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Mapping the Future
Basic blocking and tackling is just what St. Petersburg-based Geonex needs after a decade of fast growth followed by spiraling overhead and debt. At its peak in 1991, Geonex's revenues topped $67 million, with earnings close to $2 million. The following year, revenues dropped 18% and the company posted a net loss of $19.5 million. Geonex filed for Chapter 11 bankruptcy protection in early 1995.
Now out of bankruptcy, Geonex's challenge is to attract enough new business to create the cash flow for operations, debt payments and capital investments in the latest mapping technology. It won't be easy. Revenues for 1996 are expected to be only a fraction of those in the company's heyday - about $18 million, figures Mellem.
Geonex, founded by Harold and Judith Flynn in the mid-1970s, was an early player in computerized mapping, a technology-driven business that integrates database management, special mapping software, the latest in computer scanning technology and aerial photography. In an industry comprised of many small niche players, the Flynns focused on aggressive expansion, making 14 acquisitions between 1987 and 1992. Their reward was rapid revenue growth, high-profile contracts such as the bulk of the Defense Department's mapping work for Desert Storm and, for a time, Wall Street's admiration. Roger P. Favale, a former Kidder Peabody investment banker who helped take Geonex public in 1986, says, "I thought he [Harold Flynn] really had a tiger by the tail."
The tiger turned on the Flynns and by mid-1994 the company owed First Union National Bank of Florida $21.9 million, collateralized by the company's assets. Enter Morgens, Waterfall, Vintiadis & Co., a New York "vulture" investment firm that buys the debt of troubled companies using institutional money, mainly from non-profit schools and foundations. The firm bought Geonex's debt for about 50 cents on the dollar, says Morgens principal Bruce Waterfall, and nine months later, Morgens forced Geonex into bankruptcy. By mid-1995, the Flynns were out and a temporary CEO, Alex Sorokin, was running the company.
Geonex's stockholders saw the value of their investment go to zero. "The shareholders got screwed," says Favale, who himself is both a shareholder and a creditor.
Morgens, on the other hand, is sitting pretty. The firm paid about $11 million for Geonex's $21.9 million debt and, according to Waterfall, has invested another couple of million. For that $13 million or so, Morgens received a $10 million senior secured note, with 10% annual interest payable monthly.
In addition, the investment firm got 100% equity ownership of the company when, according to Chapter 11 Trustee Lawrence D. Coppel, the old shares of Geonex stock were cancelled and all new stock was issued to Morgens to settle part of its claim. With the ownership stake, Morgens has a chance to cash in big if Geonex fulfills its potential. "The business, digital mapping, seems to be a fabulous business," says Waterfall, adding, "To get the company back on its feet, to go public or whatever, will take years - whether it's two years or five years, I don't know. If we do it right, it can be very exciting."
So now a slimmed-down Geonex is trying to give Morgens the healthy payback it's looking for by regaining its place as a cutting edge mapping company. Mellem, the man who will lead Geonex's comeback, is a genial 52-year-old North Dakota native with a bachelor's degree in business and a master's in marketing. Most of his 30-year career in the computer industry was spent at Control Data Corp., the $6 billion information management company. There his responsibilities centered on integrating independent business units, both in North America and Europe. Most recently, Mellem was executive vice president of Minnesota-based Secure Computing Corp., a maker of Internet security software that went public last November.
One-stop map shop
"I think the Flynns had great vision," says Mellem. What Geonex lacked, however, was a unified strategy for its many business units, he says, adding, "Geonex was fighting with one hand tied behind its back."
So Mellem sees his job as getting Geonex's 300 workers at four locations - St. Petersburg, Chicago, Sacramento and Chatsworth, Calif. - working as a single company, with increased interaction and cross-training.
To grow revenues, Geonex will sell itself as kind of a one-stop shop for mapping services - translating aerial photographs into computer-mapping databases, professional consulting, converting paper maps to computer systems and other services. While CEO Mellem lacks direct experience in mapping, Geonex's new sales and marketing vice president, Stephen J. Prucha, has spent 21 years in the business, most recently with Huntsville, Ala.-based Intergraph Corp., a mapping software leader. Prucha says Geonex will focus on four business segments: defense, environmental mapping, AM/FM/GIS and photogrammetry.
Defense. Geonex's single largest source of revenue is the U.S. Department of Defense. About 100 Geonex workers in St. Petersburg with secret or top secret clearances map the world's oceans and hot spots using space-born imagery and other leading edge technology. "That business is going to be growing substantially in the next four or five years," says Mellem.
Not everyone is so upbeat on Defense Department work. "I'm always leery of a company that is overly dependent on Defense," says Favale, the New York securities analyst. "They're notably slow in paying."
Environmental. "Wetlands mapping has been a cornerstone of Geonex's business," says Mellem. Indeed, from 1980 through 1995, Geonex was the primary contractor for the U.S. Fish and Wildlife Service's multimillion-dollar National Wetlands Inventory program. Last year, however, Geonex's lock on the wetlands work came to an end when the federal agency divided the contract into four parts, bidding each one separately. (One part since has been cancelled for lack of federal funding.) When competitor Greenhorne & O'Mara of Greenbelt, Maryland, won the first contract, Geonex filed a protest, charging that the bid process didn't follow the government's rules. The outcome: Mellem says Geonex and Greenhorne & O'Mara will split the work 50-50. He adds, "I think it shows the commitment from Morgens. We're not going to let that business go."
AM/FM/GIS. Shorthand for "automated mapping/facilities management/geographic information systems," this is a tool used by cities and counties, utilities, land developers and military bases to manage their infrastructure using digital maps. The idea is that computerized maps permit workers to locate and fix problems more quickly and efficiently. Digital maps are created by converting paper maps, which have the locations and descriptions of utility lines, wiring, cable, roads, railroads and other infrastructure, into computer databases that can be easily manipulated and updated. Geonex, for example, is building a digital map for British Telecom that includes detailed information on types and location of wiring, substations, transformers and other equipment for telephone exchanges around Nottingham, England.
AM/FM/GIS conversion of paper maps to computer databases, however, isn't particularly profitable. To Wall Street investment banker John Westergaard, "It's a marginal business."
Additionally, Geonex's utility business has been flat, reflecting a recent industry trend. In part, the slump is a consequence of new technology which allows clients to create digital mapping systems in-house. So Geonex is turning to higher-margin consulting work, helping these organizations use the new technology. "A large component of our business is going to be teaming relationships, helping them build their own databases," says Prucha, who predicts that role will be lucrative. "For every dollar spent on hardware and software, somewhere between $5 and $10 is spent on building the database."
Photogrammetry. Using two aerial photographs taken from different angles, Geonex creates topographical and three-dimensional terrain maps used by state and federal government agencies and engineering firms. Because the procedure allows distortions in the photos to be removed, precise measurements of the earth's surface can be made and captured on the maps.
Making sales, managing cash
Although Geonex's first priority is rebuilding its U.S. business, the company also will selectively look for non-U.S. work. In the late 1980s and early 1990s, the company's high-profile international work included a $36 million, six-year project to map the Nile River Delta in Egypt and undertakings in Pakistan, Brazil and Saudi Arabia. With most of that work complete, Geonex now hopes to capitalize on large land use, land ownership, agricultural and utility mapping projects in Eastern Europe, Russia and Latin America, particularly those funded by international aid agencies such as the U.S. Agency for International Development and the World Bank. The key, says Mellem, is safeguarding Geonex's ability to get paid. He says that can be done by doing business with a U.S. government agency, a large architectural or engineering firm or, if a U.S. organization isn't involved, working with a large government agency in a developed country.
The company expects international business will grow to 50% of revenues, up from 15% to 20% right now, in the next three to five years.
Geonex's long-term success depends on quickly generating cash needed for investment and debt repayment. The company now is running at a profitable rate from an operations standpoint, says Mellem. Digging out from its steep $10 million debt to Morgens, however, won't be easy. Geonex's first principal payment, totaling $1.75 million, is due September 30.
For capital expenditures, Mellem projects the company will spend over $1 million for high-tech equipment in 1997 plus nearly that amount this year. He says, "If you are a leader through technology and skill level, the margins will be good."
The company has bolstered its 10-person business development staff by adding four sales people experienced in the mapping industry and will allocate some money for trade shows, direct mail and advertising.
To help cash flow, Geonex plans sales-leaseback arrangements for its buildings and property in St. Petersburg and Chicago, deals expected to raise about $3 million. Also, the company will sell some excess and old equipment.
"We've got to manage cash carefully," says Mellem. Indeed, Geonex's second chance at success rests squarely on just that premise.
