Item 1. BUSINESS
Geotek Communications, Inc. (the "Company" or the "Registrant"), through its subsidiaries, currently provides specialized mobile radio ("SMR") services in the United States, the United Kingdom and Germany. Since 1992, the Company has devoted substantial financial and management resources to the development of a low cost, high quality integrated digital voice and data wireless communications network known as GEONET(TM). The Company intends to deploy GEONET(TM) in a total of 36 markets by the end of 1997. The Company has acquired, and intends to continue acquiring, 900 MHz SMR licenses in cities throughout the United States and to make strategic acquisitions of spectrum and operating networks worldwide. The Company also intends to continue to develop technology, equipment and software which support its GEONET(TM) network. The Company also is engaged in the development, manufacture and marketing of communications products through its majority-owned subsidiary, Bogen Communications International, Inc. ("BCI"). The Company is a Delaware corporation whose principal executive offices are located at 20 Craig Road Montvale, New Jersey 07645 and its telephone number is (201) 930-9305.
Wireless Communications Activities
Overview
The Company currently provides analog SMR services in the United Kingdom and Germany to approximately 72,600 subscribers. The Company started providing commercial digital voice communication services through GEONET(TM) in Philadelphia in January 1996, in Washington, D.C. and Baltimore in February 1996, and in New York City in March 1996. The Company intends to deploy GEONET(TM) in a number of other cities in the United States, including New York, Boston, Miami and Dallas by the Summer of 1996 and in over 35 markets by the end of 1997. Each market will consist of a major U.S. city and its surrounding area. In certain markets, the Company also intends to offer its services regionally.
The Company's strategy is to differentiate its services from those of other wireless communications providers. Specifically, the Company's strategy is to (i) target a niche market of small- to medium-sized mobile business users in metropolitan markets throughout the United States; (ii) provide meaningful product differentiation by offering a wide array of digital voice and data communications services through an integrated subscriber unit that has been specifically designed for its mobile business users; (iii) emphasize customer relationships through a strong dealer network and dedicated customer service representatives; and (iv) exploit the low cost advantages inherent in its proprietary FHMA(TM) technology.
The Company is currently offering commercial digital voice communications services to business users through GEONET(TM). These digital voice communications services will be expanded to enable users to access both their internal phone network and the general public switched network (the latter of which services is currently available). The Company expects to expand its service offerings to include data services, including messaging, data dispatch, automatic vehicle location and mobile data. Mobile data service offerings will permit such applications as credit card authorization, inventory management, automated order entry, access to electronic mailboxes, facsimile retrieval and transmission and interconnection to both a user's internal databases and to publicly available databases and networks. It is expected that all of such mobile data services will be offered by the Company later in 1996. GEONET(TM) will also permit advanced fleet management whereby businesses will be able to configure their mobile
workforces into, and conduct private conversations within, a number or combination of subfleets. Moreover, businesses will be able to select different communications capabilities for each subfleet, depending on each subfleet's particular needs.
The Company will make continuing hardware and software enhancements to GEONET(TM) during and after the system's commercial roll-out. For example, the Company must integrate the initial GEONET(TM) data applications, which are expected to be completed in the first half of 1996, with the initial GEONET(TM) voice applications. Subsequent applications also will need to be integrated with existing GEONET(TM) applications. There can be no assurance that the Company will be able to satisfactorily complete such modifications and/or integration efforts, or that they will be able to be completed in a manner that enables the Company to offer its GEONET(TM) services on a profitable and timely basis.
To date, no other wireless service provider has been successful at providing the level of integrated voice and data services contemplated by the Company. Accordingly, in implementing GEONET(TM), the Company may encounter unforeseen technical issues. In addition, each of the Company's U.S. target markets is expected to present unique technical issues to the Company due to differences in geography and the level of local land development and construction. Technical difficulties in the operation and/or performance of GEONET(TM) also may be experienced as additional subscribers are added to the system in a given market or as the coverage area in any market is increased. There can be no assurance that the Company will be able to adequately address any such issues in any given market or that such issues will be able to be addressed in a cost-effective manner.
The Company is targeting its services to small- to medium-sized business users in over 35 of the largest metropolitan markets throughout the United States. See "- The GEONET(TM) Roll-out." The Company's efforts will be targeted at existing users of SMR, Private Mobile Radio ("PMR"), paging and cellular wireless services as well as businesses currently foregoing the use of wireless services to meet their communications needs. The Company believes that the specific communications needs of these businesses are not being met by existing wireless providers. The Company is targeting these markets in order to access a large potential subscriber base and to minimize its infrastructure costs per subscriber.
The Company intends to market its GEONET(TM) services in its target U.S. markets primarily through an indirect sales force compromised of dealers and agents, value-added resellers and joint marketing partners. The mix of distribution channels used in each target market will differ depending upon the individual characteristics of these markets. The Company's direct sales force will focus primarily on businesses that already are heavy users of mobile communications services. The Company will have its direct sales force target these customers because the sales cycle for these customers is expected to be longer and more interaction between the salesman and the potential customer is likely to be required to migrate these customers from their existing services to those provided by the Company. At present, the Company has a field sales force consisting of approximately 50 salespeople throughout the U.S. and intends to expand its direct sales force in each of its target markets as it rolls-out GEONET(TM). The Company will also market its services through dealers and agents that currently sell PMR, SMR, cellular and paging equipment and services to business users. To date, the Company has entered into agreements with over 70 dealers throughout the United States and is negotiating additional distributor agreements in its target markets. The Company also intends to utilize value-added resellers to market its services. Value-added resellers typically sell a variety of computing and communications solutions to business customers. The Company also intends to pursue marketing alliances with companies that sell complementary products and services to certain segments of the Company's targeted customer base.
The GEONET(TM) Roll-out
The Company presently expects to continue the roll-out of GEONETTM in accordance with the following schedule:
Commencement of Operations* Markets
August 1995 Philadelphia**
During 1996 Baltimore** Miami Boston New York City** Orlando Dallas Tampa Houston Washington, D.C.** Jacksonville During 1997 Atlanta New Orleans Buffalo Norfolk Charlotte Phoenix Chicago Cincinnati Pittsburgh Denver Portland Greensboro Richmond Hartford Rochester Indianapolis Salt Lake City Kansas City San Antonio Memphis San Francisco Minneapolis St. Louis Nashville Seattle
- ----------- * Markets are not in the order that services will be initiated in such markets. The rollout schedule is subject to change.
** The Company started providing commercial services in Philadelphia in January 1996, in Washington, D.C. and Baltimore in February 1996 and New York in March 1996.
The key stages to the GEONET roll-out include:
Propagation. Propagation analysis involves the identification, through software programs and engineering analysis, of the optimal areas in a target market for the placement of the GEONET(TM) base station and remote sites. The Company has substantially completed its propagation analysis for its first 11 target markets.
Procurement of Site Leases and Permits. The Company must procure leases and permits for the sites at which the GEONET(TM) base stations and remote sites are to be located. The Company has engaged multiple site leasing organizations to assist the Company in the identification of potential site leases, the negotiation of leases and the acquisition of required local approvals. The acquisition of leases and required permits is typically a two to six month
process, although delays may occur from time to time. To date, the Company has entered into leases and has received the necessary permits to install and operate its base stations in Philadelphia, Boston, Dallas, New York City, Washington, D.C./ Baltimore, Tampa, Orlando, Chicago, Jacksonville, Atlanta and Miami. As the Company increases its coverage area in each of these markets, it will need to procure additional site lease locations.
There are only a limited number of existing communications towers capable of providing the Company with optimal coverage area for its radio transmissions and that are capable of supporting the Company's transmission equipment. In the event the Company cannot obtain leases for existing towers, it may be required to purchase sites, obtain necessary permits and build such towers, a process which the Company estimates could take up to one year to complete for each tower. If the Company is required to build new towers, the roll-out of GEONET(TM) in one or more target markets could be delayed and be more costly than anticipated.
Build-out. Preparation of each base station, which includes ventilation and air conditioning, grounding and equipment installation, testing and optimization, is expected to last at least ten to twelve weeks. The Company has completed the initial build-out of GEONET(TM) in Philadelphia, Washington D.C./Baltimore, New York and has begun the initial build-out of GEONET(TM) in Boston, Miami, Orlando, Tampa, and Dallas. The Company intends to begin construction of GEONET(TM) in Jacksonville later in 1996. The Company expects to construct remote sites in these markets to increase its coverage. The Company intends to offer GEONET(TM) services in a over 35 markets by the end of 1997. The Company has entered into an agreement with IBM Corporation ("IBM") to manage the construction of the GEONET(TM) stations and the installation of FHMA equipment in the Company's U.S. target markets. The Company has also engaged, and intends to engage, other third party contractors to manage all or certain aspects of such construction or installation in certain of its U.S. target markets. A failure by IBM or such other contractors to properly manage the preparation and construction of the Company's base stations and remote sites could have a material adverse effect on the Company.
Spectrum Acquisition. The Company controls in excess of 1,000 900 MHz channels in its U.S. target markets. The Company will require additional spectrum to add capacity and to service anticipated demand in certain of its target markets, including in certain of its 1996 target markets. The Company also requires additional spectrum to initiate services in certain of its 1997 target markets.
Certain agreements pursuant to which the Company has the right to acquire spectrum are subject to regulatory approval. Although the Company believes that such approval will be forthcoming prior to its expected roll-out in each such market, there can be no assurance that such approvals will be received on a timely basis or at all.
The Company intends to acquire sufficient spectrum in each of its target markets in which it does not have sufficient spectrum to initiate service and to add additional capacity in certain of its other U.S. target markets. In December 1995, the Federal Communications Commission (the "FCC") commenced auctioning spectrum in each market in which the Company desires to acquire additional spectrum. Although the Company has bid on such spectrum to the extent it believes that such spectrum is needed, there can be no assurance that the Company will be the successful bidder for any radio spectrum auctioned by the FCC. In addition, the Company cannot predict the cost of obtaining licenses for additional spectrum since such costs are determined by factors beyond the Company's control, including but not limited to, the availability of licenses and the number of competitors seeking to acquire licenses in any particular market. Moreover, some of the spectrum available at auction in certain of the Company's 1996 and 1997 U.S. target markets is subject to a preferred right of usage by incumbent licensees. The Company, in limited circumstances, may choose to bid in the auction for licenses on a regional service area known as Market
Trading Areas ("MTA") which may be subject to the right of prior use by a preferred licensee in cases where it believes it will be able to successfully gain access to such portions of the encumbered spectrum which are material to the Company. However, there can be no assurance that the Company will gain access to any such encumbered spectrum it may acquire. The failure to obtain such access may materially diminish the value of any spectrum so obtained by the Company. Although the Company believes that it will be able to acquire sufficient spectrum in each of its U.S. target markets, there can be no assurance that the Company will be able to make such acquisitions on commercially acceptable terms or at all. See "- Government and Industry Regulation."
The successful and timely implementation of GEONET(TM) will depend upon a number of factors, including, but not limited to, the timely and cost-effective manufacture, construction and integration of the system infrastructure and software, the acquisition and control of additional radio spectrum, the procurement and preparation of base station and remote sites, the receipt of all necessary regulatory approvals, the establishment of effective sales and marketing organizations and distribution channels and the need for additional financing. The failure or delay with respect to any of these items could adversely affect the timing of the implementation of GEONET(TM) in one or more of the Company's target markets, which could have a material adverse effect on the Company. In this regard, the Company has experienced delays in the past with respect to its roll-out schedule related primarily to the development of its subscriber unit from a preproduction form to a full production unit. The Geotek subscriber units are currently being manufactured in their full production form and the Company does not expect to experience additional delays as a result of the production of its current subscriber units. However, there can be no assurance in this regard. The Company's roll-out schedule may be reviewed and revised from time to time in light of changing conditions.
Each of the Company's target markets present unique technical issues due to differences in geography and the level of local land development and construction. Technical difficulties in the operation and/or performance of GEONET(TM) also may be experienced as additional subscribers are added to the system in a given market or as the coverage area in any market is increased. There can be no assurance that the Company will be able to adequately address any such issues in any given market or that such issues will be able to be addressed in a cost-effective manner. Any failure by the Company to adequately address such issues or to address them in a cost-effective manner could have a material adverse effect on the Company.
The implementation of GEONET(TM) in all of the Company's target markets will require substantial additional funding. See item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."
FHMA(TM) Technology
The Company will implement GEONET(TM) utilizing a relatively small number of high power transmission sites with a transmitter capable of covering an area of up to 30 miles. A base station containing the system computer and switching equipment will be located at or near one of the transmission sites in each market. Areas of high use or poor transmission quality will be served by a simple antenna relay and related equipment that improves signal quality to that area. The system's use of a relatively small number of high power sites and its ability to reuse frequencies will enable the Company to divide each cell coverage area into several sectors. In contrast, many other wireless service providers, including conventional cellular system and Enhanced Specialized Mobile Radio ("ESMR") operators, are required to build multiple overlapping "cells," sometimes dozens or hundreds in a market, each with its own low power transmission station in order to reuse frequencies. The Company believes its use of a relatively small number of high power transmission sites will enable it to reduce the infrastructure cost required to service a market as compared to the multicell approach employed by other wireless service providers. The Company
also believes that its system design will allow it to initiate service in a given market at a lower cost and achieve profitability with fewer subscribers than other digital wireless communications providers. Moreover, the Company's ability to reuse frequencies will enable it to increase, at a relatively low cost, the capacity of GEONET(TM) as such capacity is needed by further sectorizing a coverage area or adding additional sites. The Company also believes that GEONET(TM) will be less expensive to operate than other multicell systems due to, among other things, lower costs for transmission lines and site leases.
GEONET(TM) utilizes FHMA(TM), the Company's proprietary frequency hopping technology. FHMA(TM) integrates certain standard digital technology, such as TDMA, voice multiplexing and packet data transmission, with advanced error correction and frequency hopping techniques in a macrocell configuration. The Company believes that the utilization of FHMA(TM) will permit it to increase the capacity of its radio spectrum by more than 20 times traditional analog SMR capacity and to improve the quality and security of wireless communications over current analog systems.
TDMA is a digital transmission technique currently utilized by digital cellular systems that allows each channel to carry several transmission signals at one time. FHMA(TM) employs "three slot" TDMA, which permits three transmission signals to be carried on each channel. The use of digital FHMA(TM) technology results in secure communications, an important attribute to many business users. FHMA(TM) also incorporates a voice multiplexing technique (digital speech interpolation) that is used by long distance carriers and borrows unused portions of a communications channel to increase capacity. The use of voice multiplexing should permit the Company to increase capacity by approximately 1.5 times the capacity of conventional analog systems and, when combined with 3.0 times TDMA, will result in capacity increases of up to 4.5 times the capacity of analog systems. In addition, FHMA(TM) utilizes a digital technology technique known as frequency hopping which enables frequency reuse in adjacent geographic areas. Typically, in wireless communications applications, it is not possible to reuse the same frequency in adjacent areas because of interference that generally results when two transmission signals share the same frequency. Frequency hopping technology permits the reuse of radio spectrum in adjacent sectors by breaking down a transmission signal into many small components and having each component "hop" from frequency to frequency in accordance with a predetermined sequence. Different frequency hopping sequence sets are used in adjacent areas to minimize interference. Finally, FHMA(TM) employs an advanced error correction feature which restores transmitted signals in the event of interference. The Company believes that its ability to sectorize coverage areas, when combined with 3.0 times TDMA and 1.5 times voice multiplexing, will enable it to increase the capacity of its available radio spectrum to more than 20 times traditional analog SMR capacity.
System Hardware
The Company offers a subscriber unit with a large screen and prominently displayed function keys. For high-end users with a greater need for telephony services, the Company will offer a small screen subscriber unit that is similar in size and appearance to a mobile cellular telephone. The Company is developing a full line of accessories for each of its subscriber units, including push-to-talk and palm size handsets, speakers and microphones and magnetic strip readers. A standard serial port will permit the attachment of laptop computers, fax machines and other intelligent devices.
PowerSpectrum Technology Ltd. ("PST"), a subsidiary of the Company, is responsible for the enhancement and manufacture of the base station and the validation systems. The Company procures all other components utilized in connection with GEONET(TM) from third parties. A number of these firms are located in Israel, the United Kingdom and the United States. These firms include PA Consulting Services Ltd. (commercial subscriber unit design), Digital Voice
Systems, Inc. (vocoder), Tadiran Limited (switches), Orckit Communications Ltd. (system software design) and Analog Devices Inc. (ASIC chip set for the mobile subscriber unit).
PST is also responsible for developing and engineering the radio component of the commercial subscriber unit for GEONET(TM) and integrating the subscriber unit with the remaining GEONET(TM) system hardware. This project is funded by the Company and involves a number of engineering and manufacturing firms including Mitsubishi Consumer Electronics America ("Mitsubishi"), Hughes Network Systems ("Hughes"), a unit of GM Hughes Electronics, Kenwood Corporation of Japan ("Kenwood"), PA Consulting Services, Ltd. and Orckit Communications Ltd. In particular, the Company has entered into an agreement with Mitsubishi pursuant to which Mitsubishi manufactures the Company's large screen vehicle-mounted subscriber units, has entered into an agreement with Hughes pursuant to which Hughes manufactures the Company's small screen vehicle-mounted subscriber units and will design, manufacture and deliver portable units starting in the fourth quarter of 1996 and has entered into an agreement with Kenwood to develop and manufacture second generation mobile subscriber units, with initial deliveries expected in the first half of 1997. There can be no assurance that such third parties will deliver such equipment on a timely basis or that the Company will be able to successfully integrate such components and hardware in a cost effective system on a timely basis, if at all. As discussed above, the Company has only a single manufacturing source for certain of the components of the GEONET(TM) system hardware, including the base stations and subscriber units. Although the Company believes that it can obtain all components necessary to build GEONET(TM) from other sources, delays may be encountered in the event of a component shortage because of the time it may take to identify substitute sources and manufacture substitute components. A failure by the Company to obtain hardware components on a timely basis or at satisfactory prices could adversely affect the ability of the Company to roll-out and market GEONET(TM), which could have a material adverse effect on the Company.
International SMR Operations
United Kingdom.
On July 2, 1993, the Company acquired all of the outstanding stock of National Band Three Ltd. ("NB3"). NB3 is the only national SMR equivalent service provider in the United Kingdom and controls approximately 70% of the domestic market for integrated dispatch voice and data wireless communications services, providing service to approximately 60,000 subscribers.
NB3 targets its services at business users with mobile distribution or service fleets. NB3's major customers include providers of domestic and commercial maintenance services, haulers and couriers. The Company believes that NB3 will benefit from increased marketing efforts aimed at increasing its utilization by business users. The Company intends to take advantage of NB3's position as the only United Kingdom-SMR equivalent provider with a national license. The Company currently is focusing its marketing efforts in the United Kingdom on businesses utilizing their own private radio networks, emphasizing NB3's wide coverage area and voice and data capabilities. The Company believes that the same competitive pressures for improved field services that exist in the United States are present in the United Kingdom and should assist the Company in migrating private radio network users to NB3's network.
The NB3 network currently is an analog system that utilizes a series of overlapping cells in conjunction with large switching stations. The NB3 network currently consists of approximately 100 base stations and three switching
stations. NB3 anticipates increasing the capacity of its analog system to approximately 75,000 subscribers from the current capacity of approximately 67,000 subscribers. The Company also is evaluating the possibility of establishing a nationwide digital network in the United Kingdom with either FHMA(TM) or a European digital standard. The Company believes that any conversion of the NB3 network to digital technology will entail significant cost. Digital technology, though, would significantly expand NB3's product offerings and may permit the Company to offer other wireless services to the general population.
Germany.
In the Summer of 1994, the Company consummated the acquisitions of a non-controlling 49.0% equity interest in Preussag Bundelfunk GmbH ("PBG") and a non-controlling 49.9% equity interest in DBF Bundelfunk GmbH ("DBF"). During 1995, the Company acquired the remaining equity interests in PBG and DBF so that these entities are now wholly-owned subsidiaries of the Company. PBG and DBF provide analog trunked mobile radio service, which is equivalent to SMR service, to eight major regions in the northern part of Germany with a population of approximately 28 million people. This service is provided through a combined network known as "RegioNet" that currently provides dispatch, telephony and data communications services to approximately 12,500 subscribers. The Company intends to increase its subscriber base in Germany by expanding RegioNet, by adding new distribution channels and by creating differentiation from other networks by offering wireless applications and other products. The Company is also exploring possible startegic relationships to enhance its German operation.
Korea
The Company and Anam Industrial Co., Ltd. ("Anam") have formed a joint venture, the purpose of which is to build an FHMA(TM) demonstration site for wireless service in Korea. The agreement pursuant to which the joint venture was established (the "Joint Venture Agreement") established of a new entity ("Newco") which in April 1996 expects to apply for a regional or national radio license in Korea and otherwise pursue the establishment of an FHMA(TM) based wireless communications system in Korea and in such other Asian countries as the Company and Anam may hereafter agree. According to the Ministry of Communications of Korea, a decision regarding the license application will be made in the summer of 1996. The Joint Venture Agreement is terminable by either the Company or Anam at any time. There can be no assurance that Newco will be granted licenses for sufficient radio spectrum to successfully develop an FHMA(TM) communications system in Korea or in any other jurisdiction or will otherwise be profitable or generate positive cash flow. The development of communications systems in Asia will be subject to many of the same risks inherent in the establishment of GEONET(TM) in the United States.
Other Opportunities.
The Company intends to continue to seek opportunities to expand its position internationally. This expansion may take the form of acquiring ownership interests in trunked mobile radio licenses or the acquisition of SMR operators, or such other international opportunities as management may determine to be advantageous. The Company's ability to make investments is limited under certain circumstances by the terms of the indentures under which the Notes and the Company's 15% Senior Secured Discount Notes due 2005 were issued.
Competition
The Company expects to experience competition for each type of service it offers and intends to offer. Many of its current competitors presently offer generic services, such as dispatch, cellular telephony, paging or access to public data and electronic mail services. Cellular telephony companies are the dominant providers of wireless voice communications, although other SMR licensees offer a combination of dispatch (the traditional service provided by SMR licensees) and telephony over relatively discrete market areas. The Company expects to experience competition from both of these types of providers. The Company also expects to experience competition for traditional trunked mobile radio customers from operators utilizing frequencies in the 220MHZ, 800 MHz and 900 MHz bands. Data communications services also may provide competition for the data capabilities to be offered as part of the Company's integrated package. The Company also will experience competition from manufacturers of PMR equipment, which target existing private network operators and SMR customers and urge them to build or upgrade their own private networks rather than utilize SMR service providers. Many of these providers and manufacturers are larger, more established, have more experience in the telecommunications industry, have greater name recognition, have larger sales staffs and/or have greater financial resources than the Company. The Company believes that its targeted business customers currently do not have access to the quality and array of services to be provided by the Company, and that such services will meaningfully differentiate the Company from other wireless providers.
NEXTEL Communications, Inc. ("NEXTEL") has announced plans to construct a nationwide digital ESMR network and is offering services in several cities including many of the cities that the Company plans to enter. NEXTEL has also secured a significant number of 800 MHz SMR channels in several of the largest U.S. markets. Furthermore, several large SMR providers are positioning themselves to compete for wireless voice and data traffic and have announced plans to construct digital ESMR networks utilizing equipment manufactured primarily by Motorola. These providers include Nextel, Motorola, and Pittencrieff Communications. Moreover, recent regulatory changes may permit the Bell Operating Company's ("BOCs") to enter the Commercial Mobile Radio Service ("CMRS") marketplace. See " - Governmental Regulation."
The Company also may face competition from technologies and services introduced in the future. In March 1995, the FCC completed auctions for wideband Personal Communications Services ("PCS") licenses on an MTA within the United States. The wideband PCS auction winners have already begun to provide service. In December 1995, the FCC commenced its auction of 493 broadband basic trading area PCS licenses. In addition, the FCC has also licensed national and regional narrowband PCS licenses. Additional narrowband PCS licenses on an MTA basis will be issued under government regulation in the future. Narrowband PCS service will be similar to paging services already offered and may compete with the Company's SMR proposed service. The FCC also intends to license additional spectrum for other wireless services. It is also possible that satellite technology ultimately could be developed to permit urban use equal to or superior to that available through SMR systems, which would result in increased competition for the Company's services. The commercialization or further development of any such technologies could have a material adverse effect on the Company.
Many of the target customers for GEONET(TM) currently use other wireless communications services. In order to be successful, the Company will need to migrate a portion of its target customers from their existing services to those provided by the Company over GEONET(TM). The Company's ability to migrate its target customers over to its services will be highly dependent on the perceived utility of the Company's services to its target customers as compared to the services currently utilized by such customers. Because there currently is no integrated wireless communications network commercially available that is comparable to that expected to be offered by the Company over GEONET(TM), the extent of the demand for the Company's wireless communication services cannot be predicted with any degree of certainty. The demand for the Company's digital wireless communications services also could be affected by other matters beyond its control, such as the future cost of subscriber equipment, marketing and pricing strategies of competitors and general economic conditions.
The Company also expects to experience competition for radio spectrum from existing and future providers of wireless communications services and for communications tower space.
The Company also faces competition for its existing services and products. In the United Kingdom, NB3 competes for customers with regional SMR equivalent systems and from private radio networks. Additionally, NB3 competes for customers with cellular providers, PCS-like services, and wireless data. In Germany, DBF and PBG compete with two large regional operators of SMR equivalent systems. DBF and PBG also face competition from cellular networks, a PCS network and wireless data networks.
The Company also experiences competition for each of its products and services other than GEONET(TM) in the markets in which its sells such products and services. Such competition is expected to remain strong for the foreseeable future.
Government and Industry Regulation
The construction, operation and acquisition of SMR systems in the United States is regulated by the FCC under the Communications Act of 1934, as amended (the "Communications Act"), and pursuant to the FCC's rules and policies adopted thereunder. The FCC previously granted five-year SMR licenses to the extent frequencies were available in a particular location. Licenses could be renewed for additional five-year terms upon demonstrating compliance with FCC regulations. In 1996, once new regulations adopted by the FCC in 1994 become fully effective, the license term for the Company's licenses will be ten years with an expectancy of renewal, provided that the Company complied with the FCC's service and operational requirements. For Market Trading Areas ("MTA") licenses which the Company is successful in acquiring through the ongoing 900 MHz spectrum auctions, the Company will be granted 10-year MTA licenses. In October 1992, the Company submitted a waiver request to the FCC in connection with certain rules and regulations covered under Part 90 of the FCC rules. Specifically, the Company requested an extension of the construction deadline for certain systems it has agreed to acquire so GEONET(TM) could be installed by 1997. On June 29, 1993, the FCC granted such waiver request extending the deadline for the construction and loading of the Company's 900 MHz SMR systems for a period of four years. This waiver allows the Company to maintain its SMR licenses until GEONET(TM) is implemented, as scheduled. In those markets where the Company successfully acquires an MTA license through the 900 MHz spectrum auctions, where the Company already has a Designated Frequency Area ("DFA") license on the same frequencies, the FCC's construction and operational rules for the MTA license will become applicable for both the existing DFA license and the MTA license, and the Company's waiver, for those frequencies, will become unnecessary. Although the Company's waiver is currently subject to a pending challenge by a third party before the FCC, the Company has vigorously opposed the challenge.
Under the Communications Act, SMR system providers were traditionally regulated as private carriers and, therefore, were subject to less regulation by both the FCC and individual states than were common carriers such as cellular telephone companies. However, the FCC has initiated and is likely to continue to initiate regulatory proceedings with wide-ranging implications for the wireless telecommunications industry. Most of the rule makings were initiated in response to congressional amendments to the Communications Act, as directed by the Omnibus Budget Reconciliation Act of 1993 (the "Budget Act"). Early this year, President Clinton signed into law the Telecommunications Act of 1996 (the "Telecommunications Act") which imposes sweeping reform of telecommunications policy. Although the majority of the Telecommunications Act's measures will directly impact large common carriers, cable and broadcast operators, and Internet service providers, many of the Telecommunications Act's provisions will have an effect upon the CMRS marketplace, and upon the Company. In particular, the Telecommunications Act may: (i) require CMRS providers to offer unblocked access to telephone toll services; (ii) require the Company to contribute to a Universal Service Fund; (iii) require local exchange (telephone) carriers ("LECs") to establish reciprocal compensation arrangements for CMRS providers for the origination and termination of calls; and (iv) require the Company to ensure that its equipment is accessible to disabled persons. All of the provisions of the Telecommunications Act which may have an effect upon the Company will be the subject of FCC rule making proceedings during the next 15 months. The FCC has been granted authority to forbear some of these requirements where appropriate. The primary intent of these recent amendments was to encourage competition among communications service providers and, thus, improve service to consumers. Accordingly, the most sweeping regulatory changes and legislative directives have been designed to ensure a level playing field among the Company and its competitors, although such impact could be materially adverse to the Company.
Commercial Mobile Service Provider Regulation
In a series of rule makings, the FCC initiated or adopted, pursuant to congressional amendments to Sections 3(n) and 332 of the Communications Act, a mandated reclassification of mobile services. Specifically, the FCC reconfigured the mobile marketplace to include in the category of CMRS, any mobile service provider (including cellular and specialized mobile radio) which offers, for a profit, mobile service interconnected to the public switched network to a substantial portion of the public. This restructuring has been accomplished through a number of rule-making proceedings.
In its first decision effecting regulatory parity for CMRS providers, released January 5, 1994, the FCC adopted similar foreign ownership limitations under Section 310(b) of the Communications Act for CMRS providers that previously applied only to common carrier telephone service providers. Section 310(b) limits the percentage of foreign ownership and/or participation in any entity holding an FCC license. As a result, the Company's ability to attract foreign investors will be limited by current FCC regulations. In a recent decision, however, the FCC revised its standards for regulating entry of foreign carriers and their affiliates into the U.S. market for international telecommunications services. The FCC will apply these revised standards in the application process for foreign entry, principally by taking into consideration whether "effective competitive opportunities" exist for U.S. carriers in the destination markets of foreign carriers seeking to enter the U.S. international services market. In addition, and of specific impact for the Company, the FCC determined that it will examine reciprocal foreign market competitive opportunities when considering additional waiver requests by CMRS providers to exceed foreign investment in excess of the existing 25% benchmark.
On March 7, 1994, the FCC released a decision which imposed the following regulatory modifications, which will generally take effect on August 10, 1996, relevant to the Company:
As a newly classified CMRS provider, the Company must comply with certain traditional common carrier obligations. Specifically, as of August 10, 1996, the Company (i) will be required to offer its services without discrimination, which could be construed as prohibiting the Company from withholding from one customer a customized service offering that it makes available to another customer; (ii) will be required to provide access to its services to other common carriers, and (iii) will be subject to the formal consumer complaint process.
Under past proceedings, the FCC determined that LECs must offer interconnection to CMRS providers on reasonable terms and conditions, and under the principle of mutual compensation. The FCC declined to impose direct interconnection obligations for CMRS-to-CMRS transmissions, but concluded that it would require CMRS providers to "resell" their services to another CMRS provider. In a recent rule making now pending, the FCC proposed specific limits with respect to prices, terms, and conditions of interconnection arrangements for LEC-CMRS interconnection, to ensure that CMRS providers are granted equal competitive footing with more established LEC service providers.
In a separate proceeding, the FCC proposed to amend its rules to permit broadband and narrowband CMRS providers to offer wireless local loop and related services. Specifically, the FCC proposed a definition of "wireless local loop" that is sufficiently broad to allow the provision, by CMRS providers such as the Company, of certain fixed services. The proposed definition of "wireless local loop" is "the path between the subscriber and the first point of switching or aggregation of traffic." Such an expansion in available service offerings could be beneficial to the Company.
The FCC is also considering the adoption of rules that would require CMRS providers to offer enhanced emergency calling ("E911") access and features to mobile radio callers in three phases within five years after adoption of the rules. The FCC's current proposal, which is still pending, would require CMRS providers to ensure such features as calling party automatic number identification ("ANI"); 911 availability from any service initialized mobile radio handset; 911 access for speech and hearing-impaired callers; and call-back capability.
Other Regulatory Matters
Management Agreements. On November 18, 1994, the FCC issued an order requiring CMRS providers subject to grandfathering protection that hold management agreements with FCC licensees to execute new revised management contracts for any managed stations by August 10, 1996. The FCC determined that the validity of a management agreement will be guided by the FCC's prohibition against the de facto transfer of control of the radio facilities from the licensee to the manager. It is the Company's belief that its existing management agreements comply with the FCC's policies by placing ultimate control over the maintenance and operation of any managed system with the licensee of the system. The Company will continue to monitor the FCC's positions on this issue, however, and holds a contractual right, contained in all of its management agreements, to modify any agreement in the event that it is determined that any are not in compliance with the FCC's rules.
Signal Boosters. With respect to operations, the FCC recently considered permitting the routine use of one-way or two-way signal boosters for CMRS providers such as the Company. This matter remains pending before the FCC. In the event that the FCC permits the use of signal boosters, the Company could improve its service offerings by "filling out" its service footprints, particularly where terrain or geographic anomalies cause minor interference problems.
900 MHz Auction. Most significantly, the FCC recently adopted rules that have had a sweeping effect on the licensing of 900 MHz SMR frequencies. The FCC imposed auction proceedings for the licensing of 20 10- channel blocks in each of the 51 MTA service areas in the 900 MHz bandwidth. Initiated in December 1995, the Company has been an active bidder in the 900 MHz spectrum auctions and could, if successful as a bidder at the close of auctions, be awarded MTA licenses in multiple markets. Although the MTA licenses will be separately licensed, the Company will be permitted to aggregate blocks of spectrum, subject only the 45 MHz spectrum cap for CMRS providers within three radio services, broadband PCS, SMR and cellular.
Where the Company is awarded an MTA license for frequencies of which it is the incumbent DFA licensee, the DFA license will be construed as included in the MTA license for purposes of build-out, operation and coverage. In those instances, the Company's waiver will no longer be necessary. In some markets, the Company may successfully bid on an MTA license where the incumbent DFA licensee is a third party. In those instances, the Company will be required to afford interference protection to the incumbent DFA licensee. In markets or with frequencies where the Company is the DFA licensee but not the successful MTA bidder, the Company's DFA license will retain all of its licensing and operational requirements, such as loading, in existence prior to the auction. The Company's waiver, in those instances, will remain in effect.
Where the Company is a successful MTA bidder, it must complete coverage of at least one third of the population of its service area within the first three years of its initial MTA license grant or in the alternative demonstrate substantial coverge of the MTA, and complete coverage of at least two thirds of the population within five years.
The FCC has granted type acceptance for the Company's network infrastructure equipment and subscriber units for commercial use.
Patents and Technology Rights
In accordance with a joint venture agreement (the "Power Spectrum Joint Venture Agreement") between the Company and Rafael Armament Development Authority ("Rafael"), PST has the right to review the technology of Rafael provided to PST pursuant to the terms of the PowerSpectrum Joint Venture Agreement, and file, in Rafael's name, patent applications on any patentable technology already in existence at the time of the signing of such agreement. Pursuant to the PowerSpectrum Joint Venture Agreement, Rafael is also obligated to grant PST an exclusive royalty free license under any patent applications so granted, subject to an exclusion for military technology. PST has the right to file patent applications on any inventions made by PST based on, or connected to, the technology developed by PST after the date of the PowerSpectrum Joint Venture Agreement. Pursuant to these terms, a United States patent has been issued to Rafael.
PST has filed several patent applications in Israel and intends to file patent applications in other countries including the United States.
In addition to those patent applications filed by PST, the Company also has filed patent applications in Israel and the United States based on technology developed by the Company. As of December 31, 1995, no patents had been issued to the Company or PST and there can be no assurance that a patent will issue from any pending or future patent applications or that if any are issued that any of them will have any commercial significance. The Company is aware of certain patents and patent applications held or filed by others which generally relate to the subject matter of the Company's activities. The Company believes that none of such patents or applications is likely to have a material adverse effect on the ability of the Company to utilize any technology currently intended to be utilized by the Company.
The Company protects its proprietary information by way of confidentiality and non-disclosure agreements with employees and third parties who may have access to such information. The Company continually reviews its technology developments in order to file patent applications and has filed patent applications with respect to certain aspects of its FHMA(TM) technology and GEONET(TM) in Israel and the United States and expects to file additional patent applications in Israel and the United States. Generally, the Company intends to file all patent applications in the United States and Israel and in such other countries as it deems appropriate. There can be no assurance that such applications will be granted. There can be no assurance that any patents issued will afford meaningful protection against competitors with similar technology or that any patents issued will not be challenged by third parties. There also can be no assurance that others will not independently develop similar technologies, duplicate the Company's technologies or design around the patented aspects of any technologies developed by the Company. Many patents and patent applications have been filed by third parties with respect to wireless communications technology. The Company does not believe that its technology infringes on the patent rights of third parties. However, there can be no assurance that certain aspects of the Company's technology will not be challenged by the holders of such patents or that the Company will not be required to license or otherwise acquire from third parties the right to use certain technology. The failure to overcome such challenges or obtain such licenses or rights could have a material adverse effect on the Company's operations.
The Company owns several trademarks, including GEONET(TM) and FHMA(TM), in the United States and certain other countries.
The Company's Research and Development expense related to the digital wireless communication system totaled $33.0 million in 1995 compared to $17.0 million in 1994 and $8.9 million in 1993 (exclusive of acquired research and development of $32.4 million in 1993).
GMSI
GMSI designs, manufactures, and sells various systems for the mobile data market. It has a dominant position in the market for data dispatch systems for taxicabs, limousines, and similar fleets, selling its systems in primarily North America, as well as, Europe and Australia.
GMSI offers the Wireless Network Interface ("WNI") software package under license to interface to a variety of private and SMR radio networks. WNI licenses are available to UNIX, Windows and DOS machines. WNI provides software developers with a seamless interface to multiple networks and eliminates the complexities, cost and risk of implementing a mobile data solution with existing dispatch and management software.
GMSI provides a variety of mobile data terminals and radio modems for courier and other applications. "Status" terminals report predetermined events such as on-site with a single keystroke on a labeled function key. A terminal with an alphanumeric keyboard is able to record information such as name of recipient. All terminals support customer designed forms, mag-swipe and bar-code data entry.
Communications Products Activities
The Company's communications products activities are conducted through Bogen Corporation ("Bogen") and Speech Design GmbH ("Speech Design"), which are subsidiaries of Bogen Communications, Inc. ("BCI"). The Company owns approximately 64% of the issued and outstanding capital stock of BCI. Bogen is a 99% owned subsidiary of BCI and Speech Design is a 68% owned subsidiary of BCI.
Bogen
Bogen develops, produces and sells telephone and telecommunications peripherals and sound and communications equipment through its wholly owned subsidiary, Bogen Communications, Inc. Since 1932, when originally founded, Bogen has been involved in the communications industry, concentrating its efforts on the development and sale of equipment for commercial, industrial, professional and institutional markets and applications.
Bogen's traditional line of products includes audio amplifiers and related sound equipment for professional, industrial and commercial system applications, such as telephone paging, intercommunications and administrative communications systems for schools, correctional facilities and other institutions.
During 1991, Bogen introduced its first product in a line of telecommunications and telephone peripherals. The product is the MMT, a digital announcer with automatic microprocessor controlled tape download for "on-hold" applications. During 1992, Bogen introduced various products in the digital telephone peripherals area, including the Automated Attendant and the Digital Announcer. Bogen introduced, during 1993, the PCM/ZPM, zone page modules for telephone paging. Although Bogen believes that the growth experienced in the last four years in this line of products may continue, there can be no assurance of such growth.
In September 1993, Bogen introduced the Friday Home Office Receptionist, a home-office digital receptionist with a built-in fax switch, call-forward capabilities, four incoming mailboxes and three outgoing message mailboxes. Additional products in this line were introduced in 1994 and 1995. In December 1995, Bogen's management decided to phase-out this product line during 1996.
Sales and Marketing
All of Bogen's products, with the exception of its office automation products, are sold primarily through distributors, dealers and contractors, often as complete systems designed to satisfy an end-user's specific sound and communications needs. The principal users of these products are industrial, professional and commercial concerns and institutions such as schools, nursing homes and correctional institutions. Bogen management believes that these user markets are all relatively stable markets in which Bogen enjoys name recognition.
Sales of Bogen's traditional products are made through a network of about 2,000 distributors, dealers and contractors located throughout the United States and Canada which purchase products directly from Bogen and then resell these products to dealers and/or end-users.
Bogen considers its distribution network to be one of its most valuable assets. Bogen's products are generally marketed through a field sales organization and several independent sales representative entities under the direction of Bogen's internal sales force. Both the representatives and the field sales group are responsible for assigned territories. The representatives are compensated on a commission basis and the field sales personnel are compensated with salary and bonuses based on performance. Sales agreements are maintained with all of Bogen's independent sales representatives and engineered systems contractors. The sales representative agreements typically permit the sale of Bogen products by the representative in a specific territory. Each territory is assigned one or more sales representatives. Similarly, the engineered systems contractor agreements typically allow the contractor to purchase and install specific product lines in a designated territory. These agreements, which restrict the representative or contractor from dealing in a competitive line of products while representing Bogen, may be terminated by either party upon 30 days' notice.
Bogen maintains its principal warehouse and executive offices at its main location in Ramsey, New Jersey and it also maintains stock in the States of California and Washington at warehouses managed by certain of Bogen's independent sales representatives. Service for all of Bogen's products is provided by its service department.
Although its sales are substantially to United States customers, Bogen also sells its products in Canada through a stocking representative that is headquartered in Ontario and has branch offices throughout Canada. Export sales to other foreign countries are handled in a similar fashion to sales within the United States, through distributors that purchase the products and sell them to an established account base overseas.
Patents and Trademarks
"Bogen" is a trademark of the Company registered in the United States and in certain foreign countries throughout the world, which expires in the United States in March 2000. Bogen has also obtained trademark registration for the trade name "Multicom 2000" utilized in connection with the engineered systems it markets, which expires in July 2001. Bogen has various pending patents related to its new products. There can be no assurance that any patents will ultimately be issued.
Sources of Material
All components and material used in the construction of Bogen's products are of standard commercial quality or better, and are readily available from overseas and United States suppliers. Bogen relies principally upon an established network of suppliers and subcontractors located in the Republic of South Korea, Taiwan, Israel and the United States. These suppliers and sub-contractors either produce sub-assemblies for use in the final assembly of a finished product, or produce the finished products themselves. Products are based on Bogen designs and are built in accordance with Bogen drawings and specifications.
Bogen's primary source of components and completed products is from manufacturers located in the Republic of South Korea. There can be no assurances that disruptions in supplies will not occur, or that such disruptions will not have a material adverse effect on Bogen.
Research and Development
Bogen's engineering department is responsible for research and development, production engineering and sales engineering. In 1995, Bogen incurred approximately $ 1.4 million in research and development expenditures, compared to $1.5 million in 1994 and $1.3 million in 1993.
Competition
Based in large part on its relatively broad product base and multiple markets, Bogen believes that it has no significant direct competitor. Instead, competition varies from market to market and product to product. Bogen competes on the basis of several different factors, including name recognition, price, innovation and product quality. Such factors vary in relative importance depending on Bogen's product(s). Bogen's management has concentrated on markets in which it believes that Bogen could obtain at least a 10% market share, be one of the top two or three suppliers and/or obtain substantial growth.
In the general line distributor customer market, Bogen's principal competition comes from University Sound, a United States manufacturer, and from several off-shore suppliers. Because these off-shore suppliers have not developed significant brand name recognition, no single one has become a major factor in this market. Because ready availability and accessibility is a primary consideration for retail customers, Radio Shack, with over several thousand retail outlets, is a significant competitor. Bogen's management anticipates no major competitive changes in this market in the foreseeable future.
In the view of Bogen's management, the Telco customer market has overall growth potential. Bogen's main competitor is Valcom Inc. which has been established in this market for several decades. Other competition comes primarily form several United States companies who have been losing market share over the past few years and from several companies attempting to enter the market. Bogen has increased its share of the Telco market in recent years.
The Engineered Sound customer market is a highly specialized market characterized by low unit volume/high dollar sales which has deterred potential competition from off-shore manufacturers. Bogen's principal competition comes from Rauland Borg Corp. and Dukane Corporation, which, like Bogen, have been in
the market for several years and have well established name recognition and distribution channels. Rauland Borg Corp. is currently the acknowledged market leader.
The Commercial Sound customer market is characterized by intense competition, particularly from several overseas companies. Bogen's principal competitor is a Japanese company, TOA Electronics, Inc., which features broad, high quality product lines. Other competitors are comparatively small manufacturers that rely mainly on established account relationships.
Government and Industry Regulation
Many of Bogen's products require either certification by the Federal Communications Commission or Underwriter's Laboratory approval, or both. All current products of Bogen that require such approval have obtained them. Bogen's products must also comply with applicable local and state regulations to permit use by the end-user. Bogen makes all reasonable efforts to ensure that its products comply with such requirements.
Speech Design
Speech Design, located in Munich, Germany, develops, manufactures and markets telephone peripheral hardware utilizing digital voice processing technologies. The Company acquired a controlling interest in Speech Design in February 1993, with a goal of initially expanding sales of the Company's communications products into Germany, Europe's largest market, and to utilize Speech Design as a platform to penetrate other European markets.
Speech Design was engaged until 1992 primarily in selling peripheral equipment for cellular telephones over the analog network. With the advent of the European GSM digital standard and the related decline of prices of ancillary subscriber equipment, Speech Design's management decided to refocus its activities from the cellular market to the telephone peripherals. Management expects continued growth in sales of telephone peripherals, but there can be no assurance that such growth will be achieved.
In 1995, sales to five customers accounted for approximately 75% of Speech Design's sales. Such customers generally packaged Speech Design products with PBX equipment for sale to third parties.
Employees
As of December 31, 1995, the Company had approximately 450 full-time employees, of which approximately 300 were engaged in its wireless communications businesses and approximately 150 of which were engaged in its communications products businesses. The Company considers its relationship with its employees to be good.
As of December 31, 1995, approximately 90 employees of Rafael were engaged on a full-time basis in the development of the Company's FHMA(TM) digital system. Rafael's employees are represented by a labor union, and, from time to time, there have been labor disputes between Rafael and its employees which have resulted in slow-downs. To date, these slow-downs have not had a material effect upon the Company's business. There can be no assurance, however, that any future disputes will not have a material adverse effect on the development or introduction of GEONET(TM) services by the Company in its target markets.
The success of the Company will depend greatly upon the active participation and the experience of its management. The loss of the services of Yaron Eitan, the Company's President and Chief Executive Officer, could adversely affect the conduct of the Company's business. In addition, the successful implementation of the Company's business plan will depend, to a large extent, upon the ability of the Company's and its subsidiaries' engineers and scientific personnel to perfect and improve upon existing and proposed products. The loss of some or all of such personnel, or the inability of the Company to attract additional personnel, or the inability of such persons to enhance such systems or to continue product enhancements will directly inhibit the ability of the Company to sell its products and services and to operate in a timely or profitable manner.
Financial Information
Financial information about the Company's industry segments and the Company's foreign and domestic operations is disclosed in Footnote 16 to the Company's Consolidated Financial Statements. See "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Item 2.
Item 2. PROPERTIES
Since July 2, 1993, the Company's principal place of business has been located at 20 Craig Road, Montvale, New Jersey. The Company rents 26,800 square feet of office space under several leases at a total rate of $500,000 per year, plus taxes and utilities. The lease expires between April 1996 and July 1999. The Company's Montvale facility functions both as its corporate headquarters and the general offices of the Company's U.S. wireless operation. The Company is considering relocating to a larger facility in the Montvale area.
Bogen subleases its facilities, located at 50 Spring Street, Ramsey, New Jersey from an unaffiliated third party. The sublease expires on December 31, 2000 and requires rental payments at a rate of approximately $700,000 per year for the remainder of the term.
NB3 leases its principal place of business in Chelmsford, England, pursuant to a lease which expires in September 1999. This lease is subject to the Company's option to extend the lease for four successive five-year periods. Annual rental payments during the initial term of this lease are $310,000. Rental payments pursuant to each of the options are to be negotiated prior to the start of each five-year period. NB3 leases sites for its base stations from different parties under leases with various terms, amounts and conditions.
Speech Design leases its facilities in Munich, Germany pursuant to a lease which expires in 2005. Annual rental payments are approximately $240,000.
GMSI leases its facilities in Ontario, Canada pursuant to a lease which expires in April 2005 Annual base rental payments over the remainder of the lease are approximately $140,000.
In connection with the roll-out of GEONET(TM), the Company expects to lease office space in each of the 35 target markets in which it intends to provide GEONET(TM) service. In addition to office space, the Company must secure leases for its transmission equipment at suitable locations in each of these cities. As of March 1996, the Company had leased office space in seven of its target markets. The aggregate annual rental payments pursuant to these leases are $375,000.
Item 3.
Item 3. LEGAL PROCEEDINGS
In June 1994, the Company filed a lawsuit in Dutch bankruptcy court against Harris Adacom Corporation B.V. ("Harris"), a Dutch corporation, to enforce its rights under a loan agreement between the parties. The Company is seeking repayment of a $3.5 million loan made to Harris in January 1994 in connection with a potential purchase transaction between the Company and Adacom Technologies Ltd. ("ATL"), an affiliate of Harris and an Israeli publicly-traded company. The loan was collateralized by stock owned by Harris in ATL. At the time of the loan, the collateral had a market value in excess of $10 million and the total market value of ATL was in excess of $100 million. The purchase transaction was not consummated. In May 1994, the market value of ATL dropped dramatically and ATL became insolvent, thereby reducing the value of the collateral to practically zero. At or about the same time, creditors placed Harris into bankruptcy proceedings in the Netherlands. The Company subsequently received information relating to the recoverability of the loan and management does not expect to recover the loan. The Company is aggressively pursuing its rights under the loan in Dutch bankruptcy court and is awaiting additional information on the assets and creditors of Harris. Based upon the information currently available to it, the Company cannot determine the amount, if any, that will ultimately be recovered and has established a reserve against the full amount of the loan.
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 ATL and subsequently breached such agreement. The plaintiffs in such action have stated an intention to file a separate claim for monetary damages and have estimated their losses to be several million dollars. The Company believes that the claims in such action are without merit and are only an attempt to delay efforts to collect Harris' debt to the Company. The Company intends to defend such action vigorously.
The Company develops and utilizes technology for substantially all of the services and products it offers and intends to offer and has, from time to time, been the subject of infringement claims related thereto. It is often difficult to predict the outcome of such litigation and the amount of damages which may be awarded in these types of cases. The Company does not believe that any pending or threatened litigation related to the Company's technology or use thereof will have a material adverse effect on its financial position.
The Company is also, from time to time, party to litigation, which may or may not be covered by insurance, arising in the ordinary course of business. The Company does not believe the results of such litigation, even if the outcome were unfavorable to the Company, would have a material adverse effect on its financial position.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the fourth quarter of 1995.
Item A. EXECUTIVE OFFICERS
As of the date hereof, the executive officers of the Company are:
Name Age Position ---- --- -------- Winston J. Churchill 55 Chairman of the Board and Director Yaron I. Eitan 39 President, Chief Executive Officer and Director Jonathan C. Crane 46 President & CEO - GEOTEK U.S. Operation George Calhoun 42 President - Wireless Communications Group and Director Yoram Bibring 38 Executive Vice President and Chief Operating Officer John Egidio 47 Senior Vice President, Operations Oliver Hilsenrath 37 Senior Vice President, Technology William A. Opet 38 Senior Vice President, Marketing and Sales Andrew Robb 52 Managing Director, European Operations Michael McCoy 43 Senior Vice President and Chief Financial Officer Michael Carus 30 Chief Accounting Officer and Corporate Controller Robert Vecsler 31 General Counsel and Secretary
Mr. Churchill has served as Chairman of the Board and as a director of the Company since 1991. Mr. Churchill is a principal of CIP Capital Management, Inc., a private investment firm formed in 1989. He has served as a principal of such firm since its inception. Prior to 1989, Mr. Churchill practiced law and served as Chairman of the Banking and Financial Institutions Department and the Finance Committee of Saul, Ewing, Remick & Saul, Philadelphia, PA.
Mr. Eitan has served as President, Chief Executive Officer and a director of the Company since March 1989. He is also Chairman of the Board of Bogen and a director of PST, GMSI and NB3, subsidiaries of the Company. Mr. Eitan served as a director of Patlex Corporation from 1985 until February 1989, during which time he served as President of Patlex from November 1987 to June 1988 and Executive Vice President of Patlex from July 1987 to November 1987 and from June 1988 to February 1989.
Mr. Crane joined the Company as President & CEO - GEOTEK U.S. Operations in October 1995. Prior to joining the Company, from January 1994 through January 1995, Mr. Crane was President & Chief Executive Officer of LightStream Corporation, a start-up ATM switch company. In January 1995, LightStream was purchased. From May 1985 through January 1994 Mr. Crane served in various executive capacities at MCI Telecommunications where he most recently served as Executive Vice President - Multinational Accounts.
Mr. Calhoun was appointed a director of the Company in July 1993 when he became President of the Company's wireless communications group. Mr. Calhoun joined the Company in June 1992 as President, Chief Operating Officer and a director of PST. He is also a director of NB3 and PST. Mr. Calhoun served in various positions with InterDigital Communications Corporation (formerly International Mobile Machines Corporation), a corporation co-founded by Mr. Calhoun and engaged in the development of digital radio technology, most recently as General Manager of the Intellectual Property Licensing Division, which position he held until June 1992.
Mr. Bibring joined the Company as Chief Financial Officer in February 1990, a position he held until September 1995. He has served as Executive Vice President and Chief Operating Officer of the Company since June 1993. He is also a director of Bogen. He served as Vice President of Aryt Optronics Industries, Ltd. ("Aryt") from December 1990 to April 1991. From November 1986 to January 1990, Mr. Bibring was a Senior Auditor at Shachak & Company, a public accounting firm in Israel.
Mr. Egidio became Senior Vice President of the Company in October 1993. From December 1991 to November 1992, he was President and Chief Executive Officer of Metagram America, Inc., a company engaged in the provision of alphanumeric messaging services. From February 1985 to April 1990, Mr. Egidio was President and Chief Executive Officer of MobileMedia Communications, Inc. (formerly Metromedia Paging), a subsidiary of Southwestern Bell engaged in wireless communications.
Mr. Hilsenrath has served as Senior Vice President of the Company since 1992. From August 1990 to September 1992, he was employed as Engineering Manager by the Aydin Vector Division of Aydin Corporation, a U.S. defense electronics and communications company. From 1983 to 1990, Mr. Hilsenrath was employed by the Communication Directorate of Rafael where he served as Chief Research and Development Engineer.
Mr. Opet was appointed Vice President of Marketing for the Company in April 1994 and has been Senior Vice President, Marketing and Sales since October 1994. From June 1990 to March 1994, he served as Vice President of Marketing for LIN Broadcasting ("LIN"), a 52% owned subsidiary of McCaw Cellular, where he worked extensively on the introduction of digital cellular systems. From May 1986 to June 1990, Mr. Opet was Vice President of Marketing and Sales for LIN's Philadelphia cellular operations.
Mr. Robb was appointed as Managing Director for the Company's European Operations in August, 1994. Previously, he had served as Managing Director of NB3 and one of its predecessor companies for more than five years. Prior to January 1987, Mr. Robb served as Sales Director of the Communications Group of Motorola in the United Kingdom for approximately four years.
Mr. McCoy has served as Senior Vice President and Chief Financial Officer of the Company since September 1995. From November 1994 through September 1995, Mr. McCoy was the Company's Vice President of the North East Region. Prior to joining the Company, from September 1992 through November 1994, Mr. McCoy was President of Greenlake Associates, Inc., a high technology consulting company. From November 1988 through September 1992, Mr. Mc Coy was a member of the Office of the Chairman and Senior Vice President of Business Development for LCI International, Inc., a facilities based long distance telecommunications company.
Mr. Carus has served as Chief Accounting Officer and Corporate Controller of the Company since June 1995. Mr. Carus is a Certified Public Accountant and, from August 1988 to June 1995, was a Business Assurance Manager in the communications team at Coopers & Lybrand L.L.P., a public accounting firm.
Mr. Vecsler was appointed General Counsel and Secretary of the Company in March 1996. From May 1995 through March 1996 he served as Corporate Counsel for the Company. Prior to joining the Company, from August 1994 until April 1995, Mr. Vecsler served as Assistant General Counsel at Enviro Source, Inc. From April 1993 until July 1994, he served as Counsel to Fletcher Asset Management, Inc. Mr. Vecsler practiced law at Kelly, Drye & Warren from September 1988 until March 1993.
PART II
Item 5.
Item 5. MARKET PRICE FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock currently trades on the NASDAQ National Market under the symbol "GOTK" and on the Pacific Stock Exchange under the symbol "GEO".
The following tables set forth, for the quarters indicated, the high and low sales prices for the Company's Common Stock as reported on the NASDAQ National Market:
Year Ended December 31, 1995 High Low
First Quarter ........................ 9 3/8 6 3/4 Second Quarter ....................... 9 7/8 7 1/8 Third Quarter ........................ 10 7 1/2 Fourth Quarter ....................... 9 1/4 5 1/2
Year Ended December 31, 1994 High Low
First Quarter ........................ 16 10 3/8 Second Quarter ....................... 11 5/8 7 1/4 Third Quarter ........................ 12 1/8 6 3/8 Fourth Quarter ....................... 10 3/4 7 1/2
As of March 25, 1996, there were 56,774,000 record holders of the Common Stock.
The Company has not declared or paid any cash dividends on the Common Stock since commencing operations and is restricted from paying any dividends on the Common Stock due to debt covenant restrictions. At present, the Company is obligated to pay, for a five-year period following the issuance of its Series H preferred stock, cumulative dividends of $2,000,000 per year on the Series H preferred stock, in cash, and, for a five-year period following the issuance of its Series I preferred stock and Series K preferred stock, respectively, cumulative dividends equaling $700,000 per year on the Series I preferred stock and $700,000 per year on the Series K preferred stock, in cash or shares of Common Stock of the Company, before any cash dividends may be paid on the Common Stock. In addition, the Company is presently obligated to pay cumulative annual dividends of $750,000 per year on its Series L preferred stock, in cash or additional shares of Series L preferred stock, and cumulative annual dividends of $988,125 per year on its Series M preferred stock, in cash or shares of Common Stock, before any cash dividends may be paid on the Common Stock. At present, the Company is current in payment of all required dividends on its outstanding preferred stock.
Item 6.
Item 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
(1) Historical numbers were restated for the acquisition in January 1994, through a merger, of 100% of Metro Net Systems Inc. The merger has been accounted for as a pooling of interests.
The Company did not pay a cash dividend on the Common Stock during any period indicated.
The difference in financial results among the years is influenced by the following acquisitions and dispositions. In April 1991, 87% of Bogen was acquired. In 1992 PowerSpectrum, Inc. was formed, the defense segment was discontinued and an additional 4% of Bogen was acquired. In 1993 NB3, Speech Design, GMSI and the remaining interest in PowerSpectrum, Inc. were acquired and Oram Electric Industries, Ltd., Oram Power Supplies 1990, Ltd. and Geopower were sold. In 1994, 49% interests in PBG and DBF and an 8% interest in Bogen were acquired. In 1995, the Company sold its interests in Special Design and Bogen to BCI in exchange for, among other things, a 64% interest in BCI, the remaining interests in PBG and DBF were acquired and the Company increased its interest in PST from 56% to 94%. See "Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto included elsewhere in this report.
Results of Operations
General
Over the past four years, the Company has devoted and expects to continue to devote substantial financial and management resources to the development of a low cost, high quality integrated digital voice and data wireless communications network ("GeoNet(TM)"). Although Management believes GeoNet(TM) 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 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 GeoNet(TM) as well as to a high investment in research and development related to its wireless communications activities. There can be no assurance that the Company will operate at profitable levels or have positive cash flow from operations.
The Company currently groups its operations primarily into three types of activities: wireless communications, communications products and corporate. The Company's wireless communications subsidiaries are currently engaged primarily in providing trunked mobile radio services in the United Kingdom and Germany utilizing analog equipment, developing and selling wireless data solutions, and implementing a digital wireless communications system for the United States that will provide integrated wireless communications services. The Company is presently in the process of commencing the rollout of GeoNet(TM). The Company started providing commercial services in Philadelphia in January 1996 and in February 1996 announced the initiation of commercial services on GeoNet TM in Washington, DC and Baltimore, MD and in March 1996, announced commercial service in New York. The Company intends to offer GeoNet TM in over 35 markets by the end of 1997.
The Company's communications products subsidiaries are primarily engaged in the development, manufacturing, and marketing of telephone peripherals and sound and communications equipment.
Summary of Operations
1995 Compared to 1994
Consolidated revenues increased by 10% in 1995, principally due to subscriber growth of the National Band Three Network ("NBTL") in the United Kingdom.
Consolidated operating expenses increased by 40.2% in 1995, principally due to increased research and development activities associated with the Company's digital wireless communication system and costs related to the rollout of GeoNet(TM).
Consolidated losses increased by $44.8 million to $87.2 million in 1995.
On a consolidated basis, interest expense increased in 1995 principally due to the July 1995 issuance of Senior Secured Discount Notes which accrue interest at 15% as well as the accretion of the value of the warrants issued in connection with the Senior Secured Discount Notes. Interest income increased in 1995 due to greater cash and cash equivalents which resulted from the issuance of the Senior Secured Discount Notes. Amortization expense increased from $2.8 million in 1994 to $4.2 million in 1995 due to the Company's acquisitions of the German Networks.
1994 Compared to 1993
Consolidated revenues increased by 49% in 1994, principally due to the acquisition of NBTL in July 1993 and higher revenues from the communications products segment.
Consolidated operating expenses increased by 4.9% in 1994, due to increased research and development activities associated with the Company's digital wireless communication system, costs related to the rollout of GeoNet(TM) and volume growth of the communications product segment.
Consolidated losses from continuing operations decreased by $8.0 million to $42.2 million in 1994.
On a consolidated basis, interest expense increased in 1994 due to a higher level of debt outstanding during the year. Interest income increased in 1994 due to greater cash and cash equivalents and higher rates earned on invested funds. Amortization expense increased from $0.9 million in 1993 to $2.8 million in 1994 due to of the Company's 1993 and 1994 acquisitions.
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 years ended December 31, 1995 and 1994. The North American column includes the U.S. Wireless Network as well as the Company's GMSI and MetroNet subsidiaries.
1995 Compared to 1994
For the Year Ended December 31, 1995 (Dollars in Thousands)
For the Year Ended December 31,1994 (Dollars in Thousands)
Revenues from wireless communications increased by $7.3 million or 29% for the year ended December 31, 1995. This increase is primarily due to the increase in the number of subscribers using the NBTL network (which totaled approximately 57,400 and 47,700 at December 31, 1995 and 1994, respectively) as well as, the inclusion of the DBF and PBG German Networks on the consolidated basis since July 1995 and December 1995, respectively, amounting to $0.7 million. Average revenue per subscriber on the NBTL network remained constant. Gross profit as a percent of revenues increased as NBTL's cost are primarily fixed thus, allowing subscriber growth to increase the gross profit percentage.
Research and development expenses (net of government grants) related to the digital wireless system and subscriber unit were $33.0 million for the year ended December 31, 1995. In 1995, the Company continued to receive grants from the Chief Scientist of the Ministry of Commerce and Industry of the Israeli Government ("Chief Scientist"). Such grants, which are recorded as a reduction of research and development expenses, totaled $5.9 million in 1995 ($4.1 million in 1994). Included in research and development expenses is a $5.6 million fourth quarter expense related to scope changes in the development of the digital wireless system. Additionally, research and development expense includes a $6.0 million fourth quarter charge related to payments for the development of the portable subscriber unit. Also included in research and development expense in 1995 is $2.0 million relating to shares of Common Stock issued to Rafael Development Corporation in consideration for a research and development project. The Company expects significant research and development expenses to continue in the future in connection with enhancements made to the system and subscriber unit.
The Company is presently in the process of commencing wireless service over its proprietary GeoNet(TM) network and accordingly continues to put in place its marketing, engineering, operations and administrative staff and systems. Marketing expenses increased by approximately $8.0 million or 90% due to the commencement of the marketing effort and increase in staff needed to execute the roll-out of GeoNetTM as well as volume growth in the German and NBTL networks. General and administrative expenses increased $2.2 million due to an increase in administrative staff to support GeoNetTM as well as volume growth in the German and NBTL networks.
For Wireless Communications Activities, equity in losses of less than 50% owned entities increased to $3.3 for the year ended December 31, 1995 from $1.9 million in 1994. The 1995 loss relates to the Company's investment in its German networks prior to the acquisitions of the remaining shares of these two networks. The Company began to fully consolidate these entities subsequent to the date of the acquisitions of the remaining interests. The 1994 loss relates to both of the German networks for six months. These networks have only recently begun operations and subscriber revenues do not cover operating expenses. It is expected that these networks will continue to generate losses in the near future. The number of subscribers on these networks as of December 31, 1995 was approximately 11,800.
Wireless activities generated a loss before net interest expense, amortization and depreciation of $55.2 million for the year ended December 31, 1995 compared to $30.0 million in 1994. This increase is primarily due to the increased research and development expense as well as costs related to the commencement of the roll-out of the digital wireless communication system for the U.S. network (including approximately $2.4 million relating to shares of common stock issued to Vanguard in consideration for management consulting services, which was $2.5 million in 1994).
The tables below set forth certain information with respect to the results of operations of the Company's Wireless Communication activities for the years ended December 31, 1994 and 1993. The North American column includes the U.S. Wireless Network as well as the Company's GMSI, Inc. and MetroNet subsidiaries.
For the Year Ended December 31, 1994 (Dollars in Thousands)
For the Year Ended December 31, 1993 (Dollars in Thousands)
Wireless Communications
1994 Compared to 1993
Revenues from wireless communications activities increased by $13.3 million, or 108%, in 1994, primarily due to the acquisitions of NBTL on July 1, 1993 (1994 revenues of NBTL were $19.8 million), and GMSI, Inc. ("GMSI") on May 1, 1993 (1994 revenues of GMSI were $3.5 million). The Company's 1993 results include the results of these subsidiaries from their date of acquisition forward, while the results for 1994 include the results of these subsidiaries for the entire year. On a pro forma basis year-to-year 1994 revenues of NBTL increased by 22%, while revenues of GMSI declined slightly. In addition, the average number of subscribers on the NBTL network increased by 29% in 1994. The increase was the result of an aggressive marketing program as well as through the acquisition of smaller regional networks. While average service revenue per subscriber on the Company's core customer base remained unchanged in 1994, the acquisition of the smaller regional networks, which charge lower tariffs, slightly reduced NBTL's average revenue per subscriber in 1994. U.S. analog wireless networks generated revenues of $2.5 million in 1994.
Operating expenses decreased $4.6 million or 8.0% in 1994. In 1993, the Company had a $32.4 million non-cash charge related to the July 1993 acquisition of the minority ownership interest in PSI (the Company's U.S. wireless communications subsidiary). In exchange for all the shares of PSI that it did not already own, the Company issued common shares and options to acquire additional shares. The value of the consideration paid over the fair value of the net assets acquired ($32.4 million) has been attributed to the incomplete research and development project and was charged to expense at the time of the exchange. Excluding the non cash charge of $32.4 million, operating expenses increased by $27.7 million or 99%. Expenses at NBTL increased by $9.7 million in 1994, including $7.8 million for both the full year inclusion of NBTL, as well as network operating costs to service the larger subscriber base and approximately $1.9 million of additional marketing and general costs. Research and development expenses (net of grants) related to the digital wireless system and subscriber unit increased by $8.3 million or 94.0%. In 1994, the Company continued to receive grants from the Chief Scientist. Such grants, which are recorded as a reduction of research and development expenses totaled $4.0 million in 1994 and $2.8 million in 1993. Costs related to marketing,
engineering, operations and administrative staff and systems totaled $14.8 million in 1994, an increase of $8.1 million over 1993.
In 1994, the Company acquired minority stakes in two wireless networks in Germany. The Company's 1994 loss related to these networks was $2.4 million.
The wireless activities generated a loss before net interest expense, amortization and depreciation of $30.0 million in 1994 compared to a loss of $48.0 million in 1993 due to the factors discussed above. Included in the 1994 loss were $17.0 million of research and development costs related to the digital wireless communications system and $14.8 million of rollout costs related to the U.S. network (including approximately $2.5 million relating to shares of common stock issued to Vanguard in consideration for management consulting services).
Communications Products Activities
In August 1995, the Company transferred its interests in Speech Design GmbH and Bogen Communications, Inc. to Bogen Communications International ("BCI") formerly, European Gateway Acquisition Corporation, in exchange for $7.0 million in cash, $3.0 million in convertible notes receivable, approximately 64% of BCI common shares and warrants to purchase 200,000 shares of BCI common stock at $5.50 per share. The Company will also be eligible to receive additional consideration if the future earnings of both Speech Design and Bogen through July 1997 attain certain levels. The Company continues to control and consolidate this entity.
The table below sets forth certain information with respect to the results of operations of BCI as consolidated by the Company for the years ended December 31, 1995, 1994 and 1993.
(Dollars in Thousands) December 31
1995 1994 1993 ---- ---- ---- Revenues $44,518 $46,074 $30,060 Gross profit 17,180 16,428 11,829 % of revenue 39% 36% 39% Research and Development 2,307 2,116 1,702 Marketing 9,960 8,913 6,374 General and Administration 5,962 3,342 2,374 Other income (236) Income before interest, tax, amortization & depreciation (813) 2,057 1,379 Amortization & depreciation 1,242 1,181 956 Interest expense, tax & minority interest 2,069 1,245 388 Net (loss) income $(4,124) $(369) 35
1995 Compared to 1994
Revenues from communications products activities for 1995 decreased by $1.6 million, or 3% to $44.5 million. The overall decrease in revenues is due to a decrease in the Office Automation System ("OAS") product line revenues of $7.8 million, offset by an increase in the core product line revenues by $6.2 million. In December 1995, due to continued losses, the management of Bogen decided to phase out the OAS product line.
Gross profit for 1995 increased $0.8 million and was equal to 39% of revenues, compared to 36% of revenues in 1994. The increase was entirely attributable to the core product line, in which the gross profit margin increased to 45% in 1995, from 40% in 1994, due primarily to change in product mix and higher average core sales prices. This was offset by the recording of a $1.5 million reserve for certain inventory in the OAS product line based on lower of cost or market.
The increase in marketing expense of $1.1 million and is due to marketing programs initiated by Bogen to stimulate sales in the OAS product line of business as well as, growth in the core product line.
The increase in general and administration expenses of $2.6 million is due primarily to costs to execute the aforementioned BCI transaction.
1994 Compared to 1993
Revenues from communications products activities in 1994 increased by $16.0 million, or 53%. Bogen increased its sales by $11.7 million, mainly due to the growth of its OAS product line. Speech Design's 1994 sales increased by $4.1 million, or 115%.
Cost of goods sold in 1994, amounted to $29.7 million or 64.3% of sales compared to $18.2 million or 60.6% of sales in 1993. This decrease in gross profit as a percentage of sales in 1994 reflects the change in product mix (the new products introduced by Bogen are typically sold at a lower margin than Bogen's traditional products), the sales to large customers and private label customers which enjoy volume discounts, and Bogen's reduction of the carrying value of certain inventories by $0.9 million. These factors were offset by the consistently higher margins on Speech Design's products.
Marketing expenses in 1994 amounted to $8.9 million or 19.4% of sales, compared to $6.4 million or 21.2% of sales in 1993. This increase of $2.5 million is largely the result of higher revenue levels in general and higher distribution costs for Bogen's new products.
General and administrative expenses in 1994 were $3.3 million or 7.2% of sales, compared to $2.4 million or 7.9% of sales in 1993. This increase of $0.9 million in general and administrative expenses is directly related to the higher revenue levels at both Bogen and Speech Design.
Income before interest, depreciation, amortization, tax and minority interest from the Company's Communications Products activities amounted to $2.1 million in 1994 compared to $1.4 million in 1993.
Corporate Group
The Corporate Group includes the Company's corporate headquarters and Geotest, Inc. subsidiary. The Company's Corporate Group generated a loss before net interest expense, amortization, depreciation and other charges of $7.2 million for 1995, compared to a loss of $5.9 million in 1994. The increase is primarily due to the general and administrative costs associated with the expansion of the corporate group. Revenues from corporate group subsidiaries were $2.8 million in 1995, compared to revenues of $1.2 million in 1994.
The Company's Corporate Group generated a loss before net interest expense, amortization, and other charges of $5.9 million in 1994, compared to a loss of $1.1 million in 1993. Revenues from corporate group subsidiaries were $1.2 million in 1994, compared to revenues of $6.6 million in 1993. The decrease in revenue is primarily caused by the disposal by the Company of Oram Electric Industries Ltd., Oram Power Supplies (1990) Ltd., and Geopower, Inc. In 1993 these entities generated a net loss of $0.3 million on revenues of $6.3 million. Operating losses at the Company's Geotest, Inc. subsidiary increased from $0.7 million in 1993 to $1.3 million in 1994. In addition, in 1994 the Company recorded a charge of $3.5 million as a reserve against a loan receivable.
Liquidity and Capital Resources
The Company requires significant capital to implement its wireless communications strategy. In order to effect its strategy, the Company increased its debt borrowings and entered into a series of transactions, including the sale of debt and equity, mainly to strategic partners. At December 31, 1995, the Company had $61.4 million of cash and cash equivalents.
The Company's short term cash needs are primarily for capital expenditures related to the digital FHMATM system which GeoNet(TM) is deploying and the other costs of rolling out the U.S. network. One of the advantages of the Company's FHMATM 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) which is sufficient to provide commercial service. Additionally, the Company expects to serve customers which require primarily local or regional coverage. Management believes therefore that the Company has additional flexibility in controlling its resources by accelerating or slowing down the rate at which various cities are rolled out without impacting the business results of its then operating city or regional networks in a material way.
The Company estimates that a minimum average investment of approximately $5 million is required to roll-out an average city. Additional expenditures will be required later if and when increased subscriber capacity or coverage is needed. In addition, the Company estimates that it will continue its present level of research and development expenses during the next 12 months in connection primarily with enhancements to the system and the subscriber unit and other related projects.
In March 1996, the Company issued $75 million Senior Subordinated Convertible Notes ("Convertible Notes"), due 2001. The Convertible Notes are convertible by the holders after one year from the date of issuance into common stock at a conversion price equal to the lower of (i) $9.50 per share and (ii) the weighted average market price of the share of Common Stock for ten trading day period immediately following the 90th day after issuance date of the Convertible Notes, but shall in no event be less than $8.25 per share. Interest on the Convertible Notes accrue at a rate of 12% per annum and will be payable semi-annually on each February 15 and August 15 commencing August 15, 1996. The Convertible Notes are unsecured senior subordinated obligations of the Company. The Convertible Notes can be converted at the option of the Company after 18 months if the closing price of the Company's common stock for 20 of the 30 trading days and for the five trading days before conversion is 160% of the conversion price.
On March 4, 1996, the Company and S-C Rig Investments - III, L.P. ("S-C Rig"), a significant stockholder of the Company, which is affiliated with George Soros, reached an agreement in principle pursuant to which S-C Rig will make a $40.0 million unsecured credit facility available to the Company. It is anticipated that all borrowings under the credit facility will accure interest at a rate of 10% per annum and will mature four years from the date of the final borrowing thereunder. It also is anticipated that the Company will be obligated to pay S-C Rig a fee equal to 3% of each borrowing under the credit facility at the time of such borrowing. Borrowings under the credit facility will constitute senior indebtedness of the Company. In connection with the establishment of the credit facility, it is anticipated that the Company will issue to S-C Rig a five-year warrant to purchase 4.2 million shares of Common Stock (subject to adjustment in certain circumstances) at an exercise price of $9.50 per share (subject to adjustment in certain circumstances). The transactions contemplated by the credit facility are subject to a number of conditions, including the negotiation and execution of definitive agreements and the authorization at the Company's next annual meeting of sufficient additional shares of Common Stock to permit the exercise in full of the warrant. There can be no assurances that the
Company will consummate the transactions contemplated by the agreement in principal on the terms described above, or at all.
The Company is planning to raise additional capital during the next 12 months to continue financing its current operating plan. The Company's long term capital needs include the planned roll-out of the U.S. network in 36 cities, the repayment of convertible debt and redeemable preferred stock (if such are not converted into equity), to finance international networks, and to make acquisitions of business 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, vendor financing, as well as a combination thereof, and other sources. 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 may cause the Company to significantly alter its GeoNet TM rollout plan.
The following discussion of liquidity and capital resources, among other things, details the changes in the Company's financial and cash position during the year ended December 31, 1995.
During 1995, cash and cash equivalents increased by $33.9 million to $61.4 million, while working capital increased by $22.1 million to $69.2 million as of December 31, 1995.
Cash utilized in connection with continuing operating activities for the year ended December 31, 1995, amounted to $42.1 million.
Cash outflows from investing activities, exclusive of decrease in temporary investments of $14.0 million, were $82.3 million. The Company expended $33.9 million on acquisitions of property, equipment $13.1 million on SMR licenses in the United States, and $6.4 million to purchase the remaining stock of one of the German subsidiaries offset by the receipt of $7.0 million in the BCI transactions.
The Company's financing activities provided cash of $143.3 million. In July 1995, the Company issued, in a private offering, $207.0 million aggregate principal amount at maturity of 15% Senior Secured Discount Notes due July 15, 2005 ("the Notes"). Gross proceeds of the Notes were approximately $100.0 million. The Notes were issued with 6,210,000 detachable warrants ("the Warrants"). Each Warrant entitles the holder to purchase one share of Company common stock at an exercise price of $9.90 per share. The Notes accrue interest until maturity at a rate of 15% per annum. Interest on the Notes are payable semi-annually, in cash, on July 15 and January 15, commencing January 15, 2001. The Notes include covenants that put restrictions on the Company primarily related to making certain investments and incurring additional debt. In August, in connection with the Notes, S-C Rig purchased approximately $21.0 million principal amount of additional units consisting of 15% Senior Secured Discount Notes due 2005 and 621,000 ten year warrants to purchase shares of Company common stock at $9.90 per share. Gross proceeds to the Company were approximately $10.0 million, bringing the total gross proceeds from the issuance of the Notes to $110.0 million. In addition, the Notes are collateralized by a pledge of the capital stock owned by the Company in NBTL, PowerSpectrum, Inc. and subsidiaries, MetroNet Systems, Inc., Geotek Communications GmbH and BCI.
In March 1995, the Company refinanced the $25.0 million of Senior Secured Notes, that were originally due in September 1995, with $36.0 million of newly issued Senior Secured Notes ("Replacement Notes"). At closing, the Company received net proceeds of $11.0 million and issued warrants to the purchaser to acquire 700,000 of the Company's common shares at $8.125 per share. The Replacement Notes are payable in three equal installments fifteen, twenty four and thirty six months after the closing. Interest at 14.75% is payable quarterly through the term of the Replacement Notes. In accordance with the Replacement Note agreement, the Replacement Notes are being converted into shares of the Company's common stock subject to daily limits and certain other restrictions, at 87.5% of the average trading price of the Company's common stock on the respective conversion dates. As of December 31, 1995, $8.0 million has been converted into 1,228,000 shares of common stock. As a result of the issuance of the aforementioned Replacement Notes in July 1995, the Company's indebtedness under the Replacement Notes was restructured in accordance with the terms thereof by the grant to the lenders of a security interest in a restricted cash account holding approximately $40.5 million and as of December 31, 1995, $30.9 million remains restricted. As conversion of the Replacement Notes occurs, a
proportionate amount of the restricted cash becomes unrestricted. This amount is recorded on the balance sheet of the Company, as restricted cash, and is expected to satisfy the principal and total interest of the Replacement Notes. This security interest released the original collateral for the Replacement Notes.
The Company paid cash dividends totaling $4.1 million on its outstanding preferred stocks. Proceeds from the exercise of warrants and options totaled approximately $1.1 million in 1995.
In April 1995, the Company completed the previously announced sale of $10.0 million of Series K Cumulative Convertible Preferred shares to the Company's partner in a joint venture which is attempting to secure a license to provide wireless services in Korea. The shares pay a dividend of 7% per annum for 5 years, carry a conversion premium and can be redeemed by the Company in certain circumstances.
In May 1995, the Company sold 531,463 shares of its Series L Cumulative Convertible Preferred Stock ("Series L Stock"), to Toronto Dominion Investments, Inc. ("TDI") for an aggregate purchase price of $5.0 million. In connection with this transaction, in September 1995, Vanguard Cellular Systems, Inc. ("Vanguard"), a stockholder of the Company, purchased an additional 531,463 shares of Series L Stock for an aggregate purchase price of $5.0 million. The shares pay a dividend of 7.5% per annum, contain a conversion premium and can be redeemed by the Company in certain circumstances.
In connection with Vanguard's purchase of the Series L Stock, the parties agreed to modify the terms of certain options (the "Options") to purchase shares of the Company's common stock granted to Vanguard pursuant the Stock Purchase Agreement between the Company and Vanguard dated December 29, 1993. Pursuant to these modifications, the total number of shares of Common Stock subject to the Options was decreased from ten million shares to seven million shares. Of the remaining Options, Options to purchase two million shares of common Stock at $15.00 per share and two million shares of Common Stock at $16.00 per share expire September 1, 1996 ($16.00 per share options are subject to a March 1, 1997 extension under certain circumstances) and Options to purchase three million shares of Common Stock at $17.00 per share expire one year from the expiration of the $16.00 options. After giving effect to these modifications, Vanguard and TDI each hold one-half of the options exercisable at $15.00 per share, Vanguard holds six-sevenths of each of the Options exercisable at $16.00 and $17.00 per share, respectively and TDI holds one-seventh of each of the options exercisable at $16.00 and $17.00 per share, respectively.
In May 1995, the Company sold 1,162.5 shares of its Series M Cumulative Convertible Preferred Stock ("Series M Stock"), to a group of investors for an aggregate purchase price of $11,625,000. The shares pay a dividend of 8.5% per annum, contain a conversion premium and can be redeemed by the Company in certain circumstances.
In July 1995, the Company acquired the remaining 50.1% of the one of the German Networks that it did not own for DM 9.0 million (approximately $6.3 million) and in December 1995, the Company received regulatory approval for the transfer of the 51% of the other German Networks network it did not already own. In the near term these networks will require additional funding as subscriber revenue does not cover operating costs and capital needs. The Company is seeking outside sources of funding for the networks.
In October 1995, the Company sold 338,000 shares of common stock to Rafael Development Corporation for $3.0 million.
In November 1995, the Company exchanged certain MetroNet licenses with Nextel Communications, Inc. whereby the Company received 900 MHZ radio channels in seven major U.S. markets. The exchange was accounted for as a non-monetary transaction and no gain or loss was recognized.
In December 1995, the Company entered into an agreement with Hughes Network Systems ("HNS"), a unit of Hughes Electronics Corporation whereby HNS will extend a $24.5 million line of credit to the Company for a period of two years. This line of credit may be used to acquire additional 900 MHZ spectrum in the United States. The loans made under this agreement bear interest, payable
quarterly, at a fixed rate of 12%. As of December 31, 1995, there were no borrowings under this line.
The debt agreements of the Company contain restrictions on the Company, affecting, among other things, the ability of the Company to incur indebtedness, make prepayments of certain indebtedness, pay common stock dividends and make certain investments.
Recently Issued Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which is effective for fiscal years begining after December 31, 1995. The Company will adopt this standard in 1996 and is presently analyzing the impact of this new standard on its financial position and results of operations.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" which is effective for fiscal years begining after December 15, 1995. The Company will adopt the disclosure provisions of this new standard in 1996. Therefore, this new standard will not have an effect on the Company's financial position and results of operations.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The remainder of this page is intentionally left blank. The Financial Statements of the Company begin on the following page.
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Financial Statements:
Geotek Communications, Inc. and Subsidiaries
Reports of Independent Accountants -
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 -
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993 -
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 -
Notes to Consolidated Financial Statements -
Separate Company Financial Statements for Subsidiaries whose Capital Stock is Pledged as Collateral.
National Band Three, Ltd. -
Bogen Communications International, Inc and Subsidiaries -
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
The information called for by Items 10, 11, 12 and 13 (except for the information regarding executive officers called for by Item 10
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data."
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed by the Company during the fourth quarter of 1995:
Current Report, dated December 21, 1995, reporting that a newly incorporated subsidiary of the Company, Geotek Financing Corporation, entered into a loan agreement with Hughes Network Systems, Inc. ("HNS") pursuant to which HNS is providing up to $24,500,000 of financing, in the form of a note bearing interest at a rate of 12% per annum, for use in connection with the future purchase of 900 MHz licenses from the FCC and from existing third party holders thereof.
(c) Exhibits
The following exhibits are filed as part of this report (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an Annual Report on Form 10-K):
Exhibit No. -------
3.1 Restated Certificate of Incorporation of the Company, as amended.(1)
3.2 By-Laws of the Company, as amended through May 30, 1992.(2)
4.1 Restated Certificate of Incorporation of the Company, as amended (incorporated from Exhibit 3.1 above).(1)
4.2 By-Laws of the Company, as amended through May 30, 1992 (incorporated from Exhibit 3.2 above).(2)
4.3 Certificate of Designation of Series H Participating Cumulative Convertible Preferred Stock.(3)
4.4 Certificate of Designation of Series I Cumulative Convertible Preferred Stock.(1)
4.5 Certificate of Designation of Series K Cumulative Convertible Preferred Stock. (4)
4.6 Certificate of Designation of Series L Cumulative Convertible Preferred Stock. (5)
4.7 Certificate of Designation of Series M Cumulative Convertible Preferred Stock. (5)
** 4.8 1989 Employee Stock Option Plan, as amended, of the Company.(6)
** 4.9 1994 Employee Stock Option Plan of the Company.(7)
4.10 Certificate of Amendment of the Restated Certificate of Incorporation of the Company filed February 26, 1993.(8)
4.11 Certificate of Amendment of the Restated Certificate of Incorporation of the Company filed February 16, 1994.(1)
4.12 Note and Warrant Purchase Agreement, dated as of June 1, 1993, by and between the Company and SC-Geo L.P.(9)
4.13 Form of 30-month Warrant Certificate granted to Investors in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.12, dated July 2, 1993.(9)
4.14 Form of 60-month Warrant Certificate granted to Investors in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.12, dated July 2, 1993.(9)
4.15 Form of 30-month Commitment Warrant Certificate granted to Investors in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.12, dated June 1, 1993.(9)
4.16 Form of 60-month Commitment Warrant Certificate granted to Investors in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.12, dated June 1, 1993.(9)
4.17 Senior Secured Note dated July 2, 1993 from the Company to The SC Fundamental Value Fund, L.P. for the aggregate principal amount of $8,592,000.(9)
4.18 Senior Secured Note dated July 2, 1993 (together with the note referenced in Exhibit 4.17, above, the "NBTL Notes") from the Company to The SC Fundamental Value BVI Ltd. for the principal aggregate amount of $3,408,000.(9)
4.19 Pledge Agreement, dated as of July 2, 1993, by and among the Company, The SC Fundamental Value Fund, L.P. [on behalf of itself] and SC Fundamental Value BVI, Ltd.(9)
4.20 Note and Warrant Purchase Agreement, dated as of March 20, 1995, by and among the Company, The SC Fundamental Value Fund, L.P. and SC Fundamental Value BVI, LTD.(7)
4.21 Warrant Certificate in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.20, dated March 30, 1995.(7)
4.22 Warrant Certificate in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.20, dated March 30, 1995.(7)
4.23 Senior Secured Convertible Note dated March 30, 1995 from the Company in connection with the Note and Warrant Purchase Agreement referenced in Exhibit 4.20.(7)
4.24 Senior Secured Convertible Note dated March 30, 1995 from the Company in connection with the Note and Warrant Purchase Agreement referenced in Exhibit 4.20.(7)
4.25 Pledge Agreement, dated as of March 30, 1995, by and among the Company, certain of its subsidiaries, and SC Fundamental Inc., as agent for, and on behalf of The SC Fundamental Value Fund, L.P. and SC Fundamental Value BVI, LTD.(7)
4.26 Unit (Note and Warrant) Purchase Agreement, dated June 29, 1995, by and between the Company and Smith Barney Inc. (10)
4.27 Indenture, dated as of June 30, 1995, between the Company and IBJ Schroder Bank & Trust Company, as trustee. (10)
4.28 Notes Registration Rights Agreement, dated June 29, 1995, by and between the Company and Smith Barney Inc. (10)
4.29 Pledge Agreement, dated as of July 6, 1995, by and between the Company and IBJ Schroder Bank & Trust Company, as collateral agent. (10)
4.30 Share Transfer Agreement, dated July 6, 1995 between the Company and IBJ Schroder Bank & Trust Company, as collateral agent. (10)
4.31 Charge Over Shares, dated July 6, 1995, between the Company and IBJ Schroder Bank & Trust Company, as collateral agent. (10)
4.32 Warrant Agreement, dated as of June 30, 1995, by and between the Company and IBJ Schroder Bank & Trust Company, as warrant agent. (10)
4.33 Warrant Share Registration Rights Agreement, dated July 6, 1995, between the Company and Smith Barney Inc. (10)
4.34 Defeasance Security Agreement, dated as of July 6, 1995, by and among the Company and SC Fundamental Inc., as agent for and on behalf of the SC Fundamental Value Fund, L.P. and SC Fundamental Value BVI, Ltd. (10)
4.35 Loan agreement dated as of December 21, 1995 between the Company and Hughes Network Systems, Inc. (11)
4.36 Note Purchase Agreement, dated March 4, 1996, by and between the Company and Smith Barney Inc.(12)
4.37 Indenture, dated as of March 5, 1996, between the Company and The Bank of New York, as trustee. (12)
4.38 Registration Rights Agreement, dated March 5, 1996, between the Company and Smith Barney Inc. (12)
10.1 Stockholders Voting Agreement, dated as of February 23, 1994, among the Company, Vanguard Cellular Systems, Inc., S-C Rig Investments-III, L.P., Evergreen Canada-Israel Investment & Co., Ltd., Yaron Eitan and Winston Churchill.(1)
10.2 Asset Exchange Agreement, dated as of March 24, 1995, by and between the Company, Metro Net Systems, Inc., Nextel Communications, Inc. and certain Nextel subsidiaries. (7)
10.3 FMHA Commercial Subscriber Unit Agreement dated as of June 8, 1994, between the Company and Mitsubishi Consumer Electronics America, Inc. (13)
10.4 FMHA Portable Subscriber Unit Agreement dated as of May 19, 1995, between the Company and Hughes Network Systems, Inc. (13)
* 12 Computation of Ratio of Earnings to Fixed Charges
* 21 Subsidiaries of the Company.
* 23.1 Consent of Coopers & Lybrand L.L.P.- Geotek Communications, Inc. Bogen Communications International, Inc.
* 23.2 Consent of Shachak & Co. - PowerSpectrum Technology Ltd.
23.3 Consent of Coopers & Lybrand - National Bank Three Limited
* Filed herewith
** Compensation Plan
- ---------- (1) Incorporated by reference to the Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.
(2) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-3 (Registration No. 33-64117) filed with the Commission on November 9, 1995.
(3) Incorporated by reference to the Exhibits to Amendment No. 1 to the Company's Registration Statement on Form S-3 (Registration No. 33-72820) filed with the Commission on January 25, 1994.
(4) Incorporated by reference to the Exhibits to Amendment No. 1 to the Company's Registration Statement on Form S-3 (Registration No. 33-85296) filed with the Commission on May 26, 1995.
(5) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated May 26, 1995.
(6) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form S-3 (Registration No. 33-72820) filed with the Commission on December 10, 1993.
(7) Incorporated by reference to the Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
(8) Incorporated by reference to the Exhibits to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 (Registration No. 33-42185) filed with the Commission on August 27, 1993.
(9) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K/A No. 1 filed with the Commission with respect to events whose earliest date was June 18, 1993.
(10) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated July 6, 1995.
(11) Incorporated by reference to the Exhibits to the Company's current report on Form 8-K dated Decemebr 27, 1995.
(12) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated March 4, 1996.
(13) Incorporated by reference to the Exhibits to the Company's current report on Form 8-K/A dated June 26, 1995.
GEOTEK COMMUNICATIONS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
(a) Uncollectible accounts written off, net of recoveries.
(b) Write-off of obsolete inventory.
(c) Assumed through acquisition.
(d) Liability of deconsolidated and partially disposed entity.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GEOTEK COMMUNICATIONS, INC.
By: /s/ Yaron I. Eitan ------------------ Yaron I. Eitan, Director, President and Chief Executive Officer
Date: March 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 28, 1996 by the following persons on behalf of the registrant in the capacities indicated.
/s/ Winston Churchill Chairman of the Board - --------------------------- Winston Churchill
/s/ Yaron I. Eitan Director, President and Chief Executive - --------------------------- Yaron I. Eitan Officer (Principal Executive Officer)
/s/ Walter E. Auch Director - --------------------------- Walter E. Auch
/s/ George Calhoun Director - --------------------------- George Calhoun
/s/ Purnendu Chatterjee Director - --------------------------- Purnendu Chatterjee
/S/ Haynes Griffin Director - --------------------------- Haynes Griffin
/s/ Richard Krants Director - --------------------------- Richard Krants
/s/ Richard T. Liebhaber Director - --------------------------- Richard T. Liebhaber
/s/ Haim Rosen Director - --------------------------- Haim Rosen
/s/ Kevin Sharer Director - --------------------------- Kevin Sharer
/s/ William Spier Director - --------------------------- William Spier
/s/ Michael McCoy Senior Vice President and Chief Financial - --------------------------- Michael McCoy Officer (Principal Financial Officer)
/s/ Michael Carus Chief Accounting Officer and Corporate - --------------------------- Michael Carus Controller
EXHIBIT INDEX ------------- Exhibit No. - -------
12 Computation of Ratio of Earnings to Fixed Charges 23.1 Consent of Coopers & Lybrand L.L.P.- Geotek Communications, Inc. Bogen Communications International, Inc. 23.2 Consent of Shachak & Co. - PowerSpectrum Technology Ltd. 23.3 Consent of Coopers & Lybrand - National Band Three Limited
[Coopers & Lybrand L.L.P. Letterhead]
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors and Shareholders of Geotek Communications, Inc.
We have audited the consolidated financial statements and the consolidated financial statement schedule of Geotek Communications, Inc. and Subsidiaries as listed in Item 14(a)(1) and (2) of this Form 10-K. The consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. We did not audit the financial statements of PowerSpectrum Technologies, Ltd., a consolidated research and development joint venture, which statements reflect losses from continuing operations of approximately 22%, 28%, and 34% of the corresponding consolidated totals in 1995, 1994 and 1993, respectively. These statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for PowerSpectrum Technologies, Ltd. for 1995, 1994, and 1993 is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits, and the reports of other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Geotek Communications, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, based on our audits and the reports of other auditors, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York March 26, 1996
F - 1
[Shachak Peer Reznick & Co. Letterhead]
AUDITORS' REPORT
To the shareholders of POWERSPECTRUM TECHNOLOGY LTD.
We have audited the accompanying balance sheets of POWERSPECTRUM TECHNOLOGY LTD. (hereinafter - "the Company") as of December 31, 1995 and 1994, and the statements of operation, changes in shareholders' equity and cash flows for the two years ended December 31, 1995 and for the fifteen month period ended December 31, 1993. These financial statements are the responsibility of the Company's Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards, including those prescribed under the Israeli Auditors' Regulations (Auditors' Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by an error in the financial statements or by an irregularity therein. An audit includes examining, on a test basis evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a fair basis for our opinion.
The financial statements referred to above have been prepared on the basis of historical cost, restated for the general purchasing power of the Israeli currency, in conformity with statements of the Institute of Certified Public Accountants in Israel. Condensed financial statements in nominal values, are presented in Note 18.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1995 and 1994 and the results of operations, changes in shareholders' equity and its cash flows for the two years ended December 31, 1995 and for the fifteen month ended December 31, 1993, in conformity with generally accepted accounting principles in Israel which are essentially identical in all material matters to the accounting principles generally accepted in the U.S.
Pursuant to Section 211 of the Companies Ordinance (New Version) 1983, we state that we have obtained all the information and explanations we required and that our opinion on the abovementioned financial statements is given according to the best of our information and the explanations received by us and as shown by the books of the Company.
Without qualifying our opinion, we draw attention to Note 1B as to the Company being in the developing stage of certain applications of its products. The Company's ability to continue its operation is contingent upon funding by shareholders or others.
/s/ SHACHAK PEER REZNICK & CO. Shachak Peer Reznick & Co. Certified Public Accountants (Israel)
Tel Aviv, March 26, 1996
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1995 and 1994 (Dollars in thousands, except per share data)
1995 1994 ASSETS --------- --------- Current assets: Cash and cash equivalents $ 61,428 $ 27,531 Temporary investments 7,945 21,960 Restricted cash 36,971 2,555 Accounts receivables trade, net of allowance for doubtful accounts of $1,487 in 1995 and $1,125 in 1994 14,028 11,371 Inventories 10,483 8,667 Deposits for spectrum licenses 11,500 Prepaid expenses and other assets 5,621 7,468 --------- ---------
Total current assets 147,976 79,552
Investments in affiliates 3,078 26,582 Property, plant and equipment, net 66,110 24,446 Intangible assets, net 68,181 46,099 Other assets 7,219 3,165 --------- --------- $ 292,564 $ 179,844 ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 17,948 $ 12,490 Accrued expenses and other 23,005 12,315 Notes payable, banks and other 8,285 5,641 Current maturities, long-term debt 29,577 2,056 --------- --------- Total current liabilities 78,815 32,502 --------- ---------
Long-term debt 95,875 29,396 Other non current liabilities 1,217 198 Minority interest 395 392
Redeemable preferred stock 40,000 40,000 Commitments and contingent liabilities
Shareholders' equity: Preferred stocks, $.01 par value: 11 Common stock, $.01 par value: Authorized 99,000,000 and 86,000,000 issued 55,251,000 and 50,869,000 shares respectively, outstanding 55,031,000 and 50,631,000 shares, respectively 553 509 Capital in excess of par value 272,456 186,651 Foreign currency translation adjustment 1,012 767 Accumulated deficit (196,384) (109,185) Treasury stock, at cost (238,000 common shares) (1,386) (1,386) --------- --------- 76,262 77,356 --------- --------- $ 292,564 $ 179,844 ========= =========
See notes to consolidated financial statements.
F - 3
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1995, 1994 and 1993 (Dollars in thousands)
See notes to consolidated financial statements.
F - 4
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS, (Continued) for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ------ ------ ------ Weighted average number of common shares outstanding 52,329,000 49,687,000 35,579,000 ========== ========== ==========
Per common share: Loss from continuing operations, after preferred dividends $(1.75) $(0.90) $(1.43) Discontinued operations: Gain on disposal 0.01 ------ ------ ------ Loss before extraordinary item and cumulative effect of accounting change (1.75) (0.90) (1.42) Extraordinary item - loss from early extinguishment of debt (0.07) Cumulative effect of change in fiscal year of subsidiary (0.03) ------ ------ ------
Net loss applicable to common shares $(1.75) $( 0.90) $(1.52) ===== ====== =====
See notes to consolidated financial statements.
F - 5
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY as of and for the years ended December 31, 1995, 1994 and 1993 (In Thousands)
See notes to consolidated financial statements
F - 6
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, Continued as of and for the years ended December 31, 1995, 1994 and 1993 (in Thousands)
See notes to consolidated financial statements.
F - 7
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1995, 1994 and 1993 (Dollars in thousands)
* Opening balance sheet adjusted to reflect cumulative effect of change in fiscal year of subsidiary.
See notes to consolidated financial statements.
F - 8
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued for the years ended December 31, 1995, 1994 and 1993 (Dollars in thousands)
* Opening balance sheet adjusted to reflect cumulative effect of change in fiscal year of subsidiary.
See notes to consolidated financial statements.
F - 9
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued for the years ended December 31, 1995, 1994 and 1993 (Dollars in thousands)
See notes to consolidated financial statements.
F - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Summary of Significant Accounting Policies:
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Geotek Communications, Inc. ("the Company") include all wholly-owned, majority-owned and controlled subsidiaries. The Company accounts for 20%-50% owned entities by the equity method. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the 1994 and 1993 financial statements and notes have been reclassified to conform to the 1995 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used for allowance for doubtful accounts, inventory reserve for the lower of cost or market, product warranty reserves, depreciation and amortization and the estimated lives of assets, including intangibles.
Revenue Recognition
Commercial manufacturing product revenues, net of expected sales returns, are recognized upon shipment. Revenues relating to contracts for the sale and installation of wireless dispatch systems are recognized using the percentage of completion method. Revenues for service income are recognized when services are provided. Deferred revenues are recognized when the customer is billed in advance and is recorded in income in the period to which the advance billing relates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market.
Cash Equivalents
Cash equivalents are highly liquid debt instruments purchased with an original maturity of three months or less, and are considered to be cash equivalents for cash flow reporting purposes.
Temporary Investments
Management determines the appropriate classification of its investments in debt securities with maturities of more than three months at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities for which the Company has the intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. At December 31, 1995 and 1994, the Company did not have any investments in equity or debt securities that qualified as trading or available for sale.
Concentration of Credit Risk and Off-Balance-Sheet Risks
The Company provides mobile radio services to commercial customers in the United States, the United Kingdom and Germany and designs, manufactures and distributes electronic communications equipment for commercial customers, under contractual arrangements. The Company performs ongoing credit evaluations of its commercial customers and generally does not require collateral. The Company maintains reserves for potential losses from these contractual arrangements. Credit risk with respect to accounts receivable is limited due to the large number of customers and their industry and geographic dispersion. The Company's Israeli subsidiaries are prohibited from making certain payments, including loans, to entities outside of Israel without the Bank of Israel's approval. The subsidiaries are permitted, however, to distribute dividends, reimburse expenses and make other specific payments.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Property, plant and equipment acquired through acquisition is recorded at the fair value at the date of acquisition. Depreciation and amortization are provided principally by the straight-line method over the estimated useful lives of the related assets which range between 3 to 10 years. Gains or losses arising from dispositions are recorded in operations.
F - 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Summary of Significant Accounting Policies: continued
Interests costs incurred on borrowings during the construction of the network infrastructure for each market (until the assets are substantially complete and ready for use) are capitalized. Interest capitalized amounted to $0.5 million in 1995.
Intangible Assets
The excess of cost over the fair value of net assets acquired is amortized on a straight-line basis over twenty to forty years. At each balance sheet date management assesses whether there has been an other than temporary impairment in the value of goodwill by comparing anticipated undiscounted future cash flows from operating activities with the carrying value of goodwill. The factors considered by management in performing this assessment include current operating results, trends and prospects as well as the effects of obsolescence, demand, competition and other economic factors. FCC and other private radio licenses are amortized over twenty years.
Foreign Currency Translation
For international operations, assets and liabilities are translated at year-end exchange rates and income statement items are translated at average exchange rates for the period. Resulting translation adjustments are recorded as a separate component of shareholders' equity.
Research and Development
Research and Development expenditures are expensed as incurred. All expenses relating to research and development ventures are recorded, net of grants, as research and development expense.
Taxes on Income
Effective January 1, 1993 the Company implemented SFAS No. 109, "Accounting for Income Taxes". This pronouncement changed the method of accounting for income taxes from the deferred method to the liability method, which includes a requirement for adjustment of deferred tax balances for tax rate changes.
Cumulative Effect on Prior Year of Changing Fiscal Year End of a Subsidiary
In 1993, the Company's PowerSpectrum, Inc. ("PSI") subsidiary changed its fiscal year end from September 30 to December 31. This change was made in anticipation of the merger, which occurred on July 30, 1993, of PSI into a wholly owned subsidiary of the Company (See Note 2). The operating results of PSI for the period October 1, 1992 to December 31, 1992 are included in the 1993 statement of operations as a cumulative effect on prior year of changing the fiscal year end of a subsidiary.
Loss Per Common Share
Net loss per common share is computed by dividing the net loss, after preferred dividend requirements, by the weighted average number of common shares outstanding during the year. Common stock equivalents are excluded since the effect would be anti-dilutive.
Recently Issued Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which is effective for fiscal years beginning after December 31, 1995. The Company will adopt this standard in 1996 and is presently analyzing the impact of this new standard on its financial position and results of operations.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" which is effective for fiscal years beginning after December 15, 1995. The Company will adopt the disclosure provisions of this new standard in 1996. Therefore, this new standard will not have an effect on the Company's financial position and results of operations.
F - 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Acquired, Discontinued and Disposed of Operations:
Wireless Networks in Germany
The Company acquired 49% of Preussag Bundelfunk GmbH ("PBG") in July 1994, for approximately $14.0 million in cash. The Company did not have a controlling interest in PBG and accounted for its investment under the equity method. Under the terms of its investment, the Company agreed to fund PBG after PBG's capital was exhausted and in 1995, the Company recorded 100% of PBG's losses as its share under the equity method. In December 1995, after regulatory approval for the transfer of the mobile radio licenses, the remaining 51% of PBG was transferred to the Company for no additional consideration and the Company began to consolidate the results of PBG in its financial statements. The Company has guaranteed the repayment of certain debt of PBG, due in 1999, to the seller, Preussag Mobilefunk GmbH ("PMG"), of DM 3.5 million plus interest (approximately $2.4 million). This guarantee has been collateralized by a letter of credit. The excess of the purchase price over the Company's share of the fair value of the net assets of PBG at the date of acquisition of $12.5 million has been accounted for as goodwill and is being amortized over 20 years.
The Company acquired 49.9% of DBF Bundelfunk GmbH & Co. ("DBF") in August 1994 for approximately $5.3 million in cash. In addition, the Company and the seller, Quante A.G., committed to contribute DM 5.0 million (approximately $3.2 million), of which DM 3.0 million (approximately $1.8 million) was contributed by the Company prior to December 31, 1994. The Company and Quante were granted call and put options, respectively, for the remaining 50.1% of DBF held by Quante. In March, 1995 Quante exercised its option to sell its 50.1% interest in DBF to the Company for DM 9.0 million (approximately $6.3 million) in cash. Prior to July 1995, the Company did not have a controlling interest in DBF and thus, accounted for its investment, and its funded share of the losses, under the equity method. Upon the purchase of the remaining 50.1% interest in DBF in July 1995, the Company began to consolidate the results of DBF in its financial statements. The excess of the purchase price over the Company's share of the fair value of the net assets of DBF at the date of acquisition of $10.1 million has been accounted for as goodwill and is being amortized over 20 years.
Communication Products
In August 1995, the Company transferred its interest in Speech Design GmbH and Bogen Communications, Inc. to Bogen Communications International ("BCI") (formerly, European Gateway Acquisition Corporation) in exchange for $7.0 million in cash, $3.0 million in convertible notes, approximately 64% of BCI's common shares and warrants to purchase 200,000 shares of BCI common stock. The Company will also be eligible to receive additional consideration if the future earnings of both companies through July 1997 attain certain levels. This transaction had no material recurring effect on the Company's results of operations and the Company continues to control and consolidate these entities. Included in general and administrative expenses are $1.5 million of costs to effect the transaction. The BCI warrant holders hold approximately 3,800,000 warrants to purchase one share of BCI common stock for between $5.00 to $5.50. These warrants are callable upon certain events. For services provided in connection with the transaction, a director of the Company acquired 19,500 shares in BCI.
In January 1994, the Company completed a tender offer, whereby its interest in Bogen Communications, Inc. increased from 91% to 99% in exchange for 233,442 shares of the Company's common stock. The shares have been valued at $3.4 million, which amount was recorded as additional goodwill.
In February 1993, the Company acquired a 67% interest in Speech Design GmbH, a Munich based developer, manufacturer and marketer of telephone peripherals in exchange for $900,000 in cash and notes and 553,000 of the Company's common shares. Goodwill created from this acquisition was $3.7 million, with $2.6 million remaining as of December 31, 1995.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Acquired, Discontinued and Disposed Operations: continued
Other Acquisitions
In May 1993, the Company acquired a 66% interest in GMSI (formerly known as Gandalf Mobile Systems, Inc.) in consideration for Canadian $2.0 million (approximately $1.5 million) and the guarantee by the Company of Canadian $2.0 million in debt (due in 1998) to the seller. In April 1994, upon the exercise by GTI, GMSI's former parent company, of a put option granted at the acquisition date, the Company acquired GTI's remaining 10% interest in GMSI in consideration for 150,000 shares of the Company's common stock. The shares issued in April 1994 have been valued at $1.6 million, which amount has been recorded as additional goodwill.
In July 1993, the Company acquired all of the outstanding stock of National Band Three Ltd. ("NBTL"), the only national provider of private mobile radio services in Great Britain, for approximately $24.0 million in cash. The intangible asset created from this transaction was $8.1 million with $6.1 million remaining as of December 31, 1995.
In July 1993, the Company acquired the 38% of its US wireless subsidiary, PSI, that it did not already own, through a merger of PSI into a wholly-owned subsidiary of the Company (the "Merger"). In connection with the Merger, the Company issued approximately 5.1 million shares of common stock and options to acquire an additional 2.0 million shares of the Company's common stock. In 1992, PSI entered into a joint venture, PowerSpectrum Technologies, Ltd. ("PST"), with an Israeli government agency, Rafael Armament Development Authority ("RDC"). PST was formed to develop the Company's digital wireless communications system based upon the technology contributed to PST by Rafael. PSI held a 56% interest in PST. The excess of consideration paid over the fair value of the net assets acquired in the merger, of $32.4 million has been attributed to the incomplete research and development project and was charged to expense at the time of the Merger. In November 1995, the Company closed its September 1995 agreement with RDC, whereby RDC converted all the principal and interest issued to it by PST under convertible debentures into shares of PST representing its 38% interest in PST. Geotek issued to RDC 1.8 million shares of unregistered Company common stock in exchange for RDC's shares of PST. The unregistered shares were valued at approximately $8.6 million and $7.8 million was recorded as goodwill. RDC was granted an option to purchase up to 10% of PST in certain circumstances.
Pro Forma Information (unaudited)
The following table summarizes the unaudited consolidated pro forma results of operations, assuming the acquisitions had occurred at the beginning of each of the periods as follows (in thousands):
1995 1994 1993* ---- ---- -----
Revenue $ 82,781 $ 72,991 $ 58,190 Loss from continuing operations (89,428) (46,313) (56,107) Loss from continuing operations per share ($1.71) ($0.93) ($1.47)
* Includes non cash charge of $32.4 million related to PSI merger.
The unaudited pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions been made at the beginning of the period, or of results which may occur in the future.
Merger and Exchange of Metro Net
In January 1994 the Company acquired, through a merger, all of the outstanding stock of Metro Net Systems, Inc. ("MetroNet") in consideration for the issuance of 3,112,500 common shares of the Company. The merger was accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements were restated for all periods prior to the acquisition to include the results of operations, financial position and cash flows of Metro Net. The effect of the merger on the results of operations in the period in which the pooling of interests occurred is immaterial. Metro Net is a provider of wide area SMR services in the New York City area.
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Acquired, Discontinued and Disposed Operations: continued
In November 1995, the Company exchanged all of MetroNet's 800 MHz radio channels for the 900 MHz radio channels in seven major U.S. markets previously held by Nextel Communications Inc. The exchange of licenses was accounted for as a non monetary transaction and no gain or loss was recognized upon the transaction.
3. Temporary Investments:
Temporary Investments include $7.9 and $22.0 million of U.S. Government Agency securities at December 31, 1995 and 1994, respectively. The amortized cost of marketable securities at December 31, 1995 and 1994 approximates fair market value. All marketable debt securities are classified as held to maturity at December 31, 1995 and 1994 and mature within one year.
4. Inventories:
Inventories as of December 31, 1994 and 1993 are as follows (in thousands):
1995 1994 ------- ------- Raw materials $ 3,520 $ 2,030
Work-in-process 2,344 781
Finished goods 7,477 7,149 ------- ------- 13,341 9,960 Reserve for lower of cost or market 2,858 1,293 ------- ------- $10,483 $ 8,667 ======= =======
5. Investments in Affiliates:
In 1995, the Company entered into a partnership in Korea the purpose of which is to build an FHMA(TM) demonstration site for wireless service. At December 31, 1995, the Company's investment in this partnership was $0.5 million. The Company entered into a joint venture in Korea which is attempting to secure a license to provide wireless service in Korea. At December 31, 1995, the Company's investment in the joint venture is $1.2 million. As part of the joint venture agreement, the Company has agreed to grant the joint venture partner 300,000 or 750,000 options to acquire Company Common Stock for $10.00 conditional on the joint venture obtaining a regional or national license in Korea, respectively.
During 1994, the Company acquired minority non controlling equity interests in two wireless networks in Germany as described in Note 2. As of December 31, 1994 the carrying values of these equity basis investments was $14.9 million and $7.2 million in PBG and DBF, respectively.
The Company acquired, in August 1993, a 25% equity interest in Cumulous Communications Company ("Cumulous") for aggregate consideration of $1.5 million. Cumulous is a provider of SMR services in the San Joaquin Valley of California. The Company's investment exceeds its share of the underlying net assets of Cumulous by approximately $940,000 which amount is being amortized over 20 years. The carrying value of this investment as of December 31, 1995 and 1994 was $1.3 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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5. Investments in Affiliates: continued
The gross revenues and net loss from operations for affiliated companies accounted for under the equity method were $3.1 million and $5.2 million, respectively, for the year ended December 31, 1994. The current assets, non-current assets, current liabilities, and non-current liabilities for such entities were $3.6 million, $15.3 million, $8.6 million and $3.7 million, respectively, as of December 31, 1994. All such amounts were not material in 1995.
6. Property, Plant and Equipment and Capital Leases (in thousands):
1995 1994 ------- ------- Property, Plant and Equipment Machinery and equipment $58,058 $29,064 Furniture and fixtures 7,481 1,891 Leasehold improvements 896 623 Construction in progress 25,846 724 ------- ------- 92,281 32,302 Capital Leases Equipment 5,364 Construction in progress 938 ------- 6,302 ------- ------- 98,583 32,302 Less: accumulated depreciation Property, Plant and Equipment 30,838 7,856 Capital Leases 1,635 ------- ------- 32,473 7,856 ------- ------- $66,110 $24,446 ======= =======
Depreciation expense was $5,962, $4,666 and $1,914 in 1995, 1994, and 1993, respectively.
7. Intangible Assets (in thousands):
1995 1994 ------- ------- Excess of cost over fair value of net assets acquired $44,847 $21,462 FCC and other private mobile radio licenses acquired and related intangibles 29,143 27,479 Other 741 753 ------- ------- 74,731 49,694
Less accumulated amortization 6,550 3,595 ------- -------
$68,181 $46,099 ======= =======
The increase in the excess of cost over fair value of net assets acquired in 1995 is primarily attributable to the acquisitions of additional interests in the DBF and PBG Networks offset by a decrease in goodwill in Bogen from the sale of an interest in the Company's Bogen Communications, Inc. and Speech Design subsidiaries to BCI. Such sale was accounted for as a reverse acquisition in EGAC. The increase in FCC and other private mobile radio licenses is attributable to the cost of licenses acquired in the United States.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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8. Notes Payable:
1995 1994 ------ ------ Notes payable consists of the following (in thousands): $10.0 million line of credit, bank interest at prime plus 2.0% to 2.75% and 2.5% in 1995 and 1994, respectively (a) $3,670 $4,355 Line of credit, bank (b) 627 728 Line of credit, bank (c ) 647 558 Line of credit, bank (d) 3,341 ------ $8,285 $5,641 ====== ======
Prime rate at December 31 8.50% 8.50%
(a) This line of credit for up to $10.0 million was refinanced in August 1995 and is subject to available collateral (80% of accounts receivable and 50% of finished goods inventory of a subsidiary). Substantially all the assets of a subsidiary are pledged as collateral for the line, which also bears interest based on loan balance, has a two year term, and is guaranteed by the Company. As of December 31, 1995, the unutilized amount available under the line was $0.4 million.
(b) The maximum amount available under this line of credit at December 31, 1995 is $2.7 million, including amounts outstanding under the long term portion. Interest rates vary between 6.5% and 9.5% depending on the length of time the funds will be used. As of December 31, 1995 the unutilized amount available under this line of credit was $1.9 million.
(c) Interest on the line is payable at a rate of 6.75%.
(d) This line of credit for $3.5 million is collateralized by $3.5 million restricted cash.
9. Long-term Debt:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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9. Long-term Debt: continued
(a) In July 1995, the Company issued, in a private offering, $207.0 million aggregate principal amount at maturity of 15% Senior Secured Discount Notes due July 15, 2005 ("the Discount Notes"). Gross proceeds of the Discount Notes were approximately $100.0 million. The Discount Notes were issued with 6,210,000 detachable warrants ("the Warrants"). Each Warrant entitles the holder to purchase one share of Company common stock at an exercise price of $9.90 per share. The Warrants, which have been valued at $29.2 million, are recorded as a reduction of the Discount Notes and are being accredited over the ten year life of the Discount Notes.
The Discount Notes accrue interest until maturity at a rate of 15% per annum. Interest on the Discount Notes will be payable semi-annually, in cash, on July 15 and January 15, commencing January 15, 2001. The Discount Notes are collateralized by a pledge of substantially all subsidiary capital stock owned by the Company. Additionally, the Discount Notes are fully and unconditionally guaranteed, jointly and severally on a senior basis, by certain subsidiaries of the Company. The Discount Notes include covenants that put restrictions on the Company primarily related to making certain investments, incurring additional debt and paying dividends on common shares.
In August, in connection with the Discount Notes, investors affiliated with George Soros purchased approximately $21.0 million principal amount of additional units consisting of 15% Senior Secured Discount Notes due 2005 and 621,000 ten year warrants to purchase shares of Company common stock at $9.90 per share. The warrants, which have been valued at $2.9 million, are recorded as a reduction on the Discount Notes and are being accredited over the ten year life of the Discount Notes. Gross proceeds to the Company were approximately $10.0 million, bringing total gross proceeds from the issuance of the Notes to approximately $110.0 million. The Company has recorded in other assets approximately $4.3 million of deferred financing costs relating to this transaction which are being amortized, using the interest method, over the ten year life of the Discount Notes.
In November 1995, the Company registered the Discount Notes through an exchange offer, and the Warrants under the Securities Act of 1933, as amended.
(b) In March 1995, the Company refinanced $25.0 million of Senior Secured Notes, that were originally due in September 1995, with $36.0 million of newly issued Senior Secured Notes (the "Replacement Notes"). At closing, the Company received net proceeds of $11.0 million and issued warrants to the purchaser to acquire 700,000 of the Company's common shares at $8.125 per share. The warrants have been valued at $1.8 million, which amount has been recorded as a discount on the Replacement Notes. The Replacement Notes are payable in three equal installments of $12 million, respectively, fifteen, twenty four and thirty six months after issuance. Interest at 14.75% is payable quarterly through the term of the Replacement Notes. In accordance with the Replacement Note agreement, the Replacement Notes are being converted into shares of the Company's common stock (conversion may occur beginning six months after the closing and end 18 months after closing) subject to daily limits and certain other restrictions, at 87.5% of the average trading price of the Company's common stock on the respective conversion dates. As of December 31, 1995, $8.0 million has been converted into 1,228,000 shares of common stock.
Concurrently with the issuance of the Discount Notes (see a above), the Company's indebtedness under the $36 million Replacement Notes was restructured in accordance with the terms thereof by the grant to the lenders of a security interest in a restricted cash account holding approximately $40.5 million. As conversion of the Replacement Notes occurs, a proportionate amount of the restricted cash becomes unrestricted and as of December 31, 1995, $30.9 million cash remains restricted. This amount is separately stated on the balance sheet of the Company, as restricted cash, and is expected to satisfy the principal and total interest of the remaining unconverted Replacement Notes. This security interest has released the original collateral for the Replacement Notes.
(c) These notes were assumed in connection with the purchase of certain SMR licenses in various cities in the US. Certain analog SMR equipment as well as revenues generated by the systems is pledged as collateral for the notes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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9. Long-Term Debt: continued
(d) In accordance with the terms of this note, it was converted into a 38% ownership interest of PST.
In December, the Company and Hughes Network Systems ("HNS"), a unit of GM Hughes Electronics, the Company's strategic partner in the development of the Company's portable subscriber unit, entered into an agreement whereby HNS will extend the Company a two year, $24.5 million line of credit for the Company to acquire additional 900 MHZ spectrum in the United States. Loans made under the line of credit will bear interest at a fixed rate of 12% payable quarterly. As of December 31, 1995, there were no outstanding loans under this line of credit.
Minimum annual principal repayments of long-term debt during the next five years and thereafter, are as follows:
Year In Thousands ---- ------------ 1996 $ 29,577 1997 990 1998 2,936 1999 3,542 2000 596 Thereafter 229,025 -------
Total $ 266,666 ========
Included in 1996 repayments, is the remaining unconverted portion of the Replacement Notes ($27,980) which are expected to be converted into common shares in 1996.
The Company's debt agreements contain covenants that restrict the Company's ability to pay dividends to common shareholders, make certain investments and incur debt.
Extinguishment of Certain Debt
In July 1993, the Company issued a $12.0 million Senior Secured Note, (the "Note") in connection with the acquisition of National Band Three Ltd.
In December 1993, in separate but related transactions, the Note was retired and the purchaser of the Note exercised its rights to purchase 2.1 million common shares under warrants issued in connection with the Note and other warrants it held. In connection with the early extinguishment of debt the Company recorded a pre-tax extraordinary loss of $2.3 million resulting primarily from the unamortized discount on the Note as of the date of repayment.
10. Income Taxes:
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The impact of adoption of this standard was immaterial.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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10. Income Taxes: continued
Taxes on income in 1995 and 1994 consists of taxes paid by a foreign subsidiary. The amounts presented includes $950,000 and $573,000 related to the 1995 and 1994 utilization of pre-acquisition net operating losses, respectively, by two subsidiaries which had full valuation allowances established at the time of the acquisitions by the Company and have been recorded in 1995 and 1994 as reductions to intangible assets.
The Company has domestic net operating loss (NOL) carryforwards for tax purposes of approximately $95.3 million and $36.2 million in 1995 and 1994, respectively, which expire between the years 2001 through 2010. Additionally, the Company has net deferred tax assets of approximately $4.6 million in 1995. The Company has established a valuation allowance offsetting the tax benefit as it is more likely than not that the tax benefit will not be realized. An effective tax rate reconciliation has not been provided as the Company had no domestic tax provision for the years ended December 31, 1995, 1994 and 1993.
The Company has domestic deferred tax assets of $ 38.9 million and $14.0 million in 1995 and 1994, respectively, related to the NOLs. In accordance with SFAS No. 109, the Company has established a valuation allowance offsetting the tax benefit of the NOL carryforwards as it is more likely than not that the tax benefit will not be realized.
The carryforwards are subject to certain limitations on their utilization and limitations as a result of various changes in control which have occurred.
The Company has not provided deferred U.S. income taxes on the undistributed earnings of foreign subsidiaries, which totaled $2.4 million at December 31, 1995 which the Company intends to permanently reinvest in their operations. The Company has foreign NOL carryforwards for tax purposes of approximately $18.8 million and $3.4 million in 1995 and 1994, respectively. The deferred tax asset related to those NOL carryforwards is approximately $9.4 million and $1.5 million, respectively. The Company has established a valuation allowance offsetting the tax benefit of the NOL carryforwards as it is more likely than not that the benefit will not be realized.
11. Commitments and Contingent Liabilities:
Capital Leases
Future minimum lease payments under capital leases at December 31, 1995 together with the present value of the minimum lease payments are:
Year In Thousands ---- ------------ 1996 $ 941 1997 934 1998 1,141 1999 718 2000 718 Thereafter 1,424 ------
Total minimum payments 5,876 Amounts representing interest (1,292) Total present value of ------ minimum payments 4,584 Current portion 572 ------ Total long-term portion $ 4,012 ======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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11. Commitments and Contingent Liabilities: continued
Operating
The Company leases facilities under noncancellable operating leases, some of which include escalation clauses. Future minimum rental commitments under noncancellable operating leases are as follows:
Year In Thousands ---- ------------ 1996 $9,732 1997 8,577 1998 8,220 1999 7,573 2000 4,013 Thereafter 6,626 ------ $ 44,741 ========
Rent expense was $7.4 million, $6.4 million and $2.1 million in 1995, 1994 and 1993, respectively.
Government Participation in Research and Development Project
The Chief Scientist of the Israeli Ministry of Industry and Commerce (Chief Scientist) has agreed to fund certain eligible expenditures related to the development of the digital wireless communication system by PST. Funding received from the Chief Scientist is repayable without interest only from revenues generated by the product being developed. Such participation amounted to $5.9 million, $4.1 million and $2.7 million, for 1995, 1994 and 1993, respectively, and have been reported in the statement of operations as a reduction of research and development expenses.
Manufacturing Commitments
The Company has contracted with Mitsubishi Consumer Electronics of America to manufacture Commercial Subscriber Units on behalf of the Company.
In March 1995, the Company and HNS formed a strategic partnership to develop a series of subscriber terminals and equipment based on the Company's proprietary technology. Under the terms of the agreement, HNS and the Company will share equally the cost of developing the portable subscriber unit. As of December 31, 1995, the Company has expensed approximately $6.0 million paid to HNS under the terms of this development contract.
Guarantees of Debt of Equity Investees
The Company has guaranteed the repayment of certain debt of PBG, due in 1999, to the former owner of PBG, in the amount of DM 3.5 million plus interest (approximately $2.4 million). A letter of credit has been issued as collateral for this obligation. Additionally, the Company has guaranteed certain debt of DBF to Quante, the former owner of DBF, in the amount of DM 5.0 (approximately $3.5 million). This amount is included as restricted cash.
FCC Waiver
The Company has applied for and received a waiver by the FCC to construct and activate certain systems it has acquired. In the event the Company fails to construct or activate such systems in accordance with the dates set forth in the waiver, the Company could lose the waiver and lose all of the frequencies covered by such waiver to the extent the systems have not been constructed or activated.
Litigation
In June 1994 the Company filed a lawsuit against Harris Adacom Corporation B.V. ("Harris"), a Dutch corporation, to enforce its rights under a loan agreement between the parties. The Company is seeking repayment of a $3.5 million loan made to Harris in January 1994 in connection with a potential purchase transaction between the Company and Adacom Technologies Ltd. ("ATL"), an affiliate of Harris and an Israeli publicly traded company. The loan was collateralized by stock owned by Harris in ATL. At the time of the loan, the collateral had a market value in excess of $10 million and the total market value of ATL was in excess of $100 million. The purchase transaction was not consummated. In May 1994 the market value of ATL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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11. Commitments and Contingent Liabilities: continued
dropped dramatically and ATL became insolvent, thereby reducing the value of the collateral to practically zero. At or about the same time, creditors placed Harris into bankruptcy proceedings in the Netherlands. The Company subsequently received limited information relating to the recoverability of the loan, and Management does not expect to recover the loan. The Company is aggressively pursuing its rights under the loan in Dutch bankruptcy court and is awaiting additional information on the assets and creditors of Harris. Based upon the information currently available, it cannot be determined what amount, if any, will ultimately be recovered; therefore, the Company has established a reserve against the full amount of the loan. Accordingly, the 1994 statement of operations includes, in other expenses, a charge of $3.5 million to establish this reserve.
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 ATL and subsequently breached such agreement. The plaintiffs in such action have stated an intention to file a separate claim for monetary damages and have estimated their losses to be several million dollars. The Company believes none of plaintiffs' claims in such 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 such action vigorously.
The Company is subject to 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 will not have a significant adverse effect on the financial position, results of operations or cash flows of the Company, if disposed of unfavorably.
12. Redeemable Preferred Stock:
In December 1993, the Company issued to investors affiliated with George Soros, a related party, 444,445 shares of Series H Cumulative Redeemable Convertible Preferred Stock at a price of $90 per share. The shares bear a dividend for five years, at a rate of five percent per year, payable quarterly. The shares are redeemable, at stated value, on October 31, 2000 only if the Company's common stock has not closed at an average price of $18 for any 20 consecutive trading days after the third anniversary of the date of issuance of the preferred shares. In the event that the shares are redeemed, the Company may elect to pay the redemption price in shares of its common stock, provided that the common shares will have an aggregate market value equal to 150% of the redemption value of the Series H shares being redeemed. The shares are convertible into common shares at any time at a ratio (adjusted for splits) of ten common shares for each preferred share. The holders of the Series H shares are entitled to vote on all matters voted on by common shareholders as if the Series H shares were converted to common stock. The Company has paid dividends of $2.0 million in each of the years ended December 31, 1995 and 1994.
13. Shareholders' Equity:
Preferred Stocks
In May 1995, the Company sold 531,463 shares of its Series L Cumulative Convertible Preferred Stock ("Series L Stock"), to Toronto Dominion Investments, Inc. ("TDI") for an aggregate purchase price of $5.0 million. In connection with this transaction, Vanguard Cellular Systems, Inc. ("Vanguard"), a stockholder of the Company, purchased an additional 531,463 shares of Series L Stock on September 1, 1995 (the "Transaction Date") for aggregate purchase price of $5.0 million. The shares pay a dividend of 7.5% per annum, contain a Common Stock conversion premium and can be redeemed by the Company in certain circumstances. The Company has paid dividends of $351,000 during the year ended December 31, 1995.
In May 1995, the Company sold 1,162.5 shares of its Series M Cumulative Convertible Preferred Stock ("Series M Stock"), to a group of investors for an aggregate purchase price of $11,625,000. The shares pay a dividend of 8.5% per annum, contain a Common Stock conversion premium and can be redeemed by the Company in certain circumstances. The Company has paid dividends of $592,000 during the year ended December 31, 1995.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13. Shareholders' Equity: continued
In April 1995, the Company sold $10.0 million of Series K Cumulative Convertible Preferred Stock ("Series K Stock") to an affiliate of the Company's partner in a joint venture which is attempting to secure a license to provide wireless services in Korea. The shares pay a dividend of 7% per annum for 5 years, carry a Common Stock conversion premium and can be redeemed by the Company in certain circumstances. The Company has paid dividends of $489,000 during the year ended December 31, 1995.
At December 31, 1994, there were 15 shares of Series E Preferred Stock and 20 shares of Series I Preferred Stock issued and outstanding. In May 1995, the Series E Preferred shares were cancelled. At December 31, 1993, there were 345,000 of Series A Preferred Stock and 30 shares of Series E Preferred Stock issued and outstanding. In February 1994 all of the Series A Preferred shares then outstanding were converted into an equal number of common shares.
In December 1994, the Company issued a total of 20 shares of Series I Convertible Preferred Stock at a price of $500,000 per share or total consideration of $10.0 million to investors affiliated with George Soros (currently holders of 100% of the Company's Series H Cumulative Convertible Preferred Stock). The shares bear a dividend, payable quarterly in either cash or common shares, for five years at a rate of 7% per annum and carry a conversion premium. The Company has the option to retire the shares, in either cash or common shares if the price of the Company's common stock exceeds 150% of the conversion price for any 20 days within a period of 30 consecutive days. The Company has paid dividends of $700,000 during the year ended December 31, 1995.
The Series E Preferred Shares were issued to collateralize principal payments required by certain subordinated debt of which $150,000 was outstanding as of December 31, 1994 and each share is convertible into common shares with a market value of $10,000 based upon market price prior to conversion. Holders of Series E shares are entitled to vote only on matters affecting the Company's preferred stock.
During 1993, 484,000 Series A and 42 Series G shares were converted into 1,323,000 common shares.
The Company's outstanding preferred shares earn cumulative annual dividends as follows: Series A (converted into common shares in 1994), $0.25 per share and Series G (converted into common shares in 1993 and 1992), $2,500 per share.
Common Stock
In February 1994 the Company sold 2.5 million shares of common stock to Vanguard Cellular Systems Inc. ("Vanguard") for a total of $30 million (before expenses of $750,000). See below for a description of the options issued to Vanguard.
In January 1993, the Company completed a private placement of 408,640 units, each consisting of nine common shares and three separate warrants to purchase one common share at an exercise price of $4.8125, expiring 18 months, 30 months and 42 months from issuance, respectively. Each unit was sold in consideration for $37.6876. Net proceeds to the Company amounted to approximately $14.4 million.
In order to finance a portion of the acquisition of National Band Three, the Company requested in June 1993 that warrant and option holders immediately exercise their right to purchase the Company's common stock. To induce the warrant and option holders to exercise early, the Company offered discounts from the original exercise price. The amount of the discount varied depending upon the expiration date of the warrant or option. The Company issued approximately 9,200,000 shares in connection with the exercise of options and warrants under this program. Net proceeds were approximately $23 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13. Shareholder's Equity: continued
Included in the 5.1 million common shares issued in connection with the PSI Merger (Note 2) were approximately 424,000 shares issued to PST in exchange for the PSI shares then owned by PST. The number of shares issued was determined using the same ratio as for other PSI shareholders. The Company has recorded the value of its ultimate ownership interest in these shares as treasury stock. In 1993 the Company cancelled the 1.2 million shares that were held in treasury at December 31, 1992.
Warrants and Options
A summary of the warrants and options activity during the years ended December 31, 1995, 1994 and 1993 is as follows (shares in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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13. Shareholder's Equity: continued
All options are vested upon issuance except those issued pursuant to the Employee / Director plan which are described below.
Employee/Director Stock Option Plan
The Company has a non-qualified stock option plan (the "Plan") which permits the granting of options to employees and directors to purchase up to 2.75 million shares at not less than fair market value on the date of grant. The options generally vest over three years and expire 10 years from the date granted. Of the options granted pursuant to this plan, options to purchase 1.5 million shares and 1.2 million shares, respectively, were vested as of December 31, 1995 and 1994.
Vanguard Options
In connection with Vanguard's purchase of the Series L Preferred Stock, the parties agreed to modify the terms of certain options (the "Options") to purchase shares of the Company's common stock granted to Vanguard pursuant to the Stock Purchase Agreement between the Company and Vanguard dated December 29, 1993. Pursuant to these modifications, the total number of shares of Common Stock subject to the Options was decreased from ten million shares to seven million shares. Of the remaining Options, Options to purchase two million shares of common Stock at $15.00 per share and two million shares of Common Stock at $16.00 per share expire September 1, 1996 ($16.00 per share options are subject to a March 1, 1997 extension under certain circumstances) and Options to purchase three million shares of Common Stock at $17.00 per share expire one year from the expiration of the $16.00 options. After giving effect to these modifications, Vanguard and TDI each hold one-half of the options exercisable at $15.00 per share, Vanguard holds six-sevenths of each of the Options exercisable at $16.00 and $17.00 per share, respectively and TDI holds one-seventh of each of the options exercisable at $16.00 and $17.00 per share, respectively.
Loan Warrants and Options
In connection with the issuance of the Discount Notes and the Replacement Notes, the Company issued approximately 6.8 million and 1.0 million warrants to purchase common stock, respectively.
Other Warrants and Options
In exchange for services rendered, the Company granted options to purchase 213,000 shares of common stock during 1993. The exercise prices on these option range between $1.00 and $6.00 per share and the options expire five years from date of grant.
14. Fair Value of Financial Instruments
The recorded amount of cash, cash equivalents, temporary investments and notes payable banks and other, approximates fair value due to the short term maturities of these assets and liabilities.
Investments in affiliates are accounted for by the equity method and pertain to equity investments in privately held companies for which fair values are not readily available. Management believes the fair values to be at least equal to carrying amounts. The asset and liability amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31, consisted as follows (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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15. Certain Other Related Party Transactions:
In connection with the issuance of common shares and options to Vanguard in February 1994, the Company entered into a five-year management consulting agreement with Vanguard, pursuant to which Vanguard will provide operational and marketing support to the Company for an aggregate of 1.5 million shares of common stock. Such management consulting agreement will terminate upon Vanguard's failure to exercise any of the Vanguard Options. For the periods ended December 31, 1995 and 1994, Vanguard earned approximately 300,000 and 258,000 shares, respectively, pursuant to this agreement, which has been recorded at approximately $2.4 million and $2.5 million, respectively, and is included in marketing expenses.
In 1995 and 1994, the Company incurred expenses of $300,000, pursuant to its consulting agreement with the Soros Group, who are the holders of the Company's Series H redeemable Preferred Shares and Series I Convertible Preferred Shares.
PST has entered into a subcontractor agreement with Rafael, the current holder of common shares, under which Rafael will partake in the development of the digital wireless communications system to be deployed by the Company in the U.S. Research and development expense for the years ended December 31, 1995, 1994 and 1993 includes approximately $12.5 million, $11.1 million and $7.0 million, respectively, for research performed by Rafael under this agreement. PST has also entered into agreements with Rafael under which Rafael will manufacture the infrastructure equipment to be used by PSI in its U.S. network. Through December 31, 1995 and 1994 the Company had placed firm orders for equipment and engineering totaling $22.6 million and $12.8 million, respectively and had made an advance payment (recorded in other current assets) of $1.2 million and $2.1 million to Rafael under these orders during the years ended December 31, 1995 and 1994, respectively.
In 1995, the Company issued 250,000 shares of common stock to Rafael in connection with the development of the digital wireless communications system. The shares have been valued at $2.0 million, which amount has been recorded in 1995 as research and development costs.
In October 1995, RDC converted all the principal and interest issued to it by PST under convertible debentures into shares of PST representing its 38% interest in PST. Geotek issued to Rafael 1.8 million shares of unregistered Company common stock in exchange for RDC's shares of PST. The Company valued the unregistered shares at $8.6 million and recorded the excess of the value of the shares over the fair value of the underlying assets of PST of $7.8 million as goodwill. As part of the arrangement, RDC was granted an option to purchase up to 10% of PST in certain circumstances. Additionally, in October 1995, Rafael purchased 338,000 shares of Company common stock for $3.0 million.
16. Segment Information:
The Company's operations have been classified into three business segments: wireless communications, communications products and other. The wireless communications group is engaged in the development of a digital wireless communication system, preparation for the commercial rollout of its wireless communications network in the United States, principally through its PSI and PST subsidiaries, provision of mobile radio services in the United States (PSI and MetroNet), the United Kingdom (NBTL), Germany (PBG and DBF) and the development of certain mobile data applications (GMSI). The development of a digital wireless communication system is primarily taking place in Israel. GMSI is located in Canada and markets its products in Canada, the United States and the United Kingdom.
The wireless communications group is relying on certain key suppliers of manufacturing and engineering for the development and mass-production of GeoNet's subscriber units. In addition, the wireless communications group has only a single manufacturing source for certain of the components of the GeoNet system hardware which includes the base station. Although the wireless communications group believes it can obtain all components necessary to build GeoNet from other sources, delays may be encountered in the event of a component shortage because of the time it may take to identify substitute sources and manufacture substitute components. This could adversely affect the results of operations in any given period.
Many of the target customers for GeoNet currently use other wireless communications services. In order to be successful, the Company will need to migrate a portion of its target customers from their existing services to those provided by the Company over GeoNet. The Company's ability to migrate its target customers over to its services will be highly dependent on the perceived utility of the Company's services to its target customers as compared to the services currently utilized by such customers. Because there currently is no integrated wireless communications network commercially available that is comparable to that expected to be offered by the Company over GeoNet, the extent of the demand for the Company's
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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16. Segment Information: continued
wireless communications services cannot be predicted with any degree of certainty. The demand for the Company's digital wireless communications services also could be affected by other matters beyond its control, such as the future cost of subscriber equipment, marketing and pricing strategies of competitors and general economic conditions.
The communications products group is principally engaged in the development, manufacturing and marketing of telephone and facsimile peripheral products and commercial audio and paging equipment in the United States (Bogen) and Munich, Germany (Speech Design). The other segment primarily consists of subsidiaries engaged in the manufacturing and marketing of customized transformers and power supplies and other diversified operations. The Company disposed of its transformer and power supply operations in 1993.
During 1995, the communications products group has decided to phase out of the Office Automation Services ("OAS") product line. The communications products group has taken a charge of $2.2 million related to this action of which $1.5 million relates to the writedown of its inventory to expected net realizable value. At December 31, 1995, the communications product group had $0.2 million of OAS inventory recorded in the financial statements.
Sales between geographic areas and industry segments are not material.
Information about the Company's segments in 1995, 1994 and 1993 follows (in thousands):
F - 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
16. Segment Information: continued
17. Subsequent Events:
In March 1996, the Company issued $75.0 million aggregate principal amount of its 12% Senior Subordinated Convertible Notes due 2001 (the "Convertible Notes"). Each Convertible Note is in the principal amount of $1,000, and beginning on March 5, 1997, will be convertible into shares of the Company's common stock, par value $0.1 per share (the "Common Stock"), at a conversion price equal to the lower of (i) $9.50 per share and (ii) the weighted average market price of the share of Common Stock for the ten trading day period immediately following the 90th day after the issuance date of the Convertible Notes, but shall in no event be less than $8.25 per share.
Cash interest on the Convertible Notes will accrue at the rate of 12% per annum and will be payable semiannually on each February 15 and August 15 commencing August 15, 1996. The Convertible Notes mature on February 15, 2001. In addition, the Company has the option to redeem the Convertible Notes, on or after February 15, 1999, in whole or in part, at a redemption price equal to 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, for the 12 month period beginning February 15, 1999, and at a redemption price equal to 105% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, on or after February 15, 2000. The Company also has the option, at any time on or after September 1, 1997, to require the conversion of all, but not less than all, of the then outstanding Convertible Notes into common stock at the conversion price then in effect if the closing price of the common stock for 20 of the 30 trading days and for the five trading days or exceeds 160% of the conversion price then in effect. The Convertible Notes are unsecured senior subordinated obligations
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
17. Subsequent Events: continued
of the Company. In addition, the indenture contains certain covenants that, subject to certain exceptions, restrict the ability of the Company and its Subsidiaries to engage in mergers and acquisitions.
Pursuant to a registration rights agreement (the "Registration Rights Agreement"), the Company has agreed to file registration statements under the Securities Act of 1933, as amended (the "Securities Act") with respect to the resale of the Convertible Notes and the issuance, or to the extent the registration of such issuance is permitted by applicable law the resale, of the Common Stock issuable upon conversion of the Convertible Notes. If the Company fails to register the Convertible Notes or the shares of Common Stock issuable upon the conversion thereof or otherwise comply with the procedures set forth in the Registration Rights Agreement within the time periods prescribed by the Registration Rights Agreement, the Company will be subject to substantial monetary penalties.
One of the investors in the Convertible Notes is affiliated with a director of the Company.
In March 1996, the Company and S-C Rig Investments - III, L.P. ("S-C Rig"), a significant stockholder of the Company and investment group affiliated with George Soros, reached an agreement in principal pursuant to which S-C Rig will make a $40.0 million unsecured credit facility available to the Company. It is anticipated that all borrowings under the credit facility will be required to be made within two years from the establishment of the credit facility. The borrowings will accrue interest at a rate of 10% per annum and will mature four years from the date of the final borrowing thereunder. It also is anticipated the Company will be obligated to pay S-C Rig a fee equal to 3% of each borrowing under the credit facility at the time of such borrowing. Borrowings under the credit facility will constitute senior indebtedness of the Company. In connection with the establishment of the credit facility, it is anticipated that the Company will issue to S-C Rig a five year warrant to purchase 4.2 million shares of Common Stock (subject to adjustment in certain circumstances) at an exercise price of $9.50 per share (subject to adjustment in certain circumstances). The transactions contemplated by the credit facility are subject to a number of conditions, including the negotiation and execution of definitive agreements and the authorization at the Company's next annual meeting of sufficient additional shares of Common Stock to permit the exercise in full of the warrant. There can be no assurance that the Company will consummate the transactions contemplated by the agreement in principal on the terms described above, or at all.
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information"):
In July and August 1995, the Company issued, in a private offering, $227.7 million aggregate principal amount at maturity of 15% Senior Secured Discount Notes due July 15, 2005 ("the Notes"). Gross proceeds of the Notes was approximately $110.0 million. The Notes were issued with 6,831,000 detachable warrants ("the Warrants"). Each Warrant entitles the holder to purchase one share of Company common stock at an exercise price of $9.90 per share. The Warrants have been valued at approximately $32.1 million and have been recorded as a discount on the Notes. The Notes accrue interest until maturity at a rate of 15% per annum. Interest on the Notes will be payable semi-annually, in cash, on July 15 and January 15, commencing January 15, 2001.
In connection with the Note offering, PowerSpectrum, Inc. and its U.S. Domestic Subsidiaries as well as MetroNet Systems, Inc. (collectively referred to as the "Guarantor Subsidiaries") fully and unconditionally guarantee such Notes jointly and severally. The Guarantor Subsidiaries are wholly owned by the Company. In addition, the 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 Communications GmbH and BCI, the entity through which, effective August 1995, the Company owns its interests in Bogen Communications, Inc. and Speech Design GmbH.
The Guarantor Information of Geotek Communications, Inc. and Subsidiaries has been presented on pages through in order to present the Guarantor Subsidiaries pursuant to the Guarantor relationship. The Guarantor Information is presented as management does not believe that
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
separate financial statements of the Guarantor Subsidiaries would be meaningful. This Guarantor Information should be read in conjunction with the Consolidated Financial Statements. The 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 Notes, the Condensed Consolidating financial information of the Guarantor Subsidiaries are presented on the following basis:
(1) Geotek Communications, Inc. -Investments in consolidated (Parent Company) subsidiaries are accounted for by the Parent Company on the cost basis for purposes of the Guarantor Information. Operating results of Subsidiaries are therefore not reflected in the Parent's investment accounts or earnings.
(2) PSI -For purposes of the Guarantor (Guarantor) Information, PowerSpectrum, Inc. ("PSI") includes all U.S. wireless subsidiaries of PSI combined with 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 PST, a subsidiary of PSI, since PST is not a Guarantor Subsidiary. Such statements of PST are included with Non-Guarantor Subsidiaries. The assets and liabilities of PST are not material in relation to PSI.
(3) Non-Guarantor -This includes the Company's Subsidiaries subsidiaries that are not Guarantor Subsidiaries.
(4) Reclassification and -Certain reclassifications were Eliminations 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING BALANCE SHEET As of December 31. 1995 (Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING BALANCE SHEET As of December 31, 1994 (Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 1995 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 1994 (Dollars in thousands)
F - 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year ended December 31, 1993 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Year Ended December 31. 1995 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Year Ended December 31. 1995 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS For the Year Ended December 31, 1994 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------
18. Condensed Consolidating Financial Information for Guarantors ("Guarantor Information") continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Year Ended December 31, 1993 (Dollars in thousands)
Registered no: 2672488
National Band Three Limited Annual report for the year ended 31 December 1995
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National Band Three Limited
Annual report for the year ended 31 December 1995
Registered no: 2672488
Pages
Directors and advisers
Directors' report -
Report of the auditors
Profit and loss account
Balance sheet
Cash flow statement
Notes to the financial statements -
F - 41
National Band Three Limited
Directors and advisers
Executive directors E J Watts S A Style R Conroy M Davey D Henson
Non-executive directors Y Eitan - Chairman Y Bibring G Calhoun A D Robb
Secretary and registered office S A Style Wren House Hedgerows Business Park Colchester Road Springfield CHELMSFORD Essex CM2 5PF
Registered Auditors Coopers & Lybrand 1 Embankment Place LONDON WC2N 6NN
Bankers National Westminster Bank Plc 21 Lombard Street LONDON EC3P 3AR
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National Band Three Limited
Directors' report for the year ended 31 December 1995
The directors present their report and the audited financial statements for the year ended 31 December 1995.
Principal activities
The profit and loss account for the period is set out on page 6.
The principal activities of the company are the expansion and operation of a national mobile communication system, under licences granted by the Department of Trade and Industry under the Telecommunications Act 1984 and the Wireless Telegraphy Act 1949.
Review of business
During the year the company continued to expand the capacity, coverage and facilities of the network. It has also invested in and strengthened its sales and marketing capability. This helped accelerate the growth in the subscriber base during the year and provided new products and services which will be the bedrock of future profitability. Both the level of business and the year end financial position were satisfactory, and the directors expect the level of activity to increase for the foreseeable future.
Dividends and transfers to reserves
The directors do not recommend the payment of a dividend. The profit for the period of (pound)1,605,000 (1994: loss (pound)508,000) has been taken to reserves.
Changes in fixed assets
The movements in fixed assets during the year are set out in note 9 to the financial statements.
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National Band Three Limited
Directors
The directors of the company during the year ended 31 December 1995 were:
A D Robb P M Ratcliffe (resigned 6 December 1995) G M Calhoun Y Eitan Y Bibring S A Style E J Watts R Conroy D Henson (appointed 5 May 1995) M Davey (appointed 12 October 1995)
Directors' interests
None of the directors held any interest in the shares of the company at 31 December 1995 (1994: None).
At the year end the directors held options over the shares of National Band Three's parent company, Geotek Communications, Inc.
Statement of directors' responsibilities
The directors are required by UK company law to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period.
The directors confirm that suitable accounting policies have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the financial statements for the year ended 31 December 1995. The directors also confirm that applicable accounting standards have been followed and that the financial statements have been prepared on the going concern basis.
The directors are responsible for keeping proper accounting records, for taking reasonable steps to safeguard the assets of the company and to prevent and detect fraud and other irregularities.
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National Band Three Limited
Auditors
A resolution to reappoint the auditors, Coopers & Lybrand, will be proposed at the annual general meeting.
By order of the board
S A Style Company Secretary 15 March 1996
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Report of the auditors to the members of National Band Three Limited
We have audited the balance sheets of National Band Three Limited as of 31 December 1995 and 1994 and the related statements of income, changes in shareholders' equity and cash flows for the years ended 31 December 1995 and 1994. The financial statements on pages to are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United Kingdom which do not differ in any significant respects from auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Band Three Limited, as of 31 December 1995 and 1994 and the results of their operations and cash flows for the years ended 31 December 1995 and 1994 in conformity with generally accepted accounting principles in the United Kingdom.
Accounting principles and financial statement presentation generally accepted in the United Kingdom vary in certain significant respects from accounting principles and financial statement presentation generally accepted in the United States. The application of these requirements would have affected the financial statement presentation and the determination of net income for the years ended 31 December 1995 and 1994 and of shareholders' equity as of 31 December 1995 and 1994, to the extent summarised in note 21 to the financial statements.
COOPERS & LYBRAND Coopers & Lybrand Chartered Accountants and Registered Auditors London 27 March 1996
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National Band Three Limited
Profit and loss account for the year ended 31 December 1995
Notes 1995 1994 (pound '000) (pound '000)
Turnover 2 15,835 12,887 Cost of sales (8,366) (8,524) ------- ------- Gross profit 7,469 4,363 Net operating expenses 3 (5,696) (4,707) ------- ------- Operating profit/(loss) 1,773 (344) Interest receivable and similar income 98 75 Interest payable and similar charges 6 (266) (266) ------- ------- Profit/(loss) on ordinary activities before taxation 7 1,605 (535) Tax on loss on ordinary activities 8 - 27 ------- ------- Retained profit/(loss) for the financial year 16 1,605 (508) ======= =======
All figures in the profit and loss account relate to continuing operations.
There is no difference between the profit on ordinary activities before taxation and the profit for the year as stated above, and their historical cost equivalents.
Statement of total recognised gains and losses
1995 1994 (pound '000) (pound '000)
Profit/(loss) for the financial period 1,605 (508) Prior year adjustment - 26 ----- ----- Total gains/(losses) recognised since last annual report 1,605 (482) ===== =====
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National Band Three Limited
Balance sheet at 31 December 1995
Notes 1995 1994 (pound '000) (pound '000)
Fixed assets Tangible assets 9 11,889 11,702 ------- ------- Current assets Stocks 10 193 77 Debtors 11 3,322 3,105 Cash at bank and in hand 1,817 1,627 ------- ------- Total current assets 5,332 4,809
Creditors: amounts falling due within one year 12 (9,727) (10,622) ------- ------- Net current liabilities (4,395) (5,813) ------- ------- Total assets less current liabilities 7,494 5,889 Provisions for liabilities and charges Deferred taxation 13 - - ------- ------- Net assets 7,494 5,889 ======= =======
Capital and reserves Called up share capital 14 9,000 9,000 Share premium account 15 8,800 8,800 Goodwill reserve 15 (58) (107) Profit and loss account 15 (10,248) (11,804) ------- ------- Total shareholders' funds 16 7,494 5,889 ======= =======
The financial statements on pages to were approved by the board of directors on 15 March 1996 and were signed on its behalf by:
/s/ E. J. Watts Director
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National Band Three Limited
Cash flow statement for the year ended 31 December 1995
Notes 1995 1994 (pound '000) (pound '000)
Net cash inflow from operating activities 17 3,024 2,857 ------- ------- Returns on investments and servicing of finance Interest received 98 75 Interest paid (266) (266) ------- ------- Net cash outflow from returns on investments and servicing of finance (168) (191) ------- -------
Taxation United Kingdom corporation tax paid - - ------- ------- Investment activities Purchase of goodwill - (25) Purchase of tangible fixed assets (2,801) (3,471) Sale of tangible fixed assets 135 66 ------- ------- Net cash outflow from investing activities (2,666) (3,430) ------- ------- Increase/(decrease) in cash and cash equivalents 18 190 (764) ======= =======
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National Band Three Limited
Notes to the financial statements for the year ended 31 December 1995
1 Principal accounting policies
The financial statements have been prepared in accordance with applicable Accounting Standards in the United Kingdom. A summary of the more important accounting policies, which have been applied consistently, is set out below.
Basis of accounting
The financial statements are prepared in accordance with the historical cost convention.
Goodwill
Goodwill arising on the acquisition of businesses is written off directly to an unrealised goodwill reserve. It is amortised to the profit and loss account reserve over five years, the directors' estimate of its useful economic life.
Tangible fixed assets
The cost of tangible fixed assets is their purchase cost, together with any incidental expenses of acquisition.
Depreciation is calculated so as to write off the cost of tangible fixed assets, less their estimated residual values, on a straight line basis over the expected useful economic lives of the assets concerned. The estimated useful lives used for this purpose are:
Short term leasehold improvements Over the term of the lease Plant and machinery Between three and ten years Fixtures and fittings Between three and five years Motor vehicles Four years
No depreciation is charged on assets in the course of construction.
Stocks
Stocks are stated at the lower of cost and net realisable value. Provision is made where necessary for obsolete, slow moving and defective stocks.
Turnover
Turnover, which excludes value added tax, represents the invoiced value of goods and services supplied.
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National Band Three Limited
Operating leases
Costs in respect of operating leases are charged on a straight line basis over the lease term.
Deferred taxation
Provision is made for deferred taxation, using the liability method, on all material timing differences to the extent that it is probable that a liability or asset will crystallise.
Pension costs
The company operates a "money purchase" pension scheme for the benefit of its employees.
The company provides no other post retirement benefits to its employees.
2 Turnover
Turnover consists entirely of sales in one class of business made in the United Kingdom.
3 Net operating expenses
1995 1994 (pound '000) (pound '000)
Selling and distribution costs 3,544 2,656 Administrative expenses 2,152 2,051 ----- ----- 5,696 4,707 ===== =====
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National Band Three Limited
4 Directors' emoluments
1995 1994 (pound' 000) (pound' 000)
Emoluments (including pension contributions and benefits in kind) 481 256 === ===
Emoluments (excluding pension contributions) include amounts paid to:
1995 1994 pound pound
The chairman Nil Nil ====== ======
The highest paid director 121,306 78,164 ====== ======
The number of directors (including the chairman and the highest paid director) who received emoluments (excluding pension contributions) within the following ranges was:
1995 1994 Number Number
pound 0 to pound 5,000 3 3 pound 5,001 to pound 10,000 - 2 pound 10,001 to pound 15,000 1 - pound 30,001 to pound 35,000 - 1 pound 40,001 to pound 45,000 1 - pound 45,001 to pound 50,000 - 1 pound 60,001 to pound 65,000 1 - pound 65,001 to pound 70,000 2 - pound 70,001 to pound 75,000 1 1 pound 75,001 to pound 80,000 - 1 pound 120,001 to pound 125,000 1 - === ===
A provision of (pound) 95,000 has been established in these financial statements in respect of bonus payments which may be made to directors at the company's discretion. As these bonuses have not yet been approved, the above disclosures include no amounts in respect of bonuses for the year. However, bonus payments made in relation to the year ended 31 December 1994 are included above.
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National Band Three Limited
5 Employee information
The average weekly number of persons (including executive directors) employed by the company during the year was:
1995 1994 Number Number
By activity Administration 26 22 Technical 43 45 Marketing 38 34 ----- ----- 107 101 ===== =====
(pound '000) (pound '000)
Staff costs (for the above persons) Wages and salaries 2,766 2,407 Social security costs 277 243 Other pension costs 154 104 ----- ----- 3,197 2,754 ===== =====
6 Interest payable and similar charges
1995 1994 (pound '000) (pound '000)
Interest payable on sums owed to parent undertaking 266 266 === ===
7 Profit/(loss) on ordinary activities before taxation
1995 1994 (pound '000) (pound '000)
The profit/(loss) on ordinary activities before taxation is stated after charging/(crediting): Depreciation 2,362 2,355 Auditors' remuneration 20 17 Auditors' remuneration for non-audit services 18 11 Rentals under operating leases on land and buildings 1,168 1,122 Hire of equipment under operating leases 1,358 1,578 Profit on disposal of fixed assets (58) (44) ====== ======
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National Band Three Limited
8 Tax on loss on ordinary activities
1995 1994 (pound '000) (pound '000)
United Kingdom corporation tax at 33% (1994: 33%) Deferred Nil 27 ===== =====
No charge arises for corporation tax in the year due to losses brought forward from previous years.
9 Tangible fixed assets
Included in the above are assets under construction to the value of (pound)235,000 (31 December 1994: (pound) 265,000) which did not incur depreciation during the year.
The adjustments relate to costs provided for and capitalised by the company in previous years which are not payable.
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National Band Three Limited
10 Stocks
1995 1994 (pound '000) (pound '000)
Goods for resale 193 77 === ===
11 Debtors
1995 1994 (pound '000) (pound '000) Amounts falling due within one year Trade debtors 1,955 2,022 Amounts owed by fellow subsidiary undertakings 155 - Other debtors 136 73 Prepayments and accrued income 1,076 1,010 ----- ----- 3,322 3,105 ===== =====
12 Creditors: amounts falling due within one year
1995 1994 (pound '000) (pound '000)
Trade creditors 2,106 2,362 Amount owed to parent undertaking 4,432 4,432 Other taxes and social security 215 212 Accruals and deferred income 2,974 3,616 ----- ----- 9,727 10,622 ===== =====
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National Band Three Limited
13 Deferred taxation
The total liability to deferred taxation is as follows:
No provision has been made for deferred taxation on these financial statements as the above potential liability is covered by corporate tax losses carried forward.
14 Called up share capital
1995 1994 (pound '000) (pound '000) Authorised 12,000,000 ordinary shares of pound 1 each 12,000 12,000 ====== ====== Allotted, called up and fully paid 9,000,000 ordinary shares of pound 1 each 9,000 9,000 ====== ======
15 Share premium account and reserves
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National Band Three Limited
16 Reconciliation of movements in shareholders' funds
1995 1994 (pound '000) (pound '000)
Profit/(loss) for the financial year 1,605 (508) Goodwill written off - (25) ----- ----- Net movement in shareholders' funds 1,605 (533) Opening shareholders' funds 5,889 6,422 ----- ----- Closing shareholders' funds 7,494 5,889 ===== =====
17 Reconciliation of operating profit/(loss) to net cash inflow from operating activities
1995 1994 (pound '000) (pound '000)
Operating profit/(loss) 1,773 (344) Profit on sale of tangible fixed assets (58) (44) Depreciation of tangible fixed assets 2,362 2,355 Amounts written off fixed assets 175 - Increase in stocks (116) (71) Increase in debtors (217) (490) (Decrease)/increase in creditors (895) 1,451 ------ ------ Net cash inflow from operating activities 3,024 2,857 ====== ======
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National Band Three Limited
18 Cash and cash equivalents
1995 1994 (pound '000) (pound '000)
Changes in the period At 1 January 1995 1,627 2,391 Net cash inflow/(outflow) 190 (764) ----- ----- At 31 December 1995 1,817 1,627 ===== =====
1995 1994 (pound '000) (pound '000)
Analysis of balances Cash at bank and in hand 1,817 1,627 ===== =====
19 Financial commitments
Capital commitments 1995 1994 (pound '000) (pound '000)
Contracted for but not provided 1,490 1,242 ===== =====
Authorised but not yet contracted for Nil 18 ===== ====
Operating lease commitments
At 31 December 1995 the company had annual commitments under non-cancellable operating leases, as follows:
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National Band Three Limited
20 Ultimate parent company
The directors regard Geotek Inc (formerly Geotek Industries, Inc), a company incorporated in the United States of America, as the ultimate parent company. Copies of the parent's consolidated financial statements may be obtained from The Secretary, Geotek Communications, Inc. 20 Craig Road, Montvale, New Jersey 07645, United States of America.
21 Summary of differences between UK GAAP and US GAAP
These Financial Statements are prepared in British Pounds and presented in accordance with UK GAAP which differs in certain significant respects from US GAAP. These differences, which have a signigicant effect on consolidated net income and shareholders' equity, are discussed and quantified in a table of adjustments below. While this is not a comprehensive summary of all differences between UK GAAP and US GAAP, other differences are immaterial.
Significant differences between UK GAAP and US GAAP
(a) Deferred income taxes
Under UK GAAP, deferred taxes are only provided on timing differences where it is considered probable that such taxes will become payable in the foreseeable future. Under SFAS No. 109, "Accounting for Income Taxes", US GAAP requires deferred taxes to be provided in full under the liability method. There is no net adjustment recorded to the deferred income tax accounts for them to comply with US GAAP. Taxes on income presented in 1995 reflects the utilization of a (pound)770,000 pre-acqusition net operating loss which had a full valuation allowance established at the time of acquisition by the Company. The utilization of this net operating loss has been recorded in 1995 as a reduction to intangible assets.
(b) Goodwill
Under UK GAAP, the Company eliminates goodwill against reserves in the year in which it arises. US GAAP requires that goodwill is capitalized and amortized through the income statement over the estimated period of benefit. Additionally, under applicable rules of "push-down accounting" goodwill associated with the Parent Company's acquisition of the Company was "pushed down" onto the books of the Company at the time of the acquisition. The Parent Company's policy is to amortize goodwill on a straight line basis over 20 years. Amortization expense relating to goodwill was (pound)260,000 for December 31, 1995 and 1994. The carrying value of goodwill at December 31, 1995 after the adjustment for utilization of pre-acquisition net operating loss (see (a)) and amortization was (pound)4,000,000.
(c) Statements of Cash Flows
The Company prepares its Consolidated Statements of Cash Flows under United Kingdom Financial Reporting Standard No. 1, "Cash Flow Statements" ("FRS 1"). Its objectives and principles are similar to those set out in the US Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows" ("SFAS 95").
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National Band Three Limited
The principal differences between the standards relate to classification. Under FRS 1, the Company presents its cash flows as (a) operating activities; (b) returns on investments and servicing of finance; (c) taxation; (d) investing acivities; and (e) financing activities. SFAS 95 requires only three categories of cash flow activity; (a) operating; (b) investing; and (c) financing. Cash flows from taxation and returns on investments and servicing of finance shown under FRS 1 would be included as operating activities SFAS 95.
Statements of income
The following is a summary of significant items which reconcile the statements of income form that reported under UK GAAP to that which would be reported has US GAAP been applied.
Year Ended Year Ended 31, December 31, December 1995 1994 (pound '000) (pound'000) --------------- ------------ Net income (loss) as shown in the financial statements (pound)1,605 (pound)(508) US GAAP adjustments: Amortization of goodwill (260) (260) Taxes on Income (770) -----
Net income (loss) under US GAAP (pound) 575 (pound)(768) =========== ============
Shareholders' Funds
The following is a summary of the signigicant items which reconcile shareholders' funds from that reported under UK GAAP to that which would be reported had US GAAP been applied.
As of December 31, (pound '000) ----------------- 1995 1994 ---- ---- Shareholders' funds shown in the financial statements (pound)7,494 (pound)5,889 US GAAP adjustments: Goodwill 4,000 5,030 Deferred Income Tax -- -- --------- ---------
Shareholders' funds under US GAAP (pound)11,494 (pound)10,919 ============= =============
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Bogen Communications Internatioal, Inc. and Subsidiaries
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[Letterhead of Coopers & Lybrand L.L.P.]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Bogen Communications International, Inc.:
We have audited the accompanying consolidated balance sheets of BOGEN COMMUNICATIONS INTERNATIONAL, INC. and SUBSIDIARIES (formerly European Gateway Acquisition Corp.) as of December 31, 1995 and 1994, and the related statements of operations, common stock subject to possible redemption and stockholders' equity and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bogen Communications International, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the two years then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
March 21, 1996 New York, New York.
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[Letterhead of Coopers & Lybrand L.L.P.]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Bogen Communications International, Inc.:
We have audited the accompanying consolidated statements of operations, common stock subject to possible redemption and stockholders' equity and cash flows of BOGEN COMMUNICATIONS INTERNATIONAL, INC. and SUBSIDIARIES (formerly European Gateway Acquisition Corp.) for the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Bogen Communications International, Inc. and Subsidiaries for the year ended December 31, 1993, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
March 21, 1996 New York, New York.
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 and 1994 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995 1994 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,276 $ 148 Accounts receivable (less allowance for doubtful accounts of $424 and $365 at December 31, 1995 and 1994, respectively) 4,992 6,035 Inventory, net (Note 2) 6,922 8,158 Prepaid expenses and other current assets 1,042 1,294 -------- --------
TOTAL CURRENT ASSETS 14,232 15,635 Property and equipment, net (Note 3) 2,191 2,024 Goodwill and intangible assets, net (Note 4) 14,706 15,055 Other assets 175 152 -------- -------- TOTAL ASSETS $ 31,304 $ 32,866 ======== ======== LIABILITIES CURRENT LIABILITIES: Amounts outstanding under revolving credit agreements (Note 5) $ 4,944 $ 5,635 Accounts payable, including cash overdrafts of $-0- and $238 at December 31, 1995 and 1994, respectively 2,861 3,645 Accrued expenses 3,610 2,029 Income taxes payable 1,353 89 Advances and notes payable to related parties (Note 6) 537 2,662 Current maturities of notes payable to non-related parties 174 573 -------- -------- TOTAL CURRENT LIABILITIES 13,479 14,633 Advances and notes payable to related parties (Note 6) 3,458 5,039 Notes payable to non-related parties (Note 6) -- 174 Other long term liabilities (Note 8) 674 649 Minority interest 550 547 -------- -------- TOTAL LIABILITIES 18,161 21,042 -------- -------- Commitments and contingencies (Note 8) Common stock - subject to possible redemption, 309,845 shares at redemption value -- 1,575 -------- -------- STOCKHOLDERS' EQUITY (Note 9) Common stock - $.001 par value; 50,000,000 shares authorized; 5,759,350 and 1,615,155 shares issued and outstanding at December 31, 1995 and 1994, respectively 6 2 Additional paid-in capital (Notes 9 and 10) 19,175 12,638 Accumulated deficit (6,185) (2,428) Cumulative currency translation adjustments 147 37 -------- -------- TOTAL STOCKHOLDERS' EQUITY 13,143 10,249 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,304 $ 32,866 ======== ========
Accompanying notes are an integral part of these financial statements
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
POST - PUSHDOWN PRE-PUSHDOWN 1995 1994 1993 ----------- ----------- -----------
Net sales (Note 14: phase-out of OAS Product Line) $ 44,518 $ 45,922 $ 30,072
Cost of goods sold (including charges of $2,222, $1,273 and $115 to reduce certain inventory to market value for the years ending December 31, 1995, 1994 and 1993, respectively)(Note 14) 27,338 29,739 18,449 ----------- ----------- -----------
Gross profit (Note 14) 17,180 16,183 11,623
Operating expenses: Research and development (Note 14) 2,307 1,999 1,696 Selling, general and administrative (Note 14) 15,067 12,555 9,140 Amortization of goodwill and intangible assets (Note 9) 443 424 18 ----------- ----------- -----------
Income (loss) from operations (637) 1,205 769
Other (income) expenses: Other (income) (237) (39) -- Interest expense, net 587 498 342 Interest expense - related parties 619 696 427 Transaction costs 1,491 -- -- Minority interest of consolidated subsidiaries 184 326 37 ----------- ----------- -----------
(Loss) before provision for income taxes (Note 14) (3,281) (276) (37)
Provision for income taxes (Note 7) (1,262) (79) -- ----------- ----------- -----------
Net (loss) $ (4,543) $ (355) $ (37) =========== =========== ===========
Net (Loss) per common share: Net (Loss) $ (1.37) (0.18) $ (0.04) =========== =========== ===========
Weighted Average number of common Shares Outstanding (Note 13) 3,311,668 1,925,000 865,506 =========== =========== ===========
Accompanying notes are an integral part of these financial statements
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK SUBJECT TO POSSIBLE REDEMPTION AND STOCKHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of these financial statements
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS OF DOLLARS)
Accompanying notes are an integral part of these financial statements
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BOGEN COMMUNCATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Accompanying notes are an integral part of these financial statements
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1. Summary of Significant Accounting Policies
A. Principles of Consolidation
The consolidated financial statements of Bogen Communications International, Inc., formerly European Gateway Acquisition Corp. (the "Company"), include the accounts of Bogen Corporation, Inc. ("Bogen") and Speech Design GmbH ("Speech Design"). All significant intercompany balances and transactions have been eliminated in consolidation. Certain 1994 and 1993 balances have been reclassified to conform with the 1995 presentation.
B. Nature of Operations
The Company's operations are conducted in one segment engaged in the development, manufacturing, and marketing of communication products. Product lines sold by the company are further described below:
Telephone Products ("Telco")
Commercial Audio Products ("Commercial Sound")
Intercom/Paging Equipment ("Engineered Systems")
Small Office/Home Office Products("OAS")
C. Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
D. Basis of Presentation
On August 21, 1995, the Company acquired a 99% interest in Bogen and a 67% interest in Speech Design. The Company paid Geotek Communications, Inc. ("Geotek") $7,000 in cash, a convertible promissory note in the aggregate principal amount of $3,000 and 3,700,000 shares of the Company's common stock and warrants to acquire 200,000 shares of common stock of the Company. As a result, Geotek acquired approximately 64% of the stock of the Company, thereby giving it a controlling interest in the Company. Geotek, in addition, forgave approximately $7,155 of intercompany indebtedness from Bogen as part of the transaction. Further, as contingent consideration, the Company could be liable to pay Geotek an amount up to $11,000, or receive up to $2,500 from Geotek, based upon the operating results of the Company during the two years after the transaction. For accounting purposes, the acquisition is being treated as a joint acquisition of the Company by Bogen and Speech Design, companies under the common control of Geotek. The transaction is considered a reverse acquisition with Geotek as the acquiror for accounting purposes. The historical financial statements reflect the combination of Bogen and Speech Design in a manner similar
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
to a pooling-of-interests. Accordingly, the historical financial statements reflect the combined operations of Bogen and Speech Design.
E. Transaction Costs
The Company incurred transaction costs of $1,491 in connection with the acquisition of Bogen and Speech Design which have been charged to non-operating expenses for the year ended December 31, 1995. These costs consist of non-recurring legal and other professional fees and other costs of the transaction amounting to $751 and a non-cash charge of $740 for the estimated fair value of 132,400 shares of common stock of the Company and warrants to purchase 60,000 shares of the Company's common stock at $5.25 per share, for services provided to the Company in connection with facilitating the acquisition of Bogen and Speech Design.
F. Revenue Recognition
Product revenue, net of expected returns, is recognized upon shipment.
G. Goodwill
As explained in Note 1D, the acquisition of Bogen and Speech Design is being accounted for as a reverse acquisition by Geotek. Accordingly, no goodwill will arise from the transaction described above as it is being accounted for on a historical cost basis.
Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill also includes the effect of push-down accounting described below, by which Bogen recorded in its financial statements Geotek's goodwill associated with its purchase of Bogen. Goodwill is being amortized using the straight-line method over 40 years. At each balance sheet date, management assesses whether there has been a permanent impairment in the net carrying value of goodwill and the amount, if any, of such impairment by comparing anticipated undiscounted future cash flows from operating activities with the carrying value of goodwill. The factors considered by management in performing this assessment include current operating results, trends, the effect of obsolescence, demand, competition and certain other economic factors.
Through a series of transactions from 1991 through 1993, Geotek acquired for an aggregate consideration of approximately $8,400, 91% of Bogen. The purchase price included $1,500 in cash and short-term notes payable, the issuance of approximately 1,559,000 shares of Geotek's common stock and the conversion of $5,200 of Bogen's debt. In January 1994, Geotek completed a tender offer whereby its interest in Bogen increased from 91% to 99% in exchange for 230,300 shares of Geotek's common stock valued at approximately $3,300. Since Geotek acquired a greater than 95% interest in Bogen, pursuant to the rules of push-down accounting, the acquisition gave rise to a new basis of accounting and the goodwill related to Geotek's acquisition was "pushed-down" to the financial
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
statements of Bogen. Accordingly, Bogen recorded net goodwill in the amount of $14,300 million in the first quarter of 1994. The goodwill is being amortized over its then remaining life of approximately 38 years. The related amortization expense for the pushed down goodwill was approximately $376 for the years ended December 31, 1995 and 1994.
The consolidated financial statements as of and for the year ended December 31, 1993 were prepared using the Company's historical basis of accounting (Pre-Pushdown basis of accounting). The consolidated financial statements as of and for the years ended December 31, 1995 and 1994, were prepared under a new basis of accounting that reflects the additional goodwill pushed down from Geotek (Post-Pushdown basis of accounting). Comparability of operating results for the pre-pushdown and post-pushdown periods are affected by the additional amortization of goodwill.
Goodwill in the amount of $739 represents the excess of cost over the fair value of net assets acquired by Speech Design related to the acquisition of its 67% owned subsidiary Satelco.
H. Cash and Cash Equivalents
Cash includes cash on-hand and all highly-liquid debt instruments purchased with original maturities of three months or less. The Company has invested approximately $500 in a Certificate of Deposit in one bank at December 31, 1995.
I. Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. Reserves are established for valuation purposes or determined by management on a periodic basis, as required by conditions of obsolescence.
J. Property and Equipment
Property and equipment is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful life of the asset which generally ranges from three to ten years. Leasehold improvements are amortized ratably over their remaining lease terms, or estimated useful lives, if shorter.
Expenditures for maintenance, repairs and renewals of minor items are charged to operations as incurred. Major renewals and improvements are capitalized. Upon disposition, the cost and related accumulated depreciation is removed from the accounts and the resulting gain or loss is reflected in operations for the period.
K. Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). FAS 109 is an asset and liability
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns.
L. Net Loss Per Share
Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding. Common stock equivalents are excluded from the shares outstanding since the effect would be antidilutive.
M. Credit Risk
The Company develops, produces, markets and sells commercial audio, electronic, paging, communications and other equipment. The Company performs on-going credit evaluations of its customers. The accounts receivable resulting from its sales transactions generally are not collateralized. The Company provides reserves for potential losses from these receivables.
N. Translation of Foreign Currencies
Assets and liabilities of the Company are translated from local currencies into U.S. dollars at the exchange rates in effect at the end of the period. Revenue and expense accounts are translated at average exchange rates prevailing during the period. Local currencies are considered to be the functional currencies of the Company and its subsidiaries. Translation adjustments that arise from translation of the Company and its subsidiaries' financial statements are accumulated in a separate component of shareholder's equity. Transaction gains and losses that arise from exchange rate changes on transactions denominated in a currency other than local currencies are included in income as incurred.
In the consolidated statements of cash flows, financing activities have been reflected at average rates for the years.
O. Fair Value of Financial Instruments
The recorded amount of cash, cash equivalents, notes payable and advances, approximates fair value due to the short term maturities of these assets and liabilities.
P. Recently Issued Accounting Pronoucements
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which is effective for fiscal years beginning after December 31, 1995. The Company will adopt this standard in 1996 and is presently analyzing the impact of this new standard on its financial position and results of operations.
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" which is effective for fiscal years beginning after December 15, 1995. The Company is still assessing the impact of implementing this new standard and can therefore not predict the effect on the Company's financial position and results of operations.
2. Inventory
Inventory, at the lower of cost (first in, first out) or market, as of December 31, 1995 and 1994, is as follows:
1995 1994 ------ ------ Raw materials and supplies $1,864 $1,985 Work in progress 1,155 758 Finished goods 3,903 5,415 ------ ------
TOTAL $6,922 $8,158 ====== ======
The inventory balances are net of a reserve for inventory valuation and obsolescence of $2,552 and $1,267 at December 31, 1995 and 1994, respectively.
3. Property and Equipment
Property and equipment at December 31, 1995 and 1994 is comprised of the following items:
1995 1994 ------- -------
Machinery, equipment and tooling $ 3,363 $ 2,735 Furniture and office equipment 1,485 1,367 Leasehold improvements 600 542 ------- ------- 5,448 4,644 Less: accumulated depreciation and amortization, net of disposals (3,257) (2,620) ------- -------
$ 2,191 $ 2,024 ======= =======
Depreciation and amortization expense was approximately $868, $574 and $428 for the years ended December 31, 1995, 1994 and 1993, respectively.
4. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following, at December 31, 1995 and 1994:
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995 1994 -------- --------
Goodwill $ 16,345 $ 16,345 Other intangibles 123 29 -------- --------
Total intangibles 16,468 16,374
Less: accumulated amortization (1,762) (1,319) -------- --------
$ 14,706 $ 15,055 ======== ========
Amortization of goodwill and other intangibles was approximately $443, $424 and $18 for the years ended December 31, 1995, 1994 and 1993, respectively.
5. Revolving Credit Agreeements
In August 1995, Bogen extended a $10,000 domestic revolving senior line of credit for a two year term expiring August 1997. The line is collateralized by substantially all the assets of Bogen and is guaranteed by Geotek. Advances bear interest at the rate of 2% to 2.75% over the lender's prime rate. At December 31, 1995, the lender's prime rate was 8.75%. Advances to Bogen are made based on a percentage of accounts receivable and inventory.
As of December 31, 1995 and 1994, Bogen had short term domestic borrowings outstanding under the line of credit of $3,670 and $4,350. The amounts available under the credit line based upon accounts receivable and inventory were $437 and $264 at December 31, 1995 and 1994, respectively. Under the terms of the line of credit, Bogen cannot, among other actions, declare or pay any dividends, return capital to its stockholders or redeem or repurchase any of its outstanding capital stock. Net assets of Bogen restricted under this agreement were $14,820 and $10,839 at December 31, 1995 and 1994, respectively.
In August 1995, in connection with the Company's acqusisition of Bogen and Speech Design, Geotek also agreed to provide Bogen with a working capital line of credit for two years in the aggregate principal amount of $2,000. Amounts drawn under the line bear interest at 1% per annum above the rate Bogen pays for its then largest credit facility. There were no borrowings under this facility at December 31, 1995.
At December 31, 1995 and 1994, Speech Design had short term lines of credit and overdraft facilities available of $3,453 and $1,863, respectively, of which short term borrowings amounted to $1,274 and $1,285, respectively. The amounts available under these credit lines were $2,179 and $578 at December 31, 1995 and 1994, respectively, with rates tied to short-term bank notes.
Total outstanding revolving lines of credit are summarized as follows at December 31:
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1995 1994 ------ ------ Domestic Lines of Credit Utilized $3,670 $4,350 Foreign Lines of Credit Utilized: Speech Design 627 728 Satelco 647 557 ------ ------
$4,944 $5,635 ====== ======
6. Long-Term Debt
A: ADVANCES and NOTES PAYABLE TO RELATED PARTIES
Advances and notes payable to related parties at December 31, 1995 consist of the following:
1995 1994 ------- -------
Advances from Geotek $ 138 $ 4,840 Notes Payable - Geotek (at prime rate + 1 1/8%) -- 1,565 Notes Payable - Geotek (at prime rate) -- 333 Notes Payable - Geotek (at prime rate + 1%) 133 267 Notes Payable - Geotek 266 381 Loan to Related Party 317 315 Notes Payable - Geotek (at 13%) 3,141 -- ------- ------- Total 3,995 7,701 Less: Current Maturities (537) (2,662) ------- ------- $ 3,458 $ 5,039 ======= =======
Advances from Geotek
The $4,840 non-interest bearing advance from Geotek to Bogen was forgiven in connection with the acquisition of Bogen by the Company and was recorded as a contribution to equity on August 21, 1995 (the date of the acquisition). The remaining $138 consists of net current advances made subsequent to the acquisition.
Notes Payable - Geotek (at prime rate + 1 1/8%)
This $1,565 note was also forgiven in connection with the acquisition of Bogen by the Company and was recorded as a contribution to equity at the date of acquisition. Prior to conversion into equity, principal installments of $39 per quarter were made plus interest at the prime rate plus 1 1/8%.
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Notes Payable - Geotek (at prime rate)
This $333 note was also forgiven in connection with the acquisition of Bogen by the Company and was recorded as a contribution to equity at the date of acquisition. Prior to conversion into equity, principal installments of $4 per month were made plus interest at the prime rate.
Notes Payable - Geotek (at prime rate + 1%)
This note payable to Geotek from Speech Design is payable in quarterly installments of $33 plus interest at the prime rate plus 1%.
Notes Payable - Geotek
This note payable to Geotek is from Satelco, a 67% owned subsidiary of Speech Design, and is payable in quarterly installments of $87 beginning in September, 1995 plus annual payments of interest at the Swiss prime rate plus 1%.
Loan to Related Party
This $315 original note from the minority shareholders of Satelco is payable in quarterly installments of $31 plus interest at the Zurich Kantonal Bank rate with installments beginning February, 1995. The payments of this note have been suspended (with the approval of the noteholder) until such time as the Satelco subsidiary becomes profitable. Accordingly, this note payable has been classified as long-term.
Notes Payable (by the Company) to Geotek
This note payable to Geotek from the Company was incurred at the date of acquisition for $3,000 plus interest payable quarterly in arrears at varying rates equal to the Company's current borrowing rate from CIT plus 2%. This note is due in February, 1997. These notes are convertible into Common Stock of the Company at any time under a conversion formula. These notes can be prepaid at any time which would void the conversion feature.
B: NOTES PAYABLE TO NON-RELATED PARTIES
Notes payable to non-related parties at December 31, 1995 consist of the following:
1995 1994 ----- ----- Various Notes Payable (at prime rate) $ 60 $ 202 Notes Payable (with imputed interest 9%) -- 147 Notes Payable (with imputed interest at 9%) 37 177 Notes Payable (at 12% interest rate) 12 62 Notes Payable to Bank (at 8.5% interest rate) 65 159 ----- ----- Total 174 747 Less: Current Maturities (174) (573) ----- ----- $ -- $ 174 ===== =====
Various Notes Payable (at prime rate)
Payable in monthly installments of $12 plus interest at the prime [ ] rate.
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Notes Payable (with imputed interest at 9%)
Payable in monthly installments of $12 including imputed interest at 9%.
Notes Payable (with imputed interest at 9%)
Payable in annual installments of $150 including imputed interest at 9%.
Notes Payable (at 12% interest rate)
Payable in monthly installments of $4 plus interest at 12%.
Notes Payable to Bank (at 8.5% interest rate)
Payable by Speech Design in quarterly installments plus interest of 8.5%.
Principal maturities of long-term debt over the next five years and thereafter are as follows:
Related Parties Other Total ------ ------ ------ 1996 $ 537 $ 174 $ 711 1997 3,141 -- 3,141 1998 -- -- -- 1999 -- -- -- 2000 -- -- -- Thereafter 317 -- 317 ------ ------ ------
$3,995 $ 174 $4,169 ====== ====== ======
7. Income Taxes
The Company's payable for income taxes consists of the following:
1995 1994 ------ ------ Foreign: Speech Design $1,353 $ 89 ------ ------
TOTAL INCOME TAXES PAYABLE $1,353 $ 89 ====== ======
The components of income tax expense (all foreign) are as follows for the years ended December 31:
1995 1994 1993 ------ ------ ------
Current income tax $1,257 $ 65 $ 0 Current corporation tax 5 14 0 ------ ------ ------
$1,262 $ 79 $ -0- ====== ====== ======
Income tax expense for 1995 and 1994 differs from the amount computed by applying the U.S. federal statutory rates due to losses in the U.S. for which no benefit
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
has been provided offset by foreign taxable income at tax rates different than the U.S. federal statutory rate.
The Company had net operating loss ("NOL") carryforwards for U.S. tax purposes of approximately $6,746 as of December 31, 1995, which expire between the years 2004 through 2010. Under Section 382 of the Internal Revenue Code of 1986, as amended, the net operating loss carryforwards are subject to certain limitations on their utilization as a result of the changes in control of the Company in 1991 and 1995.
The components of deferred tax assets at December 31, 1995 and 1994, were approximately as follows:
1995 1994 ------- ------- Deferred Tax Assets:
NOL carryforwards $ 2,601 $ 1,886 Deferred rent 251 194 Inventory Reserves 972 642 Allowance for Doubtful Accounts 163 116 Other 844 294 ------- -------
TOTAL DEFERRED TAX ASSETS 4,831 3,132
Less, valuation allowance (4,831) (3,132) ------- -------
NET DEFERRED TAX ASSETS $ -0- $ -0- ======= =======
In accordance with SFAS No. 109, the Company has established a valuation allowance of $4,831 and $3,132 for the years ended December 31, 1995 and 1994, respectively, offsetting the tax benefit of the deferred tax assets, principally the NOL carryforwards, to the extent the benefit is not expected to be realized.
8. Commitments and Contingencies
Operating Leases
The Company occupies its plant and office facilities and operates certain equipment under leases expiring at various dates through 2004. The facility lease contains an escalation clause and provides for payments of taxes and expenses over base rent. The facility lease also contains a five year renewal option.
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
The minimum annual rental commitments over the next five years under operating leases are as follows:
Year Ending December 31, ------------ 1996 $ 1,127 1997 1,116 1998 1,039 1999 954 2000 872 Thereafter 807 ------ $5,915 ======
Bogen's facility lease includes scheduled rent increases over the lease term. Rent expense has been recorded on a straight-line basis and the related deferred rent obligation of $597 and $554 at December 31, 1995 and 1994, respectively, is classified as a long-term liability.
Rent expense charged to operations totaled approximately $1,055, $779 and $787 for the years ended December 31, 1995, 1994 and 1993, respectively.
Employment and Consulting Agreements
In March 1991, Bogen entered into an employment agreement with an officer which, among other things, provided for annual compensation of approximately $150 and a bonus equal to 5% of pre-tax earnings. In the first quarter of 1993, the officer resigned from the Company. As a result, in 1993, the Company recorded a charge of $50 for a severance payment pursuant to the termination agreement with such officer. This payment was made by Geotek on behalf of the Company and has been treated as a capital contribution in 1993. Other officers of the Company are employed pursuant to written agreements with Geotek and the Company.
Commitments
At December 31, 1995, the Company had commitments to purchase merchandise from foreign vendors of $694 under documentary letters of credit and $133 under other sight documents. In addition, the Company has commitments to purchase from certain foreign vendors raw materials with a value of approximately $28. Pursuant to the sale of Aryt Optronics, Ltd. by Geotek in 1992, the Company obtained certain benefits and concessions from Reshef Technologies, Ltd. ("Reshef"), formerly a related company to Bogen. Such concessions and benefits would be lost by the Company if certain target purchases from Reshef were not met. Purchases made under this agreement complied with the target purchase requirements and approximated $3,612, $6,284 and $3,100 in 1995, 1994 and 1993, respectively. The
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BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
concessions and benefits from Reshef expired on December 31, 1995.
Litigation
On April 13, 1995, a settlement of litigation was reached between AccessLine Technologies, Inc. ("AccessLine") and Bogen, that was effective January 1, 1995. Accessline had alleged patent infringement by Bogen's "Friday" product line and had sought unspecified damages from Bogen. The settlement resolved all current and future matters that may be brought by AccessLine with regard to this alleged patent infringement. Under the terms of the settlement, AccessLine granted a license to Bogen permitting Bogen to continue selling its "Friday Home Office Receptionist" line of products and other variations thereof on a worldwide basis. In return, the Company has agreed to pay AccessLine a royalty of 3% of net sales for applicable units sold after December 31, 1994. Applicable units would include current models of the "Friday Home Office Receptionist" and future new products that would be similar and meet the requirements of the agreement. The term of the license agreement is coincident with the expiration of patents applicable under the license agreement unless terminated sooner in accordance with the agreement. Under terms of this agreement, the Company has recorded royalty expense of $92 for the year ended December 31, 1995.
9. Stockholder's Equity
Common Stock and Common Stock Subject to Possible Redemption
The following discussion summarizes the incorporation of the Company, the capitalization, and the requirements and privileges of the shareholders in the periods preceding the consummation of the acquisition of Bogen and Speech Design on August 21, 1995.
The Company was incorporated in Delaware on May 6, 1993 with the objective of acquiring a medium-sized operating business engaged in industrial manufacturing or industrial services and located in Germany, Switzerland or Austria ("Business Combination"). The Company's founding directors and advisors purchased 500,000 common shares, $.001 par value, for five hundred dollars during the three month period after incorporation. On September 30, 1993, 125,000 shares were returned to the Company by the founding shareholders and was retroactively reflected in the financial statements as a net issuance of 375,000 shares.
On October 15, 1993, the Company sold 1,550,000 units ("Units") in an initial public offering ("Offering") of the Company's common stock. Each unit consisted of one share of the Company's common stock, $.001 par value, and two Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitled the holder to purchase, during the period commencing on the later of the consummation by the Company of its Business Combination or one year from the effective date of the Offering and ending seven years from the effective date of Offering, from the Company one share of common stock at an exercise price of $5.50. The Warrants are redeemable at a price of $.01 per Warrant upon 30 days notice any at time, only in the event that the last sale price of the common stock is at least $10.00 per share for 20 consecutive trading days ending on the third day prior to
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date on which notice of redemption is given. The proceeds of the Offering were deposited in a trust fund to fund a Business Combination or liquidation of the Company.
The Company, after signing a definitive agreement for the acquisition of a Business Combination, submitted such transaction for stockholder approval. In the event that 20% or more of the shareholders excluding, for this purpose, those persons who were shareholders prior to the Offering, had voted against the Business Combination, the Business Combination would not have been consummated. For the first Business Combination consummated by the Company, all of the Company's shareholders prior to the Offering, including all of the officers, directors and advisors of the Company ("Initial Shareholders") agreed to vote their shares of common stock in accordance with the vote of the majority in interest of all other shareholders of the Company ("Public Shareholders") with respect to any Business Combination. After consummation of the Company's first Business Combination, these voting safeguards were no longer applicable.
When the Business Combination was approved and consummated, any Public Shareholder who had voted against the Business Combination could have demanded that the Company redeem his shares. The per share redemption price equaled the amount in the Trust Fund, as of the record date for determination of shareholders entitled to vote on the Business Combination, divided by the number of shares held by Public Shareholders. Accordingly, Public Shareholders holding 19.99% of the aggregate number of shares owned by all Public Shareholders could have had their shares redeemed at the time of the Business Combination. The Company has classified the value of this redemption as common stock, subject to possible redemption, on its balance sheet at December 31, 1994 prior to the consumation of the Business Combination. Such Public Shareholders were entitled to receive their per share interest in the Trust Fund computed without regard to shares held by Initial Shareholders. On August 21, 1995, in connection with the Company's acquisition of Bogen and Speech Design, the Company reclassified the common stock subject to possible redemption to common stock. No shares of stock were redeemed as discussed above.
The Company's Certificate of Incorporation had provided for mandatory liquidation of the Company, without stockholder approval, in the event that the Company did not consummate a Business Combination.
Warrants
In June 1993, 300,000 Warrants were issued to various individuals in consideration for providing the Company bridge financing until its offering in October 1993. As referred to above, the Company issued 3,100,000 Warrants to purchase its common stock in connection with the Offering.
Warrants to purchase 200,000 shares of common stock were issued to Geotek in August 1995 in connection with the acquisition of Bogen and Speech Design. Another 60,000 Warrants were issued as consideration for providing certain financings and services provided to the Company to facilitate the Business Combination. At December 31, 1995, 3,660,000 Warrants were outstanding.
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Options
Three members of the Company's Board of Directors have been granted an option by the previous members of the Board of Directors to purchase from such persons, for nominal consideration, 337,500 of the 375,000 shares of the Company's common stock currently held by such persons.
In 1994, Bogen adopted an Employee Stock Option Plan (the "Plan"). Under the Plan, an aggregate of 3,000,000 shares may be issued to members of its Board of Directors, designated officers and employees and independent contractors or consultants who perform services for the Company. No option granted under the Plan is intended to be an incentive stock option within the meaning of section 442A(b) of the Internal Revenue Code of 1986 for income tax purposes. During 1994, 1,400,000 options were granted under this Plan at a price of $1.14 per share which approximates fair value. These options vest over a five (5) year period. During 1994, there were no options exercised or exercisable. During 1995, 325,000 options were granted, and 605,000 options were cancelled due to executives leaving the Company. At December 31, 1995, 180,000 options were exercisable.
Prior to January 1, 1994, Bogen maintained a stock option plan which provided for the grant of up to 500,000 incentive and/or non-qualified stock options to officers and key employees. No options were granted pursuant to this plan in 1993.
Push-Down of Goodwill
Pursuant to Accounting Principles Board No. 16 "Business Combinations" ("APB 16"), the accumulated deficit of Bogen was required to be restated on the date of applying push-down accounting (see Note 2G, Goodwill). The restated accumulated deficit includes Geotek's recorded equity in the income and losses of Bogen since its original acquisition and all goodwill amortization recorded by Geotek relating to the acquisition of Bogen. Therefore, a reclassification of $8,524 was made from accumulated deficit to additional paid-in capital in January 1994.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors.
Common Stock
At December 31, 1995 and 1994, 3,700,000 shares of common stock were reserved for issuance upon exercise of redeemable warrants.
10. Related Party Transactions
The Company has issued 132,431 shares of its common stock for services received in connection with the acquisition of Bogen and Speech Design. Of these shares 19,565 were issued to a member of the Board of Directors of Geotek.
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During 1995, in conjuction with the acquisition of Bogen and Speech Design (see Note 1D above) Geotek forgave $7,155 in long-term debt due Geotek which was recorded as an increase in additional paid-in capital. As part of this acquisition, the Company issued $3,000 in convertible promissory notes to Geotek.
11. Economic Dependency
During the years ended December 31, 1995, 1994 and 1993, the Company purchased audio components of approximately $8,853, $14,016 and $7,460, respectively, from three suppliers located in the Republic of South Korea. Any future inability of any of these suppliers to provide the Company with a sufficient level of components may have a negative impact on the Company's operations.
Sales to one customer approximated $4,400 and accounted for more than 10% of the Company's net sales in 1995. Sales to a different customer approximated $7,100 and accounted for more than 10% of the Company's net sales in 1994.
Twenty-two of Bogen's employees are subject to collective bargaining agreements which expire in mid-1997.
12. Employee Benefit Plans
Bogen participates in multi-employer pension plans which cover all union employees. Contributions for the periods ended December 31, 1995, 1994 and 1993 were approximately $15, $18 and $19, respectively.
Employees of the Company are also eligible to participate in a defined contribution 401(K) plan sponsored by Geotek. The Company provides a matching contribution to a portion of funds contributed by employees that amounted to $82, $108, and $73 for the years ended December 31, 1995, 1994, and 1993, respectively.
13. Segments
The Company's operations are conducted in one segment engaged in the development, manufacturing and marketing of communication products, such as telephone products, commercial audio, paging equipment, and small office home office products in the United States (Bogen) and Germany (Speech Design). Information about the Company for 1995, 1994, and 1993 has been presented geographically as follows:
1995 1994 1993 ------- ------- ------- Geographic Segments: Revenues: United States $30,677 $37,745 $26,292 Foreign 13,841 8,177 3,780 ------- ------- ------- $44,518 $45,922 $30,072 ------- ------- -------
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Operating income (loss): United States $ (2,405) $ (18) $ 656 Foreign 1,768 1,223 113
Income (loss) from operations $ (637) $ 1,205 $ 769 -------- -------- --------
Identifiable assets: United States $ 24,425 $ 27,467 $ 12,263 Foreign 6,879 5,399 2,157 -------- -------- -------- $ 31,304 $ 32,866 $ 14,420 -------- -------- --------
14. Phase-out of OAS Product Line
In December 1995, the Company's management made a decision to phase-out the OAS product line. This decision was made as a result of intense competitive pressure from competing companies. The Company expects to sell all remaining OAS inventory and complete the phase-out by the middle of 1996, with no material exit costs anticipated. The results of the OAS product line for the past three years are as follows:
Selected Financial Information For The Years Ended December 31,
1995 1994 1993 ------- ------- -------
Net Sales $ 4,444 $12,252 $ 2,899
Cost of Goods Sold 4,932 9,431 1,765 ------- ------- -------
Gross Profit (Deficit) (488) 2,821 1,134
Engineering, Selling & Marketing Expenses 4,026 3,773 1,849 ------- ------- -------
Operating loss $(4,514) $ ( 952) $ (715) ------- ------- -------
15. Fourth Quarter Adjustments
Certain adjustments and provisions amounting to $1,500, primarily related to inventory valuation for the OAS product line, were recorded in the fourth quarter of 1995.
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