Item 1. BUSINESS
Overview of the Company
Geotek Communications, Inc. (the "Company") is an international provider of wireless communications systems and services. In the United States, the Company currently offers its competitively priced, high quality integrated digital voice and data wireless communications services to small and medium size businesses with a mobile workforce, in Baltimore, Boston, Dallas, Miami, New York, Orlando, Philadelphia and Washington, D.C. The Company intends to expand its digital voice and data wireless communications network services to an additional 39 cities throughout the United States by the end of 1999. In the United Kingdom, the Company operates an analog network and has been awarded a national digital license. In Germany, the Company owns a 50% interest in an entity which operates analog networks and has been awarded digital licenses. In Korea, the Company owns a significant equity interest in an entity that has been awarded a digital license and will sell its proprietary wireless infrastructure equipment to this entity and other Korean entities. The Company owns a digital license, on a contingent basis, in Canada, whereby the Company expects to provide its FHMA(R) infrastructure equipment. The Company also develops, produces and sells telephone and telecommunications peripherals and sound and communications equipment through its two-thirds ownership of Bogen Communications International, Inc. and its subsidiaries. The Company is incorporated under the laws of the State of Delaware. Its principal executive offices are located at 102 Chestnut Ridge Road, Montvale, NJ 07645 and its telephone number is (201) 930-9305.
U.S. Wireless Network
The Company is targeting its services to small-to-medium-sized business users in up to 47 of the largest metropolitan markets throughout the United States. The Company has developed an integrated digital voice and data wireless communications network where services are currently available in an integrated package and through a single subscriber unit operated by each mobile user. The Company believes that its ability to offer a wide variety of digital voice and data communications services through a single subscriber unit designed specifically for mobile business users with one monthly service fee will differentiate it from other wireless providers. Digital wireless subscribers will be able to select the combination of those communications services that meet their specific needs. The Company also plans for its digital wireless network to offer services that will enable businesses to quickly and easily custom configure their mobile workforce into discrete units, allowing members in each unit to communicate among themselves in a private network, and to select specific voice and data communications services for each unit. The Company also offers prepackaged software designed to meet the specific needs of the users.
Additionally, the Company's wireless data system used to provide data services to customers is based on IP (Internet Protocol) technology, the same protocols used by the Internet. The use of this industry standard protocol facilitates the development of applications that will function with the Company's digital wireless system. Applications developed for other existing and emerging wireless systems also based on wireless IP can readily function on the Company's system with little or no modifications to the original program.
Current Services
Mobile Telephony. The Company offers standard, cellular-like telephony service, which includes key telephone features such as speed dialing, last number redial, history of previously dialed numbers and dual tone multi-frequency capabilities during active telephone calls. This service is designed specifically for mobile fleets and enables the business owner to control telephony use by its drivers.
Group Dispatch. The Company offers traditional two-way communication voice dispatch services which allow customers to communicate with a group of mobile users within a subfleet or with the entire fleet.
Automatic Vehicle Location. This service allows the Company's customers to locate, on a personal computer with PC dispatch, their fleet vehicles at any time. The system utilizes detailed electronic maps and global satellite positioning receivers to plot the location of vehicles, and is accurate to within 100 yards. The Company believes that automatic vehicle location improves fleet efficiency by enabling managers to monitor vehicle progress, assign jobs and allocate resources.
Mobile Messaging. Mobile messaging is a sophisticated two-way program that allows business users, through a personal computer with PC dispatch, to send and receive full size messages to and from mobile workers. To confirm receipt of the messages, the worker can easily respond to such messages by choosing from a list of responses. Other features include the ability to send standard messages to mobile workers, store messages in memory for recall at any time, resend unreceived messages automatically until they are received, and time and date stamp messages for an accurate communications history.
Mobile Manifest. This service includes Windows-based software that enables dispatchers, utilizing a standard personal computer, to organize mobile workers' daily schedules, assign jobs, track fleet progress and identify problems at any time during the day. Drivers benefit from receiving detailed job instructions which can include contact name, directions, and special instructions. The Company believes this service will enable businesses to better allocate their resources and improve productivity.
Voice Manager. Voice manager is a Windows-based software which allows the user to communicate instantly with fleet vehicles individually or in groups, receive incoming dispatches and information, and keep track of communications. Voice manager logs all incoming and outgoing voice communications and generates reports that allow the user to track usage and voice communication.
Software Development Kit: The Software Development Kit (SDK) provides third party developers with the information and tools needed to quickly adapt their software to the Company's system.
Planned Services
The Company is developing additional mobile voice and data services and expects to continue to devote significant resources towards the development of new services and the enhancement of existing services. Services that the Company expects to offer during 1997 or thereafter include the following:
One-to-One Voice Dispatch. One-to-One Voice Dispatch will permit private one-to-one, half duplex conversations between a fleet dispatcher and a mobile user, or between two mobile users in a fleet, over a virtual private network. This service will permit dispatch conversations between individuals without disturbing the entire fleet.
Point of Sale Authorization. Point of Sale Authorization will allow the mobile user to receive immediate authorization for credit card sales through the Company's mobile workstation.
Private Telephony. Private Telephony will permit private one-to-one, full duplex conversations between a fleet dispatcher and a mobile user, or between two mobile users in a fleet, over a virtual private network. This service will permit full two-way conversations either through the handset of the subscriber unit or in a hands-free mode, without the push-to-talk limitations imposed by traditional dispatch equipment.
Advanced Fleet Management. Advanced fleet management will permit businesses to configure their mobile workforce into a number or combination of subfleets. The service will permit private communications between any number of subscribers in a subfleet and will allow a subscriber to belong to multiple subfleets. It will also permit a business to provide different subfleets with different communications capabilities, depending on the particular needs of the subfleet. For example, delivery personnel may be provided only with the ability to receive short data messages and to acknowledge that a delivery has been completed, while sales and management personnel may be provided advanced telephony services and access to the Company's central computer system and to public communications networks. Businesses will be able to establish and modify subfleet configurations and subfleet service capabilities from their corporate headquarters through software to be provided by the Company.
Ready-to-Run Software Applications. The Company believes that certain businesses require specific software applications in order to utilize wireless communications capabilities effectively. Such applications may include the ability to transmit customer orders to the home office or to verify inventory status or obtain credit card authorization from the field. The Company intends to develop new ready-to-run, applications-based software programs for a variety of industries that interface with the Company's integrated voice and data communications systems. The Company, through GMSI, Inc. (a 76% owned subsidiary), intends to design customized software for large fleet applications if such services are requested.
Other Services. Because the Company's current marketing strategy emphasizes its recently developed data capabilities, the Company will seek to further distinguish itself in this area by enhancing its current data offerings and by developing additional complementary service offerings.
The Company's current and proposed digital wireless services involve a complex integration of sophisticated voice and data applications that utilize newly-developed hardware and specialized software products. The implementation of the U.S. digital wireless network has raised a number of technical challenges, and the Company anticipates that additional technical challenges may arise from time to time as the Company continues to make hardware and software modifications and adds subscribers to the network. The initial introduction of the U.S. digital wireless network was limited to voice services. Commencing in October 1996, the Company added certain data services and plans to add additional data services in 1997. The integration of voice and data services has presented various technical issues, primarily involving software, which have adversely affected performance of the U.S. wireless system and delayed the scheduled implementation of the U.S. network in new markets and the loading of subscribers in the Company's existing markets. The introduction of additional services is expected to require further hardware and software modifications in order to integrate such services with the existing digital wireless services, which may present new technical issues. There can be no assurance that the Company will be able to develop or modify hardware or software to integrate successfully the planned voice and data applications, or to resolve other technical difficulties that may arise, on a timely or cost effective basis. The inability to resolve such problems could result in further delays in the implementation of the U.S. Network and adversely affect the Company's ability to add subscribers.
The U.S. Network Roll-out
As of December 31, 1996, the Company offered commercial services to 1,600 subscribers in Baltimore, Boston, Dallas, Miami, New York, Orlando, Philadelphia and Washington, D.C. The Company initially planned to complete the roll-out of its U.S. Network by the end of 1997 due in part to requirements imposed by the Federal Communications Commission ("FCC"). In connection with the Company's acquisition of Major Trading Area ("MTA") licenses in the recent FCC auctions, the Company will be permitted additional time to complete the roll-out of its U.S. Network. In order to better focus its financial and managerial resources, the Company has revised its roll-out schedule and currently expects to roll-out networks in additional U.S. cities in accordance with the following schedule:
1996 1997 1998 1999 ---- ---- ---- ---- Baltimore* Atlanta El Paso Birmingham Boston* Chicago+ Hartford Buffalo Dallas* Cincinnati St. Louis Charlotte Miami* Denver Columbus New York* Detroit Greensboro Orlando* Houston+ Kansas City Philadelphia* Indianapolis Knoxville Washington, D.C.* Jacksonville Little Rock Milwaukee Louisville Minneapolis Memphis New Orleans Nashville Phoenix+ Norfolk Pittsburgh Oklahoma City Portland Richmond San Antonio+ Rochester San Francisco+ Salt Lake City Seattle Spokane Tampa+ Tulsa - ---------------- * Operating Commercially + Build-Out in Progress
Markets are listed in alphabetical order and not in the order that services are expected to be initiated.
The Company may revise the current schedule based on the availability of financial resources, the availability of infrastructure equipment and the ability to secure and build out sites in a timely manner and the Company's success in its existing commercial markets.
The key stages to the network roll-out
Propagation. Propagation analysis involves the identification, through software programs and engineering analyses, of the optimal areas in a target market for the placement of the base station and remote sites. The Company has remote sites. The Company has markets.
Procurement of Site Leases and Permits. The Company must procure leases and permits for the sites at which the digital wireless infrastructure base stations
and remote sites are to be located. The Company has engaged multiple site leasing organizations to assist the Company in identifying potential site leases, negotiating leases and acquiring required local approvals. The acquisition of leases and required permits is typically a two-to-six-month process, although delays may occur from time to time. To date, the Company has entered into leases and received the necessary permits to install and operate its base stations in 14 of its target markets and is in the process of identifying sites in 5 additional markets. As the Company increases its coverage area in each of its target markets (including the markets where it currently provides service), it will need to procure additional site leases.
Build-out. Preparation of each base station, which includes ventilation and air conditioning, grounding and equipment installation, testing and optimization, averages ten to twelve weeks. The Company has entered into an agreement with IBM to manage the preparation and construction of each of its base stations and remote sites. The Company has completed the initial build-out of its U. S. wireless network in 8 markets and is currently building out 6 additional markets, including Chicago, Phoenix, Houston, Tampa, San Antonio and San Francisco. As the Company adds subscribers and increases its coverage area in markets, it may be required to increase the number of remote sites in such market.
Spectrum Acquisition. The Company controls 900 MHz frequencies with approximately 2,170 channels in its U.S. target markets. These channels will be sufficient to initiate digital wireless services in all of the Company's target markets. The Company recently acquired MTA licenses in many of its target markets through the recently completed FCC auctions.
There are only a limited number of existing communications towers capable of providing the Company with sufficient coverage for its radio transmissions and supporting its transmission equipment. If the Company cannot obtain leases for existing towers, it may be required to purchase sites, obtain necessary permits and build such towers, which could take up to one year for each tower. If the Company is required to build new towers, the implementation of the Company's U.S. wireless network in one or more of its target U.S. markets could be delayed.
Furthermore, each of the Company's United States target markets could present unique technical issues due to differences in geography and topography. These factors have caused technical issues in certain of the Company's existing markets (including the New York City metropolitan area) and could adversely affect the introduction of services in other markets. Technical difficulties in the operation and performance of the U.S. wireless network also may be experienced as additional subscribers are added in a particular market or as the coverage area in any market is increased. There can be no assurance that the Company will be able to develop or modify hardware or software to integrate successfully the planned voice and data applications, or to resolve other technical difficulties that may arise, on a timely or cost-effective basis. The inability to resolve such problems could result in further delays in the implementation of the U.S. Network and adversely affect the Company's ability to add subscribers.
Furthermore, the implementation of the U.S. wireless network 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."
Configuration of the Geotek Network Service Area
The Company's digital wireless network employs a macrocellular architecture consisting of a relatively small number of high power transmission with a transmitter capable of covering an area of approximately 25 miles in diameter. The macrocells are configured to form a digital wireless network in a given market. A base station containing the central computer system and switching equipment is located at or near one of the transmission sites in each market. Areas of high use or poor transmission quality are 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 enables 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 in a market, each with its own low power transmission station. The Company believes its use of a relatively small number of high power transmission sites enables it to reduce the infrastructure cost required to service a market relative to the multicell approach employed by other wireless service providers. The Company also believes that its system design allows it to initiate service in a given market at a lower cost and achieve profitability with fewer subscribers than other digital wireless communications providers. Further, the Company's ability to reuse frequencies enables it to increase, at a relatively low cost, the capacity of its networks, as such capacity is needed by further dividing a coverage area into sectors or adding additional sites. The Company also believes that its networks will be less expensive to operate than other multicell systems because, among other things, the networks require less equipment, which results in lower costs for transmission lines and site leases.
Need for Additional Spectrum
The Company will require additional spectrum to add capacity and enhanced services in certain of its existing markets as well as its planned markets in the U.S. Accordingly, the Company has entered into certain agreements that entitle the Company to acquire additional spectrum, subject to receipt of regulatory approval. Although the Company believes that such approval will be received prior to its expected introduction of services in each such market, there can be no assurance that such approvals will be received on a timely basis, if at all. The failure by the Company to obtain any such approvals could delay the introduction of services in a particular market or limit the Company's ability to add subscribers or provide certain services in such market. The Company may eventually need additional spectrum, beyond what it is already under agreement to acquire. It is possible, because spectrum is a finite resource, that the Company may be limited in the future in the spectrum it is able to acquire to suit its growing needs. In such an event, the Company's limited access to spectrum could inhibit the Company's growth and ability to expand its service capacity.
The Company currently holds 128 licenses that authorize operation in Designated Filing Areas ("DFAs") in U.S. urban markets. In order to acquire sufficient spectrum to initiate service in certain markets and to add additional capacity in other markets, the Company participated in the 1996 auction conducted by the FCC for 900 MHz specialized mobile radio ("SMR") spectrum and acquired 181 10-channel blocks in 42 regional service areas in the U.S. known as MTAs. MTA licenses authorize an expanded coverage area with non-site specific
licensing and extended construction periods. Where MTA licenses overlap channels and coverage area with a DFA license, the MTA licensee must insure non-interference to the DFA licensee. Where the MTA licensee itself holds the overlapped DFA license, the DFA license may be canceled or subsumed into the MTA license. The combined license is then regulated under MTA rules. Of the Company's 181 MTA licenses, 173 are unencumbered by a DFA, other than those DFA licenses presently held or controlled by the Company. In eight MTAs, however, the frequency block acquired by the Company is encumbered by a third party existing licensee. In these cases, the Company will seek to acquire access to the encumbered spectrum through cooperative or management agreements or may seek to acquire the license from the incumbent licensee. In all but 29 of the Company's 128 DFA licenses, the Company was able to secure surrounding MTA licenses during the auction. These 29 DFA licenses must operate within a third party's MTA service area, although the MTA licensee must afford interference protection to the Company. For all but seven of the 29, the Company: was able to acquire the MTA license from the successful bidder and therefore will remain as the incumbent; sold the license to the MTA licensee; or, "swapped" the license with another licensee. There can be no assurance that the Company will be successful in acquiring desired licenses or gaining access to encumbered spectrum, or that any licenses currently owned or acquired by the Company in the future will be renewed. In addition, for those DFA licenses where the Company does not hold the surrounding MTA license, the company must construct the system no later than June 27, 1997, the date upon which the Company's waiver, granted by the FCC in June 1993 (the "Waiver") which permitted extended construction periods for the Company's DFA licenses, expires. In the event that the Company does not construct these DFA licenses by June 1997, obtain surrounding MTA licenses for any DFA licenses which remain unconstructed at such time, or obtain relief from the Waiver, such unconstructed licenses will be canceled by the FCC, thereby reducing the Company's available spectrum. Currently, any cancellation may hinder the Company's opportunity for commercial roll-out in Charlotte, Nashville and Greensboro. The failure of the Company to obtain or retain sufficient radio spectrum on commercially acceptable terms or to renew existing or future licenses could adversely affect the Company's business.
Technology
The U.S. digital wireless network is based on the Company's proprietary frequency hopping FHMA(R) system. The FHMA(R) system integrates Time Division Multiple Access (TDMA), a standard digital transmission technique currently utilized by digital cellular systems, with spatial sectorization, frequency hopping, error correction coding and voice multiplexing. The Company believes that the combination of these techniques permits it to very significantly increase the capacity of its radio spectrum over that of traditional analog SMR capacity and improve the quality and security of wireless communications over current analog systems.
TDMA allows each channel to carry several transmission signals at one time. FHMA(R) system employs "three slot" TDMA, which permits three transmission signals to be carried on each channel. The use of digital technology results in secure communications, an important attribute to many business users. In addition, FHMA(R) system utilizes a technique known as frequency hopping to offer a secure robust signal and to break down a transmission signal into many small components. Each component "hops" from frequency to frequency within a predetermined sequence and different frequency hopping sequence sets are used in adjacent areas to minimize interference. Advanced error correction coding is
used to restore transmitted signals in the event of interference. The combination of these techniques allows for the reuse of the same frequencies in adjacent sectors if desirable
Rafael Armanent Development Authority, a division of the Israeli Ministry of Defense ("Rafael"), is sub-contracted for manufacturing and enhancing the base station and remote sites. The Company procures all other components utilized in connection with its digital wireless system from third parties. A number of these firms are located in Israel, the United Kingdom and the United States. These firms include 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). Mitsubishi Consumer Electronics of America ("MCEA") and Farbell Electronics manufacture large screen vehicle-mounted subscriber units and Hughes Network Systems ("HNS") manufactures small screen vehicle-mounted subscriber units and is developing a portable unit.
Currently, Rafael is the Company's only manufacturer of base station equipment. In September 1996, the Company and a wholly-owned subsidiary of the Company, Geotek Finance Corporation ("GFC"), entered into an agreement with HNS, pursuant to which HNS agreed to manufacture certain of the components required for the construction of 900 MHz FHMA(R) base station equipment in order to expand the Company's manufacturing supply sources. In addition, HNS is providing up to $100 million of financing (the last $50.0 million of which is subject to the satisfaction by the Company of certain operating criteria) for up to 90% of the purchase price of equipment scheduled for delivery by HNS to the Company prior to June 30, 1999. HNS has not previously manufactured FHMA(R) system equipment and its ability to do so is subject to a number of factors including its ability to successfully coordinate the transformation of the FHMA(R) system manufacturing specifications into full scale production capacity. If HNS is unable to manufacture and deliver equipment in accordance with its agreement with the Company and GFC, the Company would be required to continue to rely on Rafael as its sole manufacturer of base station equipment until such time, if any, as the Company secured an alternative source.
The Company is dependent upon a relatively small number of manufacturers for its products. Rafael currently is manufacturing the base station equipment for the U.S. wireless network on a schedule that is intended to enable the Company to meet its projected roll-out. Other third parties, including MCEA, HNS, and Farbell currently are manufacturing subscriber units and certain other components of the system hardware for the U.S. wireless network on a schedule to meet anticipated subscriber demand. There can be no assurance that such third parties will deliver such equipment on a timely basis. Although the Company believes that it can obtain all components necessary to build the digital wireless system from other sources, it may encounter delays in the event of a component shortage due to the time needed to identify alternative sources and manufacture substitute components. Failure to obtain hardware components on a timely basis or at satisfactory prices could result in delays or cost overruns in the implementation of the U.S. digital wireless system.
The Company has an agreement with IBM to manage the construction of the U.S. wireless network base station and remote sector sites. The Company also has engaged, and intends to engage, other third party contractors to manage all or certain aspects of such construction or installation in certain of its U.S. target markets. A failure by IBM or such other contractors to manage properly
the preparation and construction of the Company's base station and remote sector sites could delay the implementation of the U.S. wireless network and adversely affect the Company's business.
The Company anticipates that, in order to meet the needs of its expanding international and equipment sales activities, it will be required to establish and maintain additional manufacturing, distribution and licensing arrangements with other third party providers. The Company is currently exploring various alternatives to meet these needs, however, there can be no assurance that the Company will be able to identify or maintain relationships with such providers.
Hardware
The basic customer hardware utilized to operate the Company's digital wireless system consists of either two mobile workstations or a PC dispatching station and a mobile workstation. The PC dispatching station is a personal computer, together with specialized software, interface unit (DIU), the radio transceiver, speaker and a microphone.
The Company offers two types of mobile workstations. The enhanced mobile workstation supports telephony, dispatch and data application, and includes a four-inch screen and prominently displayed keys. For users with a greater need for voice services, the Company offers a small screen unit that is similar in size to a mobile cellular telephone, which offers limited data applications including automatic vehicle location. The Company's workstations are designed to withstand significant vibrations often encountered with extended use in commercial vehicles.
The Company is developing a full line of accessories for each of its subscriber units, that will allow the use of a standard serial port to permit the attachment of laptop computers, keyboards, printers, magnetic stripe readers, barcode readers, and other intelligent devices.
Marketing and Distribution
The Company markets its products and services though a network of independent dealers and distribution partners that have existing relationships with a large number of its target customers. The Company utilizes dealers and agents that sell private mobile radio ("PMR"), SMR, ESMR, cellular and paging equipment and services to business users. The Company's strategy is to focus on acquiring and maintaining several dealer relationships within each market. The Company supports its dealers in each local market with Geotek employees that consist of sales account managers in the sales and training area and technical support staff for installation and technical information.
The Company has initiated marketing activities with selected value added resellers ("VARS") and data equipment providers including IBM. Distributors like VARS and IBM typically sell computing solutions to business customers. Many office based mobile workers are seeking ways to conduct business remotely and the Company believes its suite of wireless solutions can address specific needs. The Company's agreement with IBM provides for the opportunity to present the IBM solutions capabilities as a value added element of the Company's current solutions. For customers seeking to integrate existing legacy office applications with wireless networks, the Company believes that IBM can provide additional value to the customer.
The Company intends to pursue alliances, relationships, and additional distribution development with additional VARS, data equipment, data services, and data software companies. If consummated, the relationships could provide the Company with access to both distribution capabilities as well as an established customer base. The successful implementation of the Company's wireless networks will depend, in part, on the Company's ability to develop, maintain, and grow relationships with such parties. Delays in the implementation of the wireless networks may adversely affect the Company's relationship with its dealers, VARS, and distribution partners.
International Operations
United Kingdom.
National Band Three Ltd. ("NB3"), a wholly-owned subsidiary of the Company, is the only national PAMR (SMR equivalent) service provider in the United Kingdom and controls approximately 70% of the domestic market for SMR and data services. As of December 31, 1996, NB3 provided service to approximately 62,600 subscribers.
NB3 targets its services to 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 currently is focusing its marketing efforts in the United Kingdom on emphasizing NB3's wide coverage area and voice and data capabilities.
The NB3 network currently is an analog system that utilizes a series of overlapping cells in conjunction with large switching centers. The NB3 network currently consists of approximately 105 base stations and three switching centers. NB3 will increase the capacity of its analog network ahead of customer requirements and currently has plans to increase the capacity to approximately 75,000 subscribers from the current capacity of approximately 65,000.
NB3 intends to deploy a digital system to introduce new products expand capacity, increase its target market and to further its competitive position. In June 1996, the United Kingdom Department of Trade and Industry awarded NB3 a license to operate a digital PAMR network in the United Kingdom. Under the terms of the new digital license, NB3 will receive an initial allocation of two MHz of spectrum in the 410-430 MHz band for the construction of a network based on the new Trans European Trunked Radio ("TETRA") standard. The Company has recognized that it will need some additional spectrum in the future to implement a digital network and is discussing this with the regulatory authorities who have indicated that they are prepared to support this requirement. Currently, there are no TETRA systems available for commercial application, but potential vendors have indicated an interest in supplying a TETRA-based system to NB3; however, the Company cannot accurately estimate the availability, quality or costs associated with the implementation of a TETRA-based network. Management is continuing to work with potential vendors and regulatory authorities in the United Kingdom regarding implementation of a digital system. There can be no assurance that the Company will be able to develop and deploy a digital wireless system in the United Kingdom. Additionally the development and deployment of a digital wireless system in the United Kingdom will be subject to some of the same risks attendant to the Company's digital wireless system in the United States.
Germany.
In November 1996, the Company entered into an agreement with RWE Telliance A.G. ("RWE") to merged their respective German analog mobile radio networks upon the approval of the German regulatory authority. In December 1996, the Company and RWE received regulatory approval. Upon receipt of this regulatory approval, the merger was effective and the Company received a 50% interest in the merged entity, which is named Terrafon. As of December 31, 1996, Terrafon provided wireless service, primarily analog dispatch to approximately 34,000 subscribers in twelve of the fourteen major regions of Germany. Neither of the analog systems operated by the Company or RWE are profitable. The Company expects that the merged entity will seek to implement a digital system to add capacity and products. The licenses awarded to the Company and RWE in Germany operate in the 410 MHz frequency band. These licenses are not limited to a specific technology. It is possible that Terrafon will need to obtain additional frequencies to implement its digital networks. At the time of formation of the joint venture, the Company announced that the joint venture intentions to deploy an FHMA(R) digital network. Subsequent to the formation of the joint venture, Terrafon decided to implement an organized process to evaluate the various alternatives for deploying a digital network. Terrafon expects to issue a request for quotation to leading suppliers of telecommunication equipment including Geotek Technologies, Inc. There can be no assurance that the Company will develop an FHMA(R) system for the German 410 MHz band. Additionally, the development and deployment of a digital wireless system in Germany will be subject to some of the same risks attendant to the Company's digital wireless system in the United States.
Korea.
In June 1996, the Korean Ministry of Information and Communications awarded, Anam Telecom Company, Ltd. ("Anam Telecom") in which the Company holds a 21% interest, a license to operate a nationwide trunked radio system in Korea. Anam Telecom also includes approximately 53 Korean companies, among them Anam Industrial Company, Ltd., Hyundai Electronics, Korean Mobile Telecom, Ssangyong Corporation and Korea Express. The license covers a geographic area with a population of approximately 45 million people and is based on the implementation of the Company's FHMA(R) system on an 800 MHz frequency band. The Company's FHMA(R) system currently operates in the 900 MHz frequency band. In 1996, the Company started a development of an 800 MHz system. Although the Company believes that it will successfully adapt its FHMA(R) system to the 800 MHz frequency band, such adaptation is subject to a number of contingencies and the manufacture of certain required equipment. Additionally, the deployment of a FHMA(R) system in Korea will be subject to the same risks attendant to the Company's digital wireless system in the United States.
In 1996, the Company through its subsidiary Geotek Technologies, Inc., entered into contracts to provide Anam Telecom with the Company's proprietary digital wireless infrastructure equipment and customer subscriber units. It is anticipated that the equipment will be deployed in 1997. A test site has been constructed in Korea and implementation of the network is expected to proceed throughout 1997. Geotek Technologies Inc. plans to start delivering infrastructure equipment and terminals to Anam Telecom during the second quarter and fourth quarter of 1997, respectively. Anam Telecom plans to commence commercial operations near the end of 1997.
In 1996, Geotek signed an equipment license and cooperation agreement with Hyundai Electronics, Inc. ("HEI"), whereby HEI will supply the Company's FHMA(R) related equipment to the Korean market. Subsequently, in 1997, HEI placed an $18 million FHMA(R) infrastructure equipment order with the Company and will in turn
supply FHMA(R) system infrastructure and terminals for the Korean Regional Trunked Radio ("RTRS") operators. The Korean Ministry of Information and Communication issued five regional operating licenses in June 1996. The RTRS operators selected FHMA(R) based system as their technology of choice and they are currently in negotiations with HEI to supply the FHMA(R) system equipment. It is expected that the equipment will be supplied and deployed in 1997 for operation before the end of 1997.
Canada.
In March 1996, Industry Canada, the Canadian agency responsible for spectrum allocation, approved in principle an award of certain 900 MHz frequencies in the provinces of Alberta, British Columbia, Ontario and Quebec to a joint venture consisting of the Company, Cogeco Cable, Inc. ("Cogeco") and Techcom, Inc., a Canadian SMR operator. These entities had entered into a letter of intent to form the joint venture in Canada to launch mobile wireless communications services based on the Company's proprietary FHMA(R) technology. In July 1996, the Company announced that it had been unable to reach a final agreement with Cogeco. In October 1996, Industry Canada granted the Company and its remaining partner, Techcom, Inc., an extension to March 31, 1997 to find a suitable replacement for Cogeco. The Company is actively negotiating with other potential Canadian partners to replace Cogeco so that it can begin deployment of an FHMA(R)-based network and comply with Canadian foreign ownership and regulatory requirements. There can be no assurance that the Company will be able to identify a joint venture partner or, if such a partner is identified, that an agreement can be reached on terms acceptable to the Company. The Company has until March 31, 1997 (absent an additional extension) to identify a Canadian partner and file a site implementation plan with Industry Canada, or else the Company may lose its Canadian licenses. The licenses have no termination date, but are granted at the sole discretion of the agency. While the Company believes that it will be able to retain the license until a satisfactory Canadian controlled entity is formed, there is no assurance that the license will not be lost.
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 certain of the Company's debt instruments and existing capital resources.
Any failure on the part of the Company to successfully adapt its technology to the frequency or standards required by its licenses in Canada, Korea, the United Kingdom or Germany or to identify a joint venture partner in Canada could have a material adverse effect on the Company's prospects in such jurisdictions. Furthermore, the roll-out of products and services in each of these countries will be subject to the same risks attendant to the development of the Company's digital wireless system in the United States.
In addition, because the Company currently sells its products and services in various countries located outside the U.S., where the majority of its current subscribers are located, a large portion of the Company's revenues are paid in foreign currencies. Further, certain of the Company's products and components are manufactured outside of the U.S., and its research and development activities are dependent upon foreign providers. Accordingly, the Company is subject to the risks inherent in conducting business across national boundaries, including currency exchange rate fluctuations, international incidents, military outbreaks, economic downturns, government instability, nationalization of foreign assets, government protectionism and changes in governmental policy, any of which could adversely affect the Company's business in one or more of its international markets or in the U.S. In addition, the licensing and other operational risks attendant upon commencing and maintaining wireless communications networks in foreign countries are similar to those in the U.S., including availability of spectrum capacity and transmission sites, competition and government regulation. Development of the Company's business in international markets may impose a significant burden on the Company's financial, managerial and personnel resources. There can be no assurance that the Company will be successful in developing its business in any of these markets or that any such expansion of the Company's business will be profitable.
GMSI
The Company owns a 76% interest in GMSI, Inc. ("GMSI"), a system integrator for the transportation market which designs, manufactures, and sells fleet management systems using mobile data software. GMSI is a leader in the market for data dispatch systems used in large fleets for taxi, limousine, paratransit, and public transportation. GMSI markets its products through a combination of direct sales and value added resellers in North America, Asia, and Europe. A proprietary software package, Wireless Network Interface ("WNI"), enables the GMSI systems to work with a variety of wireless networks, including SMR, private channel, and public wireless data systems. WNI also provides software developers and VARS with the interface, reporting, and mobile data equipment performance information. This adds value to the GMSI customer in providing a low risk implementation of mobile data.
The GMSI systems are integrated to the customers office based dispatch systems and host computer systems. In addition, GMSI provides a variety of mobile data terminals, radio modems, installation services, and licenses 3rd party software applications for use in fleet management.
Communications Products
Bogen Communications International, Inc.
The Company produces communications products through Bogen Corporation ("Bogen") and Speech Design GmbH ("Speech Design"), which are subsidiaries of Bogen Communications International, 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.
Speech Design. Speech Design, located in Munich, Germany, develops, manufactures and markets telephone peripheral hardware utilizing digital voice processing technologies.
Competition
Competition in the wireless communications industry is intense and is expected to increase. The Company faces significant competition in each of the United States markets that it currently serves, and expects to face significant competition in its planned United States markets. The Company competes with established SMR, cellular, paging and public data service providers. The Company expects competition from existing cellular as well as personal communications services ("PCS") operators, which currently offer cellular-like telephony services and have indicated the intention of offering data services in the near future. In addition, internationally, the Company competes with manufacturers of private mobile radio ("PMR") equipment, which target private network operators and SMR customers. Many of the Company's competitors have substantially greater technical, marketing, sales and distribution resources, access to capital, and experience providing wireless communications services than the Company. In light of the recent technological advancements in the industry, the Company may encounter competition in the future from existing and/or emerging providers utilizing new technology.
The Company's marketing strategy emphasizes information exchange though an integrated package of voice, data services and Windows-based software applications geared to small to medium size businesses that require simple all in one solutions. The Company competes for subscribers primarily on the basis of services offered, the technical quality of its system, capacity, coverage and price. Many of the target customers for the Company's digital wireless service currently use other wireless communications services. In order to compete effectively, the Company must attract a portion of its target customers from their existing providers. There can be no assurance that potential customers, based on the foregoing factors or other factors, will perceive the Company's services to be superior to those offered by other wireless communications providers.
Based on its experience in its eight U.S. commercial markets, the Company believes that there is adequate demand for its current and planned digital wireless services. Nevertheless, since there currently is no integrated wireless communications network commercially available that is comparable to the Company's digital wireless network, the Company cannot predict the demand for its services with any degree of certainty.
The Company believes that the FCC licenses it currently holds will be sufficient for its initial U.S. digital wireless network in its U.S. target markets. If the Company seeks to enter additional markets or to expand capacity or services beyond those currently planned, the Company may need additional spectrum and transmission sites. In such event, the Company will compete with other wireless communications providers and may not be able to obtain some or all of the spectrum or sites necessary for such expansion. See "--Need for Additional Spectrum"
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"), pursuant to the FCC's rules and policies adopted thereunder.
The FCC currently regulates two types of 900 MHz SMR licenses, which are both authorized for ten channels of 12.5 kHz in width from base station to mobile, of which the Company holds both types. The first type is the DFA licenses which were issued by the FCC in the 1980's in 50 urban markets, on a site-specific basis, with a construction deadline of one year. The Company holds 128 such DFA licenses. As a result of the Company's Waiver (See "Need for Additional Spectrum"), which was granted in 1993, the Company was permitted an extended construction period for its DFA licenses until June 1997 in which to construct and implement the U.S. digital wireless network.
The second type of FCC 900 MHz SMR license is the MTA license, issued pursuant to the FCC's 900 MHz SMR spectrum auctions, which were concluded in 1996. MTA licenses authorize much larger territory than DFA licenses in 51, rather than 50, markets. The Company was able to secure 181 MTA licenses in 42 markets. MTA licenses are non-site-specific and have an extended construction period of 3-5 years. Where the MTA licenses overlap coverage with a DFA license, the MTA license must ensure non-interference protection for the incumbent DFA licensee. Where the MTA licensee itself holds the incumbent DFA license, the DFA license may be canceled or subsumed into the MTA license, thereby assuming the regulatory build-out time frame advantages of an MTA license. (See "Need for Additional Spectrum")
Most of the equipment utilizing the Company's technology that is used to send signals must satisfy certain technical standards and receive FCC type acceptance approval. In addition, the Company's equipment must comply with the FCC's radio frequency ("RF") guidelines. Although the Company's base stations and current subscriber units have received such type acceptance approval from the FCC, there can be no assurance that future generations of subscriber units or other equipment will meet such standards.
Under the Communications Act, SMR system providers were traditionally regulated as private carriers and, therefore, were subject to less regulation by both the FCC and individual states than were common carriers such as cellular telephone companies. However, the FCC has initiated and is likely to continue to initiate regulatory proceedings with wide-ranging implications for the wireless
telecommunications industry. Most of the rule makings were initiated in response to congressional amendments to the Communications Act, as directed by the Omnibus Budget Reconciliation Act of 1993 (the "Budget Act"). The Budget Act reconfigured the wireless marketplace to include a category of Commercial Mobile Radio Service (CMRS) providers which included all wireless carriers who offer wireless services, interconnected to the public switched network to a substantial portion of the public, for profit. In 1996, President Clinton signed into law the Telecommunications Act of 1996 (the "Telecommunications Act") which imposes sweeping reform of telecommunications policy. Although the majority of the Telecommunications Act's measures 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 wireless marketplace, and upon the Company.
Under the Budget Act and Regulations which have been promulgated thereunder, the Company is now required to provide services on a "non-discriminatory basis" and on terms that are not "unjust and unreasonable," as such terms are defined in the Communications Act. As a practical matter, "non-discriminatory basis" means that the Company cannot tailor certain service packages and price offerings to individual customers that are not generally available to similarly situated parties. In addition, the Company must now limit its foreign investors to 25% or less.
Under past proceedings, the FCC determined that Local Exchange Telephone Companies (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. Although it is not yet final, the FCC may enforce specific limits with respect to prices, terms, and conditions of interconnection arrangements for LEC-CMRS interconnection, to ensure that CMRS providers are granted equal competitive footing with more established LEC service providers.
In a separate proceeding, the FCC amended its rules to permit broadband and narrowband CMRS providers to offer wireless local loop and related services. Specifically, the FCC adopted a definition of "wireless local loop" that is sufficiently broad to allow the provision, by CMRS providers such as the Company, of certain fixed services. The definition of "wireless local loop" is "the path between the subscriber and the first point of switching or aggregation of traffic." Such an expansion in available service offerings could be beneficial to the Company.
The FCC is also considering the adoption of rules that would require CMRS providers to offer enhanced emergency calling ("911") 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 with respect to the Company's obligations, 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.
In a similar proceeding, the FCC is considering: whether the Company should be required to permit "roaming" access to its system, where technically feasible, to customers of other service providers: whether the Company should be required to permit the resale of its services by other service providers; and, whether the Company's equipment must ensure the "number portability" of its
customers which would entail the incorporation of a 15-digit dialing pattern which would identify the mobile phone number world-wide. The applicability of these four proceedings -- "E911", "roaming", resale", and "number portability" - to the Company depends upon the FCC's definition of "covered SMR" and whether the Company falls within that definition. The FCC's determination in this proceedings remains pending. Although the FCC's decision can not be predicted, in the event that the Company must comply with any four of these proceedings, such requirements would require additional development effort and expenditure by the Company.
Other Regulatory Matters
On October 25, 1996, the President signed into law the Communications Assistance for Law Enforcement Act ("CALEA") which requires communications carriers to allow law enforcement the ability to "monitor" calls on their wireless systems. CALEA requires compliance with FBI Assistance Capability Requirements within four years of the signing of CALEA into law. Although it is not yet certain, it is likely that the Company, along with other SMR operators, may be waived from complying with CALEA.
Patents and Technology Rights
GTI-Israel has filed several patent applications in Israel and intends to file patent applications in other countries including the United States. In addition, GTI-Israel has an exclusive royalty free right to utilize the technology covered by a U.S. patent issued to Rafael.
In addition to those patent applications filed by GTI-Israel, the Company also has filed patent applications in Israel and the United States based on technology developed by the Company. As of December 31, 1996, no patents had been issued to the Company or GTI-Israel and there can be no assurance that a patent will be issued from any pending or future patent applications or that if any are issued that any of them will have any commercial significance. The Company is aware of certain patents and patent applications held or filed by others which generally relate to the subject matter of the Company's activities. The Company believes that none of such patents or applications is likely to have a material adverse effect on the ability of the Company to utilize any technology currently intended to be utilized by the Company.
The Company 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(R) technology and GEONETTM 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 GEONETTM and FHMA(R), in the United States and certain other countries.
The Company's Research and Development expense related to the digital wireless communication system totaled $34.0 million in 1996 compared to $33.0 million in 1995 and $17.0 million in 1994.
Employees
As of December 31, 1996, the Company had approximately 800 full-time employees, of which approximately 650 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, 1996, approximately 40 employees of Rafael and other subcontractors were engaged on a full-time basis in the production, development and enhancements of the Company's FHMA(R) 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 on the Company's business. There can be no assurance, however, that any future disputes will not adversely affect Rafael's ability to deliver equipment to the Company, which could delay the implementation of digital wireless services.
Financial Information
Financial Information about the Company's industry segments and the Company's foreign and domestic operations is disclosed in the notes to the Company's Consolidated Financial Statements. See "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Item 2.
Item 2. PROPERTIES
In February 1997, the Company's principal place of business was moved to 102 Chestnut Ridge Road, Montvale, New Jersey. The Company rents, from an unaffiliated third party, approximately 50,000 square feet of office space for approximately $1.2 million per year, plus taxes and utilities. The lease expires February 2007. The Company's Montvale facility functions both as its corporate headquarters and the general offices of the Company's U.S. wireless operation.
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, from an unaffiliated third party, that expires in September 1999. The Company has an option to extend the lease for four successive five-year periods. Annual rental payments during the initial term of the 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, with an unaffiliated third party, which expires in 2005. Annual rental payments are approximately $240,000.
GMSI leases its facilities in Ontario, Canada pursuant to a lease , with an unaffiliated third party, that expires in April 2005. Annual base rental payments over the remainder of the lease are approximately $140,000.
In connection with the roll-out of the U.S. network, the Company expects to lease office space in each of the target markets in which it intends to provide wireless digital 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 December 31, 1996, the Company had leased office space and transmission sites in 9 and 14, respectively, of its target markets. The aggregate annual rental payments pursuant to these leases are approximately $2.1 million.
Item 3.
Item 3. LEGAL PROCEEDINGS
In June 1994, the Company filed a lawsuit against Harris Adacom Corporation B.V. ("Harris"), a Dutch Corporation, to enforce the Company's right to repayment of a $3.5 million loan made to Harris in January 1994. In or about May 1994, creditors placed Harris into bankruptcy. In response to the Company's lawsuit, Harris and its subsidiaries filed a lawsuit against the Company in the courts of the State of Israel, requesting a declaratory judgment that the Company entered into a binding agreement for the purchase by the Company of a significant interest in certain wireless communication business assets owned by Adacom Technologies Ltd., ("ATL"), an affiliate of Harris and an Israeli publicly traded company, and subsequently breached such agreement. 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 develops and utilizes technology for substantially all of the services and products it offers and intends to offer and has, from time to time, been the subject of infringement claims related thereto. It is often difficult
to predict the outcome of such litigation and the amount of damages that may be awarded. The Company does not believe that any pending or threatened litigation related to the Company's technology or use thereof will have a material adverse effect on its business.
The Company also is, from time to time, a party to litigation, which may or may not be covered by insurance, arising in the ordinary course of business. The Company does not believe that results of such litigation, even if the outcome were unfavorable to the Company, would have a material adverse effect on its business.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholder's during the fourth quarter of 1996.
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Item A. EXECUTIVE OFFICERS
As of the date hereof, the executive officers of the Company are:
Name Age Position ---- --- -------- Yaron I. Eitan 40 Chairman of the Board, Chief Executive Officer and Director Jonathan C. Crane 47 President, Chief Operating Officer and Director George Calhoun 44 Vice Chairman of Strategy and Technology and Director Yoram Bibring 39 President and Chief Executive Officer - Geotek International Networks, Inc. Michael McCoy 44 President and Chief Executive Officer - Geotek U.S. Network John Egidio 48 Executive Vice President, Corporate Operations William A. Opet 39 Senior Vice President, Business Development Michael H. Carus 31 Vice President, Acting Chief Financial Officer, Chief Accounting Officer & Corporate Controller Robert Vecsler 32 General Counsel and Secretary
Mr. Eitan has served as Chief Executive Officer and a director of the Company since March 1989 and as Chairman of the Board since October 1996. From March 1989 until October 1996, Mr. Eitan also served as President of the Company. Mr. Eitan is also Chairman of the Board of Bogen and a director of Geotek Technologies Israel Ltd. ("GTIL"), formerly PST, GMSI and NB3, subsidiaries of the Company.
Mr. Crane joined the Company as President & Chief Executive Officer - Geotek U.S. Network in October 1995, a position he held until October 1996, when he became the President and Chief Operating Officer of the Company. Mr. Crane has served as a Director of the Company since June 1996. Prior to joining Geotek, 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. In October 1996, he was appointed the Vice Chairman of Strategy & Technology of the Company. Mr. Calhoun joined the Company in June 1992 as President, Chief Operating Officer and a director of GTIL. He is also a director of NB3. Mr. Calhoun previously 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 served as Executive Vice President and Chief Operating Officer of the Company from June 1993 until March 1996, when he was appointed President and Chief Executive Officer - International Networks Division of the Company. He is also a director of Bogen. He served as Vice President of Aryt Optronics Industries, Ltd. 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. McCoy was appointed President and Chief Executive Officer of Geotek's U.S Network in February 1997. Mr. McCoy served as Senior Vice President and Chief Financial Officer of the Company from September 1995 through February 1997. 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. McCoy was a member of the Office of the Chairman and Senior Vice President of Business Development for LCI International, Inc., a facilities based long distance telecommunications company.
Mr. Egidio became Senior Vice President of the Company in October 1993 and has served as Executive Vice President-Corporate Operations since February 1997. 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. Opet joined the Company in April 1994 and has been Senior Vice President of Business Development since February 1996. Prior to this appointment he served as Vice President of Marketing and Senior Vice President, Marketing and Sales. 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. Carus was appointed Acting Chief Financial Officer of the Company in February 1997. 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, most recently, a Business Assurance Manager in the communications team at Coopers & Lybrand L.L.P., a public accounting firm.
Mr. Vecsler has served as General Counsel and Secretary of the Company since March 1996. From May 1995 through March 1996, he served as Corporate Counsel for the Company. Prior to joining the Company, from August 1994 until April 1995, Mr. Vecsler served as Assistant General Counsel at Enviro Source, Inc. From April 1993 until July 1994, he served as Counsel to Fletcher Asset Management, Inc. Mr. Vecsler practiced law at Kelly, Drye & Warren from September 1988 until March 1993.
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, 1996 High Low First Quarter . . . . . . . . . . . . . . 12 6 5/16 Second Quarter. . . . . . . . . . . . . . 14 7/8 9 3/4 Third Quarter . . . . . . . . . . . . . . 13 3/4 8 Fourth Quarter . . . . . . . . . . . . . . 9 1/8 5 7/16
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
As of March 24, 1997, there were 1,302 record holders of the Common Stock.
The Company has not declared or paid any cash dividends on the Common Stock since commencing operations and is restricted from paying any dividends on the Common Stock due to debt covenant restrictions. At present, the Company is obligated to pay, for a five-year period following the issuance of its Series H preferred stock, cumulative dividends of $2,000,000 per year on the Series H preferred stock, in cash, and, for a five-year period following the issuance of its Series I preferred stock and Series K preferred stock, respectively, cumulative dividends equaling $700,000 per year on the Series I preferred stock and $700,000 per year on the Series K preferred stock, in cash or shares of Common Stock of the Company, before any cash dividends may be paid on the Common Stock. In addition, the Company is presently obligated to pay cumulative annual dividends of $750,000 per year on its Series L preferred stock, in cash or additional shares of Series L preferred stock, cumulative annual dividends of $988,125 per year on its Series M preferred stock, and annual cumulative dividends equaling $5,000,000 on the Series N preferred stock in Common Stock, and annual dividends of $5,000,000 and $2,500,000 on the Series O and P preferred stock, respectively, in cash or Common 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.
On December 31, 1996, the Company sold to a limited number of accredited investors(the "Series O Investors") 1,000 shares of the Company's Series O Convertible Preferred Stock (the "Series O Preferred Stock") and warrants (the "Warrants") to purchase 1,700,000 shares of the Company's common stock, $.01 par value per share ("Common Stock"), for an aggregate purchase price of $50,000,000. Each share of Series O Preferred Stock has a stated value of $50,000.
The offer and sale to the Series O Investors of the Series O Preferred Stock was made in reliance upon the provisions of Section 4(2) of the Securities Act of 1933, as amended. In connection with the sale of Series O Preferred Stock, each Series O Investor represented to the Company that it was purchasing the Series O Preferred Stock for its own account and not with an intent towards the distribution thereof.
Commencing April 1, 1997, each share of Series O Preferred Stock is convertible by the holder thereof into such number of shares of Common Stock as is obtained by dividing (x) the $50,000 stated value thereof plus all accrued and unpaid dividends through the date of conversion by (y) the lowest daily volume-weighted average price of the Company's Common Stock during the four(4) business days immediately preceding conversion multiplied by the Conversion Factor (as defined below); provided however, that holders of Series O Preferred Stock may only convert up to a maximum of (i) 20% of such shares prior to June 29, 1997, (ii) 50% of such shares prior to December 31, 1997, (iii) 80% of such shares prior to June 29, 1998 and (iv) 100% of such shares thereafter. The Conversion Factor begins at 100% and becomes 95%, 90% and 88% on each of June 29, 1997, December 31, 1997 and June 29, 1998. In the event that the market price for a share of Common Stock remains below $6.00 per share for five(5) consecutive trading days, the Company may restrict holders from converting any shares of Series O Preferred Stock while such market price remains below $6.00: provided however, that the aggregate number of days subject to all such conversion restiction periods may not exceed sixty (60).
The Warrants are exercisable at any time before June 30, 2000 to purchase shares of Common Stock at an exercise price of $9.2625 per share (subject to adjustment in certain circumstances).
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 was 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 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 Speech 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 GTIL from 56% to 94%. In 1996, the operating assets of the Company's German Networks were contributed to a joint venture, the Company acquired the remaining 50% interest in MIS, and the Company formed a joint venture in Korea, Anam Telecom and increased its interest is GTIL from 94% to 97%. 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 and deployment of a low cost, high quality integrated digital voice and data wireless communications network in the United States ("U.S. Network"). The Company, through its subsidiaries and joint ventures, intends to deploy similar networks internationally. Although Management believes these activities will have a positive effect on the Company's results of operations in the long term, it is expected to have a substantial negative effect on the Company's results of operations in the short term. The Company expects to incur substantial losses and have negative cash flow from operations for the foreseeable future, attributable primarily to the operating, sales, marketing, general and administrative expenses relating to the roll-out of the U.S. Network as well as to a high investment in research and development related to its wireless communications activities. The Company may also continue to expend significant resources in pursuit of international opportunities. There can be no assurance that the Company will operate at profitable levels, have positive cash flow from operations, or continue to obtain financing to continue to implement its operating plan.
The Company currently groups its operations primarily into two types of activities: wireless communications and communications products. The Company's wireless communications subsidiaries are currently engaged primarily in providing trunked mobile radio services in the United Kingdom and Germany utilizing analog equipment, developing and selling wireless data solutions, implementing a digital wireless communications system for the United States that will provide integrated wireless communications services, and implementing digital wireless communications systems internationally.
The Company is presently in the process of rolling out its U.S. Network. The Company started providing commercial services in Philadelphia, Washington, DC, Baltimore, New York, Boston, Miami, Dallas and Orlando during 1996. The Company had announced its intention to offer digital wireless communication services in over 35 markets in the United States by the end of 1997. However, this roll-out schedule was based in part on FCC - imposed network build-out requirements. In connection with the Company's acquisition of MTA licenses in the recent FCC auctions, the Company will be permitted additional time to complete the roll-out of its U.S. Network. Accordingly, to better focus its financial and managerial resources, the Company has revised its roll-out schedule and currently intends to roll-out its U.S. Network in 18 additional markets in 1997, three additional markets in 1998 and the remaining markets in 1999. The Company's roll-out schedule may be reviewed and revised from time to time in light of changing conditions. The successful and timely implementation of the U.S. Network will depend upon a number of factors, including but not limited to: the acquisition of additional financing; 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; and, the establishment of effective sales and marketing organizations and distribution channels. The failure or delay with respect to any of these items could adversely affect the timing of the implementation of the U.S. Network in one or more of the Company's target markets, which could have a material adverse effect on the Company.
In March 1996, Industry Canada, the Canadian agency responsible for spectrum allocation, approved in principle an award of certain 900 MHz frequencies in the provinces of Alberta, British Columbia, Ontario and Quebec to a joint venture consisting of the Company, Cogeco Cable, Inc. ("Cogeco") and Techcom, Inc., a Canadian SMR operator. These entities had entered into a letter of intent to form the joint venture in Canada to launch mobile wireless communications services based on the Company's proprietary FHMA(R) technology. In July 1996, the Company announced that it had been unable to reach a final agreement with Cogeco. In October 1996, Industry Canada granted the Company and its remaining partner, Techcom, Inc., an extension to March 31, 1997 to find a suitable replacement for Cogeco. The Company is actively negotiating with other potential Canadian partners to replace Cogeco so that it can begin deployment of an FHMA(R)-based network and comply with Canadian foreign ownership and regulatory requirements. There can be no assurance that the Company will be able to identify a joint venture partner or, if such a partner is identified, that an agreement can be reached on terms acceptable to the Company. The Company has until March 31, 1997 (absent an additional extension) to identify a Canadian partner and file a site implementation plan with Industry Canada, or else the Company may lose its Canadian licenses. The licenses have no termination date, but are granted at the sole discretion of the agency. While the Company believes that it will be able to retain the license until a satisfactory Canadian controlled entity is formed, there is no assurance that the license will not be lost. Moreover, even if the Company reaches an agreement with a Canadian partner, there can be no assurances that the joint venture will be able to implement a FHMA(R) wireless communications network in Canada, which implementation shall be subject to the same risk associated with the implementation of the Company's U.S. Network.
In June 1996, the Korean Ministry of Information and Communications awarded Anam Telecom Co. Ltd. ("Anam Telecom"), in which the Company holds a 21% interest, a license to operate a nationwide trunked radio system in Korea. Anam Telecom is also held by approximately 53 Korean companies, among them Anam Industrial Co. Ltd. (the Company's joint venture partner in Korea), Hyundai Electronics, Korean Mobile Telecom, Ssangyong Corporation and Korea Express. The license covers a geographic area with a population of approximately 45 million people and is based on the implementation of the Company's FHMA(R) system on an 800 MHz frequency. The Company's FHMA(R) system currently operates in the 900 MHz frequency band. Although the Company believes its 800 MHz development program will result in successfully adapting its FHMA(R) system to the 800 MHz frequency, such adaptation is subject to a number of contingencies and the manufacture of certain equipment required in connection therewith. There can be no assurance that the Company will be able to successfully adapt its FHMA(R) system to the 800 MHz frequency on a timely basis. Any failure on the part of the Company to successfully adapt its FHMA(R) technology pursuant to the terms of the Korean license could have a material adverse effect on the Company's prospects in Korea. In addition, the Company will provide FHMA(R) related infrastructure equipment and broad business and engineering support for the design, implementation and operation of the network in Korea. Finally, the development and deployment of a FHMA(R) based digital system in Korea will be subject to the same risks attendent to the development and deployment of the Company's digital wireless system in the United States.
In June 1996, the United Kingdom Department of Trade and Industry awarded the Company's United Kingdom operating subsidiary a license to operate a digital Public Access Mobile Radio ("PAMR") network in the United Kingdom. Under the terms of the new digital license, the operating subsidiary, National Band Three Ltd. ("NB3"), received an initial allocation of two megahertz of spectrum in the 410-430 MHz band for the construction of a network based on the new Trans European Trunked Radio ("TETRA") standard. The Company has recognized that it will need some additional spectrum in the future and is discussing this with the regulatory authorities who have indicated that they are prepared to support the request. Currently, there are no TETRA systems available for commercial application. While some potential vendors have indicated an interest in supplying a TETRA-based system to NB3, management of the Company and NB3 cannot accurately estimate the availability, quality and costs associated with the implementation of a TETRA-based network. Management is continuing to work with
potential vendors and regulatory authorities in the United Kingdom regarding implementation of such system. However, there can be no assurance that NB3 will be able to implement such a system or, if implemented, when NB3 will be in a position to roll-out a TETRA-based system. Finally, the development of a TETRA-based system in the United Kingdom will be subject to the same risks attendent to the development of the Company's digital wireless system in the United States.
The Company expects that the digital network, when and if implemented by the Company in the United Kingdom, will offer a full range of mobile voice and data services, including telephony, digital dispatch, automatic vehicle location and packet data. The Company hopes to commence commercial operations of such a digital network in 1998. The Company's United Kingdom operating subsidiary already provides analog PAMR services to over 62,000 business subscribers throughout the United Kingdom.
In November 1996, the Company entered into a partnership agreement with RWE Telliance A.G. ("RWE") to merge their respective German mobile radio networks upon the approval of the appropriate regulatory authority in Germany. Under the terms of the agreement, each of the Company and RWE owns 50% of the merged entity. In December 1996, the Company and RWE received approval from the appropriate authority and completed the merger. Thus, the Company deconsolidated its German entity and began to account for its investment under the equity method of accounting for uncontrolled subsidiaries.
The Company's communications products subsidiaries are primarily engaged in the development, manufacturing, and marketing of telephone peripherals and sound and communications equipment.
The Corporate Group includes the Company's Corporate headquarters and the Geotest, Inc. subsidiary, in which the Company reached a definitive agreement to sell at the end of 1996.
Summary of Operations
1996 Compared to 1995
Consolidated revenues increased by 16% in 1996 principally due to subscriber growth on the Company's National Band Three Ltd. ("NB3") network in the United Kingdom, the inclusion of the Company's German Networks on a consolidated basis in 1996, and higher revenues from the communications product segment.
Consolidated operating expenses increased by 32% in 1996, due to: increased research and development activities associated with the enhancement of the Company's digital wireless network and development of customer subscriber units; increase in general and administration expenses to support the U.S. Network roll-out and international activities; and, increased marketing expenses associated with the roll-out of the U.S. Network.
Consolidated losses increased by $51.0 million to $138.2 million in 1996.
On a consolidated basis, interest expense increased in 1996 due to: the July 1995 issuance of the 15% Senior Secured Discount Notes ("Discount Notes"); and the related accretion of the value of the warrants issued in connection with the Discount Notes; and, the March 1996 issuance of the 12% Senior Subordinated Convertible Notes ("Convertible Notes"). Interest income increased in 1996 due to a higher level of cash and cash equivalents held during the year.
1995 Compared to 1994
Consolidated revenues increased by 10% in 1995, principally due to subscriber growth of on NB3's network.
Consolidated operating expenses increased by 40.2% in 1995, principally due to increased research and development activities associated with the Company's digital wireless network and costs related to the roll-out of the U.S. digital wireless network.
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 the Discount Notes. Interest income increased in 1995 due to greater cash and cash equivalents which resulted from the issuance of the Discount Notes. Amortization expense increased from $2.8 million in 1994 to $4.2 million in 1995 due to the increase in goodwill as a result of the Company's acquisitions of the German Networks.
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, 1996, 1995, and 1994. Other International Activities include the Company's German Networks, international business development activities and equity interests in its Korean Joint Ventures. The Geotek Technologies column includes Geotek Technologies Israel, Ltd., formerly PowerSpectrum Technology, the Company's equipment and research and development operation, and GMSI, Inc.
For the Year Ended December 31, 1996 (Dollars in Thousands)
* Represents the Company's proportionate share of the 34,000 subscribers utilizing the networks of the German joint venture.
For the Year Ended December 31, 1995 (Dollars in Thousands)
For the Year Ended December 31, 1994 (Dollars in Thousands)
1996 Compared to 1995
Revenues from wireless communications increased by $9.7 million or 29% for the year ended December 31, 1996. This increase is primarily due to the inclusion of the German networks on a consolidated basis in 1996 (until the merger with RWE in December 1996), the increase in the number of subscribers using the NB3 network as well as, an increase in Geotek Technologies' revenues for GMSI, Inc.'s contract related to the Singapore taxi fleet. The increase in negative gross profit for the U.S. Network is primarily the result of increased direct costs related to the roll-out, the cost of which are currently not covered by revenues and the write-down of pre-production inventory to the lower of cost or market. In 1995, the U.S. Network included the results of the Company's MetroNet subsidiary. In November 1995, the Company exchanged the assets of MetroNet, primarily 800 MHz licenses, with Nextel Communications Inc. for certain 900 MHz licenses.
Research and development expenses (net of government grants of $0.3 million and $5.9 million in 1996 and 1995, respectively) related to the digital wireless system and subscriber unit were $34.3 million for the year ended December 31, 1996 compared to $33.0 million for the same period of 1995. The increase in the 1996 expense is primarily attributable to costs related to the development of the U.S. Network's commercial subscriber unit and enhancements to the Company's proprietary digital wireless system, including system software. In addition, the Company expensed the $1.9 million excess of the consideration paid over the fair value of the net assets received in the purchase of MIS Information Systems Holdings Ltd. as the acquisition primarily related to ongoing software development projects in process. The Company expects significant 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 rolling out its wireless service over its proprietary digital wireless network in the United States, and accordingly, continues to put in place its marketing, engineering, operations and administrative staff and systems. Marketing expenses increased by approximately $12.0 million or 71% due to the U.S. Network marketing programs and increase in staff needed to execute the roll-out of the U.S. Network in the initial 1996 markets. General and administrative expense increased $8.9 million or 53% due to an increase in administrative staff needed to support the beginning of the U.S. Network roll-out and the Company's expanding international business development activities.
The Company's equity in losses of less than 50% owned entities for the year ended December 31, 1995 is attributable to the results of the Company's German networks and Korean joint ventures. The comparable loss for 1996 is attributable solely to the Company's Korean joint ventures which is presented net of a $1.4 million reimbursement received by the Company from Anam Telecom for expenses incurred by the Company on behalf of its Korean joint venture in connection with the trunked radio system license process. As discussed above, the Company's Korean joint ventures are in the process of establishing a digital network in Korea. It is expected that these entities will continue to generate substantial losses in the near future. In July 1995 and December 1995, the Company acquired the remaining shares of the Company's German networks and began consolidating these subsidiaries. As discussed previously, in December 1996, the Company merged its German networks with RWE's network in Germany. At December 31, 1996, the merged entity has approximately 34,000 subscribers of which the Company's ownership interest is approximately 17,000.
Wireless activities generated a loss before interest, taxes, amortization and depreciation of $87.4 million for the year ended December 31, 1996 compared to $56.8 million in 1995. This increase is primarily due to costs related to the commencement of the roll-out of the digital wireless communication system for the U.S. Network and the inclusion of the German networks on a consolidated basis in 1996.
1995 Compared to 1994
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 NB3 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 NB3 network remained constant. Gross profit as a percent of revenues increased as NB3's costs 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 1995 research and development expenses is a $5.6 million expense related to scope changes in the development of the digital wireless system. Additionally, research and development expense includes a $6.0 million 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.
Marketing expenses increased by approximately $8.1 million or 90% due to the commencement of the marketing effort in the U.S. and increase in staff needed to execute the roll-out of the U.S. network as well as volume growth in the German and NB3 networks. General and administrative expenses increased $2.2 million due to an increase in administrative staff to support the U.S. network as well as volume growth in the German and NB3 networks .
For Wireless Communications Activities, equity in losses of less than 50% owned entities increased to $4.9 for the year ended December 31, 1995 from $2.3 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 in July and December 1995 and the Company's Korean joint ventures. The Company began to fully consolidate the German 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. The number of subscribers on these networks as of December 31, 1995 was approximately 11,800. As discussed above, in December 1996, the Company merged its German networks with RWE's German network and formed a joint venture in which the Company owns a 50% interest.
Wireless activities generated a loss before net interest expense, amortization and depreciation of $56.8 million for the year ended December 31, 1995 compared to $30.2 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 .
Communications Products Activities
In August 1995, the Company transferred its interests in Speech Design GmbH and Bogen Communications, Inc. (the "Operating Companies") 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. Effective January 1, 1996, the $3.0 million convertible notes were reduced and restructured to a $0.5 million non-convertible note due July 1997. The Company will also be eligible to receive additional consideration if the future earnings of the Operating Companies, through July 1997, attain certain levels. The Company controls and consolidates 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, 1996, 1995 and 1994.
1996 Compared to 1995
Revenues from communications products activities increased by $1.8 million, or 4% to $46.3 million for the year ended December 31, 1996. The increase in BCI's revenues is due to an increase in sales of all product lines offset by a decline in the Office Automation ("OAS") product line, which was phased out beginning in December 1995.
Gross profit as a percentage of revenues increased from 39% to 46% in 1996. The increase is mainly due to charges of $2.2 million in 1995 to reduce certain inventory to estimated market value and an increase in 1996 in the sales price of most of the Company's domestic products. Excluding the impact of the OAS product line, the Company's gross profit was 44% in 1995.
The decrease in marketing expenses for the year ended December 31, 1996 compared to 1995 is due to the reduction of marketing and payroll expenses related to the OAS product line which, in 1995, included an intense marketing effort prior to management's decision to phase out the product line.
General and administration expense for the year ended December 31, 1995 contained costs related to the Company's sale of Bogen Communications and Speech Design subsidiaries to BCI.
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 is due to marketing programs initiated by Bogen to stimulate sales in the OAS product line 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.
Corporate Group
The Corporate Group includes the Company's Corporate headquarters and Geotest, Inc. subsidiary, which in accordance with a December 1996 definative agreement, was sold by the Company. The Company's Corporate Group generated a loss before net interest expense, amortization, depreciation and other charges of $9.1 million and $5.6 million in 1996 and 1995, respectively. The increase in the Company's 1996 general and administrative expenses was due to costs associated the Company's investing and financing activities as well as the expansion of the corporate group. Revenues from corporate group subsidiary were $3.9 million in 1996, compared to revenues of $2.8 million in 1995.
The Company's Corporate Group generated a loss before net interest expense, amortization, depreciation and other charges of $5.6 million for 1995 and 1994. Although the loss was stable, the Company's 1995 general and administrative expenses increased due to costs associated with the expansion of the corporate group. This increase was offset by the 1994 reserve against a loan receivable. Revenues from corporate group subsidiary were $2.8 million in 1995, compared to revenues of $1.2 million in 1994.
Liquidity and Capital Resources
The Company requires significant additional capital to implement its wireless communications strategy. In order to effect its strategy, the Company increased its debt borrowing and entered into a series of transactions, including the sale of convertible notes and convertible preferred stock during the year ended December 31, 1996. At December 31, 1996, the Company had $103.6 million of cash and cash equivalents as well as $40.0 million available under a line of credit facility. Also, as further discussed later in this section , the Company has a $100.0 million vendor credit agreement with HNS for the purchase of infrastructure equipment and in January 1997, the Company received $25.0 million from the sale of its Series P Convertible Preferred Stock to investors affiliated with George Soros.
The Company's short term cash needs are attributable primarily to capital expenditures, marketing and general and administrative expenses and research and development costs associated with the implementation and deployment of its digital FHMA(R) networks. One of the advantages of the Company's FHMA(R) system is its modularity, which allows the Company to execute a flexible roll-out plan requiring a relatively low investment in infrastructure in a given geographical area (compared to other wireless communications systems) in order to provide initial commercial service. Additionally, the Company is rolling out its U.S. Network market by market and is targeting customers which require primarily local or regional coverage. Management believes that this modularity and its local deployment provides the Company flexibility in controlling its financial resources by accelerating or slowing down the rate at which the U.S. Network is rolled out in various markets without materially impacting the business results, or cash flows, of its then operating city network.
The Company estimates that a minimum average initial capital investment of approximately $7 million is required to roll-out its U.S. network in an average target market. Additional expenditures will be required later in a given market if and when increased subscriber capacity or coverage is needed. In addition, the Company currently estimates that it will continue its present level of research and development expenses during the next 12 months in connection primarily with enhancements to the system and other related projects.
The Company is planning to raise capital and use existing line of credit facilities during the next 12 months to continue financing its current operating plan. The Company's long term capital needs relate to the planned roll-out of the U.S. Network in over 40 cities, the repayment of convertible debt and redeemable preferred stock (if such are not converted into equity), the repayment of the Company's vendor credit and Senior Secured Discount Notes due 2005, the financing of international digital wireless networks, and the acquisition of businesses in the field of telecommunications and of spectrum in the United States and internationally. The Company is currently pursuing various alternatives for raising capital including issuance of equity and debt securities, as well as a combination thereof and other sources. There can be no assurance that the Company will be able to obtain any such financing on acceptable terms, or at all. The failure to obtain such financing will cause the Company to significantly alter its U.S. Network roll-out plan; financing its international digital wireless networks and joint ventures; and, defer certain discretionary expenditures.
The following discussion of liquidity and capital resources, among other things, compares the Company's financial and cash position as of December 31, 1996, to the Company's financial and cash position as of December 31, 1995.
During 1996, cash and cash equivalents increased by $42.2 million to $103.6 million, while working capital increased by $32.6 million to $101.8 million as of December 31, 1996.
Operating Activities
Cash utilized in connection with operating activities, for the year ended December 31, 1996, amounted to $88.3 million. This included changes in operating assets and liabilities of $7.2 million. This change was primarily related to an increase in inventory of $23.6 million, advances made to suppliers for subscriber unit production of $11.5 million, offset by an increase in accounts payable and accrued expenses of $32.5 million attributable to an increase in activity due to the roll-out of the U. S. Network and approximately $9.5 million in advances received from Anam Telecom for infrastructure and subscriber units.
Investing Activities
Cash outflows from investing activities was $62.9 million. This was inclusive of a decrease in temporary investments of $7.9 million and the decrease in restricted cash of $27.6 million. The Company expended $50.0 million to acquire equipment during 1996 and capitalized $7.1 million in interest on construction in progress and FCC licenses.
During the year ended December 31, 1996, the Company expended $30.2 million for spectrum licenses. In July 1996, through the Federal Communication Commission's (the "FCC") 900 MHz Spectrum auctions, the Company purchased 181 10-channel blocks in 42 regional service areas known as Major Trading Areas at an aggregate cost of approximately $30.9 million. At December 31, 1995, the Company had $8.0 million on deposit with the FCC which was applied to the purchase price in 1996. The remainder was paid in 1996 with the proceeds from the Company's $24.5 million loan agreement with HNS as more fully discussed later in financing activities.
In July 1996, the Company contributed approximately $7.7 million to Anam Telecom on account of the Company's portion of the initial capitalization of Anam Telecom and $1.8 million to the Korean Ministry of Information for the Company's portion of Anam Telecom's nationwide license in Korea. In November 1996, Anam Telecom reimbursed the Company $1.4 million in expenses previously incurred by the Company in connection with the Korean license bid activity.
In August 1996, the Company purchased the remaining 50% ownership interest in software developer M.I.S. Information Systems Ltd. ("MIS") effective July 1, 1996. MIS was formed in 1994 as a 50/50 joint venture between the Company and Decision Systems Israel Ltd. The remaining 50% interest was acquired for a $2 million promissory note which bears interest at 8.25% per annum and is due July 1, 1998. The Company attributed the excess of consideration paid over the fair value of net the assets acquired, approximately $1.9 million, to an acquired research and development project and expensed this amount at the time of the purchase as the acquisition primarily related to ongoing software development projects in process.
Financing Activities
In March 1996, the Company issued $75.0 million aggregate principal amount of Senior Subordinated Convertible Notes due 2001 ("Convertible Notes"). Each Convertible Note is in the principal amount of $1,000, and beginning on March 5, 1997 may be converted by the holders into shares of the Company's common stock, par value $.01, at a conversion price equal to $9.50 per share. Cash interest on the Convertible Notes accrues at a rate of 12% per annum and is payable semi-annually on each February 15 and August 15 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 at least $15.20 per share.
In April, 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, entered into an agreement whereby S-C Rig made a $40.0 million unsecured credit facility the ("S-C Rig Credit Facility") available to the Company beginning June 1996. Under the terms of the S-C Rig Credit Facility, all borrowings are required to be made prior to April 5, 1998. All borrowings under the S-C Rig Credit Facility will accrue interest at a rate of 10% per annum and will mature four years from the date of the final borrowing thereunder. 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 S-C Rig Credit Facility will constitute senior indebtedness of the Company. At
December 31, 1996, there were no outstanding loans under the S-C Rig Credit Facility. In connection with the establishment of the S-C Rig Credit Facility, the Company issued to S-C Rig a five-year warrant to purchase approximately 4.2 million shares of Common Stock at an exercise price of $9.50 per share (subject to adjustment in certain circumstances). This warrant is exercisable at any time.
In June 1996, the Company sold 55,000 shares of Series N Cumulative Convertible Preferred Stock ("Series N Stock") at an aggregate purchase price of $55 million, to entities affiliated with the Charles R. Bronfman Family Trust, the Kolber Trust, the Renaissance Fund, and certain existing shareholders of the Company. The Series N Stock pays dividends in Common Stock at a rate of 10% per annum. Additionally, the Series N Stock is immediately convertible into shares of the Company's Common Stock at $11.00 per share. In connection with this transaction, the Company issued five year warrants to purchase approximately 1.65 million shares of the Company's Common Stock at $11.00 per share. In addition, the Company incurred financing fees equal to 3% of the aggregate purchase price and has recorded this amount as a reduction to the net proceeds of the issuance.
In September 1996, the Company, through its wholly owned subsidiary Geotek Financing Corporation ("GFC"), entered into a series of agreements with Hughes Network Systems, Inc. ("HNS") under which HNS agreed to manufacture at least 50% of certain components utilized by the Company in its 900 MHz infrastructure equipment and to provide the Company with up to $100 million in vendor credit financing, the last $50 million of which is subject to the satisfaction of certain conditions. Under the terms of the vendor credit financing agreement, the Company will finance 90% of its purchases of infrastructure related equipment from HNS until June 1999. All borrowings made under the agreement bear interest, payable quarterly, at a rate of 11% per annum until December 1999. Beginning December 1999, principal and interest are to be repaid semi-annually in equal installments over a five year period.
In connection with the above agreement, the Company issued HNS seven year Warrants to purchase 2,500,000 shares of the Company's common stock. The warrants allow HNS to purchase 1,000,000 shares at $8.625 Per share, 1,000,000 shares at $10.78 per share, and 500,000 shares at $12.94 per share. These warrants are exercisable at any time after September 27, 1997. The warrants, which have been valued at approximately $8.7 million, are being amortized over the life of the facility and the related debt payback period.
In October 1996, the Company borrowed $24.5 million under the Company's line of credit agreement with HNS. Under the terms of the agreement, the two year loan bears interest at 12%, payable quarterly and is convertible by the holder, beginning 181 days after draw down, at the lower of 90% of the average sale price of the Company's common stock for the 10 days preceding conversion or $9.75. The loan proceeds were used to finance the cost of licenses acquired in the FCC auction.
In December 1996, the Company sold 1,000 shares of its Series O Convertible Preferred Stock ("Series O Stock") to a group of investors for an aggregate purchase price of $50 million. The Series O Stock pays dividends in either shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per annum after a dividend payment failure). Additionally, commencing April 1, 1997, each share of Series O Stock is convertible by the holder into the number of shares of the Company's Common Stock as obtained by dividing the $50,000 stated value per share plus any accrued or unpaid dividends at the date of conversion, by the lowest daily volume weighted average price of the Company's Common Stock during the four trading days immediately preceding conversion multiplied by the conversion factor (the conversion factor begins at 100% and becomes 95%, 90% and 88% on June 29, 1997, December 31, 1997, and June 29, 1998, respectively). However, the holder can only convert up to a maximum of 20% prior to June 30, 1997, an additional 30% prior to December 31, 1997 an additional 30% prior to
June 29, 1998 and the remaining balance thereafter. In connection with this transaction, the Company issued warrants to purchase 1.7 million shares of the Company's Common Stock at $9.2625 per share (subject to adjustment in certain circumstances). The warrants are exercisable at any time, and from time to time, before June 30, 2000.
In January 1997, the Company sold to entities affiliated with George Soros, 500 shares of its Series P Convertible Preferred Stock ("Series P Stock") for an aggregate purchase price of $25 million. The Series P Stock contains terms which are substantially similar to those related to the Series O Stock. In connection with this transaction, the Company issued warrants to purchase 850,000 shares of the Company's Common Stock at $9.2625 per share (subject to adjustment in certain circumstances). The warrants are exercisable at any time, and from time to time, before June 30, 2000.
The Company paid cash dividends totaling approximately $5.1 million on its outstanding preferred stocks during 1996. Proceeds from the exercise of warrants and options totaled approximately $2.6 million in 1996.
Based on the Company's current business plan, the Company estimates that it will need approximately $250 million of additional financing through 1999 to implement its U.S. Network in all of its target markets. The amount of additional financing will increase if the Company experiences delays in the commercial implementation of its U.S. Network (which have occurred in the past), including loading subscribers on the U.S. Network, cost overruns or unanticipated cash needs. The Company also expects to need substantial additional financing to fund the deployment of NB3's digital wireless network and its other international operations and opportunities. Although the Company believes that the marcrocellular architecture of its FHMA(R) network will permit the Company to control its cash expenditures to a limited extent by focusing its activities in certain markets while reducing or delaying its activities in other markets, the failure by the Company to obtain necessary financing on a timely basis may prevent the Company from expanding coverage, adding subscribers or offering additional services in some or all of its U.S. markets and forego certain international opportunities.
The Company is considering a number of alternatives to raise additional financing including, but not limited to, public or private equity or debt financing, bank loans, strategic partners, joint ventures, vendor financing, leasing arrangements or a combination of these sources. The documents governing the Company's outstanding indebtedness impose certain significant operating and financial restrictions on the Company, which limit, among other things, the Company's ability to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, and engage in mergers and acquisitions. There can be no assurance that the Company will be able to obtain additional financing on a timely basis or on acceptable terms.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standard Board issued statement No.128 "Earnings Per Share" which is applicable for financial statements issued after December 15, 1996. The adoption of this standard will have no impact on the Company as the Company is in a loss position and only needs to present basic earnings per share as the inclusion of common stock equivalents or convertible securities has an antidilutive effect on the calculation of earnings per share.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages ----- Financial Statements:
Geotek Communications, Inc. and Subsidiaries
Reports of Independent Accountants -
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 -
[COOPERS & LYBRAND L.L.P. LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Geotek Communications, Inc.:
We have audited the consolidated financial statements and the consolidated financial statement schedule of Geotek Communications, Inc. and Subsidiaries as listed in Item 14(a)(1) and (2) of this Form 10-K. The consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits. We did not audit the financial statements of Geotek Technologies Israel Ltd., formerly PowerSpectrum Technologies, Ltd., a consolidated research and development entity, which statements reflect losses from operations of approximately 13%, 22%, and 26% of the corresponding consolidated totals in 1996, 1995 and 1994, respectively. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Geotek Technologies Israel Ltd. for 1996, 1995, and 1994, 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 report of other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above presently fairly, in all material respects, the consolidated financial position of Geotek Communications, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of its operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, based on our audits and the report of other auditors, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York March 31, 1997
[SHACHAK PEER REZNICK & CO. LETTERHEAD]
AUDITORS' REPORT TO THE SHAREHOLDERS OF
To the shareholders of GEOTEK TECHNOLOGIES ISRAEL (1992) LTD.
We have audited the accompanying balance sheets of GEOTEK TECHNOLOGIES ISRAEL (1992) LTD. (f/k/a Powerspectrum Technology Ltd.) (Hereinafter - "the Company") as of December 31, 1996 and 1995, and the statements of operation, changes in shareholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. 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 (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by an error in the financial statements or by an irregularity therein. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a fair basis for our opinion.
The financial statements referred to above have been prepared on the basis of historical cost, restated for the general purchasing power of the Israeli currency, in conformity with statements of the Institute of Certified Public Accountants in Israel. Condensed financial statement in nominal values, are presented in Note 20.
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, 1996 and 1995 and the results of its operations, changes in shareholders' equity and its cash flows for the years ended December 31, 1996, 1995 and 1994, 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 US.
Without qualifying our opinion, we draw attention to Note 1B as to the Company's dependence upon further funding by shareholders or others.
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 above mentioned financial statements is given according to the best of our information and the explanations received by us and as shown by the books of the Company.
SHACHAK PEER REZNICK & CO. Certified Public Accountants (Israel)
Tel Aviv, Israel March 26, 1997
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1996 and 1995 (Dollars in thousands, except per share data)
ASSETS 1996 1995 ---- ---- Current assets: Cash and cash equivalents ............................ $ 103,605 $ 61,428 Temporary investments ................................ 7,945 Restricted cash ...................................... 9,418 36,971 Accounts receivables trade, net of allowance for doubtful accounts of $1,346 in 1996 and $1,487 in 1995 ................................. 15,435 14,028 Inventories, net ..................................... 28,150 10,483 Deposits for spectrum licenses ....................... 11,500 Prepaid expenses and other current assets ............ 23,384 5,621 --------- --------- Total current assets ............................... 179,992 147,976
Investments in affiliates ............................ 36,972 3,078 Property, plant and equipment, net ................... 93,581 66,110 Intangible assets, net ............................... 91,508 68,181 Other assets, principally debt issuance costs ........ 28,069 7,219 --------- --------- $ 430,122 $ 292,564 ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable - trade ............................. $ 20,587 $ 17,948 Accrued expenses and other ........................... 49,279 23,005 Notes payable, banks and other ....................... 8,075 8,285 Current maturities, long-term debt ................... 261 29,577 --------- --------- Total current liabilities .......................... 78,202 78,815 --------- ---------
Long-term debt ....................................... 215,430 95,875 Other non current liabilities ........................ 1,008 1,217 Minority interest .................................... 438 395
Redeemable preferred stock ........................... 40,000 40,000
Commitments and contingent liabilities
Shareholders' equity:
Preferred stocks, $.01 par value: .................. 11 11 Common stock, $.01 par value: Authorized 135,000,000 and 99,000,000, respectively, issued 60,026,000 and 55,251,000 shares respectively, outstanding 59,788,000 and 55,013,000 shares, respectively ........... 600 553 Capital in excess of par value ..................... 429,483 272,456 Foreign currency translation adjustment ............ 942 1,012 Accumulated deficit ................................ (334,606) (196,384) Treasury stock, at cost (238,000 common shares) .... (1,386) (1,386) --------- --------- 95,044 76,262 --------- --------- $ 430,122 $ 292,564 ========= =========
See notes to consolidated financial statements.
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1996, 1995 and 1994 (Dollars in thousands, except per share data)
See notes to consolidated financial statements.
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY as of and for the years ended December 31, 1996, 1995 and 1994 (In Thousands)
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, Continued
as of and for the years ended December 31, 1996, 1995 and 1994 (in Thousands)
See notes to consolidated financial statements.
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1996, 1995 and 1994 (Dollars in thousands)
GEOTEK COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued for the years ended December 31, 1996, 1995 and 1994 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies:
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Geotek Communications, Inc. ("the Company") include all wholly-owned, majority-owned and controlled subsidiaries. The Company accounts for 20%-50% owned entities by the equity method. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the 1995 and 1994 financial statements and notes have been reclassified to conform to the 1996 presentation.
The Company's existing cash resources as of December 31, 1996 and expected cash flow from operations will be insufficient to fund the full implementation of the Company's current operating plan for the roll-out of the U.S. digital wireless network, international expansion and infrastructure equipment sales. The Company is in the commercialization stages of its domestic networks and, as a result, has not yet generated positive cash flow. The Company is planning to raise capital during 1997 and plans to use existing line of credit facilities to continue to finance its current operating plans which includes significantly increasing the number of subscribers on the U.S. Network during 1997, the buildout of the U.S. Network infrastructure as well as the related sales of its products. The failure to obtain such financing will cause the Company to significantly alter its current U.S. Network roll-out plan as well as its plans for expansion of its international digital wireless networks. Altering the U.S. Network roll-out plan will not impair the productivity of the Company's active markets due to the benefits of the macrocellular architecture that the Company's infrastructure is based on. The Company believes that its ability to delay expenditures relating to the U.S. Network roll-out and international expansion, or to defer discretionary spending, will ensure that the Company has sufficient liquidity to operate throughout 1997.
The Company's current and proposed digital wireless services involve a complex integration of sophisticated voice and data applications that utilize newly-developed hardware and specialized software products. The implementation of the U.S. digital wireless network has raised a number of technical challenges. The integration of voice and data services has presented various technical issues, primarily involving software, which have adversely affected performance of the U.S. wireless system and delayed scheduled implementation of the U.S. network in new markets and the loading of subscribers in the Company's existing markets. The introduction of additional services and the loading of additional subscribers is expected to require further hardware and software modifications in order to integrate such services with the existing digital wireless services, which may present new technical issues.
Furthermore, each of the Company's United States target markets could present unique technical issues due to differences in geography and topography. These factors have caused technical issues in certain of the Company's existing markets (including the New York City metropolitan area) and could adversely affect the introduction of services in other markets. Technical difficulties in the operation and performance of the U.S wireless network also may be experienced as additional subscribers are added in a particular market or as the coverage area in any market is increased. There can be no assurance that the Company will be able to develop or modify hardware or software to integrate successfully the planned voice and data applications, or to resolve other technical difficulties that may arise, on a timely or cost-effective basis. This could result in further delays in the implementation of the U.S. Network and adversely affect the Company's ability to add subscribers.
The Company may eventually need additional spectrum, beyond what it is already under agreement to acquire. It is possible, because spectrum is a finite resource, that the Company may be limited in the future in the spectrum it is able to acquire to suit its growing needs, In such an event, the Company's limited access to spectrum could inhibit the Company's growth and ability to expand its service capacity.
The Company is dependent upon a relatively small number of manufacturers for its products. Rafael currently is manufacturing the base station equipment for the U.S. wireless network on a schedule that is intended to enable the Company to meet its projected roll-out. Other third parties, including Mitsubishi Consumer Electronics of America ("MCEA"), Hughes Network Systems, Inc. ("HNS"), and Farbell Electronics currently are manufacturing subscriber units and certain other components of the system hardware for the U.S. wireless network on a schedule to meet anticipated subscriber demand. There can be no assurance that such third parties will deliver such equipment on a timely basis. Although the Company believes that it can obtain all components necessary to build the digital wireless system from other sources, it may encounter delays in the event of a component shortage due to the time needed to identify alternative sources and manufacture substitute components. Failure to obtain hardware components on a timely basis or at satisfactory prices could result in delays or cost overruns in the implementation of the U.S. digital wireless system.
Many of the target customers for digital wireless service 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 wireless service providers to those provided by the Company over its digital wireless network. 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 the digital wireless network to be offered by the Company, the extent of the demand for the Company's 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, technolocy changes and enhancements, marketing and pricing strategies of domestic and international competitors and general economic conditions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used for, among other things, 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 for the Company's Bogen Communications International subsidiary ("BCI"), net of expected sales returns, are recognized upon shipment. Revenues for the Company's GMSI, Inc. subsidiary relating to contracts for the sale of wireless dispatch products 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. Revenues for the Company's Geotek Technologies, Inc. subsidiary relating to the sale of digital wireless networks and related customer equipment are recognized upon customer acceptance.
Inventories
Inventories, which include handsets and telephone peripherals, 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 evaluates 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, 1996 and 1995, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and 10 years. Gains or losses arising from dispositions are recorded in operations.
Interests costs incurred on borrowings during the construction phase of the network infrastructure buildout for each market (until the assets are substantially complete and ready for use) are capitalized and depreciated over the service life of the equipment. Interest capitalized amounted to $2.6 million and $0.5 million in 1996 and 1995, respectively.
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 recorded at cost and are amortized over twenty years. Interest costs incurred on borrowings during the period during which certain FCC Licenses being readied for use is capitalized and amortized over the life of the license once the market to which the license pertains becomes commercial. Interest capitalized amounted to $3.9 million in 1996.
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. Grants are recorded once the Company receives approval reflecting the fact that all terms and conditions relating to the expenditures have been met.
Taxes on Income
The Company provides for deferred taxes on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax asset will not be realized.
The Company does not provide for taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted because the Company considers these earnings to be permanently invested in these operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Common Share
Net loss per common share is computed by dividing the net loss, after preferred stock dividend requirements, by the weighted average number of common shares outstanding during the year. Common stock equivalents are excluded since the effect would be anti-dilutive.
Long-Lived Assets
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 adopted this standard in 1996; the impact was immaterial.
2. Acquired and Disposed of Operations:
Wireless Networks in Germany
In November 1996, the Company entered into a partnership agreement with RWE Telliance A.G. ("RWE") to merge their respective German mobile radio networks upon the approval of the appropriate regulatory authority in Germany. Under the terms of the agreement, each of the Company and RWE owns 50% of the merged entity. In December 1996, the Company and RWE received approval from the appropriate authority to complete the merger. The Company no longer controls its German networks and, therefore has deconsolidated these networks as of December 31, 1996 and accounts for the merged German entity under the equity method of accounting. The Company's investment in the merged entity is $23 million (see Note 5) at December 31, 1996 which includes $20.0 million of goodwill which is being amortized over approximately 18 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. Effective January 1, 1996, the $3.0 million convertible notes were reduced and restructured to a $0.5 million non-convertible promissory note due July 1997. In connection with this restructuring, the Company was granted an option to purchase up to $3.0 million of the common stock of BCI at up to a 35% discount. This option expires on October 31, 1997. The BCI warrant holders hold approximately 3,800,000 warrants to purchase one share of BCI common stock for between $5.00 and $5.50. These warrants are callable upon the occurrence of certain events.
Other Acquisitions
In July 1996, in a private transaction, the Company issued a Convertible Promissory Note ("Promissory Note") in the amount of $800,000 due December 31, 1996 in exchange for shares, held by a minority shareholder, in the Company's subsidiary Geotek Technologies Israel ("GTI-Israel"), formerly PST. The Company recorded this amount as additional goodwill in GTI-Israel and is amortizing it over 20 years. The Promissory Note pays interest at a rate of 6% per annum until conversion or until maturity and is convertible at the closing price of the Company's common stock on the day preceding the holder's notice to convert. In October 1996, the holder converted the Promissory Note and accrued interest into approximately 102,000 shares of the Company's common stock. As of December 31, 1996, the Company owns 97% of GTI-Israel.
The Company purchased the remaining 50% ownership interest in software developer M.I.S. Information Systems Holdings Ltd. ("MIS") effective July 1, 1996. MIS was formed in 1994 as a 50/50 joint venture between the Company and Decision Systems Israel Ltd. The remaining 50% interest was acquired for a $2 million promissory note which bears interest at 8.25% per annum and is due July 1, 1998. The Company attributed the excess of consideration paid over the fair value of net the assets acquired, approximately $1.9 million, to an acquired research and development project and expensed this amount at the time of the purchase as the acquisition primarily related to ongoing software development projects in process.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Temporary Investments:
Temporary Investments include $7.9 million of U.S. Government Agency securities at December 31, 1995. The amortized cost of marketable securities at December 31, 1995 approximates fair market value. All marketable debt securities are classified as held to maturity at December 31, 1995, and mature within one year.
4. Inventories:
Inventories at December 31, 1996 and 1995 consist of the following (in thousands):
1996 1995 ------- ------- Raw materials .................................... $ 3,760 $ 3,520 Work-in-process .................................. 2,068 2,344 Finished goods ................................... 28,601 7,477 ------- ------- 34,429 13,341 Reserve for lower of cost or market .............. 6,279 2,858 ------- ------- $28,150 $10,483 ======= =======
5. Investments in Affiliates:
In June 1996, the Korean Ministry of Information and Communications awarded a consortium, Anam Telecommunications Co. Ltd. ("Anam Telecom") in which the Company holds a 21% interest, in a license to operate a nationwide trunked radio system in Korea. Anam Telecom also includes approximately 53 Korean companies, among them Anam Industrial Co. Ltd. (the Company's joint venture partner in Korea), Hyundai Electronics, Korean Mobile Telecom, Ssangyong Corporation and Korea Express.
In July 1996, the Company contributed $7.7 million to Anam Telecom representing the Company's portion of the initial capitalization of Anam Telecom. Additionally, the Company paid the Korean Ministry of Information and Communications $1.8 million representing the Company's portion of the fee for the Korean nationwide license. Interest costs incurred by the Company during the development period prior to Anam Telecom commencing commercial service are capitalized. The amount capitalized in 1996 was approximately $0.6 million. The Company intends to amortize, over 20 years, the cost of the nationwide license and related interest capitalized upon commencement of commercial service. These amounts have been included in investments in affiliates
As part of the joint venture agreement, in 1996, upon obtaining a national license in Korea, the Company granted the joint venture partner and other related parties options to purchase 800,000 shares of the Company's common stock for $10.00 per share. The Company estimated the fair value of the options granted at approximately $2.2 million. The Company recorded this amount as an additional investment in Anam Telecom and is amortizing this amount over a two year period.
In September 1996, the Company entered into an agreement with Anam Telecom whereby the Company will provide Anam Telecom $14.8 million of 800 MHz infrastructure equipment. Additionally, the Company entered into a separate agreement to sell customer subscriber units to Anam Telecom. In connection with these agreements the Company received advance payments of approximately $9.5 million which is included in accrued liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company contributed the net operating assets of their two wireless networks in Germany to a joint venture with RWE as described in Note 2. As of December 31, 1996, the carrying value of the Company's equity based investment in the new joint venture was approximately $23.0 million. The Company's investment exceeds its share of the underlying net assets of the joint venture by approximately $20.0 million which is being amortized over approximately 18 years.
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, 1996 and 1995 was $1.1 million and $1.3 million, respectively.
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, 1995. The entities that were accounted for under the equity method in 1995 were consolidated by the Company for the majority of 1996. The entities, which were accounted for on the equity method in 1996, only commenced operations in 1996, therefore, revenues were not material. Net loss from operations was approximately $0.9 million in 1996. The unaudited current assets, non-current assets, current liabilities, and non-current liabilities for such entities were $41.5 million, $31.1 million, $21.9 million and $6.0 million, respectively, as of December 31, 1996. All such amounts were not material in 1995.
6. Property, Plant and Equipment:
Property, plant and equipment consists of the following at December 31, 1996 and 1995 (in thousands):
1996 1995 -------- ------- Property, Plant and Equipment Machinery and equipment ...................... $104,242 $58,058 Furniture and fixtures ....................... 4,487 7,481 Leasehold improvements ....................... 993 896 Construction in progress ..................... 25,133 25,846 -------- ------- 134,855 92,281 Capital Leases Equipment .................................... 978 5,364 Construction in progress ..................... 938 -------- ------- 978 6,302 -------- ------- 135,833 98,583
Less accumulated depreciation Property, plant and equipment ................ 42,217 30,838 Capital Leases ............................... 35 1,635 -------- ------- 42,252 32,473 -------- ------- $ 93,581 $66,110 ======== =======
Depreciation expense was $15,902, $5,962 and $4,666 in 1996, 1995 and 1994, respectively. The decrease in assets under capital lease resulted from the deconsolidation of the Company's German networks.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Intangible Assets:
Intangible Assets consists of the following at December 31, 1996 and 1995 (in thousands):
1996 1995 ---- ---- Excess of cost over fair value of net assets acquired $22,989 $ 44,847 FCC and other private mobile radio licenses acquired and related intangibles 75,595 29,143 Other 840 741 -------- -------- 99,424 74,731 Less accumulated amortization 7,916 6,550 -------- -------- $ 91,508 $ 68,181 ======== ========
The decrease in the excess of cost over fair value of net assets acquired in 1996 is primarily attributable to the contribution of the net operating assets of the Company's previously consolidated German networks into the Company's joint venture with RWE (see Note 2) which effective December 1996, is accounted for under the equity method and therefore, the excess cost over fair value of net assets acquired is recorded in an investment in affiliates.
In July 1996, through the FCC's 900 MHz Spectrum auctions, the Company purchased 181 10-channel blocks in 42 regional service areas known as Major Trading Areas at an aggregate cost of approximately $30.9 million. The remaining $11.7 million increase in FCC and other private mobile radio licenses acquired is attributable to the purchase of several 900 MHz Licenses throughout the United States.
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 on the transaction.
8. Notes Payable:
Notes Payable consists of the following at December 31, 1996 and 1995 (in thousands):
1996 1995 ---- ----
$10.0 million line of credit, bank (a) $ 1,545 $ 3,670 Line of credit, bank (b) 1,830 627 Line of credit, bank interest payable at 5.5% to 6.5% 478 647 Line of credit, bank interest payable at 4.4% 975 Line of credit, bank (c ) 3,247 3,341 ------- ------- $ 8,075 $ 8,285 ======= =======
Prime rate at December 31 8.25% 8.50% Weighted average interest rate 6.02% 8.16%
(a) This line of credit for the Company's BCI subsidiary is for up to $10.0 million, bears interest at prime plus 2.0% to 2.75% in 1996 and 1995, and is subject to available collateral (80% of BCI's accounts receivable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 50% of BCI's finished goods inventory). 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, 1996, the available line based on available collateral was $3.6 million and the unutilized amount available under the line was $2.1 million.
In February 1997, the Company's subsidiary refinanced this line of credit. The new line of credit is for up to $7.0 million and bears interest at a rate of prime plus 0.75%. This line is subject to available collateral of 85% of BCI's accounts receivable and 50% of BCI's finished goods inventory and 35% of BCI's raw materials inventory. Additionally, this new line of credit is not guaranteed by the Company.
(b) The maximum amount available under this line of credit at December 31, 1996 is $2.6 million, including amounts outstanding under the long term portion. Interest rates vary between 4.4% and 7.25% depending on the length of time the funds will be used. As of December 31, 1996 the unutilized amount available under this line of credit was $0.8 million.
(c ) This line of credit for $3.5 million is collateralized by $3.5 million restricted cash and was repaid by the Company in January 1997.
9. Long-term Debt:
Long-term Debt consists of the following at December 31, 1996 and 1995 (in thousands):
(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 TO CONSOLIDATED FINANCIAL STATEMENTS
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 the Company's common stock at an exercise price of $9.90 per share. The Warrants, which were valued at $29.2 million, were recorded as a reduction of the Discount Notes and are being accreted over the ten year life of the Discount Notes.
The Discount Notes accrue interest until maturity at a rate of 15% per annum. Interest on the Discount Notes will be payable semi-annually, in cash, on July 15 and January 15, commencing January 15, 2001. The Discount Notes are 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, the most restrictive of which are primarily related to making certain investments in assets other than telecommunication assets, 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 were valued at $2.9 million, were 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 Discount Notes to approximately $110.0 million. The Company recorded in other assets approximately $4.3 million of deferred financing costs relating to this transaction which are being amortized, using the interest method, over the ten year life of the Discount Notes. Accumulated amortization as of December 31, 1996 was approximately $0.6 million.
In November 1995, the Company registered the Discount Notes and the Warrants through an exchange offer under the Securities Act of 1933, as amended.
(b) In March 1995, the Company refinanced $25.0 million of Senior Notes, that were originally due in September 1995, with $36.0 million of newly issued Senior Secured Notes (the "Senior Convertible 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 were valued at $1.8 million, which amount was recorded as a discount on the Senior Convertible Notes. In accordance with the Senior Convertible Note agreement, the Senior Convertible Notes were 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, 1996, $36 million was converted into 4,489,000 shares of common stock (as of December 31, 1995, $8 million was converted into 1,228,000 shares of common stock). In connection with the conversion, the Company incurred approximately $1.0 million in financing costs which were offset against the conversion proceeds.
Concurrently with the issuance of the Discount Notes (see a above), the Company's indebtedness under the $36 million Senior Convertible 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 the Senior Convertible Notes were converted, a proportionate amount of the restricted cash became unrestricted. As of December 31, 1996, no cash was restricted.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) In March 1996, the Company issued $75.0 million aggregate principal amount of Senior Subordinated Convertible Notes due 2001 ("Convertible Notes"). Each Convertible Note is in the principal amount of $1,000, and beginning on March 5, 1997 may be converted by the holders into shares of the Company's common stock, par value $.01, at a conversion price equal to $9.50 per share. Cash interest on the Convertible Notes accrues at a rate of 12% per annum and is payable semi-annually on each February 15, and August 15, 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 at least $15.20 per share. The Company has reserved 7,894,737 shares of the Company's $ .01 per value Common Stock which are issuable upon conversion of the Convertible Notes. In connection with the issuance of the Convertible Notes, the Company incurred approximately $2.3 million in financing costs which have been recorded in other assets and are being amortized over the five year term of the Convertible Notes. Accumulated amortization as of December 31, 1996 was approximately $0.4 million.
(d) 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.
(e) In December 1995, 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 extended the Company a two year, $24.5 million line of credit for the Company to acquire additional 900 MHz spectrum in the United States. In October 1996, the Company borrowed $24.5 million under the line of credit agreement. Under the terms of the agreement, the two year loan bears interest at 12%, payable quarterly and is convertible by the holder, beginning 181 days after drawdown, at the lower of 90% of the average sale price of the Company's common stock for the 10 days preceding conversion or $9.75. In connection with this agreement, the Company has reserved 3,888,889 shares of the Company's $.01 per value Common Stock which are issuable upon conversion of the note.
(f) In connection with the deconsolidation of the Company's German networks, assets under capital lease and related obligation were contributed to the Company's joint venture.
Available Credit Facilities
In September 1996, the Company, through its wholly owned subsidiary Geotek Financing Corporation ("GFC"), entered into a series of agreements with Hughes Network Systems, Inc. ("HNS") under which HNS agreed to manufacture at least 50% of certain components utilized by the Company in its 900 MHz infrastructure equipment and to provide the Company with up to $100 million in vendor credit financing, the last $50 million of which is subject to the satisfaction of certain conditions. Under the terms of the vendor credit financing agreement, the Company will finance 90% of its purchases of infrastructure related equipment from HNS until June 1999. All borrowings made under the agreement bear interest, payable quarterly, at a rate of 11% per annum until December 1999. Beginning December 1999, principal and interest are to be paid semi-annually in equal installments over a five year period.
HNS will be granted a security interest in the components manufactured by HNS as security for GFC's obligation under this credit facility. GFC has also pledged to HNS a $24.5 million intercompany note of Geotek License Holdings, Inc., a wholly owned subsidiary of GFC ("License Holdings"), and the capital stock of License Holdings as security for these obligations. License Holdings holds all of the 900 MHz licenses acquired by the Company in the recently completed FCC auctions for approximately $30.9 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the above agreements, the Company issued HNS seven year warrants ("HNS Warrants") to purchase 2,500,000 shares of the Company's common stock. The HNS Warrants allow HNS to purchase 1,000,000 shares at $8.625 per share, 1,000,000 shares at $10.78 per share, and 500,000 shares at $12.94 per share. These warrants are exercisable at any time, and from time to time, after September 27, 1997. The Company intends to draw down on the credit facility and as such, the HNS Warrants, which have been valued at approximately $8.7 million, were recorded as other assets and are being amortized over the life of the facility and the debt payback period, approximately seven years. Should the Company decide not to incur any indebtedness under the vendor credit agreement, all unamortized amounts will be expensed. Accumulated amortization as of December 31, 1996 was approximately $0.3 million.
In April 1996, the Company and S-C Rig Investments - III, L.P. ("S-C Rig"), a significant stockholder of the Company and an investment group affiliated with George Soros, entered into a Senior Loan Agreement whereby S-C Rig made a $40.0 million unsecured credit facility (the "S-C Rig Credit Facility") available to the Company beginning June 1996. Under the terms of the S-C Rig Credit Facility, all borrowings are required to be made within two years from the establishment of the credit facility. The borrowings accrue interest at a rate of 10% per annum payable semi-annually and will mature four years from the date of the final borrowing thereunder. The Company is obligated to pay S-C Rig a fee equal to 3% of each borrowing under the S-C Rig Credit Facility at the time of such borrowing. Borrowings under the S-C Rig Credit Facility will constitute senior indebtedness of the Company. At December 31, 1996, there were no outstanding loans under the S-C Rig Credit Facility.
In connection with the establishment of the credit facility, the Company issued to S-C Rig a five year warrant ("S-C Rig Warrant") to purchase approximately 4.2 million shares of Common Stock (subject to adjustment in certain circumstances) at an exercise price of $9.50 per share (subject to adjustment in certain circumstances). This warrant is exercisable at any time during the warrant period. The S-C Rig Warrant, which has been valued at $13.4 million, is recorded in other assets and is being amortized over the terms of the underlying credit facility, approximately five years. Accumulated amortization as December 31, 1996 was approximately $2.1 million.
Minimum annual principal repayments of long-term debt, assuming no conversions, and capital lease obligations (which are not material), during the next five years and thereafter, are as follows:
Year In Thousands ---- ------------ 1997 $261 1998 28,329 1999 129 2000 2,273 2001 75,000 Thereafter 227,938 --------- Total $ 333,930 =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes:
The source of loss before provision for income taxes for the years ended December 31, 1996, 1995, and 1994 is as follows (dollars in thousands):
1996 1995 1994 ---- ---- ====
United States ($98,251) ($66,012) ($26,248) Foreign (38,368) (18,965) (15,497) -------- -------- -------- Loss before income taxes ($136,619) ($84,977) ($41,745) ========== ========= =========
The provision for income taxes, solely attributable to foreign taxes, consists of the following for the years ended December 31, 1996, 1995 and 1994 (dollars in thousands):
1996 1995 1994 ---- ---- ---- Current foreign $989 $2,222 $660 Deferred foreign 614 ------ ------ ---- Total provision for taxes $1,603 $2,222 $660 ====== ====== ====
Included in the current foreign tax provision in 1996, 1995, and 1994 is $357,000, $950,000, and $573,000, respectively related to the utilization of pre-acquisition net operating losses of two subsidiaries which had full valuation allowances established at the time of the respective acquisitions by the Company and have been recorded as reductions to intangible assets. The Company has not provided deferred U.S. income taxes which would be payable if the undistributed earnings of its foreign subsidiaries, which totaled $5.5 million and $2.4 million at December 31, 1996 and 1995, respectively, were remitted because the Company considers these earnings to be permanently reinvested in these operations.
As of December 31, 1996 and 1995, temporary differences and carryforwards that give rise to deferred tax assets and liabilities are as follows (dollars in thousands):
1996 1995 ---- ---- Current deferred tax assets: Allowances for bad debt $ 498 $ 163 Inventory reserve 592 1,185 Net operating loss carryforwards 72 Valuation allowance (926) (1,348) -------- -------- Total current deferred tax assets $ 236 $ 0 ======== ========
Long-term deferred tax assets: Net operating loss carryforwards $ 85,745 $ 48,300 Other 10,860 3,202 Valuation allowances (96,605) (51,502) -------- -------- Total long-term deferred tax assets $ 0 $ 0 ======== ======== Long-term deferred tax liabilities $ 850 $ 0 -------- -------- Net long-term deferred tax liabilities $ 850 $ 0 ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The company has established a valuation allowance substantially offsetting the tax benefit of current and long term deferred tax assets as it is more likely than not that the tax benefit will not be realized. The Company has domestic net operating loss carryforwards ("NOL") for tax purposes of approximately $163.4 million and $95.3 million as of December 31, 1996 and 1995, respectively, which expire between the years 2001 through 2011. Additionally, the Company has foreign NOL carryforwards for tax purposes of approximately $35.9 million and $18.8 million in 1996 and 1995, respectively. The NOL's are subject to certain limitations on their utilization and as a result of various changes in control which have occurred.
11. Commitments and Contingent Liabilities:
Operating
The Company leases facilities under noncancellable operating leases, some of which include escalation clauses. Future minimum rental commitments under noncancellable operating leases as of December 31, 1996 are as follows:
Year In Thousands ---- ------------ 1997 $ 11,452 1998 10,443 1999 9,829 2000 8,665 2001 3,493 Thereafter 9,625 -------- $ 53,507 ========
Rent expense was $8.9 million, $7.4 million, and $6.4 million in 1996, 1995 and 1994, 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 GTI-Israel. Funding received from the Chief Scientist is repayable without interest based on 3% of revenues generated by the product being developed by GTI-Israel up to the total grant received. Such participation amounted to $0.3 million, $5.9 million, and $4.1 million for 1996, 1995 and 1994, respectively, and has been reported in the statement of operations as a reduction of research and development expenses. The Company has not recorded any additional amounts in the current year to reflect potential grants that may be received in 1997 relating to 1996 expenditures as these expenditures had not been approved by the Chief Scientist as of December 31, 1996.
Manufacturing Commitments
In 1994, the Company contracted with Mitsubishi Consumer Electronics of America to manufacture commercial subscriber terminals and units on behalf of the Company.
In September 1996, in connection with the HNS vendor credit facility, the Company entered into an agreement with HNS whereby HNS will manufacture at least 50% of certain components utilized by the Company in its 900 MHz infrastructure equipment through June 1999. As part of this agreement, the Company made a 10% or approximately $1 million advance to HNS for production.
In March 1995, the Company and HNS formed a strategic partnership to develop a portable subscriber unit. Under the terms of the agreement, HNS and the Company will share equally in the cost of developing the portable subscriber unit. During 1995, the Company expensed approximately $6.0 million paid to HNS under the terms of this development contract. During 1996 the Company made advances on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
account of production of $11.5 million to HNS. The Company has included all advances made to HNS in prepaid expenses and other current assets.
In 1996, the Company entered into a manufacturing agreement with Farbell Electronics ("Farbell"), whereby Farbell will produce 20,000 subscriber terminals for the Company's digital wireless system. At December 31, 1996, the Company placed $2.2 million into a restricted cash account to fund these purchases.
In 1996, the Company entered into an agreement with Anam Telecom (see Note 5) whereby the Company will provide the Company's digital wireless system infrastructure equipment and subscriber units to Anam Telecom. In connection with these agreements, the Company received advance payments of approximately $9.5 million which is included in accrued expenses as of December 31, 1996.
Guarantees of Debt of a Subsidiary
The Company has guaranteed the repayment of certain indebtedness of its German subsidiary, due in 1999, to its former owners, in the amount of DM 3.5 million plus interest (approximately $2.3 million). The Company has guaranteed the loan and has placed $2.4 million into a restricted cash account as collateral for this obligation. Additionally, the Company has guaranteed the line of credit of its German subsidiary in the amount of DM 5.0 million (approximately $3.2 million) and has placed DM 5.0 million (approximately $3.2 million) into a restricted cash account as collateral for this line of credit.
FCC Waiver
The Company was granted a waiver (the "Waiver") by the Federal Communication Commission ("FCC") which permits it to construct and activate certain systems on a delayed construction schedule. The Waiver, which expires in June 1997, is relevant to the Company's designated frequency area ("DFA") licenses which were acquired by the Company prior to the FCC's 900 MHz specialized mobile radio ("SMR") spectrum auctions conducted during 1995 and 1996. For those licenses acquired by the Company through the spectrum auctions, e.g. major trading area ("MTA") licenses, and for previously acquired DFA licenses authorized for overlapping frequencies with the Company's new MTA licenses, the Waiver is inapplicable. Instead, construction requirements for these MTA and DFA licenses will be satisfied if a portion of the market's population is served after three years. The population coverage requirement increases after five years.
Litigation
In June 1994, the Company filed a lawsuit against Harris Adacom Corporation B.V. ("Harris"), a Dutch Corporation, to enforce the Company's right to repayment of a $3.5 million loan made to Harris in January 1994. In or about May 1994, creditors placed Harris into bankruptcy. In response to the Company's lawsuit, Harris and its subsidiaries filed a lawsuit against the Company in the courts of the State of Israel, requesting a declaratory judgment that the Company entered into a binding agreement for the purchase by the Company of a significant interest in certain wireless communication business assets owned by Adacom Technologies Ltd., ("ATL"), an affiliate of Harris and an Israeli publicly traded company, and subsequently breached such agreement. 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 other various legal proceedings arising in the ordinary course of business. In the opinion of management, all such matters are without merit or are of such kind, or involve such amounts, as would not have a significant adverse effect on the financial position, results of operations or cash flows of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company has reserved 4,444,450 shares of its $.01 par value Common Stock issuable upon conversion of the Series H Stock. The holders of the Series H 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 cash dividends of $2.0 million in each of the years ended December 31, 1996 and 1995.
13. Shareholders' Equity:
Preferred Stocks
On December 31, 1996, the Company sold 1,000 shares of its Series O Convertible Preferred Stock ("Series O Stock") to a group of investors for an aggregate purchase price of $50 million. The Series O Stock pays dividends in either shares of the Company's Common Stock or cash at a rate of 10% per annum (12% per annum after a dividend payment failure) at the option of the Company. Additionally, commencing April 1, 1997, each share of Series O Stock is convertible by the holder into the number of shares of the Company's Common Stock as obtained by dividing the $50,000 stated value per share plus any accrued or unpaid dividends at the date of conversion, by the lowest daily volume weighted averaged price of the Company's Common Stock during the four trading days immediately preceding conversion multiplied by the conversion factor (the conversion factor begins at 100% and becomes 95%, 90% and 88% on June 29, 1997, December 31, 1997, and June 29, 1998, respectively). However, the holder can only convert up to a maximum of 20% prior to June 30, 1997, an additional 30% prior to December 31, 1997 an additional 30% prior to June 29, 1998 and the remainder thereafter. In connection with this transaction, the Company issued warrants to purchase 1.7 million shares of the Company's Common Stock at $9.2625 per share (subject to adjustment in certain circumstances). The warrants are exercisable at any time, and from time to time, before June 30, 2000.
Pursuant to a registration rights agreement, in February 1997, the Company filed a registration statement under the Securities Act of 1993, as amended, with regard to the resale of shares of Common Stock issuable (i) for dividends; (ii) upon conversion of Series O Stock; and, (iii) upon the exercise of the warrants.
In June 1996, the Company sold 55,000 shares of Series N Cumulative Convertible Preferred Stock ("Series N Stock") at an aggregate purchase price of $55 million, to entities affiliated with the Charles R. Bronfman Family Trust, the Kolber Trust, The Renaissance Fund and certain existing shareholders of the Company. The Series N Stock pays dividends in Common Stock at a rate of 10% per annum. Additionally, the Series N Stock is immediately convertible into shares of the Company's Common Stock at $11.00 per share. In connection with this transaction, the Company issued five year warrants to purchase approximately 1.65 million shares of the Company's Common Stock at $11.00 per share. The Company has reserved 6,650,000 shares of its $.01 par value Common Stock issuable upon conversion of the Series N Stock and upon exercise of the warrants. In addition, the Company incurred financing fees equal to 3% of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate purchase price, and has recorded this as a reduction to the net proceeds of the issuance. During 1996, the Company paid dividends of approximately 353,000 shares of common stock with a value of approximately $2.9 million.
In November 1996, a holder of the Company's Series N Stock converted 275 shares into 25,000 shares of the Company's Common Stock.
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 reserved 1,062,926 shares of its $.01 par value Common Stock issuable upon conversion of the Series L Stock. The Company has paid cash dividends of $750,000 and $351,000 during the years ended December 31, 1996 and 1995, 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 Series M Stock pay a dividend of 8.5% per annum, contain a Common Stock conversion premium and can be redeemed by the Company in certain circumstances. The Company has reserved 1,223,684 shares of the Company's $.01 par value Common Stock issuable upon conversion of Series M Stock. The Company has paid cash dividends of $988,000 and $592,000 during the years ended December 31, 1996 and 1995, respectively.
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 joint venture partner 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 reserved 851,064 shares of the Company's $.01 par value Common Stock issuable upon conversion of the Series K Stock. The Company has paid cash dividends of $700,000 and $489,000 during the years ended December 31, 1996 and 1995, respectively.
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 canceled. 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 ("Series I Stock") at a price of $500,000 per share or total consideration of $10.0 million to investors affiliated with George Soros. 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 reserved 851,064 shares of its $.01 par value Common Stock issuable upon conversion of the Series I Stock. The Company has paid cash dividends of $700,000 during each of the years ended December 31, 1996 and 1995, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock
In April 1996, the Company purchased 100% of the outstanding stock of MacDermott Communications, Inc., a private company whose only asset was an SMR License, for 190,988 shares of the Company's Common Stock. The value of the Common Stock issued, was approximately $2.0 million. This amount was ascribed to the SMR license which is included in intangible assets and will be amortized over twenty years.
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.
The Company has reserved approximately 33.2 million shares of the Company's $.01 par value Common Stock issuable upon the conversion of all redeemable preferred stocks, convertible preferred stock, and convertible indebtedness.
Warrants and Options
A summary of the compensatory warrants and options issued for other than employee benefit purposes during the years ended December 31, 1996, 1995 and 1994 is as follows (shares in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All warrants and options outlined above are vested upon issuance, except those issued in September 1996 pursuant the Company's vendor financing agreement with HNS which are exercisable beginning September 27, 1997.
Loan Warrants and Options
In connection with the issuance of the Discount Notes, the Senior Convertible Notes, S-C Rig Credit Facility, and HNS vendor financing, the Company issued approximately 6.8 million, 1.0 million, 4.2 million and 2.5 million warrants to purchase common stock, respectively. As of December 31, 1996, all warrants remain outstanding.
Preferred Stock
During 1996, in connection with the issuance of Series N Stock and Series O Stock, the Company issued warrants to purchase 1.65 million and 1.7 million shares of the Company's common stock at $11.00 and $9.2625 per share, respectively.
Vanguard Options
In 1994, the Company issued Vanguard Cellular Systems, Inc. ("Vanguard") options to purchase 10 million shares of the Company's Common Stock ("Series A Options") at an exercise price of $15.00 to $17.00 per share. In connection with the issuance of the Series L Stock to Vanguard and Toronto Dominion Investments, Inc. ("TDI"), the terms of the Series A Options were modified whereby the total number of Series A Options were decreased from 10 million to 7 million and TDI held approximately 1.8 million of the Series A Options.
In September 1996, the Series A Options expired. Additionally, the Company's Management Consulting Contract with Vanguard was terminated (See Note 16).
Other Warrants and Options
In July 1996, in accordance with the terms of the Company's joint venture agreement with Anam Industrial Co., Ltd. and other related agreements, which required the Company to grant options to its joint venture partner and other related parties upon receipt of a regional or national license in Korea (see Note 5), the Company granted options to purchase a total of 800,000 shares of the Company's common stock at $10 per share.
14. Stock Compensation Plans
The Company issues employee and director options to purchase shares of the Company's $.01 par value Common Stock under two separate non-qualified stock option plans which were adopted in 1989 and 1994 and allow the Company to issue approximately 6.0 million shares. Under these plans, employees and directors are granted ten year options to purchase shares of the Company's Common Stock at the greater of $8.00 per share or the closing price of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's Common Stock on NASDAQ on the date of grant except in certain circumstances such as employment agreements. Employees vest over a period of three to five years from the date of grant.
The Company has adopted the disclosure only provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") but applies the recognition criteria under Accounting Principles Board Opinion No. 25 ("APB No. 25") and related interpretations in accounting for its plans. Compensation expense in accordance with APB No. 25 was insignificant to the Company's results of operations in 1996 and 1995. If the Company elected to recognize compensation costs for stock option plans based on the fair value at the date of grant for awards under these plans, consistent with methods prescribed by SFAS No. 123, net loss and loss per share would have been the following pro forma amounts for the years ended December 31 (in thousands):
1996 1995 ---- ---- Net loss As reported ($138,222) ($87,199) Pro forma ($142,564) ($89,957) Loss per share
As reported ($2.51) ($1.75) Pro forma ($2.58) ($1.80)
The pro forma net loss and loss per share for 1996 and 1995 are not necessarily representative of the net loss and loss per share in future years because the 1996 and 1995 amounts do not include the incremental fair value of non-vested stock options granted prior to the adoption of SFAS No. 123.
The fair value of the Company's stock options used to compute proforma net income and loss per share disclosures is the estimated present value at grant date using the Black Scholes option-pricing model with the following assumptions for 1996: dividend yield of 0% as the Company is prohibited from paying dividends on its Common Stock in accordance with the restrictions of the covenants of the Company's Discount Notes; expected volatility of approximately 51%; an average risk free interest rate of 6.0%; and, an expected average holding period of approximately 1.5 years from date of vesting. Assumptions for 1995 are as follows: dividend yield 0%, expected volatility of approximately 53%; an average risk-free interest rate of 5.9%; and an expected average holding period of approximately 1.5 years from date of vesting.
Presented below is a summary of the status of the Company's stock options held by the Company's employees and directors and the related transactions for the years ended December 31 (shares in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant-date fair value of options granted during the years ended December 31 are (shares in thousands):
The following table sets forth the status of the Company's fixed stock options outstanding and exercisable at December 31, 1996 (share in thousands):
15. 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 fair value of the Company's cash and cash equivalents, temporary investments, restricted cash, and notes payable are considered to be equal to the carrying amount as they are short-term in nature. The value of the Company's Convertible Notes and Discount Notes were determined using the market price of the debt instrument at December 31. The Company determines the fair value of its warrants using the Black Scholes option pricing model. The asset and liability amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31, consisted of the following (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Company's S-C Rig Credit Facility and HNS vendor financing agreement, the Company issued 4.2 million and 2.5 million warrants to purchase shares of the Company's common stock. At December 31, 1996, the S-C Rig Warrants and HNS Warrants were carried at $11.4 and $8.4, respectively and have a fair value of $6.5 million and $5.7 million, respectively.
16. Certain Other Related Party Transactions:
In connection with the expiration of the Vanguard Options in September 1996, the Company's five-year management consulting agreement with Vanguard, pursuant to which Vanguard provided operational and marketing support to the Company for an aggregate of 1.5 million shares of common stock, was terminated. For the years ended December 31, 1996, 1995, and 1994, Vanguard earned approximately 199,000, 300,000, and 258,000 shares, respectively pursuant to this agreement. The fair market value of these shares have been recorded as marketing expenses in 1996, 1995, and 1994 at approximately $2.1 million, $2.4 million and $2.5 million, respectively.
The Company incurred expenses of $300,000 in 1996, 1995 and 1994, pursuant to its consulting agreement with a company affiliated with George Soros. Entities affiliated with George Soros also hold the Company's Series H Redeemable Preferred Shares, Series I Convertible Preferred Shares, $5.0 million of the Company's Series N Convertible Preferred Stock, 10% of the Company's Senior Secured Discount Notes due 2005, and S-C Rig Credit Facility.
GTI-Israel has entered into a subcontractor agreement with Rafael under which Rafael will partake in the development of the digital wireless network to be deployed by the Company and its subsidiaries in the United States and Korea. Research and development expense for the years ended December 31, 1996, 1995 and 1994 includes approximately $11.7 million, $12.5 million, and $11.1 million, respectively, for research performed by Rafael under this agreement. GTI-Israel has also entered into agreements with Rafael under which Rafael manufactures the infrastructure equipment to be used by the Company in its U.S. network and for the sale of such equipment by the Company to third parties. Through December 31, 1996 and 1995, the Company had placed firm orders for equipment and engineering totaling $24.0 million and $22.6 million, respectively and had made an advance payment (recorded in other current assets) of $2.5 million and $1.2 million to Rafael under these orders as of December 31, 1996 and 1995, 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 were valued at $2.0 million, which amount was recorded in 1995 as research and development costs.
In July 1996, the Company issued a Convertible Promissory Note in the amount of $800,000, due December 31, 1996, for additional shares, held by a minority shareholder, in the Company's subsidiary GTI-Israel (See Note 2).
In October 1995, Rafael Development Corporation ("RDC") converted all the principal and interest issued to it by GTI-Israel under convertible debentures into shares of GTI-Israel representing its 38% interest in GTI-Israel. The Company issued to Rafael 1.8 million shares of unregistered Company common stock in exchange for RDC's shares of GTI-Israel. The Company valued the unregistered shares at $8.6 million and recorded the excess of the value of the shares over the fair value of the underlying assets of GTI-Israel of $7.8 million as goodwill which is being amortized over 20 years. As part of the arrangement, RDC was granted an option to purchase up to 10% of GTI-Israel in certain circumstances. Additionally, in October 1995, RDC purchased 338,000 shares of Company common stock for $3.0 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Segment Information:
The Company's operations have been classified into two business segments: wireless communications and communications products. The wireless communications group is engaged in the commercial roll-out and enhancement of its digital wireless network in the United States, principally through its PSI and GTI-Israel subsidiaries, sale of digital wireless infrastructure equipment, provision of mobile radio services in the United States (PSI and MetroNet), the United Kingdom (NB3), and Germany, and the development of certain mobile data applications (GMSI and MIS). The enhancement of the Company's digital wireless network is primarily taking place in Israel. GMSI is located in Canada and markets its products in Canada, the United States and the United Kingdom.
The communications products group is principally engaged, through the Company's Bogen Communications International subsidiary, in the development, manufacturing and marketing of telephone and facsimile peripheral products and commercial audio and paging equipment in the United States and Germany. During 1995, the communications products group 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.
Corporate and other consists primarily of the Company's corporate headquarters activities and an insignificant subsidiary of the Company.
Sales between industry segments are not material.
Information about the Company's segments in 1996, 1995 and 1994 follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is subject to the risks inherent in conducting business across national boundaries, including currency exchange rate fluctuations, international incidents, military outbreaks, economic downturns, government instability, nationalization of foreign assets, government protectionism and changes in governmental policy, any of which could adversely affect the Company's business in one or more of its international markets or in the U.S. in addition, the licensing and other operational risks attendant upon commencing and maintaining wireless communications networks in foreign countries are similar to those in the U.S., including availability of spectrum capacity and transmission sites, competition and government regulation. Development of the Company's business in international markets may impose a significant burden on the Company's financial, managerial and personnel resources. There can be no assurance that the Company will be successful in developing its business in any of these markets or that any such expansion of the Company's business will be profitable.
18. Subsequent Events:
In January 1997, the Company sold to entities affiliated with George Soros, 500 shares of its Series P Convertible Preferred Stock ("Series P Stock") for an aggregate purchase price of $25 million. The Series P Stock contains terms which are substantially similar to those related to the Series O Stock (see Note 13). In connection with this transaction, the Company issued warrants to purchase 850,000 shares of the Company's Common Stock at $9.2625 per share (subject to adjustment in certain circumstances). The warrants are exercisible at any time, and from time to time, before June 30, 2000. Additionally, in February 1997, the Company filed a registration statement under the Securities Act of 1993, as amended, with regard to the resale of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of Common Stock issuable (i) for dividends; (ii) upon conversion of Series P Stock; and, (iii) upon the exercise of the warrants.
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"):
In July and August 1995, the Company issued, in a private offering, $227.7 million aggregate principal amount at maturity of 15% Senior Secured Discount Notes due July 15, 2005 ("the Discount Notes"). In connection with the Discount Note offering, the Company's wholly-owned U.S. Domestic Subsidiaries, including PowerSpectrum, Inc. and its Subsidiaries, (collectively referred to as the "Guarantor Subsidiaries") fully and unconditionally guarantee such Discount Notes jointly and severally. The Guarantor Subsidiaries are wholly owned by the Company. In addition, the Discount Notes are collateralized by a pledge of the capital stock owned by the Company in National Band Three Ltd., PowerSpectrum, Inc. and Subsidiaries, MetroNet Systems, Inc., Geotek GmbH Holding Corporation and Bogen Communications International, Inc.
The Guarantor Information of Geotek Communications, Inc. and Subsidiaries has been presented on pages through in order to present the Guarantor Subsidiaries pursuant to the Guarantor relationship. The Guarantor Information is presented as management does not believe that separate financial statements of the Guarantor Subsidiaries would be meaningful. This Guarantor Information should be read in conjunction with the Consolidated Financial Statements. The Discount Notes include covenants that place restrictions on the Company primarily related to making certain investments, paying dividends and incurring additional debt.
Notes to Guarantor Information:
Basis of Presentation - To conform with the terms and conditions of the 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) Guarantor Subsidiaries -For purposes of the Guarantor Information, Guarantor Subsidiaries includes all U.S. wireless subsidiaries of PowerSpectrum, Inc. ("PSI") combined with Geotek Financing Corporation, Geotek License Holding Inc., MetroNet Systems, Inc. and ANSA Communications, Inc., both direct wholly owned subsidiaries of the Parent Company. For purposes of the Guarantor Information, PSI does not contain the consolidated financial statements of GTI -Israel, formerly PST, a subsidiary of PSI, since GTI- Israel is not a Guarantor Subsidiary. Such statements of GTI-Israel are included with Non-Guarantor Subsidiaries.
(3) Non-Guarantor Subsidiaries -This includes the Company's subsidiaries that are not Guarantor Subsidiaries.
(4) Reclassifications and -Certain reclassifications were made Eliminations 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For (Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING BALANCE SHEET As of December 31, 1996 (Dollars in thousands, except per share amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. 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
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year ended December 31, 1996 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 1995 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 1994 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Year Ended December 31, 1996 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial Information For Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Year Ended December 31. 1995 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Condensed Consolidating Financial InformationFor Guarantors ("Guarantor Information"): continued
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW For the Year Ended December 31. 1995 (Dollars in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. 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)
Registered no: 2672488
NATIONAL BAND THREE LIMITED
Annual report
for the year ended 31 December 1996
NATIONAL BAND THREE LIMITED
Annual report for the year ended 31 December 1996
Registered no: 2672488
Pages
Directors and advisers
Directors' report -
Report of the auditors F- 47
Profit and loss account F - 48
Balance sheet F -49
Cash flow statement F - 50
Notes to the financial statements F - 51- F - 61
Directors and advisers
Executive directors E J Watts R Conroy M Davey D Henson G Darsley
Non-executive directors Y Eitan - Chairman Y Bibring G M Calhoun A D Robb
Secretary and registered office 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
NATIONAL BAND THREE LIMITED
Directors' report for the year ended 31 December 1996
The directors present their report and the audited financial statements for the year ended 31 December 1996.
Principal activities
The profit and loss account for the period is set out on page 48.
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 and future developments
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 the continued growth in the subscriber base during the year and provided new products and services. Both the level of business and the year end financial position were satisfactory, and the directors expect the level of activity to continue for the foreseeable future.
During the year the company was awarded a licence to operate a digital network. This will significantly enhance the current range of products and services available to customers in the future and facilitate the penetration of related and competitive markets.
Dividends and transfers to reserves
The directors do not recommend the payment of a dividend. The profit for the period of (pound)2,490,000 (1995: (pound)1,605,000) 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.
Directors
The directors of the company during the year ended 31 December 1996 were:
A D Robb G M Calhoun Y Eitan Y Bibring E J Watts R Conroy D Henson M Davey S A Style (resigned on 31 January 1997)
G Darsley was appointed to the board on 17 February 1997.
Directors' interests
None of the directors held any interest in the shares of the company at 31 December 1996 (1995: 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 1996. 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.
Auditors
The company's auditors are Coopers & Lybrand. Under an elective resolution the company has dispensed with the need to reappoint auditors on an annual basis.
By order of the board
/s/ G. Darsley Secretary 28 February 1997
NATIONAL BAND THREE LIMITED
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 1996 and 1995 and the related statements of income, changes in shareholders' equity and cash flows for the years ended 31 December 1996 and 1995. 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 1996 and 1995 and the results of their operations and cash flows for the years ended 31 December 1996 and 1995 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 1996 and 1995 and of shareholders' equity as of 31 December 1996 and 1995, to the extent summarised in note 21 to the financial statements.
COOPERS & LYBRAND Chartered Accountants and Registered Auditors London 28 February 1997
NATIONAL BAND THREE LIMITED
Profit and loss account for the year ended 31 December 1996
Notes 1996 1995 (pound)'000 (pound)'000 ----- ---------- ---------- Turnover 2 18,164 15,835
Cost of sales (9,522) (8,366) ------- ------ Gross profit 8,642 7,469
Net operating expenses 3 (6,015) (5,696) ------- ------ Operating profit 2,627 1,773
Interest receivable and similar income 120 98 Interest payable and similar charges 6 (217) (266) ------- ------ Profit on ordinary activities before taxation 7 2,530 1,605
Tax on profit on ordinary activities 8 (40) -- ------- ------ Retained profit for the financial year 15 2,490 1,605 ======= ======
All figures in the profit and loss account relate to continuing operations.
There is no difference between the profit on ordinary activities before taxation and the profit for the year as stated above, and their historical cost equivalents.
There have been no other gains and losses in the year.
NATIONAL BAND THREE LIMITED
Balance sheet at 31 December 1996
Notes 1996 1995 (pound)'000 (pound)'000 ----- ----------- -----------
Fixed assets Tangible assets 9 12,522 11,889 ------- ------- Current assets Stocks 10 411 193 Debtors 11 3,246 3,322 Cash at bank and in hand 3,553 1,817 ------- ------- Total current assets 7,210 5,332 Creditors: amounts falling due within one year 12 (9,748) (9,727) ------- ------- Net current liabilities (2,538) (4,395) ------- ------- Total assets less current liabilities 9,984 7,494 Provisions for liabilities and charges Deferred taxation 13 -- -- ------- ------- Net assets 9,984 7,494 ======= ======= Capital and reserves Called up share capital 14 9,000 9,000 Share premium account 15 8,800 8,800 Goodwill reserve 15 (9) (58) Profit and loss account 15 (7,807) (10,248) ------- ------- Total equity shareholders' funds 16 9,984 7,494 ======= =======
The financial statements on pages to were approved by the board of directors on 28 February 1997 and were signed on its behalf by:
/s/ G. Darsley Director
NATIONAL BAND THREE LIMITED
Cash flow statement for the year ended 31 December 1996
Notes 1996 1995 (pound)'000 (pound)'000 ----- ----------- ----------- Net cash inflow from operating activities 17 5,243 3,024 ----- ----- Returns on investments and servicing of finance
Interest received 120 98 Interest paid (217) (266) ----- ----- Net cash outflow from returns on investments and servicing of finance (97) (168) ----- ----- Taxation
United Kingdom corporation tax paid -- -- ----- ----- Investment activities
Purchase of tangible fixed assets (3,470) (2,801) Sale of tangible fixed assets 60 135 ----- ----- Net cash outflow from investing activities (3,410) (2,666) ----- ----- Increase in cash and cash equivalents 18 1,736 190 ===== =====
NATIONAL BAND THREE LIMITED
Notes to the financial statements for the year ended 31 December 1996
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.
Operating leases
Costs in respect of operating leases are charged on a straight line basis over the lease term.
NATIONAL BAND THREE LIMITED
Deferred taxation
Provision is made for deferred taxation, using the liability method, on all material timing differences to the extent that it is probable that a liability or asset will crystallise.
Pension costs
The company operates a "money purchase" pension scheme for the benefit of its employees.
The company provides no other post retirement benefits to its employees.
Related party transactions
The company has taken advantage of the exemptions under Financial Reporting Standard 8 not to disclose any transactions with entities that are part of the group qualifying as related parties.
2 Turnover
Turnover consists entirely of sales in one class of business made in the United Kingdom.
3 Net operating expenses
1996 1995 (pound)'000 (pound)'000 ----------- ----------- Selling and distribution costs 3,440 3,544 Administrative expenses 2,575 2,152 ----- ----- 6,015 5,696 ===== =====
4 Directors' emoluments
1996 1995 (pound)'000 (pound)'000 ----------- ----------- Emoluments (including pension contributions and benefits in kind) 567 481 === ===
NATIONAL BAND THREE LIMITED
Emoluments (excluding pension contributions) include amounts paid to:
1996 1995 (pound) (pound) ------- ------- The chairman Nil Nil ======= =======
The highest paid director 166,603 121,306 ======= =======
The number of directors (including the chairman and the highest paid director) who received emoluments (excluding pension contributions) within the following ranges was:
1996 1995 Number Number ------ ------
(pound)0 to (pound)5,000 3 3 (pound)5,001 to (pound)10,000 - - (pound)10,001 to (pound)15,000 - 1 (pound)30,001 to (pound)35,000 - - (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 1 2 (pound)70,001 to (pound)75,000 - 1 (pound)75,001 to (pound)80,000 1 - (pound)80,001 to (pound)85,000 1 - (pound)85,001 to (pound)90,000 1 - (pound)120,001 to (pound)125,000 - 1 (pound)165,001 to (pound)170,000 1 - ====== ======
A provision of (pound)80,000 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 1995 are included in the figure for 1996 above.
NATIONAL BAND THREE LIMITED
5 Employee information
The average weekly number of persons (including executive directors) employed by the company during the year was:
1996 1995 Number Number ------ ------
By activity Administration 28 26 Technical 42 43 Marketing 40 38 ----- ------ 110 107 ===== ======
1996 1995 (pound)'000 (pound)'000 ----------- ----------- Staff costs (for the above persons) Wages and salaries 2,994 2,766 Social security costs 310 277 Other pension costs 160 154 ----- ------ 3,464 3,197 ===== =====
6 Interest payable and similar charges
1996 1995 (pound)'000 (pound)'000 ----------- ----------- Interest payable on sums owed to parent undertaking 217 266 ===== =====
7 Profit on ordinary activities before taxation
1996 1995 (pound)'000 (pound)'000 ----------- ----------- The profit on ordinary activities before taxation is stated after charging/(crediting): Exceptional cost of sales 340 - Depreciation 2,815 2,362 Auditors' remuneration 20 20 Auditors' remuneration for non-audit services 11 18 Rentals under operating leases on land and buildings 1,242 1,168 Hire of equipment under operating leases 1,562 1,358 Profit on disposal of fixed assets (38) (58) ===== =====
NATIONAL BAND THREE LIMITED
8 Profit on ordinary activities before taxation
The exceptional cost of sales related to a provision for costs to be incurred in moving one of the company's switching sites, presently located in Manchester.
9 Tax on profit on ordinary activities
1996 1995 (pound)'000 (pound)'000 ----------- ----------- United Kingdom corporation tax at 33% (1995: 33%) Current tax 40 Nil === ===
The charge for corporation tax in the year is abnormally low due to the availability of losses brought forward from previous years.
10 Tangible fixed assets
Included in the plant and machinery above are assets under construction to the value of (pound)1,303,000 (31 December 1995: (pound)235,000) which did not incur depreciation during the year.
NATIONAL BAND THREE LIMITED
11 Stocks
1996 1995 (pound)'000 (pound)'000 ----------- -----------
Goods for resale 411 193 === ===
12 Debtors
1996 1995 (pound)'000 (pound)'000 ----------- -----------
Amounts falling due within one year Trade debtors 2,123 1,955 Amounts owed by fellow subsidiary undertakings 94 155 Other debtors 33 136 Prepayments and accrued income 996 1,076 ----- ----- 3,246 3,322 ===== =====
13 Creditors: amounts falling due within one year
1996 1995 (pound)'000 (pound)'000 ----------- ----------- Trade creditors 2,821 2,106 Amount owed to parent undertaking 3,112 4,432 Corporation tax 40 -- Other taxes and social security 273 215 Accruals and deferred income 3,502 2,974 ----- ----- 9,748 9,727 ===== =====
14 Deferred taxation
The total liability to deferred taxation is as follows:
NATIONAL BAND THREE LIMITED
15 Called up share capital
1996 1995 (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 ======= =======
16 Share premium account and reserves
17 Reconciliation of movements in shareholders' funds
1996 1995 (pound)'000 (pound)'000
Profit for the financial year 2,490 1,605 Opening shareholders' funds 7,494 5,889 ------- ------- Closing shareholders' funds 9,984 7,494 ======= =======
NATIONAL BAND THREE LIMITED
18 Reconciliation of operating profit/(loss) to net cash inflow from operating activities
1996 1995 (pound)'000 (pound)'000 ----------- -----------
Operating profit 2,627 1,773 Profit on sale of tangible fixed assets (38) (58) Depreciation of tangible fixed assets 2,815 2,362 Amounts written off fixed assets - 175 Increase in stocks (218) (116) Decrease/(increase) in debtors 76 (217) Decrease in creditors (19) (895) ----- ----- Net cash inflow from operating activities 5,243 3,024 ===== =====
19 Cash and cash equivalents
1996 1995 (pound)'000 (pound)'000 ----------- -----------
Changes in the period At 1 January 1996 1,817 1,627 Net cash inflow 1,736 190 ----- ----- At 31 December 1996 3,553 1,817 ===== =====
1996 1995 (pound)'000 (pound)'000 ----------- -----------
Analysis of balances Cash at bank and in hand 3,553 1,817 ===== =====
20 Financial commitments
Capital commitments 1996 1995 (pound)'000 (pound)'000 ----------- -----------
Contracted for but not provided 790 1,490 ===== =====
Authorised but not yet contracted for 13 Nil ===== =====
NATIONAL BAND THREE LIMITED
Operating lease commitments
At 31 December 1996 the company had annual commitments under non-cancellable operating leases, as follows:
21 Ultimate parent company
The directors regard Geotek Communications Inc (formerly Geotek Industries, Inc), a company incorporated in the United States of America, as the ultimate parent company.
Copies of the parent's consolidated financial statements may be obtained from The Secretary, Geotek Communications, Inc. 102 Chestnut Ridge Road, Montvale, New Jersey 07645, United States of America.
22 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 significant effect on consolidated net income and shareholders' equity, are discussed and quantified in a table of adjustments below. While this is not a comprehensive summary of all differences between UK GAAP and US GAAP, other differences are immaterial.
Significant differences between UK GAAP and US GAAP
(a) Deferred income taxes
Under UK GAAP, deferred taxes are only provided on timing differences where it is considered probable that such taxes will become payable in the foreseeable future. Under SFAS No. 109, "Accounting for Income Taxes", US GAAP requires deferred taxes to be provided in full under the liability method. There is no net adjustment recorded to the deferred income tax accounts for them to comply with US GAAP. Taxes on income presented in 1996 and 1995 reflect the utilization of (pound)630,000 and (pound)770,000 pre-acquisition net operating loss, respectively, which had a full valuation allowance established at the time
NATIONAL BAND THREE LIMITED
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)227,000 and (pound)260,000 for December 31, 1996 and 1995, respectively. The carrying value of goodwill at December 31, 1996 after the adjustment for utilization of pre-acquisition net operating loss (see (a)) and amortization was (pound)3,753,000.
(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"). 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 activities; 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 1996 1995 (pound)'000 (pound)'000 ----------- ----------- Net income (loss) as shown in the financial statements (pound)2,490 (pound)1,605 US GAAP adjustments: Amortization of goodwill (227) (260) Taxes on Income (630) (770) ----------- --------- Net income (loss) under US GAAP (pound)1,633 (pound)575 =========== ========= Shareholders' Funds
NATIONAL BAND THREE LIMITED
The following is a summary of the significant items which reconcile shareholders' funds from that reported under UK GAAP to that which would be reported had US GAAP been applied.
As of December 31, (pound)'000 ----------------------------------- 1996 1995 ------------- ------------- Shareholders' funds shown in the financial statements (pound)9,984 (pound)7,494 US GAAP adjustments: Goodwill 3,753 4,000 Deferred Income Tax (361) -- ------------- ------------- Shareholders' funds under US GAAP (pound)13,376 (pound)11,494 ============= =============
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Bogen Communications International, Inc.:
We have audited the consolidated financial statements and the financial statement schedules of BOGEN COMMUNICATIONS INTERNATIONAL, INC. and SUBSIDIARIES (formerly European Gateway Acquisition Corp.) (the "Company") listed in Item 14(a)(2) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bogen Communications International, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules 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.
March 7, 1997 New York, New York
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 and 1995 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
ASSETS 1996 1995 ------- ------- CURRENT ASSETS:
Cash and cash equivalents $885 $ 1,276
Accounts receivable (less allowance for doubtful accounts of $470 and $424 at December 31, 1996 and 1995, respectively) 6,517 4,992
Inventory, net 6,519 7,598
Prepaid expenses and other current assets 780 366 ------ ------- TOTAL CURRENT ASSETS 4,701 14,232
Property and equipment, net 2,130 2,191
Goodwill and intangible assets, net 4,308 14,706
Other assets 247 175 ------- ------- TOTAL ASSETS $31,386 $31,304 ======= =======
The accompanying notes are an integral part of these consolidated financial statements
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 and 1995 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
LIABILITIES 1996 1995 ------- ------- CURRENT LIABILITIES: Amounts outstanding under revolving credit agreements $4,828 $4,944 Accounts payable 3,707 2,861 Accrued expenses 3,026 3,610 Income taxes payable - 1,353 Advances and notes payable to related parties 746 537 Current maturities of notes payable to non-related parties 5 174 ------- -------
TOTAL CURRENT LIABILITIES 12,312 13,479
Advances and notes payable to related parties 361 3,458 Notes payable to non-related parties 8 - Other long term liabilities 536 674 Minority interest 593 550 ------- ------- TOTAL LIABILITIES 13,810 18,161 ------- ------- Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 1,000,000 shares authorized; none issued and outstanding at December 31, 1996 and 1995, respectively - - Common stock - $.001 par value; 50,000,000 shares authorized; 5,758,850 and 5,759,350 shares issued and outstanding at December 31, 1996 and 1995, respectively. 6 6 Additional paid-in capital 21,774 19,175 Accumulated deficit (4,177) (6,185) Currency translation adjustments (27) 147 ------- ------- TOTAL STOCKHOLDERS' EQUITY 17,576 13,143 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,386 $31,304 ======= =======
The accompanying notes are an integral part of these consolidated financial statements
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1996 1995 1994 ------- ------- ------
Net sales $ 46,269 $ 44,518 $ 45,922
Cost of goods sold 25,004 27,338 29,739 --------- --------- --------- Gross profit 21,265 17,180 16,183
Operating expenses: Research and development 2,892 2,307 1,999 Selling, general and administrative 14,360 15,067 12,555 Amortization of goodwill and intangible assets 445 443 424 --------- --------- --------- Income (loss) from operations 3,568 (637) 1,205
Other (income) expenses: Other (income) - (237) (39) Interest expense, net 596 587 498 Interest expense - related parties 72 619 696 Transaction costs - 1,491 - Minority interest of consolidated subsidiaries 337 184 326 --------- --------- --------- Income(loss) before provision for income taxes 2,563 (3,281) (276)
Provision for income taxes 555 1,262 79 --------- --------- --------- Net Income (loss) $2,008 $(4,543) $(355) ========= ========= ========= Net Income (loss) per common share: Net Income (loss) $ 0.35 $ (1.37) $ (0.18) ========= ========= ========= Weighted average number of common shares outstanding 5,759,075 3,311,668 1,925,000 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements
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 consolidated financial statements
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 consolidated financial statements
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS OF DOLLARS)
The accompanying notes are an integral part of these consolidated financial statements
BOGEN COMMUNCATIONS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
1996 1995 1994 ---- ---- ---- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 609 $ 829 $ 654 Cash paid for income taxes 2,175 4 6
Non Cash Investing and Financing Activities:
Restructuring of $3,000 debt by Geotek treated as equity contribution 2,602 -- --
Forgiveness of Bogen debt by Geotek treated as an equity contribution -- 7,155 --
Goodwill pushed down from parent -- -- 14,252
Adjustments to combine companies -- 1,966 --
Notes payable to Geotek in consideration for acquiring Bogen and Speech Design -- 3,000 --
Common stock issued to Geotek in consideration for acquiring Bogen and Speech Design -- 4 --
Common stock and warrants issued as consideration for certain services provided to the Company in connection with the acquisition of Bogen and Speech Design -- 740 --
Assets acquired (net of cash): Prepaid assets -- 8 -- Intangible assets -- 34 --
Liabilities assumed: Accrued expenses -- 160 -- Note payable to non-related party -- 115 -- Advances from Geotek -- 33 -- ------- ------- -------
Net liabilities assumed $ -- $ (266) $ -- ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements
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 ("Bogen") and Bogen's wholly owned subsidiary, Bogen Communications, Inc. ("BCI"), as well as Speech Design GmbH ("Speech Design"), its 67%-owned subsidiary Satelco AG, and its wholly owned subsidiaries, Speech Design (Israel), Ltd. And Speech Design (UK), Ltd. All significant intercompany balances and transactions have been eliminated in consolidation. Certain 1995 and 1994 balances have been reclassified to conform with the 1996 presentation.
B. Nature of Operations
The Company's operations are conducted in one segment engaged in developing, manufacturing, and marketing sound and communication products. Product lines sold by the company are as follows: Telephone Products ("Telco") Commercial Audio Products ("Commercial Sound") Intercom/Paging Equipment ("Engineered Systems")
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 Corporation ("Bogen") and a 67% interest in Speech Design GmbH ("Speech Design") from Geotek Communications, Inc. ("Geotek"). The Company paid Geotek $7,000 in cash, a convertible promissory note in the aggregate principal amount of $3,000, 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, contributed approximately $7,155 of intercompany indebtedness from Bogen to equity as part of the transaction. Further, as contingent consideration, the Company could be liable to pay Geotek an amount up to $11,000, based upon a calculation of operating results of Bogen and Speech Design during the two years after the acquisition. Based on management's review of the earnout calculation, which takes into account Speech Design and Bogen's operating results for the last two quarters of 1995, all of 1996 and the first two quarters of 1997, the anticipated contingent consideration payment, if any, will not have a material effect on the Company's financial position and operating results.
In May 1996, the Company and Geotek entered into the most recent amendment to the Stock Purchase Agreement effective January 1, 1996. Pursuant to such agreement, (i) the $3,000 convertible promissory note payable by the Company to
Geotek, due February 1997, was reduced and restructured to a $500 non-convertible promissory note due July 1997, (ii) the earnout formula was revised to reflect an increase in the amount the Company could be liable to pay Geotek from $11,000 to $13,500 in connection with the reduction of the principal amount of the promissory note, and (iii) Geotek was granted an option to purchase, at any time through October 31, 1997, from the Company $3,000 worth of Common Stock with exercise prices ranging from 100% to 65% of market price, depending on the date of exercise.
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 to a pooling of interests. Accordingly, the historical financial statements reflect the combined operations of Bogen and Speech Design prior to the transaction.
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 by various unrelated parties in connection with facilitating the acquisition of Bogen and Speech Design.
F. Revenue Recognition
Sales, net of expected returns, are recognized upon shipment.
G. Goodwill
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. The Company periodically evaluates the recoverability of goodwill and measures any impairment by comparison to estimated undiscounted cash flows from future operations.
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.
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 lives 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 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 Income (Loss) Per Share
Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the year, (unless anti-dilutive).
M. Credit Risk
The Company develops, produces, markets and sells commercial audio, electronic, paging, communications and other equipment and telecommunications peripherals. 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
Foreign denominated 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. Revenues and expenses 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.
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 Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement 128, Earnings per Share, effective for periods ending after December 15, 1997. This statement establishes standards for computing and presenting earnings per share ("EPS"), and replaces the current presentation of primary EPS with basic EPS, which excludes the effect of common stock equivalents. The Company will adopt this standard in 1997, and is presently analyzing the impact of this new standard on its financial statements and related disclosures.
2. Inventory
Inventory, at the lower of cost (first in, first out) or market, as of December 31, 1996 and 1995, is as follows:
1996 1995 ------- ------ Raw materials and supplies $1,525 $1,864 Work in progress 701 1,155 Finished goods 4,293 4,579 ----- ----- TOTAL $6,519 $7,598 ====== ======
The inventory balances are net of a reserve for inventory valuation and obsolescence of $1,126 and $2,552 at December 31, 1996 and 1995, respectively.
3. Property and Equipment
Property and equipment at December 31, 1996 and 1995 is comprised of the following items:
1996 1995 ------- ------ Machinery, equipment and tooling $ 3,581 $ 3,363 Furniture and office equipment 1,774 1,485 Leasehold improvements 694 600 ------- ------- 6,049 5,448 Less: accumulated depreciation and amortization, net of disposals (3,919) (3,257) ------- ------- $ 2,130 $ 2,191 ======= =======
Depreciation and amortization expense was approximately $978, $868, and $574 for the years ended December 31, 1996, 1995 and 1994, respectively.
4. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following, at December 31, 1996 and 1995:
1996 1995 ------- ------ Goodwill $16,295 $16,345 Other intangibles 220 123 ------- -------- Total intangibles 16,515 16,468 Less: accumulated amortization (2,207) (1,762) ------- ------- $14,308 $14,706 ======= =======
As explained above in Note 1D, the acquisition of Bogen and Speech Design was accounted for as a reverse acquisition by Geotek. No goodwill was recorded in connection with this transaction.
In January 1994 Geotek acquired a greater than 95% interest in Bogen, and 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 statements of Bogen. Accordingly, Bogen recorded net goodwill in the amount of $14,300 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 $378 for the year ended December 31, 1996, and $376 for the years ended December 31, 1995 and 1994.
Goodwill in the amount of $685 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. This Goodwill is being amortized using the straight-line method over 20 years.
Amortization of goodwill and other intangibles was approximately $445, $443, and $424 for the years ended December 31, 1996, 1995 and 1994, respectively.
5. Revolving Credit Agreements
In August 1995, Bogen Communications, Inc. ("BCI"), a wholly owned subsidiary of 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, 1996, the lender's prime rate was 8.25%. Advances to Bogen were made based on a percentage of accounts receivable and inventory.
As of December 31, 1996 and 1995, Bogen had short term domestic borrowings outstanding under the line of credit of $1,545 and $3,670, respectively. The amounts available under the credit line based upon accounts receivable and inventory were $2,126 and $437 at December 31, 1996 and 1995, 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 $16,655 and $14,910 at December 31, 1996 and 1995, respectively.
In the first quarter of 1997, BCI obtained a new revolving senior credit line for a period of two years. The new credit line has a maximum line of borrowing of $7,000 and bears an annual interest rate of .75% over the lenders prime rate,
replaces Bogen's previous line of $10,000 with an annual interest rate of 2.5% over the lender's prime rate. The senior loan is collaterized by all of the accounts receivable, inventory, property, plant and equipment, and general intangibles of BCI and is guaranteed by the Company. Under the terms of this line of credit, BCI cannot, among other actions, declare or pay dividends, return capital to its stockholders or redeem or repurchase any of its outstanding capital stock.
In August 1995, in connection with the Company's acquisition 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, 1996 or 1995.
At December 31, 1996 and 1995, Speech Design had short term lines of credit and overdraft facilities of $4,344, and $3,453, respectively, of which short term borrowings amounted to $3,283 and $1,274, respectively. The amounts available under these credit lines were $1,061 and $2,179 at December 31, 1996 and 1995, respectively, with rates tied to short-term bank notes and Euromarket loans. Speech Design's short term lines of credit are collaterized by all of Speech Design's accounts receivable and inventory. At December 31, 1996 interest rates on these short term lines ranged from 4.4% to 6.3%.
Total outstanding revolving lines of credit are summarized as follows at December 31, 1996 and 1995:
1996 1995 ---- ---- Domestic Lines of Credit Utilized $1,545 $3,670 Foreign Lines of Credit Utilized: Speech Design 2,805 627 Satelco 478 647 ------ ------ $4,828 $4,944 ====== ======
6. Long-Term Debt
A: ADVANCES and NOTES PAYABLE TO RELATED PARTIES
Advances and notes payable to related parties at December 31, 1996 and 1995 consist of the following:
1996 1995 -------- ------
Advances from Geotek $152 $ 138 Notes Payable - Geotek (at prime rate + 1%) - 133 Notes Payable - Geotek (at Swiss prime rate + 1%) - 266 Loan from Speech Design Shareholder (at German discount rate + 2%) 129 - Loan from Related Party (at Zurich Kantonal Bank rate) 232 317 Notes Payable - Geotek (at 13%) 594 3,141 ------ ------
Total 1,107 3,995
Less: Current Maturities (746) (537) ------ ------ $361 $3,458 ====== ======
Advances from Geotek
Advances from Geotek consist of net non-interest bearing advances made to Bogen.
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 from Speech Design Shareholders
This note payable to Speech Design's minority shareholders matures on December 31, 1999, at which date it can be renewed or called in at three months notice. Interest is paid in quarterly installments and is charged at 2% over the German discount rate.
Loan from 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 highest borrowing rate plus 2%. In May 1996, the $3,000 note plus accrued interest was reduced and restructured, retroactive to January 1, 1996, to a $500 non-convertible promissory note due July 1997.
B: NOTES PAYABLE TO NON-RELATED PARTIES
Notes payable to non-related parties at December 31, 1996 and 1995 consist of the following:
1996 1995 ------- ------ Various Notes Payable (at prime rate) $ - $ 60 Notes Payable (with imputed interest at 9%) - 37 Notes Payable (at 12% interest rate) - 12 Notes Payable to Bank (at Libor plus 2.5% interest) 13 - Notes Payable to Bank (at 8.5% interest rate) - 65 ---- ------ Total 13 174 Less: Current Maturities (5) (174) ------ ------ $ 8 $ - ====== ======
Various Notes Payable (at prime rate) Payable in monthly installments of $12 plus interest at the prime rate.
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 Libor plus 2.5%) Payable in monthly installments of $.4 plus interest at the Libor rate plus 2.5%.
Notes Payable to Bank (at 8.5% interest rate) Payable by Speech Design in quarterly installments plus interest at 8.5%.
Principal maturities of long-term debt over the next five years and thereafter are as follows:
Related Parties Other Total ------- ----- ----- 1997 $ 746 $ 5 $ 751 1998 -- 8 8 1999 129 -- 129 2000 -- -- -- 2001 -- -- -- Thereafter 232 -- 232 ------ ------ ------ $1,107 $ 13 $1,120 ====== ====== ======
7. Income Taxes
The Company's pre-tax book income is as follows for the years ended December 31, 1996 and 1995:
1996 1995 ---- ---- Domestic U.S. Operations $1,322 $(4,886) Foreign Operations 1,241 1,605 ------ ------ Total $2,563 $(3,281) ====== =======
The components of income tax expense are as follows for the years ended December 31, 1996 and 1995:
1996 1995 ---- ---- Current Income Tax (Foreign Only) $ 555 $1,262 Deferred Income Tax - - ------ ----- Total Income Tax Expense $ 555 $1,262 ====== ======
The difference between the provision for income taxes computed at the U.S. federal statutory rate and the provision as reported are as follows:
1996 1995 ---- ----
Provision at U.S. Statutory Rate $ 871 $(1,116) Non-deductible Expenses 338 785 Change in Valuation Allowance (793) 998
German Taxes 162 604 Other (23) (9) ---- ------ Tax Provision as Reported $555 $1,262 ==== ======
The Company has net operating loss ("NOL") carryforwards for U.S. tax purposes of approximately $7,847 as of December 31, 1996, 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, 1996 and 1995, were as follows:
1996 1995 ---- ---- Deferred Tax Assets: NOL Carryforwards $2,808 $2,601 Deferred Rent 191 251 Inventory Items 592 1,185 Allowance for Doubtful Accounts 157 163 Accrued Liabilities 196 470 Property, Plant & Equipment 137 103 Other 56 58 ----- ----- TOTAL DEFERRED TAX ASSETS $4,137 $4,831 Less, Valuation Allowance (4,137) (4,831) ------- ------ NET DEFERRED TAX ASSETS $ 0 $ 0 ======= =====
In accordance with SFAS No. 109, the Company has established a valuation allowance of $4,137 and $4,831 for the years ended December 31, 1996 and 1995, respectively. The valuation allowance was established due to the uncertainty of the realization of the deferred tax assets. A significant portion of the deferred tax assets which are currently subject to a valuation allowance may be allocated to reduce goodwill or other noncurrent intangible assets when subsequently recognized due to the application of SFAS No. 109 and purchase accounting.
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 2005. 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.
The minimum annual rental commitments over the next five years under operating leases are as follows:
Year Ending December 31, ------------ 1997 $ 1,351 1998 1,307 1999 1,214 2000 1,043 2001 368 Thereafter 975 ------ $6,258 ======
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 $478 and $597 at December 31, 1996 and 1995, respectively, is classified as a long-term liability.
Rent expense charged to operations totaled approximately $1,151, $1,055, and $779 for the years ended December 31, 1996, 1995 and 1994, respectively.
Employment and Consulting Agreements
Compensation of Directors
Directors, other than non-employee directors who are members of the Executive Committee of the Board, receive no compensation for acting as directors to the Company. During 1996, Messrs. Rosenfeld and Stern received $50,000 each as members of the Company's Executive Committee.
Employment Contracts
In January 1996, the Company entered into an agreement with Mr. Zvi Peled generally setting forth the terms and provisions of his employment as President and Chief Executive Officer of the Company. Mr. Peled joined the Company in such capacity in March 1996. Mr. Peled's base salary is $150,000 per annum and he is entitled to a minimum annual bonus of $50,000, contingent upon the satisfaction of performance criteria established by the Company's Board of Directors and Mr. Peled at the start of each year. In addition, the Company agreed to grant Mr. Peled stock options to purchase 175,000 shares of the Company's Common Stock, at the following prices: 75,000 shares at an exercise price of $5.00 per share, 75,000 shares at an exercise price of $7.50 per share, and 25,000 shares at an exercise price of $10.00 per share. Such options will vest in equal installments over a five year period. In addition, the Company provides Mr. Peled with $2,000 per month towards home rental payments, as well as a car. Effective January 1, 1997, and in lieu of participating in the Company's 401(k) Retirement Savings Plan and the Company's life and disability insurance plans, Mr. Peled receives an additional $2,300 per month, which amount is applied towards Mr. Peled's personal benefits program. In the event that Mr. Peled's employment is terminated without cause, Mr. Peled will continue to receive his salary and benefits until he obtains a replacement position or for six months, whichever is sooner. Pursuant to the employment agreement, Mr. Peled was provided with a $10,000 relocation allowance.
The Company also has a written agreement with Mr. Yoav M. Cohen, dated August 1, 1996, generally setting forth the terms and provisions of his employment as Chief Financial Officer of the Company. Mr. Cohen joined the Company in such capacity on July 31, 1996. Mr. Cohen's annual base salary is $110,000 and he may receive an annual bonus equal to 1 - 1.5% of the profits of the Company during the relevant fiscal year. Pursuant to the employment agreement, the Company agreed
to grant Mr. Cohen stock options, in accordance with the terms and provisions of the Company's 1996 Incentive Stock Option Plan, to purchase 50,000 shares of the Company's Common Stock. Mr. Cohen also participates in the Company's 401(k) Retirement Savings Plan, health and dental plans, and disability and life insurance plans and is provided with Life Insurance with an annual premium of up to $3,000 annually. In addition, Mr. Cohen is provided with a Company car, insured by the Company. In the event that Mr. Cohen is terminated without cause, he is entitled to a severance package pursuant to which he would continue to receive his base salary and related benefits for six months.
Mr. Menashe Ben-David is employed by the Company pursuant to a written agreement with Geotek, dated June 7, 1991, which has no definite term. The agreement provides for Mr. Ben-David to receive a base salary of $75,000 per year, subject to periodic review and increase by Geotek. Geotek has also agreed to provide life and health insurance to Mr. Ben-David as well as an automobile. Mr. Ben- David also received a total of 50,000 stock options to purchase shares of common stock of Geotek. Geotek is entitled to terminate the employment agreement at any time upon thirty days prior written notice; provided, however, that Geotek continues to pay Mr. Ben-David his base salary for a period of six months from termination of the agreement, unless Mr. Ben-David is terminated as a result of certain conditions. Mr. Ben-David has agreed not to compete with Geotek for a period of two years after his employment is terminated. The Company has assumed all of Geotek's obligations under this agreement.
Mr. Kasimir Arciszewski is employed by Speech Design pursuant to a written agreement dated February 9, 1993 which has no definite term. The agreement provides for Mr. Arciszewski to receive a base salary of DM 180,000 ($119,682 as of December 31, 1996), subject to review and increase by the parties at the end of each calendar year. In addition, Mr. Arciszewski is entitled to annual bonuses based on Speech Design's pre-tax profits. Speech Design has agreed to provide Social Security and health insurance benefits to Mr. Arciszewski and agreed to furnish an automobile to him. Mr. Arciszewski has agreed not to compete with Speech Design during the term of the agreement and for one year thereafter and Speech Design has agreed to compensate Mr. Arciszewski during this noncompetition period. Mr. Arciszewski has agreed not to disclose any of Speech Design's business or trade secrets.
Commitments
At December 31, 1996, the Company had commitments to purchase merchandise from foreign vendors of $627 under documentary letters of credit and $394 under other sight documents. 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, and $6,284 in 1995 and 1994, respectively. The concessions and benefits from Reshef expired on December 31, 1995.
Litigation
The Company is not aware of any material pending or threatened legal proceedings to which it is a party or of which any of its property is subject.
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 acquistion 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 (a "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 at any 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 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 a Business Combination, submitted such transaction for shareholder 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 classified the value of this redemption as common stock, subject to possible redemption, on its balance sheet at December 31, 1994 prior to the consummation 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 shareholder 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, 1996, 3,660,000 Warrants were outstanding.
Options
In 1996, the Company adopted the 1996 Incentive Stock Option Plan (the "1996 Plan") pursuant to which an aggregate of 1,253,335 shares of the Company's Common Stock were reserved for issuance pursuant to the plan. The 1996 Plan can award stock options to eligible employees of the Company and its subsidiaries (including employee directors), non-employee directors, and independent contractors and consultants who perform services for the Company. The options vest over a period of five years and are exercisable at prices determined on a case by case basis. The Company will apply the intrinsic value based method permitted by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." During 1996, there were no options granted, exercised or exercisable under the 1996 Plan.
In 1994, Bogen adopted an Employee Stock Option Plan (the "Bogen Plan"). Under the Bogen 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 Bogen 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 the Bogen Plan at a price of
$1.14 per share which approximated fair value. These options vest over a five (5) year period. All options granted under the Bogen Plan were outstanding at December 31, 1996, 1995, and 1994. In 1997, the Company intends to cancel all the options granted under the Bogen Plan and grant certain participants under the Bogen Plan an option for a Share of Common Stock of the Company under the 1996 Plan in exchange for an option of three shares of Common Stock of Bogen, granted to a participant in the Bogen Plan. Options, for an aggregated 253,325 shares of Common Stock will be granted under the 1996 Plan to former participants of the Bogen Plan.
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 1G, 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, 1996 and 1995, 3,960,000 shares of common stock were reserved for issuance upon exercise of redeemable warrants.
10. Related Party Transactions
In 1995, the Company 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.
During 1995, in conjunction with the acquisition of Bogen and Speech Design 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 which was reduced and restructured to a $500 non-convertible promissory note due July 1997 (see Note 1D "Basis of Presentation").
11. Economic Dependency
During the years ended December 31, 1996, 1995 and 1994, the Company purchased audio components of approximately $12,072, $8,853, and $14,016, 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 $4,506 and $4,400 and accounted for more than 10% of the Company's net sales in 1996 and 1995, respectively. Sales to a
different customer approximated $7,100 and accounted for more than 10% of the Company's net sales in 1994.
Twenty 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, 1996, 1995 and 1994 were approximately $17, $15, and $18, 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. Amounts charged to expense were $83, $82, and $108 for the years ended December 31, 1996, 1995 and 1994, respectively.
13. Segments
The Company's operations are conducted in one segment in the United States (Bogen) and Germany (Speech Design). Information about the Company for 1996, 1995, and 1994 has been presented geographically as follows:
1996 1995 1994 ------ ------- ------ Geographic Segments: Revenues: United States $30,671 $30,677 $37,745 Foreign 15,598 13,841 8,177 ------- ------- ------- $46,269 $44,518 $45,922 ======= ======= ======= Operating income (loss): United States $ 1,862 $(2,405) $ (18) Foreign 1,706 1,768 1,223 ------- ------- ------- Income (loss) from operations $ 3,568 $ (637) $ 1,205 ======= ======== ======= Identifiable assets: United States $23,604 $24,425 $27,467 Foreign 7,782 6,879 5,399 ------- ------- ------- $31,386 $31,304 $32,866 ======= ======= =======
14. Fourth Quarter Adjustments
Certain adjustments and provisions amounting to $1,500, primarily related to inventory valuations for the OAS product line, were recorded in the fourth quarter of 1995.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
The information called for by Items 10, 11, 12 and 13 (except for the information regarding executive officers called for by Item 10
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
Page ----
(a)(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data," for Geotek Communications Inc. and Subsidiaries to
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 49
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed by the Company during the fourth quarter of 1996:
Current Report on Form 8-K filed October 7, 1996, reporting that the Company and a wholly-owned subsidiary of the Company, Geotek Finance Corporation ("GC"), entered into a vendor credit financing agreement and a manufacturing agreement with Hughes Network Systems, Inc. ("HNS"), pursuant to which HNS agreed to manufacture certain of the components required for construction of the Company's 900MHz FHMA(R) network equipment and to provide up to $100.0 million of financing (the last $50.0 million of which is subject to the satisfaction by the Company of certain operating criteria) for up to 90% of the purchase price of equipment scheduled for delivery to the Company prior to June 30, 1999.
Current report dated December 31, 1996, reporting the issuance of 1,000 shares of the Company's Series O Convertible Preferred Stock ("Series O Stock") for an aggregate purchase price of $50
million. The Series O Stock pays dividends in either shares of the Company's Common Stock or cash at a rate of 10% per annum. Each share is convertible at a conversion price which varies based on the price of the Company's Common Stock discounted based on the length on time the Series O Stock is held by the investor. In connection with this transaction, the Company issued warrants to purchase 1.7 million shares of the Company Common Stock at $9.2625 per share (subject to adjustment is certain circumstances) which can be exercised at any time from time to time before June 30, 2000. Additionally, the Company announced a letter of intent, with investors affiliated with George Soros, to issue 500 shares of the Company's Series P Convertible Preferred Stock ("Series P Stock") for an aggregate purchase price of $25 million. The terms of the Series P Stock are substantially identical to those of the Series O Stock.
(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 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)
4.18 Warrant Certificate in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.17, dated March 30, 1995.(7)
4.19 Warrant Certificate in connection with Note and Warrant Purchase Agreement referenced in Exhibit 4.17, dated March 30, 1995.(7)
4.20 Senior Secured Convertible Note dated March 30, 1995 from the Company in connection with the Note and Warrant Purchase Agreement referenced in Exhibit 4.17.(7)
4.21 Senior Secured Convertible Note dated March 30, 1995 from the Company in connection with the Note and Warrant Purchase Agreement referenced in Exhibit 4.17.(7)
4.22 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)
4.23 Unit (Note and Warrant) Purchase Agreement, dated June 29, 1995, by and between the Company and Smith Barney Inc. (10)
4.24 Indenture, dated as of June 30, 1995, between the Company and IBJ Schroder Bank & Trust Company, as trustee. (10)
4.25 Pledge Agreement, dated as of July 6, 1995, by and between the Company and IBJ Schroder Bank & Trust Company, as collateral agent. (10)
4.26 Share Transfer Agreement, dated July 6, 1995 between the Company and IBJ Schroder Bank & Trust Company, as collateral agent. (10)
4.27 Charge Over Shares, dated July 6, 1995, between the Company and IBJ Schroder Bank & Trust Company, as collateral agent. (10)
4.28 Warrant Agreement, dated as of June 30, 1995, by and between the Company and IBJ Schroder Bank & Trust Company, as warrant agent. (10)
4.29 Loan agreement dated as of December 21, 1995, between the Company and Hughes Network System, Inc. (11)
4.30 Note Purchase Agreement, dated March 4, 1996, by and between the Company and Smith Barney Inc.(12)
4.31 Indenture, dated as of March 5, 1996, between the Company and The Bank of New York, as trustee. (12)
4.32 Senior Loan Agreement dated April 4, 1996 between the Company and SC Rig Investment-III L.P. (12)
4.33 Warrant Agreement dated April 4, 1996 between the Company and SC Rig Investment-III L.P. (12)
4.34 Registration Rights Agreement, dated March 5, 1995, between the Company and Smith Barney Inc. (11)
4.35 Form of Subscription Agreement to purchase Series N Cumulative Convertible Preferred Stock and Warrants. (14)
4.36 Certificate of Designation of Series N Cumulative Convertible Preferred Stock.(14)
4.37 Form of 60-month Warrant Certificate granted to investors in connection with Subscription Agreement referenced in Exhibit 4.35.(14)
4.38 Certificate of Designation of Series O Convertible Preferred Stock.(15)
4.39 Form of Letter Agreement by and between the Company and each of the purchasers of Series O Preferred Stock.(15)
4.40 Form of 42-month Warrant Certificate granted to certain purchasers of Series O Preferred Stock and the purchaser of the Series P Preferred Stock.(15)
4.41 Form of Registration Rights Agreement by and among the Company and the purchasers of the Series O Preferred Stock.(15)
4.42 Certificate of Designation of Series P Convertible Preferred Stock.(16)
4.43 Certificate of Correction, filed January 6, 1997, to correct a certain error in the Certificate of Designation of Series O Convertible Preferred Stock.(16)
4.44 Certificate of Correction, filed January 29, 1997, to correct a certain error in the Certificate of Designation of Series O Convertible Preferred Stock.(16)
10.1 Stockholders Voting Agreement, dated as of February 23, 1994, among the Company, Vanguard Cellular Systems, Inc., S-C Rig Investments-III, L.P., Evergreen Canada-Israel Investment & Co., Ltd., Yaron Eitan and Winston Churchill.(1)
10.2 Asset Exchange Agreement, dated as of March 24, 1995, by and between the Company, Metro Net Systems, Inc., Nextel Communications, Inc. and certain Nextel subsidiaries. (7)
10.3 FHMA Commercial Subscriber Unit Agreement, dated as of June 8, 1994, between the Company and Mitsubishi Consumer Electronics America Inc. (13)
10.4 FHMA Portable Subscriber Unit Agreement dated as of May 19, 1995 between the Company and Hughes Network Systems, Inc. (13)
10.5 Vendor Credit Financing Agreement, dated as of September 27, 1996, by and among Geotek Financing Corporation, the Company and Hughes Network Systems, Inc.(17)
10.6 Security Agreement, dated as of September 27, 1996, by and among Geotek Financing Corporation, the Company and Hughes Network Systems, Inc.(17)
10.7 Form of Warrants to Purchase Common Stock.(17)
10.8 Amended and Restated Borrower Pledge Agreement, dated as of September 27, 1996, by and among Geotek Financing Corporation, the Company and Hughes Network Systems, Inc.(17)
*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. - Geotek Technologies Israe Ltd.
*23.3 Consent of Coopers & Lybrand - National Band 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 December 27, 1995.
(12) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated March 4, 1996.
(13) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K/A dated June 26, 1995.
(14) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated June 20, 1996.
(15) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated December 31, 1996.
(16) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated January 23, 1997.
(17) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated September 27, 1996.
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) Liability of deconsolidated and partially disposed entity. (d) Foreign Currency Fluctuation (e) Post acquisition adjustment for utilization of acquired net operating loss carry forwards.
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, Chairman of the Board, Chief Executive Officer, and Director
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 31, 1997 by the following persons on behalf of the registrant in the capacities indicated.
/s/ Yaron I. Eitan Chairman of the Board, Chief Executive - -------------------------------- Officer and Director (Principal Yaron I. Eitan Executive Officer)
/s/ Walter E. Auch Director - -------------------------------- Walter E. Auch
/s/ George Calhoun Director - -------------------------------- George Calhoun
/s/ Purnendu Chatterjee Director - -------------------------------- Purnendu Chatterjee
/s/ Winston Churchill Director - -------------------------------- Winston Churchill
/s/ Jonathan C. Crane President, Chief Operating Officer - -------------------------------- and Director Jonathan C. Crane
/s/ Haynes Griffin Director - -------------------------------- Haynes Griffin
/s/ Richard Krants Director - -------------------------------- Richard Krants
/s/ Richard T. Liebhaber Director - -------------------------------- Richard T. Liebhaber
/s/ Kevin Sharer Director - -------------------------------- Kevin Sharer
/s/ William Spier Director - -------------------------------- William Spier
/s/ Michael Carus Vice President, Acting Chief Financial - -------------------------------- Officer (Principal Financial Officer), Michael Carus Chief Accounting Officer and Corporate Controller
EXHIBIT INDEX ------------- Exhibit No. - -------
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. - Geotek Technologies Israel Ltd.
23.3 Consent of Coopers & Lybrand - National Band Three Limited