stock on conversion of preferred stock -- -- 4,814 48 (48) Issuance of Series P Convertible Preferred Stock 25,000 Deemed dividend/interest on convertible preferred stock and convertible debt 3,954 Amendment to value of warrants issued with credit facility (5,996) Preferred dividends, including $1,908 in deemed dividends (10,702) Changes in currency (3,247) Net loss (76,306) ----- --- ------ ---- -------- ------- --------- ------- Balances, June 30, 1997 1,119 $11 66,321 $663 $448,390 $(2,305) $(410,912) $(1,386) ===== === ====== ==== ======== ======= ========= =======
See notes to consolidated financial statements. 5 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) (Note 1) Six Months Ended June 30, ------------------ 1997 1996 ---- ---- Cash flows from operating activities: Net loss $(76,306) $(57,707) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest 274 103 Depreciation and amortization 11,980 7,513 Provision for inventory reserve for the lower of cost or market 595 Post acquisition adjustment for utilization of acquired net operating loss carry forward 119 875 Non cash interest expense 16,271 12,050 Equity in net loss of investees 3,609 1,020 Non cash management consulting expense 1,549 Changes in operating assets and liabilities (net of effects from acquisitions): Increase in accounts receivable (6,020) (1,471) Increase in inventories (1,237) (5,121) Increase in prepaid expenses and other assets (4,435) (3,228) Decrease in accounts payable and accrued expenses (2,025) 14,088 Other (925) 552 -------- -------- Net cash provided by operating activities (58,100) (29,777) -------- -------- Cash flows from investing activities: Acquisition of licenses (695) (400) Spectrum license deposit returned from FCC 1,784 Net decrease in temporary investments 7,945 Acquisitions of property and equipment (27,698) (25,966) Interest capitalized on construction in progress and pre-commercial spectrum licenses (4,474) (1,807) Cash invested in unconsolidated subsidiaries, net (3,830) (350) Decrease in contract deposits - other current assets 496 1,046 Decrease in restricted cash 3,035 20,394 Other 274 -------- -------- Net cash (used in) provided by investing activities (32,892) 2,646 -------- -------- See notes to consolidated financial statements. 6 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (Dollars in thousands) (Unaudited) (Note 1) Six Months Ended June 30, ------------------- 1997 1996 ---- ---- Cash flows from financing activities: Net repayments under line-of-credit agreements (4,092) 1,100 Borrowings under credit facility 20,000 Proceeds from issuance of convertible notes 75,000 Proceeds from issuance of convertible preferred stock 25,000 53,350 Deferred financing costs (2,213) Repayment of capital lease obligations (79) (244) Repayments of debt (800) Exercise of warrants and options 211 1,752 Payment of preferred dividends (2,548) (2,555) Financing costs (810) Other (59) (333) --------- --------- Net cash provided by financing activities 38,433 124,247 --------- --------- Effect of exchange rate changes on cash 188 (905) --------- --------- (Decrease) increase in cash and cash equivalents (52,371) 96,211 Cash and cash equivalents, beginning of period 103,605 61,428 --------- --------- Cash and cash equivalents, end of period $ 51,234 $ 157,639 ========= ========= Supplemental schedule of non cash investing and financing activities: Management consulting fee paid in common stock $ 1,549 Issuance of shares in connection with debt conversion 18,691 Issuance of shares in connection with acquisition of SMR license 2,000 Acquisition of assets under capital lease $ 1,031 Issuance of common stock for preferred dividends 6,243 151 Deemed dividend on convertible preferred stock 1,908 Issuance of common shares for the acquisition of minority interest in GTIL 240 See notes to consolidated financial statements. 7 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIAIRES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 Basis of Presentation: The consolidated balance sheet of Geotek Communications, Inc. and Subsidiaries (the "Company") as of December 31, 1996 has been derived from the audited consolidated balance sheet contained in the Company's Form 10-K and is presented for comparative purposes. In the opinion of management, all significant adjustments including normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The results of operations for interim periods are not necessarily indicative of the operating results for the full year. Certain 1996 amounts have been reclassified to conform with the 1997 presentation. Footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the published rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the most recent fiscal year. The Company's existing cash resources as of June 30, 1997, expected cash flow from operations and the $30 million of funds raised in August 1997 through the sale of the Company's Series Q Convertible Preferred Stock (see Note 10) will be insufficient to fund the full implementation of the Company's current operating plan for the roll-out of the U.S. digital wireless network and international expansion. The Company is in the initial commercialization stages of its domestic networks and, as a result, has not yet generated positive cash flow. The Company is planning to raise additional capital during 1997 and 1998 to continue to finance its operating plans which include significantly increasing the number of subscribers on the U.S. Network, the roll-out of the U.S. Network infrastructure, as well as the related sales of its products. The Company is currently operating in nine markets and is in the process of constructing four additional markets. In order to ensure sufficient liquidity to operate throughout 1997, the Company does not intend to construct additional markets or to expand into new international digital wireless networks until such time that it obtains sufficient financing to do so. The Company anticipates that it will need to raise additional financing to operate through the second quarter of 1998. There can be no assurance that the Company will be able to obtain any such financing on acceptable terms, or at all. The failure to obtain such financing will prevent the Company from executing its modified or original business plan. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or carrying amounts and classification of liabilities that might result should the Company be unable to raise additional capital to execute its business plan. Note 2 Inventories, net June 30, 1997 December 31, 1996 ------------- ----------------- Raw materials $ 4,196 $ 3,760 Work-in-process 1,181 2,068 Finished goods 25,586 28,601 ------ ------ 30,963 34,429 Reserve for lower of cost or market 2,171 6,279 ----- ----- $ 28,792 $ 28,150 ======== ======== In January, 1997, the Company adjusted inventory standard costs to more accurately reflect the market value of their finished goods inventory. Note 3 Investment in Affiliates In June 1997, the Company contributed approximately $4.7 million to Anam Telecommunications Co. Ltd. ("Anam Telecom"), the Company's joint venture in Korea, which represents the Company's portion of Anam Telecom's 1997 capital requirements. In March 1997, the Company contributed approximately $2.5 million to Terrafon, the Company's joint venture in Germany, which represents the Company's portion of the estimated 1997 operating budget. These investments are accounted for under the equity method of accounting. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4 Note Payable, Banks and Other: In January 1997, the Company's German subsidiary repaid its DM 5.0 million (approximately $3.3 million) line of credit with DM 5.0 million (approximately $3.3 million) restricted cash. Note 5 Long-Term Debt In April 1997, the Company and S-C Rig Investments - III, L.P. ("S-C Rig"), a significant stockholder of the Company and an investment group affiliated with George Soros, modified the terms of the S-C Rig Credit Facility. Under the modified terms of the S-C Rig Credit Facility, all borrowings are required to be made within three years from the initial establishment of the credit facility. The borrowings will accrue interest at a rate of 8% per annum and will mature five years from the date of the final borrowing thereunder. Original terms of the S-C Rig Credit Facility were a 10% interest rate per annum and a four year term from the final borrowing which was required to be made within two years from the establishment of the facility. At June 30, 1997, there was $20 million outstanding under the $40.0 million SC-Rig Credit Facility. In connection with the modification to the S-C Rig Credit Facility, the Company lowered the exercise price of the warrants to purchase approximately 4.2 million shares of common stock (the "S-C Rig Warrants") from $9.50 to $6.00 per share and extended the warrant termination date from April 2001 to April 2003. The S-C Rig Warrants, which when issued were valued at $13.4 million and recorded in other assets, were revalued at $4.5 million due to the modification of the terms. The $6.0 million excess of the net book value of the S-C Rig Warrants over the new valuation was recorded by the Company as a decrease in additional paid in capital. S-C Rig Warrants are being amortized over the term of the underlying credit facility, approximately five years. Additionally, in connection with the drawdown of $20.0 million under the S-C Rig Credit Facility, a proportionate amount of the remaining valuation of the S-C Rig Warrants was transferred to long-term debt and is reflected as a discount on the issuance of the loans made under the facility. Note 6 Preferred Stock: During the second quarter of 1997, 271 and 100 shares, including accrued dividends through the date of conversion, of the Company's Series O Convertible Preferred Stock ("Series O Stock") and Series P Convertible Preferred Stock ("Series P Stock"), respectively were converted into approximately 3,546,000 shares and 1,386,000 shares of the Company's common stock, respectively. Pursuant to an agreement between the Company and the holders (the "Series O Holders") of the Company's Series O Stock, the Series O Holders were only permitted to convert 20% of the shares of Series O Stock held by them prior to July 1, 1997. Due to relatively favorable market conditions for the Company and in exchange for an agreement by the Series O Holders to convert additional shares of Series O Stock prior to July 1, 1997 at a higher conversion price than would otherwise have been in effect, on July 1, 1997, the Company permitted the Series O Holders to convert additional shares of Series O Stock. As a result, as of June 30, 1997 an aggregate of 271 shares of Series O Stock were converted into Common Stock, representing 27% of the 1,000 shares of Series O Stock initially issued on December 31, 1996. The terms of the Company's Series O Stock and Series P Stock allow the Company to institute a Conversion Restriction period of 60 days if the trading price of the Company's common stock is less than $6.00 per share for five consecutive trading days. In April 1997, the Company elected to institute such Conversion Restriction Period. During the Conversion Restriction Period, the aggregate amount which can be converted by all holders of Series O Stock and Series P Stock is $50,000 per day. The 60 day period expired in June 1997. In January 1997, the Company sold 500 shares of its Series P Stock to a group of investors affiliated with George Soros for an aggregate purchase price of $25 million. The Series P Stock pays dividends in either shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per annum after a dividend payment failure) at the option of the Company. Additionally, commencing April 1, 1997, each share of Series P Stock is convertible by the holder into the number of shares of the Company's Common Stock as obtained by dividing the $50,000 stated value per share plus any accrued or unpaid dividends at the date of conversion, by the lowest daily volume weighted 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) average price of the Company's Common Stock during the four trading days immediately preceding conversion multiplied by the conversion factor (the conversion factor begins at 100% and becomes 95%, 90% and 88% on June 29, 1997, December 31, 1997, and June 29, 1998, respectively). However, the holder can only convert up to a maximum of 20% prior to June 30, 1997, an additional 30% prior to December 31, 1997 an additional 30% prior to June 29, 1998 and the remainder thereafter. In connection with this transaction, the Company issued warrants to purchase 850,000 shares of the Company's Common Stock at $9.2625 per share (subject to adjustment in certain circumstances). The warrants are exercisable at any time, and from time to time, before June 30, 2000. Pursuant to a registration rights agreement, in February 1997, the Company filed a registration statement under the Securities Act of 1933, as amended, with regard to the resale of shares of Common Stock issuable (i ) for dividends; (ii) upon conversion of Series P Stock; and, (iii) upon the exercise of the warrants. Note 7 Deemed Dividends and Interest The staff of the Securities and Exchange Commission recently clarified their position on accounting for convertible preferred stock and convertible debt which contains a conversion feature with a stated discount to the market price of the Company's common stock at the time of conversion. With respect to convertible preferred stock, solely for purposes of calculating earnings per share, the stated discount is amortized over the period from the date of issuance until the holder is permitted to convert and thus reduces the amount of income available to common stockholders. During the three months and six months ended June 30, 1997, the Company recognized approximately $0.9 million and $1.9 million, respectively, as a deemed dividend on Series O Stock and Series P Stock which resulted in a $0.02 and $0.03 increase in net loss applicable to common shares for the respective periods. With respect to convertible debt, the stated discount is amortized over the period from the date of issuance until the holder is permitted to convert, as additional non-cash interest expense. The Company recognized approximately $1.0 million and $2.0 million in deemed interest on its $24.5 million convertible note with Hughes Network Systems, Inc. during the three and six months ended June 30, 1997. Note 8 Commitments and Contingent Liabilities: FCC Waiver In June of 1993, the Company was granted a four-year waiver ("Waiver") of the FCC's construction and loading rules which permitted the Company to construct and activate certain systems on a delayed schedule. Prior to the FCC's 900 MHz spectrum auctions, the Waiver protected the Company's designated frequency area ("DFA") licenses from revocation for lack of construction. Following the FCC's 1996 900MHz spectrum auctions, however, the Waiver became obsolete. Specifically under the terms of the major trading area ("MTA") licenses the Company acquired during the auctions, the construction requirements will be satisfied if one-third of the market's population is served within three years of the date of the grant, August 12, 1999 and two-thirds of the population are served within five years of the grant, August 12, 2001. The Company's DFA licenses acquired prior to the auctions can be combined with the Company's MTA licenses so that together, they are regulated as a single MTA license with the automatic delayed construction requirements. Litigation In June 1994, the Company filed a lawsuit against Harris Adacom Corporation B.V. (AHarris@), a Dutch Corporation, to enforce the Company=s right to repayment of a $3.5 million loan made to Harris in January 1994. In or about May 1994, creditors placed Harris into bankruptcy. In response to the Company's lawsuit, Harris and its subsidiaries filed a lawsuit against the Company in the courts of the State of Israel, requesting a declaratory judgment that the Company entered into a binding agreement for the purchase by the Company of a significant interest in certain wireless communication business assets owned by Adacom Technologies Ltd., (AATL@), an affiliate of Harris and an Israeli publicly traded company, and subsequently breached such agreement. In July 1997, the plaintiffs filed a motion with the court seeking to amend the Statement of Claim to assert a claim for monetary damages of approximately $27 million arising out of the same transaction. In addition, the plaintiffs are seeking to add Yaron Eitan, the Company's Chairman of the Board, and Yoram Bibring, President and CEO of Geotek International Networks, Inc. as party defendants. The plaintiffs' motion to amend requires approval of the court. Based upon independent analysis and the advice of counsel, the Company believes that none of plaintiffs' claims, which they seek to amend in their motion to amend, have any merit 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) and the Company intends to vigorously oppose the motion to amend. Based upon independent analysis and the advice of counsel, the Company believes none of plaintiffs' claims in this action have any merit and are only an attempt to delay efforts to collect Harris's debt to the Company. The Company intends to defend this action vigorously. However, the results of litigation are inherently uncertain. If Plaintiffs prevail in this action, it could have a material adverse effect on the financial position of the Company. The Company is subject to other various legal proceedings arising in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such kind, or involve such amounts, as would not have a significant adverse effect on the financial position, results of operations or cash flows of the Company. Note 9 Certain Related Party Transactions: The Company incurred expenses of $75,000 and $150,000 in each of the three and six month periods ended June 30, 1997 and 1996, respectively, pursuant to its consulting agreement with a company affiliated with George Soros. Entities affiliated with George Soros also hold the Company's Series H Redeemable Preferred Shares, Series I Convertible Preferred Shares, $5.0 million of the Company's Series N Convertible Preferred Stock, Series P Stock, 10% of the Company's Senior Secured Discount Notes due 2005, and $40.0 million senior unsecured Credit Facility ("S-C Rig Credit Facility"). As discussed in Note 6, 100 shares of the Company's Series P Stock were converted into 1,386,000 shares of the Company's Common Stock during the quarter ended June 30, 1997. Geotek Technologies Israel Ltd. ("GTI-Israel") has entered into a subcontractor agreement with Rafael, a shareholder of the Company, under which Rafael will partake in the enhancement and continued development of the Company's digital wireless communications system. Engineering and development expense for the three and six months ended June 30, 1997, includes approximately $0.6 and $1.7 million, respectively, for activities performed by Rafael under this agreement. For the three and six month periods ended June 30, 1996, engineering and development performed by Rafael was $1.9 million and $2.9 million, respectively. GTI-Israel has also entered into agreements with Rafael under which Rafael will manufacture the infrastructure equipment to be used by the Company in its US network and to be sold to third parties. Through June 30, 1997, the Company had placed firm orders for equipment totaling $59.1 million of which $44.7 million has been paid to Rafael to date. During the three and six months ended June 30, 1997, the Company, after the elimination of inter-company revenues recognized approximately $6.7 million on its sale of digital wireless infrastructure equipment to Anam Telecom, the Company's joint venture in Korea. At June 30, 1997, the Company had an accounts receivable from Anam Telecom of approximately $4.1 million. Note 10 Subsequent Events: In August 1997, the Company sold 600 shares of its Series Q Convertible Preferred Stock ("Series Q Stock") for an aggregate purchase price of $30 million. The Series Q Stock pays dividends in either shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per annum after a dividend payment failure) at the option of the Company. Additionally, commencing October 10, 1997, each share of Series Q Stock is convertible by the holder into the number of shares of the Company's Common Stock as obtained by dividing the $50,000 stated value per share plus any accrued or unpaid dividends at the date of conversion, by the lowest daily volume weighted average price of the Company's Common Stock during the four trading days immediately preceding conversion multiplied by the conversion factor (the conversion factor begins at 100% and becomes 95%, and 90% on January 1, 1998 and April 1, 1998, respectively). However, the holder can only convert up to a maximum of 25% prior to January 1, 1998, an additional 25% prior to March 31, 1998, an additional 30% prior to June 30, 1998 and the remainder thereafter. Beginning in August, 1997, the Company will recognize deemed dividends resulting from the stated discount on conversion of Series Q stock (see Note 7 for Deemed Dividends on Preferred Stock). In connection with this transaction, the Company issued warrants to purchase 1,800,000 shares of the Company's Common Stock at $8.00 per share (subject to adjustment in certain circumstances). The warrants are exercisable at any time, and from time to time, before February 10, 2001. In July 1997, Industry Canada, the Canadian regulatory agency responsible for spectrum allocation, affirmed its 1996 authorization of 900 MHz licenses to Geotek Communications Canada Inc. ("Geotek Canada") in the provinces of Ontario, Quebec and British Columbia. Geotek Canada, the license holder, is a wholly-owned subsidiary of GeoNet Communications Canada Inc. ("GeoNet Canada") which the Company formed in July 1997 with two Canadian partners. The Company invested $2 million in GeoNet Canada and two Canadian partners invested $1 million each, for a total initial investment of $4 million. The Company received a 50% equity interest and has the maximum 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) allowable voting interest in accordance with Canadian foreign ownership regulations. Additionally, the Company deposited $2.3 million in a restricted cash account as collateral for the co-investor's investment. The deposit is refundable within 180 days upon the registration of additional shares of the Company's Common Stock. The Company and its partners are currently negotiating a series of agreements, which will include future financing commitments for GeoNet Canada and is subject to, among other things, the parties' agreement on the business plan, build-out and marketing strategies, FHMA(R) equipment supply agreements, board of directors approvals and the completion of satisfactory due diligence by all parties. The parties also reserve the right to withdraw from the joint venture, should they be unable to execute these agreements. Note 11 Condensed Consolidating Financial Information For Guarantors (AGuarantor Information@): In July and August 1995, the Company issued, in a private offering, $227.7 million aggregate principal amount at maturity of 15% Senior Secured Discount Notes due July 15, 2005 ("the Discount Notes"). In connection with the Discount Note offering, the Company's wholly-owned U.S. Domestic Subsidiaries, including PowerSpectrum, Inc. and its Subsidiaries, (collectively referred to as the "Guarantor Subsidiaries") fully and unconditionally guarantee such Discount Notes jointly and severally. The Guarantor Subsidiaries are wholly owned by the Company. In addition, the Discount Notes are collateralized by a pledge of the capital stock owned by the Company in National Band Three Ltd., PowerSpectrum, Inc. and Subsidiaries, MetroNet Systems, Inc., Geotek GmbH Holding Corporation and Bogen Communications International, Inc. The Guarantor Information of Geotek Communications, Inc. and Subsidiaries has been presented on pages 13 through 18 in order to present the Guarantor Subsidiaries pursuant to the Guarantor relationship. The Guarantor Information is presented as management does not believe that separate financial statements of the Guarantor Subsidiaries would be meaningful. This Guarantor Information should be read in conjunction with the Consolidated Financial Statements. The Discount Notes include covenants that place restrictions on the Company primarily related to making certain investments, paying dividends and incurring additional debt. Notes to Guarantor Information: Basis of Presentation - To conform with the terms and conditions of the Discount Notes, the condensed consolidating financial information of the Guarantor Subsidiaries is presented on the following basis: (1) Geotek Communications, -Investments in consolidated Inc.(Parent Company) subsidiaries are accounted for by the Parent Company on the cost basis for purposes of the Guarantor Information. Operating results of Subsidiaries are therefore not reflected in the Parent's investment accounts or earnings. (2) Guarantor Subsidiaries -For purposes of the Guarantor Information, Guarantor Subsidiaries includes all U.S. wireless subsidiaries of PowerSpectrum, Inc. (APSI@) combined with Geotek Financing Corporation, Geotek License Holding Inc., MetroNet Systems, Inc. and ANSA Communications, Inc., both direct wholly owned subsidiaries of the Parent Company. For purposes of the Guarantor Information, PSI does not contain the consolidated financial statements of GTI -Israel, formerly PST, a subsidiary of PSI, since GTI -Israel is not a Guarantor Subsidiary. Such statements of GTI-Israel are included with Non-Guarantor Subsidiaries. (3) Non-Guarantor Subsidiaries -This includes the Company's subsidiaries that are not Guarantor Subsidiaries, principally National Band Three Ltd. and Bogen Communications International, Inc. (4) Reclassifications and Eliminations -Certain reclassifications were made to conform all of the Guarantor Information to the financial presentation of the Company's consolidated financial statements. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 11 Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued CONDENSED CONSOLIDATING BALANCE SHEET As of June 30, 1997 (Dollars in thousands, except per share data) (Unaudited)
Geotek Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc. Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries ------------- ------------ -------------- ------------------ -------------- ASSETS (1) (2) (3) (4) CURRENT ASSETS Cash and cash equivalents $42,075 $531 $8,628 $51,234 Restricted cash 6,383 6,383 Accounts receivable, net 1,709 15,637 17,346 Accounts receivable, related party 5,272 ($1,163) 4,109 Inventories 14,429 14,335 28,792 Prepaid expenses and other assets 1,354 14,131 8,292 23,777 -------- -------- -------- --------- -------- Total current assets 49,812 30,800 52,164 (1,163) 131,641 -------- -------- -------- --------- -------- Inter-company account 396,543 80,392 87 (477,022) Investments in affiliates 17,989 20,312 69 38,370 Property, plant and equipment, net 2,946 92,408 31,147 (13,369) 113,132 Intangible assets, net 12,346 68,649 12,509 93,504 Other assets 16,051 318 2,905 (1,964) 17,310 Investments in subsidiaries, at cost 90,683 (90,683) -------- -------- -------- --------- -------- Total Assets $586,370 $272,567 $119,152 ($584,132) $393,957 ======== ======== ======== ========= ======== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Accounts payable - trade $352 $6,941 $9,364 $ 16,657 Accrued expenses and other 5,129 7,075 38,980 51,184 Notes payable, banks and other 4,483 $(500) 3,983 Current maturities, long-term debt 165 119 45 329 -------- -------- -------- --------- -------- Total current liabilities 5,646 14,135 52,872 (500) 72,153 -------- -------- -------- --------- -------- Long-term debt 217,399 24,500 5,365 (1,574) 245,690 Intercompany accounts 393,007 83,815 (477,022) Other non current liabilities 2,405 (1,464) 941 Minority interest 712 712 Redeemable preferred stock 40,000 40,000 Shareholders' equity: Preferred stocks, $.01 par value 11 11 Common stock, $.01 par value: 663 663 Capital in excess of par value 422,252 40,621 74,627 (89,110) 448,390 Foreign currency translation adjustment (2,305) (2,305) Accumulated deficit (98,215) (199,696) (98,539) (14,462) (410,912) Treasury stock, at cost (1,386) (1,386) -------- -------- -------- --------- -------- 323,325 (159,075) (26,217) (103,572) 34,461 -------- -------- -------- --------- -------- $586,370 $272,567 $119,152 $(584,132) $393,957 ======== ========= ======== ========= ========
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 11. Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued CONDENSED CONSOLIDATING BALANCE SHEET As of December 31, 1996 (Dollars in thousands, except per share amounts)
Geotek Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc. Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries ------------- ------------ -------------- ------------------ -------------- ASSETS (1) (2) (3) (4) CURRENT ASSETS: Cash and cash equivalents $94,218 $364 $9,023 $103,605 Restricted cash 7,794 1,624 9,418 Accounts receivables trade, net 620 14,815 15,435 Inventories, net 15,915 12,235 28,150 Prepaid expenses and other assets 4,514 12,093 6,777 23,384 -------- -------- -------- --------- -------- Total current assets 106,526 28,992 44,474 179,992 -------- -------- -------- --------- -------- Inter-company account 307,673 76,303 ($383,976) Investments in affiliates 11,954 25,181 (163) 36,972 Property, plant and equipment, net 1,155 70,297 32,753 (10,624) 93,581 Intangible assets, net 12,492 66,064 12,952 91,508 Other assets 29,363 217 403 (1,914) 28,069 Investments in Subsidiaries, at cost 89,921 (89,921) -------- -------- -------- --------- -------- $559,084 $241,873 $115,763 ($486,598) $430,122 ======== ======== ======== ========= ======== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $762 $6,993 $12,832 $20,587 Accrued expenses and other 6,546 11,319 31,414 49,279 Notes payable, banks and other 8,575 $(500) 8,075 Current maturities, long-term debt 101 155 5 261 -------- -------- -------- --------- -------- Total current liabilities 7,409 18,467 52,826 (500) 78,202 -------- -------- -------- --------- -------- Inter-company account 316,716 67,260 (383,976) Long-term debt 186,823 24,500 5,681 (1,574) 215,430 Other non-current liabilities 2,422 (1,414) 1,008 Minority interest 438 438 Redeemable preferred stock 40,000 40,000 Shareholders' equity: Preferred stocks, $.01 par value 11 11 Common stock, $.01 par value 600 600 Capital in excess of par value 403,103 40,621 74,106 (88,347) 429,483 Foreign currency translation adjustment 942 942 Accumulated deficit (77,476) (158,431) (87,912) (10,787) (334,606) Treasury stock, at cost (1,386) (1,386) -------- -------- -------- --------- -------- 324,852 (117,810) (12,864) (99,134) 95,044 -------- -------- -------- --------- -------- $559,084 $241,873 $115,763 ($486,598) $430,122 ======== ======== ======== ========== ========
14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 11 Condensed Consolidating Financial Information for Guarantors ("Guarantor Information"): continued CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1997 (Dollars in thousands) Unaudited
Geotek Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc. Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries ------------- ------------ -------------- ------------------ -------------- (1) (2) (3) (4) REVENUES Net product sales $ 1,784 $ 52,819 ($17,000) $ 37,603 Service income 202 15,846 (71) 15,977 -------- -------- --------- -------- Total revenues 1,986 68,665 (17,071) 53,580 -------- -------- --------- -------- Costs and expenses: Cost of goods sold 10,726 33,338 (13,079) 30,985 Cost of services 7,860 5,273 (495) 12,638 Engineering and development 3,315 13,489 270 17,073 Marketing $150 8,853 8,156 17,160 General and administrative 4,357 5,602 10,414 20,373 Depreciation 119 5,447 3,511 (525) 8,552 Amortization of intangibles 1,037 400 876 2,313 Equity in losses of investees 1,020 2,589 3,609 Interest expense 16,452 1,474 1,339 (306) 18,959 Interest income (2,311) (1,278) 306 (3,283) Other income (85) (426) (34) 433 (112) -------- -------- -------- --------- -------- Total Costs and expenses 20,739 43,251 77,673 (13,396) 128,267 -------- -------- -------- --------- -------- Loss from operations before taxes on income and minority interest (20,739) (41,265) (9,008) (3,675) (74,687) Taxes on income (1,345) (1,345) Minority interest (274) (274) -------- -------- -------- --------- -------- Net loss ($20,739) ($41,265) ($10,627) ($3,675) ($76,306) ======== ======== ======== ========= ========
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 11 Condensed Consolidating Financial Information for Guarantors ("Guarantor Information"): continued CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1996 (Dollars in thousands) Unaudited
Geotek Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc. Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries ------------- ------------ -------------- ------------------ -------------- (1) (2) (3) (4) REVENUES Net sales $220 $47,259 ($19,251) $28,228 Service income 88 15,600 15,688 -------- -------- --------- -------- Total revenues 308 62,859 (19,251) 43,916 -------- -------- --------- -------- Costs and expenses: Cost of goods sold 3,082 30,620 (13,769) 19,933 Cost of services 5,778 6,549 (81) 12,246 Engineering and development 5,502 10,797 (12) 16,287 Marketing $150 7,369 8,374 15,893 General and administrative 5,420 3,280 7,287 15,987 Depreciation 23 1,209 3,801 (133) 4,900 Amortization of intangibles 966 578 974 2,518 Equity in losses of investees 1,020 1,020 Interest expense 14,464 58 1,329 (528) 15,323 Interest income (3,195) (162) (342) 528 (3,171) Other income (78) (589) (206) 78 (795) -------- -------- -------- --------- -------- Total Costs and expenses 18,770 26,105 69,182 (13,917) 100,140 -------- -------- -------- --------- -------- Loss from operations before taxes on income and minority interest (18,770) (25,797) (6,323) (5,334) (56,224) Taxes on income (1,380) (1,380) Minority interest (103) (103) -------- -------- -------- --------- -------- Net loss ($18,770) ($25,797) ($7,806) ($5,334) ($57,707) ======== ======== ======== ========= ========
16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 11 Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Six Months Ended June 30, 1997 (Dollars in thousands) Unaudited
Geotek Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc. Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries ------------- ------------ -------------- ------------------ -------------- (1) (2) (3) (4) Cash Flows From Operating Activities: Net loss ($20,739) ($41,265) ($10,627) ($3,675) ($76,306) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest 274 274 Depreciation & amortization 1,157 6,605 4,403 (185) 11,980 Equity in losses of investees 1,020 2,589 3,609 Provision for inventory reserve for the lower of cost or market 1,225 (630) 595 Post acquisition adjustment for utilization of acquired net operating loss carry forwards 119 119 Non cash interest expense 14,229 2,042 16,271 Changes in operating assets & liabilities: Accounts receivable (1,089) (6,094) 1,163 (6,020) Inventories 261 (1,498) (1,237) Prepaid expenses and other assets (340) (2,012) (2,083) (4,435) Accounts payable & accrued expenses (1,827) (4,296) 4,098 (2,025) Other 20 100 (1,045) (925) -------- -------- -------- --------- -------- Net cash used in operating activities (6,480) (38,429) (10,494) (2,697) (58,100) -------- -------- -------- --------- -------- Cash flows from investing activities: Acquisition of licenses (695) (695) Acquisitions of property & equipment (880) (26,081) (4,007) 3,270 (27,698) Decrease in contract deposits 496 496 Interest capitalized on construction in progress and precommercial specturm licenses (720) (3,754) (4,474) Cash invested in unconsolidated subsidiaries, net (1,246) (2,584) (3,830) Decrease in restricted cash 1,411 1,624 3,035 Other 274 274 -------- -------- -------- --------- -------- Net cash (used in) provided by investing activities (1,435) (30,256) (4,471) 3,270 (32,892) -------- -------- -------- --------- -------- Cash flows from financing activities: Net borrowings under line of credit agreements (4,092) (4,092) Borrowings under credit facility 20,000 20,000 Proceeds from issuance of convertible preferred stock 25,000 25,000 Repayment of capital lease obligation (79) (79) Proceeds from exercise of warrants & options 211 211 Payment of preferred dividends (2,548) (2,548) Capital contributed from parent (86,833) 68,945 18,461 (573) Other (59) (59) -------- -------- -------- --------- -------- Net cash (used in) provided by financing activities (44,249) 68,945 14,310 (573) 38,433 -------- -------- -------- --------- -------- Effect of exchange rate changes on cash 188 188 (Decrease) increase in cash & cash equivalents (52,143) 167 (395) (52,371) Cash & cash equivalents, beginning of period 94,218 364 9,023 103,605 -------- -------- -------- --------- -------- Cash & cash equivalents, end of period $42,075 $531 $8,628 $51,234 ======== ======== ======== ========= ========
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 11 Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Six Months Ended June 30, 1996 (Dollars in thousands) Unaudited
Geotek Geotek Guarantor Non-Guarantor Reclassifications Comm,Inc. Comm,Inc. Subsidiaries Subsidiaries & Eliminations & Subsidiaries ------------- ------------ -------------- ------------------ -------------- (1) (2) (3) (4) Cash Flows From Operating Activities: Net loss ($18,770) ($25,797) ($7,806) ($5,334) ($57,707) Adjustment to reconcile net loss to net cash used in operating activities: Minority interest 103 103 Depreciation & amortization 988 1,788 4,870 (133) 7,513 Equity in net loss of investees 1,020 1,020 Non cash management consulting expense 1,549 1,549 Post acquisition adjustment for utilization of acquired net operating loss carry forward 875 875 Non cash interest expense 12,050 12,050 Changes in operating assets and liabilities: Accounts receivable (106) (1,365) (1,471) Inventories (3,391) (1,730) (5,121) Prepaid expenses 37 (1,003) (2,262) (3,228) Accounts payable & accrued expenses 4,908 1,530 7,650 14,088 Other 50 502 552 -------- -------- -------- --------- -------- Net cash provided by (used in) operating activities 283 (25,430) 837 (5,467) (29,777) -------- -------- -------- --------- -------- Cash flows from investing activities: Net decrease in temporary investments 7,945 7,945 Acquisition of spectrum licenses (400) (400) Spectrum license deposit return 1,784 1,784 Acquisitions of property & equipment (104) (24,535) (6,661) 5,334 (25,966) Cash invested in unconsolidated subsidiaries (350) (350) Interest capitalized on construction in progress and precommercial spectrum licenses (1,807) (1,807) Decrease contract deposits - other current assets 1,046 1,046 Decrease in restricted cash 20,394 20,394 -------- -------- -------- --------- -------- Net cash provided by (used in) investing activities 27,885 (24,958) (5,615) 5,334 2,646 -------- -------- -------- --------- -------- Cash flows from financing activities: Net borrowings under line of credit agreements 1,100 1,100 Proceeds from issuance of convertible notes 75,000 75,000 Deferred financing costs (2,213) (2,213) Net proceeds from issuance of Preferred stock 53,350 53,350 Repayments of debt (605) (195) (800) Repayment of capital lease obligations (30) (214) (244) Exercise of warrants & options 1,752 1,752 Payment of preferred dividends (2,555) (2,555) Financing costs (810) (810) Other (333) (333) Capital contributed from parent (52,894) 50,833 1,928 133 -------- -------- -------- --------- -------- Net cash provided by financing activities71,600 50,228 2,286 133 124,247 -------- -------- -------- --------- -------- Effect of exchange rate changes on cash (905) (905) Increase (decrease) in cash & cash equivalents 99,768 (160) (3,397) 96,211 Cash & cash equivalents, beginning of period 53,128 522 7,778 61,428 -------- -------- -------- --------- -------- Cash & cash equivalents, end of period $152,896 $362 $4,381 -- $157,639 ======== ======== ======== ========= ========
18 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto, included elsewhere in this report. Results of Operations General The Company has devoted and expects to continue to devote substantial financial and management resources to the development and deployment of a low cost, high quality integrated digital voice and data wireless communications network in the United States ("U.S. Network"). The Company, through its subsidiaries and joint ventures, intends to deploy similar networks internationally. Although Management believes these activities will have a positive effect on the Company's results of operations in the long term, it is expected to have a substantial negative effect on the Company's results of operations and financial position in the short term. The Company expects to incur substantial losses and have negative cash flow from operations for the foreseeable future, attributable primarily to the operating, sales, marketing, general and administrative expenses relating to the roll-out of the U.S. Network as well as to a high investment in engineering and development related to its wireless communications activities. The Company may also continue to expend significant resources in pursuit of international opportunities. There can be no assurance that the Company will operate at profitable levels, have positive cash flow from operations, or continue to obtain financing to continue to implement its operating plan. The Company currently groups its operations primarily into two types of activities: wireless communications and communications products. The Company's wireless communications subsidiaries are currently engaged primarily in providing trunked mobile radio services in the United Kingdom utilizing analog equipment, developing and selling wireless data solutions, implementing a digital wireless communications system for the United States that will provide integrated wireless communications services, and implementing digital wireless communications systems internationally. The Company is in the process of rolling out its U.S. Network. The Company started providing commercial services in Philadelphia, Washington DC, Baltimore, New York, Boston, Miami, Dallas, and Orlando during 1996 and Tampa in 1997. The Company is currently constructing four additional markets. The Company's success in raising additional capital will dictate its ability to enter into additional markets beyond these thirteen as contemplated by the Company's roll-out plan. In July 1997, Industry Canada, the Canadian regulatory agency responsible for spectrum allocation, affirmed its 1996 authorization of 900 MHz licenses to Geotek Communications Canada Inc. ("Geotek Canada") in the provinces of Ontario, Quebec and British Columbia. Geotek Canada, the license holder, is a wholly-owned subsidiary of GeoNet Communications Canada Inc. ("GeoNet Canada") which the Company formed in July 1997 with two Canadian partners. The Company invested $2 million in GeoNet Canada and two Canadian partners invested $1 million each, for a total initial investment of $4 million. The Company received a 50% equity interest and has the maximum allowable voting interest in accordance with Canadian foreign ownership regulations. The Company and its partners are currently negotiating a series of agreements, which will include future financing commitments for GeoNet Canada and is subject to, among other things, the parties' agreement on the business plan, build-out and marketing strategies, FHMA(R) equipment supply agreements, board of directors approvals and the completion of satisfactory due diligence by all parties. The parties also reserve the right to withdraw from the venture, should they be unable to execute these agreements. The development and deployment of a FHMA(R) based digital system in Canada will be subject to the same risks attendent to the development and deployment of the Company's digital wireless system in the United States. The Company's 50/50 joint venture in Germany, which was established in December 1996 through a merger of the Company's German networks and RWE Telliance A.G. ("RWE") mobile radio network, provides analog radio service to approximately 38,500 subscribers. Additionally, the Company holds a 21% interest in Anam Telecommunications, Inc. ("Anam Telecom"), a holder of a nationwide trunked radio system license in Korea. The license covers a geographic area with a population of approximately 45 million people and is based on the implementation of the Company's FHMA(R) system on an 800 MHz frequency. The Company's FHMA(R) system operates in the 900 MHz frequency band in the United States. The deployment of a FHMA(R) based digital system in Korea will be subject to the same risks attendent to the deployment of the Company's digital wireless system in the United States. 19 The Company's subsidiary, Geotek Technologies, Inc. ("GTI") has received a total of approximately $48 million of orders for the Company's proprietary FHMA(R) system infrastructure and related equipment from Anam Telecom as well as Hyundai Electronics, who in turn will sell such equipment to unrelated Korean regional operators. It is anticipated that Anam Telecom and the Korean regional operators will commence commercial operations in the fourth quarter of 1997. In June 1996, the United Kingdom Department of Trade and Industry awarded the Company's United Kingdom operating subsidiary a license to operate a digital Public Access Mobile Radio ("PAMR") network in the United Kingdom. Under the terms of the new digital license, the operating subsidiary, National Band Three Ltd. ("NB3"), received an initial allocation of two megahertz of spectrum in the 410-430 MHz band for the construction of a network based on the new Trans European Trunked Radio ("TETRA") standard. The Company has recognized that it will need some additional spectrum in the future and is discussing this with the regulatory authorities who have indicated that they are prepared to support the request. Currently, there are no TETRA systems available for commercial application. While some potential vendors have indicated an interest in supplying a TETRA-based system to NB3, management of the Company and NB3 cannot accurately estimate the availability, quality and costs associated with the implementation of a TETRA-based network. Management is continuing to work with potential vendors and regulatory authorities in the United Kingdom regarding implementation of such system. However, there can be no assurance that NB3 will be able to implement such a system or, if implemented, when NB3 will be in a position to roll-out a TETRA-based system. Finally, the development of a TETRA-based system in the United Kingdom will be subject to many of the same risks attendent to the development of the Company's digital wireless system in the United States. The Company expects that the digital network, when and if implemented by the Company in the United Kingdom, will offer a full range of mobile voice and data services, including telephony, digital dispatch, automatic vehicle location and packet data. The Company hopes to commence commercial operations of such a digital network in 1998. The Company's United Kingdom operating subsidiary already provides analog PAMR services to approximately 64,000 business subscribers throughout the United Kingdom. The Company's communications products subsidiaries are primarily engaged in the development, manufacturing, and marketing of telephone peripherals and sound and communications equipment. The Corporate Group includes the Company's Corporate headquarters and the Geotest, Inc. subsidiary, which in accordance with a December 1996 definitive agreement, the Company sold in 1996. Summary of Operations The summary of operations provides an analysis of the three and six months ended June 30, 1997 compared to the same periods in 1996. For purposes of this discussion, year to date represents the six month period ended June 30. Consolidated Consolidated revenues increased by 39% for the three months ended June 30, 1997 and by 22% year to date 1997 over the same period of 1996 principally due to GTI commencing shipments of digital wireless infrastructure equipment to Korea, and subscriber growth on the U.S. Network and the NB3 network in the United Kingdom, offset by the deconsolidation of the Company's German Networks in December 1996. Consolidated operating expenses increased by 34% in the second quarter of 1997 and by 23% year to date 1997 compared to 1996, due primarily to increased product costs due to commencing shipment of digital wireless infrastructure equipment to Korea, increased general and administrative expenses for GTI and the U.S. Network to support the growth and sales of these entities, and sales and administrative expenses for NB3 related to activities associated with the planning for a digital wireless system in the United Kingdom. Consolidated losses increased by $9.8 million to $41.1 million during the second quarter of 1997 and by $18.6 million to $76.3 million year to date 1997, principally due to increased interest expense due to the accretion of the Company's 15% Senior Secured Discount Notes, the March 1996 issuance of the 12% Senior Subordinated Convertible Notes ("Convertible Notes"), and the deemed interest on the Company's $24.5 million convertible note with Hughes Network Systems, Inc., and increased depreciation on its U.S. Network due to the ongoing deployment of that network. 20 Wireless Communications Activities The tables below set forth certain information with respect to the results of operations of the Company's Wireless Communications Activities for the three months ended June 30, 1997 and 1996. Other International Activities include the Company's German Networks, international business development activities and equity interests in its Korean Joint Ventures. The Geotek Technologies column includes Geotek Technologies Israel, Ltd., formerly PowerSpectrum Technology, the Company's equipment and research and development operation, and wireless data activities includes the Company's MIS and GMSI, Inc. subsidiaries. For the Three Months Ended June 30, 1997 (Dollars in Thousands)
US Other Int'l Geotek Wireless Network NB3 Activities Technologies Data Total -------- -------- ----------- ------------ --------- -------- Revenues $ 962 $ 8,029 $ 29 $ 6,828 $ 2,504 $ 18,352 Gross profit (10,089) 5,105 4 3,460 611 (909) % of revenues 64% 50% 24% (5%) Engineering and Development 7,306 1,010 8,316 Marketing 4,966 1,625 430 7,021 General and Administrative 3,126 1,544 879 2,288 107 7,944 Equity in losses of less than 50% -owned entities 2,108 2,108 Other (income) expense (74) (74) (Loss) income before interest and amortization & depr (18,107) 1,936 (2,983) (6,134) 936 (26,224) Amortization and depreciation 2,768 1,306 263 527 53 4,917 (Loss) income before interest (20,875) 630 (3,246) (6,661) (989) (31,141) Net (loss) income ($20,810) $ 532 ($ 3,244) ($ 6,527) ($1,035) ($31,084) Subscribers 5,400** 64,700 19,250* 89,350
* - Represents the Company's proportionate share of approximately 38,500 subscribers utilizing the networks of the German joint venture. ** - Due to sales promotions at the end of June 1997, certain signed service contracts were not activated on the network until the first weeks of July. As of July 5, 1997, the Company had approximately 6,000 subscribers activated. For the Three Months Ended June 30, 1996 (Dollars in Thousands)
US Other Int'l Geotek Wireless Network NB3 Activities Technologies Data Total -------- -------- ----------- ------------ --------- -------- Revenues $ 114 $ 6,939 $ 909 $ 2,426 $10,388 Gross profit (5,471) 4,620 (25) 512 (364) % of revenues 67% (3%) 21% (4%) Engineering and Development $ 7,343 180 7,523 Marketing 4,675 1,383 165 364 6,587 General and Administrative 1,067 784 1,966 136 188 4,141 Equity in losses of less than 50% -owned entities 584 584 Other income (222) 17 (205) (Loss) income before interest and amortization & depr. (10,991) 2,453 (2,757) (7,479) (220) (18,994) Amortization and depreciation 952 1,061 940 338 48 3,337 (Loss) income before interest (11,943) 1,392 (3,697) (7,817) 266 (22,331) Net (loss) income ($12,747) $ 1,807 ($3,799) ($8,026) ($303) ($23,068) Subscribers 500 60,500 13,100 74,100
21 Revenues from wireless communications increased by $8.0 million or 77% for the three months ended June 30, 1997. This increase is primarily due to an increase in Geotek Technologies' revenues due to the sale of digital wireless infrastructure equipment to the Company's joint venture in Korea (after elimination of intercompany revenue of 21%) and the increase in the number of subscribers using the U.S. Network and the NB3 network offset by the deconsolidation of the German networks in December 1996 due to the merger with RWE. The increase in negative gross profit for the U.S. Network is primarily the result of increased direct service costs related to the roll-out of the digital network in additional markets, the cost of which are currently not covered by revenues, and the cost of subscriber inventory units which are currently being marketed under a promotion program at an amount less than cost. Engineering and development costs related to the digital wireless system and subscriber unit were $7.3 million for the three months ended June 30, 1997 and 1996. The Company expects significant engineering and development costs to continue in the future in connection with continued enhancements, maintenance and upgrades to the system and subscriber unit and adaptation of the digital wireless system to frequencies other than 900 MHz. Development costs related to wireless data products were $1.0 million for the quarter ended June 30, 1997 compared to $0.2 million for the same period of 1996. This increase is due to the consolidation of MIS Ltd., the Company's data development subsidiary beginning in July 1996 upon the Company purchasing the remaining 50% interest. The Company is presently in the process of rolling out its wireless service over its proprietary digital wireless network in the United States, and accordingly, continues to put in place its marketing, engineering, operations and administrative staff and systems. Marketing expenses increased by approximately $0.4 million or 7% due to the U.S. Network marketing programs and increase in staff needed to execute the roll-out of the U.S. Network in the initial markets and activities at NB3 related to the planning for a digital network in the United Kingdom. General and administrative expenses increased $3.8 million due to increased administrative staff to support the roll-out of the U.S. Network, Geotek Technologies infrastructure sales and NB3 digital network activities. The Company's equity in losses of less than 50% owned entities in 1996 is attributable solely to the results of the Company's Korean joint ventures. The comparable loss for 1997 is attributable to the Company's German and Korean joint ventures of $1.5 million and $0.6 million, respectively. As discussed above, the Company's Korean joint ventures are in the process of establishing a digital network in Korea. It is expected that these entities will continue to generate substantial losses in the near future. As discussed previously, in December 1996, the Company merged its German networks with RWE's network in Germany and thus, deconsolidated these entities. At June 30, 1997, the merged entity had approximately 38,500 subscribers of which the Company's proportionate ownership interest is approximately 19,250. Wireless activities generated a loss before interest, taxes, amortization and depreciation of $26.2 million for the three months ended June 30, 1997 compared to $19.0 million in 1996. This increase is primarily due to costs related to the commencement of the roll-out of the digital wireless communication system in the U.S. offset by the deconsolidation of the German networks in 1997. The tables below set forth certain information with respect to the results of operations of the Company's Wireless Communications Activities for the six months ended June 30, 1997 and 1996. Other International Activities include the Company's German Networks, international business development activities and equity interests in its Korean Joint Ventures. The Geotek Technologies column includes Geotek Technologies Israel, Ltd., formerly PowerSpectrum Technology, the Company's equipment and research and development operation, and wireless data activities includes the Company's MIS and GMSI, Inc. subsidiaries. 22 For the Six Months Ended June 30, 1997 (Dollars in Thousands)
US Other Int'l Geotek Wireless Network NB3 Activities Technologies Data Total -------- -------- ----------- ------------ --------- -------- Revenues $ 1,447 $15,543 $ 71 $ 7,340 $ 5,134 $29,535 Gross profit (15,980) 10,151 9 3,466 1,199 (1,155) % of revenues 65% 12% 47% 23% (4%) Research and Development 14,080 1,640 15,720 Marketing 9,004 2,956 806 12,766 General and Administrative 5,579 2,671 1,543 3,101 259 13,153 Equity in losses of less than 50% -owned entities 3,584 3,584 Other (income) expense (87) (87) (Loss) income before interest and amortization & depr. (30,476) 4,524 (5,118) (13,715) (1,506) (46,291) Amortization and depreciation 5,319 2,616 550 1,178 107 9,770 (Loss) income before interest (35,795) 1,908 (5,668) (14,893) (1613) (56,061) Net (loss) income ($35,659) $ 1,339 ($5,751) ($14,432) ($1,722) ($56,225) Subscribers 5,400** 64,700 19,250* 89,350
* - Represents the Company's proportionate share of approximately 38,500 subscribers utilizing the networks of the German joint venture. ** - Due to sales promotions at the end of June 1997, certain signed service contracts were not activated on the network until the first weeks of July. As of July 5, 1997, the Company had approximately 6,000 subscribers activated. For the Six Months Ended June 30, 1996 (Dollars in Thousands)
US Other Int'l Geotek Wireless Network NB3 Activities Technologies Data Total -------- -------- ----------- ------------ --------- -------- Revenues $ 172 $13,398 $1,884 $ 4,432 $19,886 Gross profit (8,413) 8,868 (64) 1,055 1,446 % of revenues 66% (3%) 24% 7% Research and Development $14,211 527 14,738 Marketing 7,519 2,580 404 635 11,138 General and Administrative 3,279 1,542 2,984 963 395 9,163 Equity in losses of less than 50% -owned entities 1,020 1,020 Other income (785) (785) (Loss) income before interest and amortization & depr. (18,426) 4,746 (4,472) (15,174) (502) (33,828) Amortization and depreciation 1,652 2,229 1,678 606 93 6,258 (Loss) income before interest (20,078) 2,517 (6,150) (15,780) (595) (40,086) Net (loss) income ($20,576) $ 2,422 ($6,408) ($15,772) ($657) ($40,991) Subscribers 500 60,500 13,100 74,100
23 Revenues from wireless communications increased by $9.6 million or 49% for the six months ended June 30, 1997. This increase is primarily due to an increase in Geotek Technologies' revenues for the sale of digital wireless infrastructure equipment and the increase in the number of subscribers using the NB3 network offset by the deconsolidation of the German networks in December 1996 due to the merger with RWE. The increase in negative gross profit for the U.S. Network is primarily the result of increased direct service costs related to the roll-out, the cost of which are currently not covered by revenues, and the cost of subscriber inventory units which are currently being marketed under a promotion program at an amount less than cost. Engineering and development cost related to the digital wireless system and subscriber unit were $14.1 million for the six months ended June 30, 1997 compared to $14.2 million for the same period of 1996. The Company expects significant engineering and development costs to continue in the future in connection with continued enhancements, maintenance and upgrades to the system and subscriber unit and adaptation of the digital wireless system to frequencies other than 900 MHz. The Company is presently in the process of rolling out its wireless service over its proprietary digital wireless network in the United States, and accordingly, continues to put in place its marketing, engineering, operations and administrative staff and systems. Marketing expenses increased by approximately $1.7 million or 15% due to the U.S. Network marketing programs and increase in staff needed to execute the roll-out of the U.S. Network in the initial markets. General and administrative expenses increased $3.9 million due to increased administrative staff to support the roll-out of the U.S. Network, Geotek Technologies Sales and NB3 digital network activities. The Company's equity in losses of less than 50% owned entities in 1996 is attributable solely to the results of the Company's Korean joint ventures. The comparable loss for 1997 is attributable to the Company's German and Korean joint ventures of $2.5 million and $1.0 million, respectively. As discussed above, the Company's Korean joint ventures are in the process of establishing a digital network in Korea. It is expected that these entities will continue to generate substantial losses in the near future. As discussed previously, in December 1996, the Company merged its German networks with RWE's network in Germany. Wireless activities generated a loss before interest, taxes, amortization and depreciation of $46.3 million for the six months ended June 30, 1997 compared to $33.8 million in 1996. This increase is primarily due to costs related to the commencement of the roll-out of the digital wireless communication system for the U.S. Network offset by the deconsolidation of the German networks in 1997. Communications Products Activities The table below sets forth certain information with respect to the results of operations of Bogen Communication International and subsidiaries ("BCI"), a 64% owned entity, as consolidated by the Company for the three and six months ended June 30, 1997 and 1996.
(Dollars in Thousands) Three months ended June 30 Six months end June 30 1997 1996 1997 1996 -------- -------- -------- -------- Revenues $ 12,537 $ 10,322 $ 24,045 $ 21,690 Gross profit 5,792 4,787 11,112 9,592 % of revenue 46% 46% 46% 44% Research and Development 696 667 1,353 1,279 Marketing 2,289 2,085 4,394 4,135 General and Administration 1,423 1,044 2,863 2,141 Other income (8) 35 (34) Income before interest, tax, minority interest, amortization & depreciation 1,392 956 2,536 2,037 Amortization & depreciation 86 193 288 480 Interest expense, tax & minority interest 635 265 1,226 933 Net income (loss) $ 671 $ 499 $ 1,022 $ 624
24 Revenues from communications products activities increased by $2.2 million or 21% to $12.5 million for the three months ended June 30, 1997 and by $2.3 million or 11% to $24.0 million year to date 1997. Revenue's increased for the three and six months is due to increases in BCI's core product lines, which include commercial sound, engineered system and Telco products, is offset by the $1.2 million decrease in the Office Automation product line ("OAS") which was phased out beginning in December 1995 and eliminated in December 1996. Gross profit as a percentage of revenues remained consistent between the three months ended June 30 1997 and 1996 was stable at 46% and increased from 44% to 46% year to date 1997. The increase in gross profit is resulting from the re-negotiation of certain supply agreements and a reduction in direct material costs. General and administration expense for the three and six months ended June 30, 1997 increased by $0.4 million and $0.7 million respectively from the same period of 1996 due to increased headcount, bank charges for BCI's new line of credit facility, and other one time charges. Corporate Group The Corporate Group includes the Company's Corporate headquarters and Geotest, Inc. subsidiary, which, in accordance with a December 1996 definitive agreement, was sold by the Company. The Company's Corporate Group generated a loss before net interest expense, amortization, depreciation and other charges of $2.3 million and $1.8 million for the three month periods ended June 30, 1997 and 1996, respectively and $4.4 million and $4.8 million for the six month periods ended June 30, 1997 and 1996. Liquidity and Capital Resources The Company requires significant additional capital to implement its wireless communications strategy. In furtherance of its capital financing strategy, the Company sold $25 million convertible preferred stock and renegotiated its $40.0 million line of credit facility during the six months ended June 30, 1997. At June 30, 1997, the Company had $51.2 million of cash and cash equivalents as well as $20.0 million available under a line of credit facility. Also, the Company has a $100.0 million vendor credit agreement with Hughes Network Systems for the purchase of infrastructure equipment and in August 1997, the Company received $30 million from the sale of its Series Q Convertible Preferred Stock. The Company's short term cash needs are attributable primarily to capital expenditures, inventory, marketing and general and administrative expenses and research and development costs associated with the implementation and deployment of its digital FHMA(R) networks. One of the advantages of the Company's FHMA(R) system is its modularity, which allows the Company to execute a flexible roll-out plan requiring a relatively low investment in infrastructure in a given geographical area (compared to other wireless communications systems) in order to provide initial commercial service. Additionally, the Company is rolling out its U.S. Network market by market and is targeting customers which require primarily local or regional coverage. Management believes that this modularity and its local deployment provides the Company flexibility in controlling its financial resources by accelerating or slowing down the rate at which the U.S. Network is rolled out in various markets without materially impacting the business results, or cash flows, of its then operating city network. The Company estimates that a minimum average initial capital investment of approximately $7 million is required to roll-out its U.S. network in an average target market. Additional expenditures will be required later in a given market if and when increased subscriber capacity or coverage is needed. In addition, the Company currently estimates that it will continue its present level of engineering and development expenses during the next 12 months in connection primarily with enhancements to the system and other related projects. The Company is planning to raise additional capital and use existing line of credit facilities during the next 12 months to continue financing its current operating plan. The Company is currently operating in nine markets and is in the process of constructing four additional markets. The Company's existing cash resources as of June 30, 1997 and the $30 million of funds raised through the August 1997 sale of the Company's Series Q Convertible Preferred Stock will be insufficient to fund the full implementation of the Company's business plan. The Company's long term capital needs relate to the planned roll-out of the U.S. Network in over 40 cities, the repayment of convertible debt and redeemable preferred stock (if such are not converted into equity), the repayment of the Company's vendor credit and Senior Secured Discount Notes due 2005, the financing of international digital wireless networks, and the acquisition of businesses in the field of telecommunications and of spectrum in the United States and internationally. The Company is currently pursuing various alternatives for raising capital including issuance of equity and debt securities, as well as a combination thereof and other sources. In order to ensure sufficient liquidity to operate throughout 1997, the Company does not intend to construct additional markets or to expand into 25 new international digital wireless networks until such time that it obtains sufficient financing to do so. The Company anticipates that it will need to raise additional financing to operate through the second quarter of 1998. There can be no assurance that the Company will be able to obtain any such financing on acceptable terms, or at all. The failure to obtain such financing will prevent the Company from executing its modified or original business plan. The following discussion of liquidity and capital resources, among other things, compares the Company's financial and cash position as of June 30, 1997, to the Company's financial and cash position as of December 31, 1996. During the first six months of 1997, cash and cash equivalents decreased by $52.4 million to $51.2 million, while working capital decreased by $42.3 million to $59.5 million as of June 30, 1997. Operating Activities Cash utilized in connection with operating activities, for the six months ended June 30, 1997, amounted to $58.1 million. This included changes in operating assets and liabilities of $14.6 million. This change was primarily related to an increase in prepaid expenses of $4.4 million, an increase in inventory of $1.2 million, an increase in receivables of $6.0 million, primarily due to the sale of digital infrastructure equipment, and a decrease in accounts payable and accrued expenses of $2.0. During the third quarter of 1997, the Company's U.S. Network operations extended a sales and marketing promotion under which a dealer will be eligible to purchase equipment at a discount based upon the achievement of certain sales goals in the third quarter. The Company has neither provided an accrual for this promotion as of June 30, 1997 nor adjusted the $14.4 million carrying value of the U.S. Network inventory for this promotion as of June 30, 1997. The results of this promotion will be recorded in the third quarter of 1997 commensurate with the achievement of the required sales goals. Investing Activities Cash used in investing activities was $32.9 million for the six months ended June 30, 1997. The Company expended $27.7 million to acquire equipment during the first six months of 1997 and capitalized $4.5 million in interest on construction in progress and pre-commercial FCC licenses. During the first quarter of 1997, the Company contributed approximately $2.5 million to Terrafon, the Company's joint venture in Germany, representing the initial capital call for the Company's 50% portion of Terrafon's estimated 1997 operating capital. During the second quarter of 1997, the Company contributed $4.7 million to Anam Telecom, the Company's joint venture in Korea, representing the Company's 21% portion of the 1997 capital requirements. Financing Activities In January 1997, the Company sold 500 shares of its Series P Convertible Preferred Stock (ASeries P Stock") to a group of investors affiliated with George Soros for an aggregate purchase price of $25 million. The Series P Stock pays dividends in either shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per annum after a dividend payment failure) at the option of the Company. Additionally, commencing April 1, 1997, each share of Series P Stock is convertible by the holder into the number of shares of the Company's Common Stock as obtained by dividing the $50,000 stated value per share plus any accrued or unpaid dividends at the date of conversion, by the lowest daily volume weighted averaged price of the Company's Common Stock during the four trading days immediately preceding conversion multiplied by the conversion factor (the conversion factor begins at 100% and becomes 95%, 90% and 88% on June 29, 1997, December 31, 1997, and June 29, 1998, respectively). However, the holder can only convert up to a maximum of 20% prior to June 30, 1997, an additional 30% prior to December 31, 1997 an additional 30% prior to June 29, 1998 and the remainder thereafter. In connection with this transaction, the Company issued warrants to purchase 850,000 shares of the Company's Common Stock at $9.2625 per share (subject to adjustment in certain circumstances). The warrants are exercisable at any time, and from time to time, before June 30, 2000. In April 1997, the Company and S-C Rig Investments - III, L.P. (AS-C Rig@), a significant stockholder of the Company and an investment group affiliated with George Soros, modified the terms of the Senior Loan Agreement whereby S-C Rig made a $40.0 million unsecured credit facility (the@S-C Rig Credit Facility@) available to the Company. Under the modified terms of the S-C Rig Credit Facility, all borrowings are required to be made within three years from the initial establishment of the credit facility. The borrowings will accrue interest at a rate of 8% per annum and will mature five years from the date of the final borrowing thereunder. Original terms of the S-C Rig Credit Facility were a 10% interest rate per annum and a four year term from the final borrowing which was required to be made within two years from the establishment of the Credit Facility. In connection with the modification to the S-C Rig Credit Facility, the Company lowered the exercise price of the 26 warrants to purchase approximately 4.2 million shares of common stock (the AWarrant Shares@) from $9.50 to $6.00 per share and extended the Warrant Shared termination date from April 2001 to April 2003. As of June 30, 1997, $20.0 million was outstanding under this facility. In August 1997, the Company sold 600 shares of its Series Q Convertible Preferred Stock ("Series Q Stock") for an aggregate purchase price of $30 million. The Series Q Stock pays dividends in either shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per annum after a dividend payment failure) at the option of the Company. Additionally, commencing October 10, 1997, each share of Series Q Stock is convertible by the holder into the number of shares of the Company's Common Stock as obtained by dividing the $50,000 stated value per share plus any accrued or unpaid dividends at the date of conversion, by the lowest daily volume weighted average price of the Company's Common Stock during the four trading days immediately preceding conversion multiplied by the conversion factor (the conversion factor begins at 100% and becomes 95%, and 90% on January 1, 1998 and April 1, 1998, respectively). However, the holder can only convert up to a maximum of 25% prior to January 1, 1998, an additional 25% prior to March 31, 1998, an additional 30% prior to June 30, 1998 and the remainder thereafter. In connection with this transaction, the Company issued warrants to purchase 1,800,000 shares of the Company's Common Stock at $8.00 per share (subject to adjustment in certain circumstances). The warrants are exercisable at any time, and from time to time, before February 10, 2001. The Company paid cash dividends totaling approximately $2.5 million on its outstanding preferred stocks during the six months ended June 30, 1997. Proceeds from the exercise of warrants and options totaled approximately $0.2 million during the first six months of 1997. Based on the Company's current business plan which includes over 40 U.S. markets, the Company estimates that it will need approximately $275 million of additional financing to implement its U.S. Network in all of its target markets. The amount of additional financing will increase if the Company experiences delays in the commercial implementation of its U.S. Network (which have occurred in the past), including the loading of subscribers, cost overruns or unanticipated cash needs. The Company also expects to need substantial additional financing to fund the deployment of NB3's digital wireless network and its other international operations and opportunities. Although the Company believes that its market by market roll-out plan of its FHMA(R) network will permit the Company to control its cash expenditures to a limited extent by focusing its activities in certain markets while reducing or delaying its activities in other markets, the failure by the Company to obtain necessary financing on a timely basis may prevent the Company from executing its business plan. The Company is considering a number of alternatives to raise additional financing including, but not limited to, public or private equity or debt financing, bank loans, strategic partners, joint ventures, vendor financing, leasing arrangements or a combination of these sources. The documents governing the Company's outstanding indebtedness impose certain significant operating and financial restrictions on the Company, which limit, among other things, the Company's ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, and engage in mergers and acquisitions. There can be no assurance that the Company will be able to obtain additional financing on a timely basis or on acceptable terms. Recently Issued Accounting Pronouncements In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings per Share" which is applicable for financial statements issued after December 15, 1997. The adoption of this standard will have no impact on the Company as the Company is in a loss position and only needs to present basic earnings per share as the inclusion of common stock equivalents or convertible securities has an antidilutive effect on the calculation of earnings per share. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic area, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. 27 GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES Item 4. Submission of Matters to a Vote of Security-Holders (a) On June 16, 1997, the Company held its Annual Meeting of Stockholders. As of the record date the total number of votes eligible to cast at the Annual Meeting was 62,327,129. The following proposals were presented for a vote by the Company's stock holders: PROPOSAL I - Election of Ten (10) Directors PROPOSAL II - Approval of the Amendment to the Company's Restated Certificate of Incorporation to Increase the Number of Authorized Shares to 200,000,000 Shares of Common Stock. PROPOSAL III - Approval of the adoption of an Employee Stock Purchase Plan for the Company. PROPOSAL IV - Approval of the Company's 1994 Stock Option Plan, as Amended and Restated. PROPOSAL V - Approval of the Issuance of Shares of Common Stock Underlying the Series O Convertible Preferred Stock, Series P Convertible Preferred Stock, and Certain Warrants. PROPOSAL VI - Ratification of the Appointment of Coopers & Lybrand L.L.P. as the Company's independent auditors for the 1997 fiscal year. Each such proposal was approved by the Company's stockholders as set forth in 4 (c) below. (b) N/A (c) PROPOSAL I - Election of Directors Name of Nominee Votes for Votes Withheld --------------- ---------- -------------- Judith C. Areen 49,839,568 1,584,545 Walter Auch 49,830,367 1,593,746 George Calhoun 49,837,667 1,586,446 Purnendu Chatterjee 49,852,380 1,571,733 Winston Churchill 49,856,663 1,567,450 Yaron Eitan 49,852,517 1,571,596 Haynes G. Griffin 49,842,617 1,581,496 Richard Krants 49,437,692 1,986,421 Richard Liebhaber 49,854,017 1,570,096 William Spier 49,846,267 1,577,846 PROPOSAL II Approval of the Amendment to the Company's Restated Certificate of Incorporation to Increase the Number of Authorized Shares to 200,000,000 Shares of Common Stock. Votes for Against Abstain --------- ------- ------- 49,679,226 1,383,892 360,995 PROPOSAL III Approval of the Adoption of an Employee Stock Purchase Plan for the Company. Votes for Against Non-Vote Abstain --------- ------- -------- ------- 25,610,176 1,605,843 23,953,192 254,902 28 PROPOSAL IV Approval of the Company's 1994 Stock Option Plan, as Amended and Restated. Votes for Against Non-Vote Abstain --------- ------- -------- ------- 18,230,481 6,884,964 25,916,678 391,990 PROPOSAL V Approval of the Issuance of Shares of Common Stock Underlying the Series O Convertible Preferred Stock, Series P Convertible Preferred Stock, and Certain Warrants. Votes for Against Non-Vote Abstain --------- ------- -------- ------- 24,153,937 1,266,652 25,658,543 344,981 PROPOSAL VI Ratification of the Appointment of Coopers & Lybrand L.L.P. as the Company's independent auditors for the 1997 fiscal year. Votes for Against Abstain --------- ------- ------- 50,934,557 340,075 149,481 Item 6. Exhibits and Report on Form 8-K (a) Exhibit: 12 - Computation of Ratio of Earnings to Fixed Charges Exhibit: 27 -Financial Data Schedule (b) Report on Form 8-K The following report on Form 8-K was filed by the Company during the second quarter of 1997. (i) Current Report on form 8-K filed April 22, 1997, the Company modified the terms of its Senior Loan agreement with S-C Rig Investments L.P.. Under the modified agreement, all borrowings bear interest at a rate of 8% per annum and will maintain five years from the final borrowing, original terms were 10% interest per annum and four year term. Additionally, the stock price of the warrants to purchase 4.2 million shares of the Company's Common Stock was lowered from $9.50 to $6.00 and the expiration date was extended from April 2001 to April 2003. 29 GEOTEK COMMUNICATIONS, INC. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GEOTEK COMMUNICATIONS, INC. Date: August 14, 1997 /s/Robert A. Kerstein ---------------------------- Robert A. Kerstein Chief Financial Officer Date: August 14, 1997 /s/ Michael H. Carus --------------------------- Michael H. Carus V.P., Chief Accounting Officer and Corporate Controller 30 EX-12 2 COMPUTATION OF RATIOS EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Earnings include income before income taxes plus fixed charges less capitalized interest. Fixed charges include interest and one-third of rent expense (representing the estimated interest component of operating leases). The dollar amount of the deficiency in earnings to fixed charges was $85.7 million for the six months ended June 30, 1997. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 51,234 0 21,455 0 28,792 131,641 164,338 51,206 393,957 72,153 245,690 40,000 11 663 36,940 393,957 53,580 53,580 43,623 69,100 (112) 0 18,959 (74,687) (1,345) (76,306) 0 0 0 (76,306) (1.41) (1.41)
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