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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
March 9, 1998
Date of Report (Date of earliest event reported)
AMERICAN MOBILE SATELLITE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-23044 93-0976127
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
10802 Parkridge Boulevard, Reston, Virginia 20191-5416
(Address of principal executive offices) (Zip Code)
(703) 758-6000
(Registrant's telephone number, including area code)
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Item 5. Other Events
The information set forth on the following pages is included in a preliminary
offering memorandum of American Mobile Satellite Corporation and its subsidiary,
AMSC Acquisition Company, Inc., each a Delaware corporation (together, the
"Company") for a financing.
This Report on Form 8-K contains statements that are forward-looking within the
meaning of applicable securities laws. Those statements include projections of
earnings results and other forward-looking statements and are based on the
Company's current expectations and assumptions, which are subject to a number of
risks and uncertainties. Factors that could cause actual results to differ are
discussed in the Company's Form 10-K for the year ended December 31, 1996; Form
10Q for the quarter ended September 30, 1997; and other periodic filings the
Company has made with the Securities and Exchange Commission.
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RECENT DEVELOPMENTS
AMERICAN MOBILE'S FOURTH QUARTER RESULTS
For the fourth quarter ended December 31, 1997, American Mobile's service
revenues increased 90% to $5.9 million from $3.1 million for the same period in
1996. Total revenues, including equipment sales, were $14.0 million compared to
$9.2 million for the fourth quarter of 1996. American Mobile reported a fourth
quarter EBITDA loss of $(9.5) million, before a $12.0 million inventory
reserve, compared to $(16.9) million for the same quarter in 1996. Including
the inventory reserve, American Mobile's EBITDA loss was $(21.5) million and
net loss was $(46.5) million versus a net loss of $(38.9) million for the
fourth quarter of 1996.
For the year ended December 31, 1997, American Mobile's service revenues
increased 125% to $20.7 million from $9.2 million in 1996 and total revenues
increased to $44.2 million from $27.7 million in 1996. EBITDA loss for 1997,
including the inventory reserve taken during the fourth quarter, improved to
$(54.1) million from $(75.4) million in 1996. American Mobile's net loss for
the year was $(149.6) million compared to $(165.0) million for 1996.
During the quarter, American Mobile added approximately 3,100 net new units.
As of December 31, 1997, American Mobile had approximately 32,400 units
operating on its network.
ARDIS' FOURTH QUARTER RESULTS
For the fourth quarter ended December 31, 1997, ARDIS' service revenues were
$10.2 million compared to $10.2 million for the same period in 1996. Total
revenues, including equipment sales and consulting revenues, were $10.9 million
compared to $10.7 million for the fourth quarter of 1996. ARDIS' fourth quarter
EBITDA loss improved to $(2.5) million from $(3.6) million for the same quarter
in 1996. ARDIS' net loss for the quarter was $(4.0) million compared to $(5.2)
million for the fourth quarter of 1996.
For the year ended December 31, 1997, ARDIS' service revenues were $41.9
million compared to $43.4 million in 1996. ARDIS' service revenues were
adversely affected by reduced usage of several accounts, including UPS which
recorded lower usage due to the UPS strike. Total revenues for 1997 were $44.2
million compared to $45.3 million in 1996. EBITDA loss for 1997 improved to
$(2.8) million from $(11.9) million for 1996. ARDIS' net loss for the year was
$(11.7) million compared to $(19.0) million for 1996.
During the quarter, ARDIS added approximately 500 net new units. As of
December 31, 1997, ARDIS had approximately 55,400 units (including
approximately 6,500 units, common to both American Mobile and ARDIS) operating
on its network.
NEW CUSTOMER CONTRACTS
During the fourth quarter of 1997, ARDIS executed significant new customer
contracts with Enron, Schindler, and UPS. Pursuant to the contract with Enron,
ARDIS provides network access for Enron's wireless utility monitoring service.
Enron has committed to deploy a minimum of 55,000 units over the next three
years. The Company believes that Schindler Elevator may deploy over 2,000 units
by mid-1999 to support its field service operations. The Company believes that
the contract with UPS (the "UPS Contract") will lead to the addition of
approximately 50,000 UPS units to the ARDIS network by the end of the year
2000. Pursuant to the UPS Contract, the Company will be responsible for
increasing capacity of its terrestrial network, among other obligations. See
"Risk Factors--UPS Contract." American Mobile recently reached agreements with
several other customers, including Cannon Express, Dart Transit and The
Williams Companies, for satellite mobile messaging and nationwide dispatch
services in 1998, which in aggregate represent a minimum of 2,200 contracted
units.
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CORPORATE STRUCTURE
The following diagram illustrates the corporate structure following
consummation of the Acquisition:
----------------------------
Holdings(1)
----------------------------
-------------------- -----------------------
AMRC Holdings, Inc.
and
The Company(2) American Mobile
Radio Corporation
("AMRC")
-------------------- -----------------------
---------------------------------------------------------------
- ----------------- ---------------------- ----------------- ----------
American Mobile AMSC Sales AMSC
Satellite Sales Corporation Subsidiary ARDIS(4)
Corporation(3)(4) Ltd.(3)(4) Corporation(3)(4)
- ----------------- ---------------------- ----------------- ----------
(1) Guarantor of the Notes on a subordinated, unsecured basis.
(2) The Company is a wholly-owned subsidiary of Holdings.
(3) American Mobile Satellite Sales Corporation, AMSC Sales Corporation Ltd.
and AMSC Subsidiary Corporation are collectively referred to as "American
Mobile."
(4) Guarantors of the Notes on a joint and several, full and unconditional,
senior unsecured basis.
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RISK FACTORS
Prospective investors should carefully review the information set forth
below, in addition to the other information contained in this Offering
Memorandum, in evaluating an investment in the Units offered hereby. This
Offering Memorandum includes "forward looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act of
1934, as amended (the "Exchange Act"). Although the Company believes that its
plans, intentions and expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such plans,
intentions or expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's forward looking
statements are set forth below and elsewhere in this Offering Memorandum. All
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the cautionary
statements set forth below.
SUBSTANTIAL AND CONTINUING OPERATING LOSSES
Each of American Mobile and ARDIS has incurred significant operating losses
and negative cash flows in each year since it commenced operations, due
primarily to start-up costs, the costs of developing and building each network
and the cost of developing, selling and providing its respective products and
services. American Mobile has reported operating losses of approximately $66.5
million in the nine months ended September 30, 1997 and $120.9 million, $71.3
million and $30.0 million in 1996, 1995 and 1994, respectively. ARDIS has
reported operating losses of approximately $11.2 million in the nine months
ended September 30, 1997 and $29.2 million, $40.6 million and $22.8 million in
1996, 1995 and 1994, respectively.
Since inception, American Mobile has been engaged in the operation of its
business, the recruitment of key management and technical personnel and
raising capital to fund its operations and the development of the satellite
and associated network. American Mobile launched commercial service in January
1996. Accordingly, it has a short operating history upon which an evaluation
of its prospects in each of its markets can be made. The prospects for the
Company's success must be considered in light of the risks, expenses and
difficulties often encountered in the establishment of a new business in a
continually evolving industry subject to rapid technological and price
changes, and characterized by an increasing number of market competitors. See
"Business."
The Company, on a pro forma basis, had an operating loss of approximately
$79.2 million for the nine months ended September 30, 1997. The Company
estimates that, absent the successful leasing of its MSAT-2 satellite,
operating revenues will not be sufficient to cover operating expenses for the
foreseeable future. Even with the leasing of MSAT-2, the ability of the
Company to generate positive operating cash flow will depend upon, among other
factors, the success of the Acquisition and the successful marketing of the
Company's services, as to which there can be no assurance.
In addition, further development of the Company's business and the expansion
of its networks will require additional capital and other expenditures and the
Company expects that it will have significant operating losses and will record
significant net cash outflow in the near term. A substantial portion of the
proceeds from this Offering will be utilized to fund working capital,
operating losses and capital expenditures. There can be no assurance that the
Company will have sufficient resources to complete such expenditures and make
principal or interest payments with respect to the Notes.
SUBSTANTIAL LEVERAGE
American Mobile is, and the Company will continue after the Offering to be,
highly leveraged. As of September 30, 1997, on a pro forma basis, the Company
on a consolidated basis would have had total indebtedness of approximately
$289.5 million and would have had availability of $57.9 million under the
Company's Revolving Credit Facility. In addition, since September 30, 1997,
American Mobile has received extended payment terms from certain vendors, of
which approximately $16.9 million was outstanding as of
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February 28, 1998, and that will generally be due and payable within one year
following the consummation of the Offering. The Company also has received a
commitment from Motorola for up to $10.0 million of vendor financing of
certain capital expenditures (the "Vendor Financing Commitment"). On a pro
forma basis, the Company's earnings would have been insufficient to cover its
fixed charges by approximately $203.9 million and $106.1 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and at September 30, 1997 the Company's stockholders' equity
would have been approximately $251.0 million. The Company and its subsidiaries
will be permitted to incur additional indebtedness in the future. Further,
commencing , 2001 (three years after the date of the Indenture), the
Company will be permitted to pay dividends to Holdings to permit Holdings to
meet its interest expense obligations with respect to the Term Loan Facility.
See "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Selected Financial and Operating Data" and "Description of the Notes."
American Mobile historically has not generated sufficient earnings or cash
flow from operations to make such interest payments. Accordingly, the Company
expects that it will be necessary for its operating results to improve
significantly in order to permit it to meet the debt service obligations under
the Notes beyond the period for which the payment of interest on the Notes is
provided for through the Pledged Securities. The ability of the Company to
improve its operating results will depend upon a variety of factors, including
economic, financial, competitive, regulatory and other factors beyond its
control. There can be no assurance that the Company will generate sufficient
earnings or cash flow from operations in the future to service the Notes and
to meet its working capital, capital expenditure and other requirements. If
the Company is unable to service the Notes using earnings or cash flow from
operations, it will have to examine alternate means of repayment that could
include restructuring or refinancing its indebtedness or seeking additional
sources of debt or equity financing. There can be no assurance, however, that
the Indenture or the New Bank Financing would permit the Company to pursue
alternative means of repayment or that the Company would be able to effect
such a restructuring or refinancing or obtain such additional financing if
permitted to do so. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
In addition, Holdings is, and will continue after the Offering to be, highly
leveraged. On September 30, 1997, after giving pro forma effect to the
Offering, Holdings would have had total indebtedness of approximately $404.6
million and stockholders' equity of approximately $133.4 million. Also after
giving pro forma effect to such transactions, Holdings' earnings would have
been insufficient to cover its fixed charges by approximately $212.4 million
and $114.9 million for fiscal 1996 and for the nine months ended September 30,
1997, respectively. Holdings will not be subject to any of the covenants or
restrictions under the Indenture governing the Notes. Accordingly, the
Indenture will not restrict Holdings' ability to incur additional indebtedness
and issue preferred stock, pay dividends or make certain other payments, enter
into transactions with affiliates, make certain asset dispositions, merge or
consolidate with, or transfer substantially all of its assets to, another
person, encumber assets, or engage in certain business activities.
The degree to which the Company and Holdings will be leveraged following the
Offering could have important consequences to holders of the Notes, including,
but not limited to: (i) making it more difficult for the Company to satisfy
its obligations with respect to the Notes, (ii) increasing the Company's
vulnerability to general adverse economic and industry conditions, (iii)
limiting the Company's ability to obtain additional financing to fund future
working capital, capital expenditures, research and development and other
general corporate requirements, (iv) requiring the dedication of a substantial
portion of the Company's cash flow from operations to the payment of principal
of, and interest on, its indebtedness, thereby reducing the availability of
such cash flow to fund working capital, capital expenditures, research and
development or other general corporate purposes, (v) limiting the Company's
flexibility in planning for, or reacting to, changes in its business and the
industry, and (vi) placing the Company at a competitive disadvantage vis-a-vis
less leveraged competitors. In addition, the Indenture and the New Bank
Financing will contain financial and other restrictive covenants that will
limit the ability of the Company to, among other things, borrow additional
funds. Failure by the Company to comply with such covenants could result in an
event of default which, if not cured or waived, could have a material adverse
effect on the Company. In addition, the degree to which the Company is
leveraged could prevent it from repurchasing all of the Notes tendered
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to it upon the occurrence of a Change of Control. See "Description of the
Notes--Repurchase at the Option of Holders--Change of Control" and
"Description of New Bank Financing."
LIQUIDITY; NEED FOR ADDITIONAL CAPITAL
The Company expects to continue to make significant capital outlays for the
foreseeable future to fund interest expense, capital expenditures and working
capital prior to the time that it begins to generate positive cash flow from
operations and for the foreseeable future thereafter. The Company currently
believes that the net proceeds of this Offering, together with borrowings
under the New Bank Financing and the Vendor Financing Commitment, will be
sufficient to meet the Company's currently anticipated capital expenditures,
operating losses, working capital and debt service requirements through the
time it generates positive operating cash flow and thereafter. However, if the
Company's cash flows from operations are less than projected, the Company will
require additional debt or equity financing in amounts that could be
substantial. The type, timing and terms of financing selected by the Company
will be dependent upon the Company's cash needs, the availability of other
financing sources and the prevailing conditions in the financial markets.
There can be no assurance that any such sources will be available to the
Company at any given time or as to the favorableness of the terms on which
such sources may be available. The Vendor Financing Commitment is subject to
customary conditions, including due diligence, and there can be no assurance
that the facility will be obtained by the Company on these terms or at all.
Further, there can be no assurance that there will be a final agreement on
favorable terms, or at all, with respect to the Vendor Financing Commitment or
any other vendor financing or that, once finalized, the Company will meet the
conditions therein to funding. See "Management's Discussion and Analysis of
Operations--Liquidity and Capital Resources." There can also be no assurance
that the Company's current projection of cash flow from operations (which will
depend upon numerous future factors and conditions, many of which are outside
of the Company's control) will be accurate. Projections are merely estimates
of future events and actual events should be expected to vary from current
estimates, possibly materially. In addition, if customer demand exceeds
current expectations and if such demand can be accommodated without adversely
affecting the quality of the Company's service, the Company is likely to
attempt to accelerate its expansion. If the Company elects to accelerate its
build-out or introduce new products or services, its funding needs will
increase, possibly to a significant degree. There can be no assurance that any
additional financing will be available to the Company on commercially
reasonable terms or at all. Because the Company's cost of expanding its
network and operating its business, as well as the Company's revenues, will
depend on a variety of factors (including the ability of the Company to meet
its expansion schedules, the number of customers and the services for which
they subscribe, the nature and penetration of new services that may be offered
by the Company and its competitors, regulatory changes and changes in
technology) actual costs and revenues may vary from expected amounts, possibly
to a material degree, and such variations are likely to affect the Company's
future capital requirements. Accordingly, there can be no assurance that the
Company will not be required to raise substantial additional capital in the
future or that its current projections will prove to be accurate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Market Opportunity," "--Business Strategy," "--
Products and Services," "--Competition;" and "Regulation."
HOLDINGS' GUARANTEE
The Guarantee of Holdings will be subordinated in right of payment to all
existing and future Indebtedness of Holdings, including borrowings under the
Holdings Term Loan Facility. In the event of bankruptcy, liquidation, or
reorganization of Holdings, the assets of Holdings will be available to pay
obligations on the Guarantee of Holdings only after all senior Indebtedness
has been paid in full, and there may not be sufficient assets remaining to pay
amounts due on the Guarantee of Holdings. In addition, under certain
circumstances Holdings will not be permitted to pay its obligations under its
Guarantee in the event of a default under any or all senior Indebtedness. As
of September 30, 1997, after giving pro forma effect to the Offering and the
Acquisition, on a stand-alone basis Holdings would have had $100.0 million of
Indebtedness effectively ranking senior to the Guarantee of Holdings.
Holdings will not be subject to any of the covenants or restrictions under
the Indenture governing the Notes. Accordingly, the Indenture will not
restrict Holdings' ability to incur additional Indebtedness and issue
preferred
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stock, pay dividends or make certain other payments, enter into transactions
with affiliates, make certain asset dispositions, merge or consolidate with,
or transfer substantially all of its assets to, another person, encumber
assets, or engage in certain business activities. If the Company were to
default on its obligations to pay amounts payable under the Notes, Holdings
may lack funds for payment of such amounts, and, in such event, holders of the
Notes would not be able to rely upon the Guarantee for payment of such
amounts. See "Description of New Bank Financing."
NECESSARY BUILDOUTS
On June 5, 1996, the FCC granted ARDIS extensions of time to complete the
buildouts of 190 antenna sites, as required to maintain previously granted
licenses. As of February 1998, approximately 104 of the sites remain to be
constructed by expiration dates that range between June 27, 1998 to March 31,
1999. Management estimates that $5.2 million will be necessary to achieve
timely buildouts of the network, including $5.0 million in 1998. Failure to
obtain such capital or to complete the buildouts in a timely manner could
result in loss of licenses for such sites from the FCC, loss of customers, as
well as the incurrence of penalties under the UPS Contract, which would have a
material adverse effect on the Company. See "--Liquidity; Need for Additional
Capital," "--UPS Contract," "--Customer Concentration" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Liquidity and Capital Resources."
RAPIDLY CHANGING MARKET
The markets for wireless communications services are characterized by rapid
technological and other changes. The Company's success depends, in part, on
its ability to respond and adapt to such changes. There can be no assurance
that the Company will be able to compete effectively under, or adjust its
contemplated plan of development to meet, changing market conditions or that
the Company will be able to implement its strategy or that its strategy will
be successful in this rapidly evolving market.
This market is also marked by the introduction of new products and services
and increased capacity for services similar to those provided by the Company.
Future technological advances in the wireless communications industry may
result in the availability of new products or services (or increase the
efficiency of existing products or services). If a technology becomes
available that is more cost-effective or creates a superior product, the
Company may be unable to access such technology or its use may involve
substantial capital expenditures that the Company may be unable to finance.
There can be no assurance that existing proposed or as yet undeveloped
technologies will not render the Company's technology less profitable or less
viable, or that the Company will have available the financial and other
resources to compete effectively against companies possessing such
technologies. The Company is unable to predict which of the many possible
future products and services will meet evolving industry standards and
consumer demands. There can be no assurance that the Company will be able to
adapt to such technological changes or offer such products or services on a
timely basis or establish or maintain a competitive position.
DEPENDENCE ON MARKET ACCEPTANCE
The Company's success is subject to a number of business, economic,
regulatory and competitive factors, many of which are beyond the Company's
control, including the extent to which prospective customers will purchase the
Company's service. The Company's ability to service its Indebtedness,
including the Notes, is subject to the successful implementation of its growth
strategy, which, in turn, is premised, among other things, on the Company's
expectation that demand for its services will increase significantly in its
markets. Certain of these services have not yet been commercially introduced
and there can be no assurance that any of them will achieve market acceptance
or result in the generation of operating cash flow. Failure to gain market
acceptance for current or planned products and services would have a material
adverse effect on the Company. In addition, the Company has incurred and will
continue to incur significant operating expenses, has made, and will continue
to make, significant capital investments, has entered into operating leases,
equipment supply contracts and service arrangements, and is attempting to
secure financing, in each case based upon certain expectations as to the
anticipated market acceptance of, and customer demand for, the Company's
services. Accordingly, any material
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miscalculation by the Company with respect to its operating strategy or
business plan could have a material adverse effect on the Company.
CHALLENGES OF BUSINESS INTEGRATION
The full benefits of a combination of American Mobile and ARDIS as a result
of the Acquisition will require the integration of each company's
administrative, finance, sales and marketing organizations, the coordination
of each company's sales efforts and the implementation of appropriate
operational, financial and management systems and controls. This will require
substantial attention from the senior management teams of American Mobile and
ARDIS, who have limited experience integrating the operations of companies of
the size of American Mobile and ARDIS and whose members have not worked
together previously as one team. The diversion of management attention, as
well as any other difficulties that may be encountered in the transition and
integration process, could have a material adverse effect on the revenues and
operating results of the Company. In addition, American Mobile and ARDIS
provide similar services to certain shared customers, requiring the Company to
integrate the services provided to these shared customers. If the contemplated
organizational changes are not properly managed, there could be an adverse
effect on the Company's results of operations. There can be no assurance that
the Company will be able to integrate the operations of American Mobile and
the ARDIS network successfully or, if successful, that such integration will
yield the expected benefits to the Company or will not materially adversely
affect the Company's business, financial condition or results of operations.
The Company's prospects should be considered in light of the numerous risks
commonly encountered in business combinations. The historical financial
statements and pro forma financial statements presented in this Offering
Memorandum may not necessarily be indicative of the results that would have
been attained had the Company operated on a combined basis and as an
independent entity.
MANAGEMENT OF GROWTH
In its continuing efforts to respond to changing market conditions, the
Company may experience periods of rapid expansion. In order to manage growth
effectively in the complex environment in which it operates, the Company will
need to maintain and improve its operating and financial systems and expand,
train and manage its employee base. The Company must expand the capacity of
its sales, distribution and installation networks in order to achieve
continued growth in its existing and future markets. In general, the failure
to manage growth effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
UPS CONTRACT
ARDIS has entered into a contract with UPS for the use of the ARDIS network
pursuant to which the Company anticipates providing communication services for
approximately 50,000 UPS units by the end of 2000. However, performance under
the UPS Contract is subject to certain significant conditions, including,
among others, (i) required capital expenditures by the Company to expand
capacity of the ARDIS network in certain areas, (ii) successful development of
the DIAD III device by Motorola and (iii) successful deployment of the DIAD
III devices on the ARDIS network within strict guaranteed operational
performance levels. Management believes that the Company will be required to
incur capital spending of approximately $17.4 million in connection with the
UPS Contract over the next three years. In addition, the contract represents a
significant implementation effort of a magnitude in excess of that of any
existing ARDIS customer. Failure to meet the requirements under the UPS
Contract could result in a loss of the contract as well as monetary penalties
that could materially adversely affect the Company. See "Business--Customers."
Under the UPS Contract, the Company also has significant warranties of
performance, both during the implementation phase and for ongoing network
performance. During the implementation phase, the Company must meet key
checkpoints and milestones culminating in an acceptance test. Failure of the
acceptance test could result, after a cure period, in the loss of the
contract. In addition, the Company will have to construct network
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capacity in several key cities. Failure to complete such construction by the
committed dates would subject the Company to monthly penalties until
compliance is achieved.
On an ongoing basis, the UPS Contract requires that the Company guarantee
network performance levels. If network availability drops below 99%, the
Company will be subject to an initial penalty of 2% of the average monthly use
of the service, calculated as the average of the last three months in the
affected area. The penalty increases if performance levels further drop.
As a part of the negotiations leading to the signing of the UPS Contract,
Motorola issued a performance guarantee regarding the network's performance.
In connection with the Acquisition, the Company agreed to indemnify Motorola
for up to $10.0 million in connection with such performance guarantee (the
"UPS Guarantee"). The Company intends to satisfy any such obligation by
depositing $10.0 million of the proceeds from the Offering into an escrow
account, such escrow account having the same three-year term (with two
possible one-year renewals) as the UPS Contract.
CUSTOMER CONCENTRATION
After giving pro forma effect to the Acquisition, IBM, NCR and Pitney Bowes
accounted for 26%, 7% and 5%, respectively, of the Company's recurring service
revenue for the twelve months ended December 31, 1997. The loss of one or more
of such customers, or any event, occurrence or development which adversely
affects the relationship between the Company and such customer could have a
material adverse effect upon the Company.
RELIANCE ON THIRD PARTY VENDORS
The Company relies on independent third-party vendors to develop and
manufacture wireless communications devices for its networks, which are
significant elements of the Company's business plan. See "Business--Equipment;
Supplier Relationships." These suppliers do not sell such devices to the
Company on an exclusive basis. The Company carries a limited inventory of such
devices and generally has no guaranteed supply arrangements. The Company has
from time to time experienced interruptions and/or delays of supply and there
can be no assurance that the Company will not experience such interruptions in
the future. In addition, the Company's contracts with the majority of its
suppliers are short-term contracts. There can be no assurance that such
suppliers will continue to provide products to the Company at attractive
prices, or at all, or that the Company will be able to obtain such products in
the future from these or other providers on the scale and within the time
frames required by the Company. Further, there can be no assurance that any of
the Company's suppliers will not enter into exclusive arrangements with the
Company's competitors, or cease selling these components to the Company at
commercially reasonable prices, or at all. Any failure to obtain such products
on a timely basis at an affordable cost, or any significant delays or
interruptions of supply, would have a material adverse effect on the Company.
Further, as part of its growth strategy, the Company is relying on its
suppliers to reduce the cost of wireless communications devices approved and
available for use on its network. Management believes that reductions in the
cost of wireless communications devices will result in increased sales of
devices, additional subscribers for the Company's services and a corresponding
increase in the Company's service revenues. Any failure to obtain such cost
reductions on a timely basis, or any significant delays of such reductions,
would have a material adverse effect on the Company.
In addition, the anticipated expansion of the Company's operations and
infrastructure is expected to place a significant demand on the Company's
suppliers, some of which have limited resources and production capacity. In
addition, certain of the Company's suppliers, in turn, rely on sole or limited
sources of supply for components included in their products. Failure of the
Company's suppliers to adjust to meet such increasing demand may prevent them
from continuing to supply devices in the quantities and the quality and at the
times required by the Company, or at all. The Company's inability to obtain
sufficient quantities of sole or limited source devices or to develop
alternative sources if required could result in delays and increased costs in
the expansion of the
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Company's operations and infrastructure or the inability of the Company to
properly maintain its existing level of operations. Such occurrences would
have a material adverse effect on the Company's business, financial condition
and results of operations.
ARDIS TECHNOLOGY RISKS
The ARDIS network, and certain of its competitive strengths such as deep in-
building penetration, is based upon a single frequency reuse ("SFR")
technology. Motorola holds the patent for SFR technology. ARDIS has entered
into support agreements with Motorola to provide for certain support of the
operations of the ARDIS network. See "The Acquisition." However, there can be
no assurance that Motorola will not enter into arrangements with the Company's
competitors, or that if it does, such arrangements would not have a material
adverse effect on the Company. In addition, the construction of additional
network sites may disclose the existence of interfering facilities operated by
other licensees that were not apparent in the design and licensing of the
ARDIS facilities. To the extent that is the case, ARDIS may be required either
to pay the operators of those interfering facilities to cease operations or to
abandon operation of interfering facilities.
SATELLITE TECHNOLOGY RISKS
The Company presently has an agreement with TMI, the Canadian mobile
satellite licensee, for reciprocal backup, restoral and excess capacity usage
("Backup Capacity") on the other party's satellite in the event of a satellite
failure or a need for excess capacity. On December 4, 1997, the Company
entered into the Satellite Lease Agreement with ACTEL to lease MSAT-2 for
deployment over sub-Saharan Africa and, simultaneously, entered into the
Satellite Purchase Agreement with TMI to acquire a one-half ownership interest
in TMI's satellite, MSAT-1. See "Offering Memorandum Summary--Recent
Developments." In the event that the lease and deployment is consummated, the
Company will no longer have available Backup Capacity from MSAT-1, which may
reduce the marketability of the Company's services, since certain services
such as voice dispatch can only be provided by the MSAT-1 or MSAT-2
satellites. Each of MSAT-2 and MSAT-1 has in the past experienced certain
technological anomalies, most recently with respect to MSAT-2 in January 1998.
While recent anomalies have involved either spare components or ones which
have not had a material impact on the Company, there can be no assurance that
either of the satellites will not experience subsequent anomalies that could
adversely affect the Company's financial condition, results of operations and
cash flows. In the event that MSAT-1 experiences anomalies of this type or
other types at a time when the Company has no back-up capacity, there would be
a material adverse effect on the Company.
MSAT-2 has an expected remaining service life of approximately eight years
and the expected remaining life of MSAT-1 is approximately ten years. This
expected remaining service life of each satellite may be affected by a number
of factors. For example, random failure of satellite components could result
in damage to or loss of MSAT-2 or MSAT-1. It is also possible that either
satellite could be damaged by electromagnetic storms or collisions with other
objects, although such occurrences are rare. Although the Company believes
that the actual service lives of both satellites may exceed their expected
service lives, there can be no assurance that MSAT-2's or MSAT-1's expected
service life will be exceeded or achieved. Although the Company has obtained
in-orbit insurance against a failure of MSAT-2, it is unlikely that any
recovery under such insurance would fully compensate the Company for losses it
would sustain in such event. At present, there is no insurance policy in
effect for MSAT-1. Although there can be no assurance, the Company believes
that it will be able to obtain insurance with respect to its interest in MSAT-
1 in connection with the Satellite Purchase Agreement on terms substantially
similar to those presently in effect for MSAT-2. In addition, the orbit
insurance policy is subject to annual renewal, and there is no assurance that
insurance on favorable terms and at commercially reasonable rates will remain
available for coverage of MSAT-2, or be available for coverage of MSAT-1.
In the event that, following the satellite lease, MSAT-1 ceases to operate,
the Company would have several options to replace the lost capacity, through
the lease or purchase of capacity on certain Inmarsat satellites, or the
launch of a new satellite. However, each of these options would require
substantial lead-time and significant
10
<PAGE>
financing. As a result, any such delay or need for significant funds would
result in a material adverse effect on the Company.
SATELLITE LEASE AND PURCHASE AGREEMENT RISKS
The five-year Satellite Lease Agreement provides for aggregate lease
payments to the Company of $182.5 million. The Satellite Lease Agreement
includes a renewal option, at the lessee's election, through the end of the
life of MSAT-2, on the same terms, exercisable two and one-half years prior to
the end of the initial lease term. The Satellite Purchase Agreement
contemplates Holdings' one-half ownership acquisition at a cost of $60.0
million payable in equal installments over a five-year period; certain
additional payments to TMI of up to one-half of additional net payments
received are contemplated in the event that additional benefits are realized
by Holdings with respect to MSAT-2 after the initial lease term. Under the
Satellite Purchase Agreement, TMI and Holdings will each own a 50% undivided
ownership interest in MSAT-1, will be jointly responsible for the operation of
MSAT-1, and will share certain satellite operating expenses, but will
otherwise maintain their separate business operations.
The Satellite Purchase Agreement and Satellite Lease Agreement are separate
transactions and reflect separate sets of obligations for the Company. As a
result, it is possible, under certain circumstances, that the Company would
remain obligated to make or continue payments under the Satellite Purchase
Agreement to TMI without receipt from the lessee of anticipated payments under
the Satellite Lease Agreement, principally by virtue of a default of ACTEL.
While the Company believes that if ACTEL defaults under the Satellite Lease
Agreement, the Company would be able to achieve the return of MSAT-2 from
ACTEL to its operation in the United States and terminate its payment
obligations to TMI under the Satellite Purchase Agreement, there can be no
assurances that such actions can be achieved. In addition, there can be no
assurances that the agreements will operate in parallel, or that the Company
will not be met with certain completion or transactional risks under the
Satellite Lease Agreement. If it is necessary for the Company to make payments
under the Satellite Purchase Agreement at a time when it is not receiving
payments under the Satellite Lease Agreement, the Company would be materially
and adversely affected.
Closing under the Satellite Purchase Agreement and Satellite Lease Agreement
is subject to a number of conditions, including: United States and Canadian
regulatory approvals; a successful financing by ACTEL of at least $120
million; completion of certain satellite testing, inversion and relocation
activities with respect to American Mobile's satellite, to support the
contemplated services over Africa; receipt of various government
authorizations from Gibraltar, South Africa and other jurisdictions to support
satellite relocation, including authorizations with respect to orbital slot
and spectrum coordination; and completion of certain system development
activities sufficient to support satellite redeployment. It is anticipated
that the closing under both agreements will occur simultaneously in the spring
of 1998. While it is anticipated that these transactions would improve the
leverage of and provide additional liquidity to the Company, there can be no
assurance that such transactions will be consummated simultaneously, or at
all.
LIMITATION ON REMOTE DISASTER RECOVERY SYSTEM FOR GROUND SEGMENT OF SATELLITE
NETWORK
At the present time, the Company's disaster recovery systems focus on
internal redundancy and diverse routing within each of the complexes operated
by or for the Company. However, the Company does not currently have access to
a remote backup complex that would enable it to continue to provide mobile
satellite communications services to customers in the event of a natural
disaster or other occurrence that rendered the system unavailable.
Accordingly, the Company's business is subject to the risk that such a
disaster or other occurrence could hinder or prevent the Company from
continuing to provide services to some or all of its customers. ARDIS,
however, does have access to a remote backup complex that would enable it to
continue to provide its services in such circumstances.
11
<PAGE>
COMPETITION
The wireless communications industry is highly competitive and is
characterized by frequent technological innovation. The industry includes
major domestic and international companies, many of which have financial,
technical, marketing, sales, distribution and other resources substantially
greater than those of the Company and which provide, or plan to provide, a
wider range of services than will be provided the Company. The Company's
products and services compete with a number of communications services,
including existing satellite services, terrestrial air-to-ground services, and
terrestrial land-mobile and fixed services, and may compete with new
technologies in the future. In addition, the FCC has recently allocated large
amounts of additional spectrum for communications uses or potential uses that
could compete with the Company, and additional allocations of spectrum for
such uses may occur in the future. See "Business--Competition."
REGULATORY RISKS
The ownership and operations of the Company's communication systems are
subject to significant regulation by the FCC, which acts under authority
granted by the Communications Act of 1934, as amended (the "Communications
Act"), and related federal laws. A number of the Company's licenses are
subject to renewal by the FCC and, with respect to the Company's satellite
operations, are subject to international frequency coordination. In addition,
current FCC regulations generally limit the ownership and control of Holdings
by non-U.S. citizens or entities to 25%. There can be no assurances that the
rules and regulations of the FCC will continue to support the Company's
operations as presently conducted and contemplated to be conducted in the
future, or that all existing licenses will be renewed and requisite
frequencies coordinated. See "Regulation."
RISK OF UNWIND OF ACQUISITION
The information presented herein assumes the consummation of the
Acquisition. Accordingly, the unaudited pro forma condensed financial
information reflects the financial condition and results of operations of
American Mobile and ARDIS as a combined entity.
The FCC Authorization was granted on March 3, 1998, permitting ARDIS and
American Mobile to consummate the Acquisition. There is a 40 to 45 day period
during which the FCC Authorization is subject to reconsideration by the FCC or
challenge by third parties. If such period concludes without FCC
reconsideration or third party challenge, the FCC Authorization would become
final and not subject to appeal. If the FCC Authorization is reconsidered or
challenged during such period, the Company could be required to refile its
applications with the FCC, rescind the Acquisition or otherwise dispose of
part of or all the FCC licenses held by ARDIS. In the event such a
reconsideration or challenge is received by American Mobile that does not
permit American Mobile to operate ARDIS as contemplated, American Mobile has
the right to rescind the Acquisition (an "Unwind") by providing notice to
Motorola within 30 days following receipt of such adverse order. In the event
of an Unwind, the Purchase Price would be returned to American Mobile and
American Mobile's ownership interests in ARDIS would be returned to Motorola.
If the consummation of the Acquisition is delayed, American Mobile receives
an adverse order from the FCC, or American Mobile is otherwise forced to
unwind the Acquisition, American Mobile and the Guarantors would remain
subject to their obligations under the Notes and the Indenture but would not
enjoy the benefits of the ARDIS network, other ARDIS assets and results of
operations of ARDIS. Such an Unwind would have a material adverse effect on
American Mobile and Holdings.
YEAR 2000 COMPLIANCE
The Company has implemented a Year 2000 program to ensure that the Company's
computer systems and applications will function properly beyond 1998. The
Company believes that it has allocated adequate resources for this purpose and
expects its Year 2000 data conversion program to be successfully completed on
a timely basis. There can, however, be no assurance that this will be the
case. The Company does not expect to incur significant expenditures to address
this issue. The ability of third parties with whom the Company transacts
12
<PAGE>
business to adequately address their Year 2000 issues is outside of the
Company's control. There can be no assurance that the failure of the Company
or such third parties to adequately address their respective Year 2000 issues
will not have a material adverse effect on the Company's business, financial
condition, cash flows and results of the operations.
CONTROL BY PRINCIPAL STOCKHOLDERS
Holdings' principal stockholders following the consummation of the
Acquisition will be Hughes, Motorola, Baron Capital, Inc., Singapore Telecom
and AT&T Wireless, who will hold in aggregate approximately 78.3% of the
Common Stock of Holdings on a fully diluted basis. Holdings has entered into
material contracts and transactions with its principal stockholders or their
affiliates and may enter into additional contracts in the future, including in
some instances the guarantee of debt obligations of the Company and Holdings.
See "Certain Relationships and Related Party Transactions." Those stockholders
have other interests in the communications industry that may conflict with the
Company's interests.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of a group of employees with
technical and business knowledge regarding Holdings' and the Company's
systems. The loss of services of one or more of these individuals could
materially and adversely affect the business of Holdings and the Company and
their future prospects. The Company does not maintain key man life insurance
on any of the Company officers or employees. Holdings' and the Company's
future success will also depend on their ability to attract and retain
additional management and technical personnel required in connection with the
growth and development of their businesses. Failure by the Company to retain
or attract such key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management."
POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to offer to
repurchase all of the outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of repurchase. There can be no assurance that the
Company would have sufficient resources to repurchase the Notes upon the
occurrence of a Change of Control. The failure to repurchase all of the Notes
tendered to the Company would constitute an Event of Default under the
Indenture. Furthermore, the repurchase of the Notes by the Company upon a
Change of Control might result in a default on the part of the Company in
respect of other future indebtedness of the Company, as a result of the
financial effect of such repurchase on the Company or otherwise. The Change of
Control repurchase feature of the Notes may have anti-takeover effects and may
delay, defer or prevent a merger, tender offer or other takeover attempt.
Notwithstanding these provisions, the Company could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time. See "Description of the Notes--Repurchase at the Option of Holders."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company or any Guarantor, at the time it incurred the indebtedness evidenced
by the Notes or its Note Guarantee (i) (a) was or is insolvent or rendered
insolvent by reason of such occurrence or (b) was or is engaged in a business
or transaction for which the assets remaining with the Company or such
Guarantor constituted unreasonably small capital or (c) intended or intends to
incur, or believed or believes that it would incur, debts beyond its ability
to pay such debts as they mature, and (ii) the Company, or such Guarantor
received or receives less than reasonably equivalent value or fair
consideration for the incurrence of such indebtedness, then the Notes and the
Note Guarantees, and any pledge or other security interest securing such
indebtedness, could be voided, or claims in respect of the Notes or the Note
Guarantees could he subordinated to all other debts of the Company or such
Guarantor, as the case may be. In addition, the payment of interest and
13
<PAGE>
principal by the Company pursuant to the Notes or the payment of amounts by a
Guarantor pursuant to a Note Guarantee could be voided and required to be
returned to the person making such payment, or to a fund for the benefit of
the creditors of the Company or such Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature or (ii)
it could not pay its debts as they become due.
The Company has no operations of its own and derives substantially all of
its revenue from its subsidiaries. If the Note Guarantees were voided, the
holders of indebtedness of, and trade creditors of, subsidiaries of the
Company would generally be entitled to payment of their claims from the assets
of the affected subsidiaries before such assets were made available for
distribution to the Company. In the event of a bankruptcy, liquidation or
reorganization of a subsidiary, holders of any of such subsidiary's
indebtedness will have a claim to the assets of the subsidiary that is prior
to the Company's interest in those assets. If any subsidiary indebtedness were
to be accelerated, there can be no assurance that the assets of such
subsidiary would be sufficient to repay such indebtedness or that the assets
of the Company and of the other subsidiaries would be sufficient to repay in
full the indebtedness of the Company, including the Notes.
On the basis of historical financial information, recent operating history
and other factors, the Company and each Guarantor believes that, after giving
effect to the indebtedness incurred in connection with the Offering, it will
not be insolvent, will not have unreasonably small capital for the business in
which it is engaged and will not incur debts beyond its ability to pay such
debts as they mature. There can be no assurance, however, as to what standard
a court would apply in making such determinations or that a court would agree
with the Company's or the Guarantors' conclusions in this regard.
CERTAIN TAX CONSIDERATIONS
The Notes will be issued with original issue discount ("OID") for United
States federal income tax purposes in an amount equal to the excess of the
principal amount due at maturity on the Notes over their "issue price" (as
described in "Certain United States Federal Income Tax Consequences--U.S.
Holders--Original Issue Discount"). Each United States holder of a Note will
be required to include in taxable income for any particular taxable year a
portion of such OID in advance of the receipt of the cash to which such OID is
attributable. For additional information regarding the OID associated with the
Notes, as well as certain other federal income tax considerations relevant to
the purchase, ownership and disposition of the Notes, Warrants and Warrant
Shares, see "Certain United States Federal Income Tax Consequences."
CURRENT REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the shares of Common Stock underlying the
Warrants is then in effect, or the exercise of such Warrants is exempt from
the registration requirements of the Securities Act, and such securities are
qualified for sale or exempt from qualification under the applicable
securities laws of the states in which the various holders of the Warrants
reside. Although Holdings is required under the terms of the Warrant
Registration Rights Agreement to file a shelf registration statement on an
appropriate form under the Securities Act covering the resale of the Warrants
and issuance of the Warrant Shares and to use its best efforts to cause such
registration statement to be declared effective by the earlier of one year
after the Closing Date and 65 days after the occurrence of a Change in
Control, there can be no assurance that Holdings will be able to do so in a
timely manner. Holdings will be unable to issue shares of Common Stock to
those persons desiring to exercise their Warrants if a registration statement
covering the securities issuable upon the exercise of the Warrants is not
effective (unless the sale and issuance of shares upon the exercise of such
Warrants is exempt from the registration requirements of the
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<PAGE>
Securities Act) or if such securities are not qualified or exempt from
qualification in the states in which the holders of the Warrants reside. See
"Description of the Warrants."
ANTITAKEOVER PROVISIONS
Holdings' Certificate of Incorporation and Bylaws and the Delaware General
Corporation Law (the "Delaware GCL") contain certain provisions that may have
the effect of discouraging, delaying or making more difficult a change in
control of Holdings or preventing the removal of incumbent directors. The
existence of these provisions may have a negative impact on the price of the
Common Stock and may discourage third-party bidders from making a bid for
Holdings or may reduce any premiums paid to stockholders for their Common
Stock. Furthermore, Holdings is subject to Section 203 of the Delaware GCL,
which could have the effect of delaying or preventing a change in control of
Holdings.
NO LIMITS ON ISSUANCE OF HOLDINGS PREFERRED STOCK
Holdings' Certificate of Incorporation also allows the Board of Directors to
issue up to 200,000 shares of Preferred Stock (as defined herein) and to fix
the rights, privileges and preferences of such shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. While Holdings has no
present intention to issue shares of Preferred Stock, any such issuance could
be used to discourage, delay or make more difficult a change in control of
Holdings. See "Description of Capital Stock of Holdings--Preferred Stock."
NO DIVIDENDS
Holdings has not declared or paid any dividends on its Common Stock since
its date of inception. Holdings intends to retain any earnings to support the
growth and development of its business and has no present intention of paying
dividends in the foreseeable future. In addition, Holdings' ability to pay
dividends is restricted by financial covenants under the New Bank Financing.
See "Description of New Bank Financing."
VOLATILITY OF THE COMMON STOCK, WARRANTS AND NOTES
Historically, the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. Future announcements
concerning Holdings or its competitors, including results of technological
innovations, new commercial products, or government regulations may have a
significant impact on the market price of Holdings' Common Stock. Holdings'
Common Stock has been thinly traded since Holdings' initial public offering
and its price has been highly volatile in recent periods.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Holdings' Common Stock, or the
perception that such sales may occur, could adversely affect the value of the
Warrant Shares and therefore the Units and could impair Holdings' ability to
raise additional capital in the future through the sale of equity securities.
Following consummation of the Acquisition, there will be approximately 31.4
million shares of Common Stock outstanding, approximately 8.7 million shares
of which will have been registered under the Securities Act. The balance of
such shares are subject to various registration rights agreements, lock-up
agreements, and shareholder agreements. In addition, Holdings has reserved
approximately 12.2 million shares of Common Stock for issuance upon the
exercise of outstanding warrants and pursuant to employee benefit and stock
incentive plans. Holdings may be required to register certain of such shares
upon registration of the Warrant Shares. See "Description of Capital Stock of
Holdings."
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<PAGE>
RESTRICTIONS ON TRANSFER; ABSENCE OF A PUBLIC MARKET FOR THE UNITS, NOTES AND
WARRANTS
The Units, Notes and Warrants offered hereby have not been registered under
the Securities Act. Accordingly, the Units, Notes and Warrants may only be
offered or sold pursuant to an exemption from the registration requirements of
the Securities Act or pursuant to an effective registration statement.
The Units, Notes and Warrants are new issues of securities for which there
currently are no public markets. Holdings does not intend to apply for listing
of the Units, Notes or Warrants on any securities exchange or on the Nasdaq
National Market, although these securities are expected to be eligible for
trading in the PORTAL Market. Although the Initial Purchasers have informed
the Company that they currently intend to make a market in the Units, Notes
and Warrants, they are not obligated to do so and any such market-making may
be discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer and the pendency of
any shelf registration statement. The Units, Notes and Warrants have not been
registered under the Securities Act and there can be no assurance as to the
development or liquidity of any market for these securities. If a market for
the Units, Notes or Warrants were to develop, the Units, Notes (or, if issued,
the Exchange Notes) or Warrants may trade at prices that may be higher or
lower than their initial offering price depending upon many factors, including
prevailing interest rates, the Company's operating results and the market for
similar securities. The Company and the Guarantors have agreed to file the
Exchange Offer Registration Statement with the Commission within 45 days after
the date upon which the Offering is consummated and to use its best efforts to
cause such registration statement to become effective within 135 days after
such date. If and when such registration statement becomes effective, the
Notes will be exchanged for the Exchange Notes which will have terms identical
in all material respects to the Notes, except that the transfer of the
Exchange Notes will not be restricted under the Securities Act. The transfer
of the Warrants, however, will be restricted under the Securities Act until
the effectiveness of the Warrant Shelf Registration Statement or until an
exemption to transfer exists under such act. Historically, the market for
securities such as those offered hereby has been subject to disruptions that
have caused substantial volatility in the prices of similar securities. There
can be no assurance, if a market for the Units, Notes (or, if issued, the
Exchange Notes) and Warrants were to develop, such a market would not be
subject to similar disruptions. Any such disruptions may have an adverse
effect on the holders of the Units, Notes (or, if issued, the Exchange Notes)
and Warrants. See "Description of the Notes--Registration Rights; Liquidated
Damages" and "Notice to Investors."
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<PAGE>
THE ACQUISITION
GENERAL
Pursuant to the Purchase Agreement, dated as of December 31, 1997, by and
among Motorola, Holdings, the Company and certain other parties, the Company
has agreed to purchase ARDIS, a subsidiary of Motorola. Subject to certain
purchase price adjustment provisions, the Company will acquire ARDIS for the
purchase price of $100 million. The Purchase Price will be paid as follows:
(i) $50 million in cash, paid at the closing of the Acquisition; (ii)
approximately $38 million in shares of Holdings' Common Stock paid at the
closing of the Acquisition; and (iii) approximately $12 million in shares of
Holdings' Common Stock and warrants for shares of Holdings' Common Stock only
if, at the annual meeting of Holdings' stockholders, the stockholders approve
the issuance of the additional shares and warrants to Motorola, such warrants
having an exercise price of $.01. The holders of approximately 76% of
Holdings' Common Stock outstanding and entitled to vote thereon have agreed
with Motorola that they will vote for approval of such issuance.
The Company believes that, as a result of the Acquisition, it will be able
to capitalize upon meaningful operational synergies which could expedite the
Company's ability to generate positive EBITDA and free cash flow (operating
cash flow less capital expenditures). In addition, the Company believes it
will be able to enhance revenue growth through cross-selling opportunities
between American Mobile's and ARDIS' salesforces. The Company also expects to
rationalize its cost structure through (i) network optimization and
integration, (ii) office and systems consolidation and (iii) limited personnel
reductions.
PROPOSED RESTRUCTURING
Upon completion of the Acquisition, ARDIS will become a wholly-owned
subsidiary of the Company. In connection with the Acquisition, Holdings also
intends to transfer all of its rights, title and interest in American Mobile
Satellite Sales Corporation, AMSC Subsidiary Corporation and AMSC Sales
Corporation, Ltd. to the Company. As a result, each of these entities will
become a wholly-owned subsidiary of the Company that, in turn, will continue
to operate as a wholly-owned subsidiary of Holdings. Holdings will continue to
retain its ownership interest in AMRC. Concurrently with the proposed
restructuring, Holdings intends to refinance and restructure its outstanding
indebtedness. See "Description of New Bank Financing" and "Offering Memorandum
Summary--Corporate Structure."
RECEIPT OF FCC FINAL ORDER
On March 3, 1998, FCC Authorization for the Acquisition was granted. The
Acquisition will be consummated prior to receipt of a final order ("Final
Order") of the FCC. The Company has the right to Unwind the Acquisition in the
event that an adverse Final Order is received that does not permit the Company
to operate ARDIS as contemplated, by providing notice to Motorola within 30
days following receipt of such adverse Final Order. In the event of an Unwind,
the Purchase Price for ARDIS would be returned to the Company, and the
Company's stock and interests in ARDIS would be returned to Motorola. See
"Risk Factors--Risk of Unwind of Acquisition."
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<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of American
Mobile at September 30, 1997 and the Company on a pro forma basis giving
effect to (i) the Acquisition, (ii) the Offering and (iii) the New Bank
Financing, as if each had occurred on September 30, 1997. This table should be
read in conjunction with the consolidated financial statements of Holdings and
of ARDIS and the related notes, the Pro Forma Financial Information and other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------------------
ACTUAL: PRO FORMA PRO FORMA:
AMERICAN MOBILE ADJUSTMENTS THE COMPANY
--------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and restricted
cash (1)............................. $ 2,592 $ 95,600 $ 98,192
======== ========= ========
Debt, including current portion:
Bank Financing (2).................. $186,000 $(186,000) $ --
Revolving Credit Facility........... -- 17,950 17,950
% Senior Notes (3)................. -- 250,000 250,000
Due to Holdings (4)................. 434,349 (434,349) --
Other debt (5)...................... 12,827 8,751 21,578
-------- --------- --------
Total debt, including current por-
tion............................. 633,176 (343,648) 289,528
-------- --------- --------
Stockholders' equity (3)(4)........... (308,824) 559,816 250,992
-------- --------- --------
Total capitalization............ $324,352 $ 216,168 $540,520
======== ========= ========
</TABLE>
- ---------------------
(1) Restricted cash includes Pledged Securities of $85.6 million and $10.0
million escrowed to fulfill potential obligations under the UPS Guarantee.
(2) Subsequent to September 30, 1997, the Company drew down the remaining
$14.0 million under the Bank Financing and expects to draw down $10.0
million available under the Bridge Facility prior to the closing of the
Offering. Upon consummation of the Offering and partial repayment of the
Bank Financing, it is expected that the Company will have an additional
$57.9 million available for borrowing under the Revolving Credit Facility
and Holdings will assume the obligation for the $100.0 million Term Loan
Facility.
(3) Does not reflect the debt discount that would be recorded upon issuance of
any Warrants associated with the issuance of Notes.
(4) Includes inter-company loans from Holdings to American Mobile that will be
partially repaid and the balance contributed as equity of the Company upon
consummation of the Offering.
(5) Adjustment includes $8.6 million of ARDIS capitalized leases. Since
September 1997, American Mobile has incurred $16.9 million, net, of
deferred trade payables.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Holdings' Common Stock is quoted on the Nasdaq National Market under the
symbol "SKYC." The following table sets forth the range of high and low
trading prices on the Nasdaq National Market for the Common Stock for the
periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE
-------------
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter.................................................. $20.75 $12.50
Second Quarter................................................. 30.25 18.88
Third Quarter.................................................. 28.25 21.50
Fourth Quarter................................................. 31.25 19.00
1996
First Quarter.................................................. 33.25 16.00
Second Quarter................................................. 20.00 15.00
Third Quarter.................................................. 17.50 10.75
Fourth Quarter................................................. 14.63 9.26
1997
First Quarter.................................................. 14.75 9.38
Second Quarter................................................. 12.13 8.50
Third Quarter.................................................. 10.88 6.63
Fourth Quarter................................................. 10.75 6.19
</TABLE>
The closing price of the Common Stock on the Nasdaq National Market on March
6, 1998 was $7.875.
Holdings has never paid cash dividends on its Common Stock and has no plans
to do so in the foreseeable future. Holdings intends to retain earnings, if
any, to develop and expand its business.
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<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following selected historical financial information of American Mobile
and Holdings has been derived from Holdings' historical financial statements
and should be read in conjunction with such consolidated financial statements
and the notes thereto included elsewhere in this Offering Memorandum.
Holdings' Consolidated Financial Statements include the combined condensed
financial statements of American Mobile in Note 17 for the three year period
ended December 31, 1996. Holdings' Consolidated Financial Statements for each
of the five years in the period ended December 31, 1996 have been audited by
Arthur Andersen LLP, independent auditors, and appear elsewhere in this
Offering Memorandum.
The following historical selected financial information for ARDIS for each
of the two years in the period ended December 31, 1996 have been derived from
the audited Combined Financial Statements of ARDIS, which have been audited by
KPMG Peat Marwick LLP, independent auditors, and appear elsewhere in this
Offering Memorandum.
Selected historical financial information for American Mobile for 1992 and
1993 and for ARDIS for 1992, 1993 and 1994 have been derived from the audited
Consolidated Financial Statements of Holdings and unaudited combined financial
statements of ARDIS, respectively. In the respective opinions of the
management of American Mobile and ARDIS, such unaudited selected financial
statements have been prepared on the same basis as the audited financial
statements referred to above and include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial
information for the periods presented.
Selected historical financial information for American Mobile, Holdings and
ARDIS as of and for the nine months ended September 30, 1996 and 1997 have
been derived from unaudited consolidated financial statements of Holdings and
unaudited Combined Financial Statements of ARDIS, respectively. In the
respective opinions of management of American Mobile, Holdings and ARDIS, such
unaudited combined and consolidated financial statements have been prepared on
the same basis as the audited financial statements referred to above and
include all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the financial information for the interim periods.
Results of operations for the nine months ended September 30, 1997, are not
necessarily indicative of the results to be expected for fiscal 1997. The
following data should be read in conjunction with the ARDIS' Combined
Financial Statements and related notes and Holdings' Consolidated Financial
Statements and related notes including American Mobile's combined condensed
financial statements, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and other financial information included
elsewhere herein, as applicable.
20
<PAGE>
AMERICAN MOBILE
SELECTED COMBINED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBERS AND REVENUE PER UNIT)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Services............... $ 277 $ 852 $ 3,662 $ 6,873 $ 9,201 $ 6,071 $ 14,758
Equipment.............. -- -- 1,578 1,924 18,529 12,452 15,475
-------- -------- -------- -------- --------- --------- ---------
Total revenue.......... 277 852 5,240 8,797 27,730 18,523 30,233
Cost of service and
operations............. 5,997 7,188 10,241 23,863 30,471 23,258 24,953
Cost of equipment sold.. -- -- 2,329 4,676 31,903 23,116 18,930
Sales and advertising... 2,633 2,942 5,882 22,683 24,541 18,049 9,109
General and
administrative......... 9,975 8,375 12,231 17,285 16,212 12,641 10,739
Depreciation and
amortization........... 7,656 7,459 4,541 11,568 45,496 34,554 33,040
-------- -------- -------- -------- --------- --------- ---------
Operating loss.......... (25,984) (25,112) (29,984) (71,278) (120,893) (93,095) (66,538)
Interest and other
income................. 693 202 847 1,242 552 485 1,086
Interest expense (1).... -- -- -- (3,305) (44,636) (33,437) (37,618)
-------- -------- -------- -------- --------- --------- ---------
Net loss................ $(25,291) $(24,910) $(29,137) $(73,341) $(164,977) $(126,047) $(103,070)
======== ======== ======== ======== ========= ========= =========
OTHER FINANCIAL AND
OPERATING DATA:
Number of subscribers
(end of period) (2).... -- -- -- -- 20,300 13,400 29,300
Average monthly revenue
per unit (2)........... -- -- -- -- $ 81 $ 88 $ 66
EBITDA (3).............. (18,328) (17,653) (25,443) (59,710) (75,397) (58,541) (32,623)
Capital expenditures.... 58,734 64,044 50,762 83,776 14,054 10,418 6,370
Ratio of earnings to
fixed charges (4)...... -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 6,054 $ 4,012 $ 10,861 $ 8,864 $ 2,182 $ 3,388 $ 2,592
Property and equipment,
net (6)................ 127,510 220,520 275,146 383,301 287,127 294,550 258,324
Total assets............ 142,722 230,226 292,971 419,546 386,537 380,721 359,789
Total debt (5).......... 75,761 157,630 244,849 425,863 545,432 495,812 633,176
Total stockholders'
equity (deficit)....... 62,000 61,701 32,564 (40,779) (205,754) (166,825) (308,824)
</TABLE>
- ---------------------
(1) Includes interest expense accrued on inter-company loans between Holdings
and American Mobile in the amount of $2.4 million in 1995, $29.5 million
in 1996, $22.1 million for the nine months ended September 30, 1996 and
$22.1 million for the nine months ended September 30, 1997, net of inter-
company interest capitalized of $0.6 million in 1992, $9.0 million in
1993, $9.4 million in 1994 and $21.1 million in 1995.
(2) Prior to 1996 American Mobile was a development stage company and leased
satellite capacity primarily on a pass-thru basis. As such, subscriber
information is not available for periods prior to 1996. Average monthly
revenue per unit for year ending December 31, 1996 was calculated on an
average monthly basis after adjusting both subscribers and revenues to
normalize for the acquisition, in late 1996, of MCSS.
(3) EBITDA consists of operating income (loss) plus depreciation and
amortization. EBITDA is a financial measure commonly used in The Company's
industry and should not be construed as an alternative to operating income
(as determined in accordance with GAAP) or as a measure of liquidity.
EBITDA does not represent funds available for dividends, reinvestment or
other discretionary activities. EBITDA for the nine-months ending
September 30, 1997 has been adjusted to include $875,000 of other income
from the licensing of certain technology.
(4) For purposes of calculating the ratio of earnings to fixed charges,
earnings are defined as loss before income taxes and extraordinary item
plus fixed charges. Fixed charges consist of interest expense,
amortization of debt issuance costs, accretion of discount on preferred
stock and a reasonable approximation of the interest factor included in
rental payments on operating leases. Earnings were inadequate to cover
fixed charges for the years ended December 31, 1992, 1993, 1994, 1995, and
1996 by $26.9 million, $47.3 million, $42.1 million, $99.1 million, and
$165.0 million, respectively, and for the six months ended September 30,
1996 and 1997 by $126.0 million and $103.1 million, respectively.
(5) Includes $47.4 million in 1992, $103.2 million in 1993, $163.3 million in
1994, $349.5 million in 1995, $400.8 million in 1996 and $393.6 million as
of September 30, 1996 and $434.3 million as of September 30, 1997 of
inter-company loans between Holdings and American Mobile.
(6) Includes capitalized interest of $1.6 million, $22.4 million, $12.9
million, and $25.7 million in 1992, 1993, 1994 and 1995, respectively.
21
<PAGE>
HOLDINGS
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- --------- --------- -------- --------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Services............... $ 277 $ 852 $ 3,662 $ 6,873 $ 9,201 $ 6,071 $ 14,758
Equipment.............. -- -- 1,578 1,924 18,529 12,452 15,475
-------- --------- --------- -------- --------- ---------- ---------
Total revenue.......... 277 852 5,240 8,797 27,730 18,523 30,233
Cost of service and
operations............. 6,069 7,232 10,327 23,948 30,471 23,258 24,984
Cost of equipment sold.. -- -- 2,329 4,676 31,903 23,116 18,930
Sales and advertising... 2,697 3,010 5,973 22,775 24,541 18,048 9,140
General and
administrative......... 9,089 7,528 11,674 16,681 17,464 13,635 10,863
Depreciation and
amortization........... 7,656 7,459 4,541 11,218 43,390 32,975 31,461
-------- --------- --------- -------- --------- ---------- ---------
Operating loss.......... (25,234) (24,377) (29,604) (70,501) (120,039) (92,509) (65,145)
Interest and other
income................. 953 569 8,501 4,500 552 485 1,263
Interest expense........ -- -- -- (916) (15,151) (11,364) (16,305)
-------- --------- --------- -------- --------- ---------- ---------
Loss before
extraordinary item..... (24,281) (23,808) (21,103) (66,917) (134,638) (103,388) (80,187)
Extraordinary item (1).. -- (1,372) -- -- -- -- --
-------- --------- --------- -------- --------- ---------- ---------
Net loss................ $(24,281) $ (25,180) $ (21,103) $(66,917) $(134,638) $ (103,388) $ (80,187)
======== ========= ========= ======== ========= ========== =========
Loss per share of Common
Stock:
Loss before
extraordinary item..... $ (2.71) $ (2.36) $ (0.86) $ (2.69) $ (5.38) $ (4.13) $ (3.19)
Extraordinary item...... -- (0.13) -- -- -- -- --
-------- --------- --------- -------- --------- ---------- ---------
Net loss per common
share.................. $ (2.71) $ (2.49) $ (0.86) $ (2.69) $ (5.38) $ (4.13) $ (3.19)
======== ========= ========= ======== ========= ========== =========
Weighted average shares
outstanding (000's).... 8,970 10,103 24,672 24,900 25,041 25,024 25,125
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
--------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- --------- --------- -------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 6,713 $ 243,060 $ 166,004 $ 8,865 $ 2,182 $ 3,388 $ 2,592
Property and equipment,
net (2)................ 126,965 211,461 274,656 362,105 267,863 274,758 240,638
Total assets............ 146,823 460,382 448,674 398,351 350,173 342,929 334,811
Total debt.............. 49,040 82,585 81,572 76,362 144,601 102,221 213,899
Total stockholders'
equity................. 92,822 367,370 351,544 287,527 158,700 188,969 83,383
</TABLE>
- ---------------------
(1) Reflects extraordinary losses on debt conversion associated with the
initial public offering. Net loss per share on a pro forma basis, after
giving effect to the debt conversion, would have been ($2.15).
(2) In 1992, 1993, 1994 and 1995, capitalized interest was $1.1 million, $13.3
million, $3.5 million and $4.7 million, respectively.
22
<PAGE>
ARDIS
SELECTED COMBINED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBERS AND REVENUE PER UNIT)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Services............... $ 39,717 $ 43,831 $ 48,561 $ 40,006 $ 43,413 $ 33,215 $ 31,747
Equipment and
consulting............ 1,283 2,773 2,346 1,266 1,884 1,336 1,624
-------- -------- -------- -------- -------- --------- --------
Total revenue.......... 41,000 46,604 50,907 41,272 45,297 34,551 33,371
Cost of service and
operations............. 33,084 39,078 38,923 39,884 32,805 24,762 23,113
Cost of equipment sold.. 264 1,756 1,621 1,878 1,350 1,267 1,784
Selling and
advertising............ 7,449 10,193 14,311 15,164 13,677 9,521 4,283
General and
administration......... 7,103 7,979 8,785 10,623 9,364 7,332 4,431
Depreciation and
Amortization........... 6,733 7,888 10,098 14,355 17,269 12,752 10,915
Non-recurring expense
(1).................... -- 20,414 -- -- -- -- --
-------- -------- -------- -------- -------- --------- --------
Operating loss.......... (13,633) (40,704) (22,831) (40,632) (29,168) (21,083) (11,155)
Interest income......... 319 258 327 481 198 160 101
Interest expense........ -- -- -- (688) (1,556) (1,181) (1,028)
-------- -------- -------- -------- -------- --------- --------
Net loss before taxes... (13,314) (40,446) (22,504) (40,839) (30,526) (22,104) (12,082)
Income tax benefit...... -- -- -- 15,586 11,528 8,320 4,382
-------- -------- -------- -------- -------- --------- --------
Net loss................ $(13,314) $(40,446) $(22,504) $(25,253) $(18,998) $ (13,784) $ (7,700)
======== ======== ======== ======== ======== ========= ========
OTHER FINANCIAL AND
OPERATING DATA:
Number of subscribers
(end of period)........ 23,900 24,800 33,100 44,200 52,500 52,400 55,000
Average monthly revenue
per unit............... $ 153 $ 150 $ 140 $ 86 $ 75 $ 76 $ 66
EBITDA (2).............. (6,900) (32,816) (12,733) (26,277) (11,899) (8,331) (240)
Capital expenditures.... 17,803 17,966 17,303 42,366 4,806 3,958 1,302
Ratio of earnings to
fixed charges (3)...... -- -- -- -- -- -- --
<CAPTION>
AS OF
AS OF DECEMBER 31 SEPTEMBER 30,
------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 4,403 $ 8,896 $ 16,035 $ 6,985 $ 5,289 $ 3,275 $ 2,621
Property and equipment,
net.................... 28,930 31,738 38,476 65,228 53,302 56,500 44,758
Total assets............ 58,724 61,113 83,368 103,231 91,252 89,860 75,474
Total debt.............. -- -- -- 18,019 16,395 16,816 13,751
Total stockholders'
equity................. 48,090 48,143 55,940 72,267 65,141 63,416 54,559
</TABLE>
- ---------------------
(1) Non-recurring item represents the write-off of previously capitalized
software development costs.
(2) EBITDA consists of operating income (loss) plus depreciation and
amortization. EBITDA is a financial measure commonly used in the Company's
industry and should not be construed as an alternative to operating income
(as determined in accordance with GAAP) or as a measure of liquidity.
EBITDA does not represent funds available for dividends, reinvestment or
other discretionary activities. EBITDA for 1993 includes extraordinary
items. EBITDA for 1993 includes a non-recurring charge in the amount of
$20.4 million relating to the write-off of previously capitalized software
development costs.
(3) For purposes of calculating the ratio of earnings to fixed charges,
earnings are defined as loss before income taxes and extraordinary item
plus fixed charges. Fixed charges consist of interest expense,
amortization of debt issuance costs, accretion of discount on preferred
stock and a reasonable approximation of the interest factor included in
rental payments on operating leases. Earnings were inadequate to cover
fixed charges for the years ended December 31, 1992, 1993, 1994, 1995 and
1996 by $13.3 million, $40.4 million, $22.5 million, $40.8 million and
$30.5 million, respectively, and for the nine months ended September 30,
1996 and 1997 by $22.1 million and $12.1 million, respectively.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
General. The Company believes that its targeted customer base selects its
communications service provider based on a variety of considerations including
network coverage and quality as well as the total cost of ownership. The
Company also believes that the coverage and quality of its network are
superior to other competing networks. As a result, the Company believes it is
able to price its offerings at a premium to other competitors. However, to
remain competitive and to accelerate penetration of its targeted markets, as
well as to gain access to new markets, the Company seeks to lower the
customers' total cost of ownership of its products and services.
Total cost of ownership is comprised of three main components: (i) equipment
costs, (ii) software application costs and (iii) usage fees. Currently,
American Mobile and ARDIS benefit from positive trends in equipment pricing.
Historically, manufacturers have been able to provide similar products at
significantly lower prices and enhanced products at relatively lower prices.
The Company is working closely with a number of equipment vendors to develop
more capable, less costly next generation devices. As a result, the Company
believes that the cost of its equipment will decline in the future. American
Mobile and ARDIS also have benefited, although to a lesser degree, from trends
in the software industry that have resulted in lower prices for software
applications. In the future, the Company intends to increase its offering of
pre-packaged software as standardized applications become more advanced. The
Company believes that by offering pre-packaged applications, it will be able
to lower its customers' total cost of ownership. The Company also is able to
lower the total cost of ownership by offering a wide range of product
offerings and service packages. The Company provides its data customers with a
choice of multi-mode or single mode (i.e., satellite and/or terrestrial)
products as well as a variety of service packages that vary the mix of fixed
access and variable usage fees. Depending on where, how and when a customer
intends to use the Company's network, it can select among various products and
service packages to minimize its monthly usage fee.
Revenues. American Mobile and ARDIS generate their service revenues from
fixed monthly access charges and variable usage fees. Both companies also have
entered into certain multi-year take-or-pay contracts with resellers and
value-added service providers ("VASPs"). The Company anticipates that such
resellers and VASPs will represent an increasing percentage of its revenue and
its customer base in the future. In addition, American Mobile sells bulk
channel capacity on its satellite under take-or-pay contracts that generally
last for five years. Each month a percentage of the Company's customer base
may terminate its service for a variety of reasons, including failure to pay,
dissatisfaction with the service or the use of a competing service. However,
the Company believes that given the generally high quality of its service, the
long-term nature of many of its contracts, the significant up-front investment
required to install a new system and the critical nature of the service
provided, the Company experiences relatively low levels of turnover.
American Mobile generates additional revenues from the sale of equipment. As
a result of certain manufacturer requirements to purchase bulk quantities of
inventory and American Mobile's shift from a consumer to a business customer
focus in 1996, American Mobile has not sold subscriber equipment at a positive
margin and does not expect to do so in the future. ARDIS generates additional
revenues from consulting fees earned during service implementation and from
equipment sales, but the majority of ARDIS' customers buy their equipment
directly from manufacturers.
Costs and Expenses. American Mobile and ARDIS operate wireless networks
which have been deployed on a nationwide scale. As a result, both companies
have incurred, and the Company will continue to incur, large fixed costs
related to the ongoing maintenance and operation of the network. Major
components of the Company's fixed cost structure include (i) lease expense
related to the network's 1,700 base stations, dedicated and frame relay access
lines and network backbone, (ii) operation of American Mobile's and ARDIS'
network operations and control centers, (iii) satellite telemetry, tracking
and control expenses and (iv) satellite insurance.
24
<PAGE>
American Mobile and ARDIS also have incurred significant sales and marketing
expenses as they have grown their customer bases. Both companies recently
reoriented their sales and marketing efforts toward serving business
customers. Previously, both American Mobile and ARDIS spent significant time
and resources to penetrate consumer markets. Toward this end, the companies
developed large, consumer-oriented sales and marketing organizations that
resulted in increased operating expenses without corresponding subscriber
growth. The Company believes that it now has developed an appropriate sales
and marketing infrastructure to meet the anticipated demand of its business
customers.
The Company believes that, as a result of the Acquisition, it will be able
to capitalize upon meaningful operational synergies which could expedite the
Company's ability to generate positive EBITDA and free cash flow (operating
cash flow less capital expenditures). In addition, the Company believes it
will be able to enhance revenue growth through cross-selling opportunities
between American Mobile's and ARDIS' salesforces. The Company also expects to
rationalize its cost structure through (i) network optimization and
integration, (ii) office and systems consolidation and (iii) limited personnel
reductions.
To date, American Mobile and ARDIS have experienced significant operating
and net losses and negative EBITDA as they have developed their networks. The
Company expects that it will continue to experience such operating losses and
negative EBITDA until such time as it develops a revenue-generating customer
base sufficient to fund its operating expenses.
AMERICAN MOBILE
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Operating Revenues. Service revenues, which include both American Mobile's
voice and data services, approximated $14.8 million for the nine-month period
ended September 30, 1997. Service revenue from voice services approximated
$9.2 million for the nine-month period ended September 30, 1997, as compared
to $2.9 million for the comparable period in 1996. This increase was primarily
a result of (i) a 144% increase in voice customers as of September 30, 1997,
as compared to voice customers as of September 30, 1996, and (ii) a 9%
increase in private network customers ("PNCs") contracts, offset by
approximately $1.3 million received in the first five months of 1996,
attributable to satellite capacity leased to TMI, under a commitment that was
completed in May 1996. Service revenue from American Mobile's data services
approximated $5.5 million for the nine-month period ended September 30, 1997,
compared to $3.2 million for the same period in 1996, an increase of $2.3
million. The increase was primarily a result of additional revenue from multi-
mode units added as a result of the MCSS acquisition, in November 1996, of
Rockwell's multi-mode mobile messaging and global positioning and monitoring
service, as compared to the revenue received in the first nine months of 1996
for satellite capacity leased by Rockwell. Revenue from the sale of mobile
data terminals and mobile telephones increased from $12.5 million for the nine
months ended September 30, 1996 to $15.5 million for the nine months ended
September 30, 1997. This increase is attributable to increased equipment sales
of the multi-mode mobile messaging product, discussed above.
Costs and Expenses. American Mobile's overall costs and expenses have
primarily decreased in the nine-month period ended September 30, 1997, as
compared to the comparable period in 1996, as a result of stringent cost
controls and expense management. Cost of service and operations for the nine-
month period ended September 30, 1997, which includes costs to support units
and to operate the satellite network, was $25.0 million, and $1.7 million
greater than the comparable periods in 1996. Cost of service and operations
for the nine-month period ended September 30, 1997, as a percentage of
operating expenses, was 26%, compared to 21% for the comparable period in
1996. The dollar and percentage increase in cost of service and operations was
primarily attributable to (i) increased interconnect charges associated with
increased service usage by customers, and (ii) the additional costs associated
with supporting the multi-mode mobile messaging product, discussed above. The
cost of equipment sold decreased to $18.9 million from $23.1 million for the
nine months periods ended September 30, 1997 and 1996, respectively, and
represented 20% and 21% for total operating expenses for the same periods. The
overall decrease in both dollars and as a percentage of operating expenses of
the cost of
25
<PAGE>
equipment sold was primarily attributable to certain charges in the second and
third quarters of 1996, totaling $8.8 million, for the reconfiguration of
inventory and the write down of certain assets, including inventory, to net
realizable value, offset by equipment sales of the multi-mode mobile message
product, discussed above. Sales and advertising expenses were $9.1 million for
the nine-month period ended September 30, 1997, compared with $18.0 million
for the same period in 1996. Sales and advertising expenses for the nine-month
period ended September 30, 1997, were 9% as a percentage of operating
expenses, compared to 16% for the comparable period in 1996. Both the dollar
decrease and the percentage decrease of sales and advertising expenses were
primarily attributable to (i) a more focused approach to advertising as
American Mobile has moved from consumer markets to targeted business-to-
business sales, and the resulting reduction in print advertising, (ii)
increased costs in the first quarter of 1996 for the development of collateral
material needed to support the sales effort, and (iii) costs incurred in the
first quarter of 1996 associated with the formal launch of service. General
and administrative expenses for the nine month period ended September 30,
1997, were $10.7 million, $1.9 million less than the comparable period in
1996. General and administrative expenses for both the nine-month periods
ended September 30, 1996, and 1997 were 11%, as a percentage of operating
expenses. Both the dollar and percentage decrease in general and
administrative expenses for the first nine months of 1997 compared to 1996
were primarily attributable to reductions made in staffing as a result of a
management restructuring in the third quarter of 1996. Depreciation and
amortization expense was $33.0 million for the nine-month period ended
September 30, 1997 compared with $34.6 million for the same period in 1996.
Depreciation and amortization nine-month period ended September 30, 1997, was
34% as a percentage of operating expenses, compared with 31% for the
comparable period in 1996. The dollar decrease in depreciation and
amortization expense was attributable to the reduction of the carrying value
of the satellite as a result of the resolution, in August 1996, of claims
under American Mobile's satellite insurance contracts and policies and the
receipt of approximately $66.0 million, offset by a $1.0 million one-time
charge associated with increased amortization in accordance with SFAS No. 86,
in the second quarter of 1997, of certain costs associated with software
development for the mobile data product.
Interest and Other Income. Interest income was $211,000 for the nine-month
period ended September 30, 1997, compared to $485,000 in the same period in
1996. The decrease was a result of lower average cash balances in the first
nine months of 1997 as compared to the same period in 1996. American Mobile
incurred $37.6 million of interest expense for the nine-month period ended
September 30, 1997, including $22.1 million of interest charged on loans from
Holdings, compared to $33.4 million of interest expense which includes $22.1
million of interest charged on loans from Holdings for the comparable period
of 1996, reflecting (i) increased debt balances during the first nine months
of 1997 as compared to 1996, and (ii) the amortization of debt discount and
debt issuance costs in the first nine months of 1997 of approximately $6.8
million compared to $4.0 million in the same period of 1996. Additionally, in
the first nine months of 1997, American Mobile received other income in the
amount of $875,000 representing proceeds from the licensing of certain
technology associated with the SKYCELL System.
Capital Expenditures. Capital expenditures, including additions financed
through vendor financing arrangements, for the first nine months of 1997 were
$6.4 million compared to $10.4 million for the same period in 1996. The
decrease was largely attributable to the reduction in the acquisition of
assets necessary to complete the satellite network.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Operating Revenues. Service revenues, which include both American Mobile's
voice and data services, approximated $9.2 million for 1996 as compared to
$6.9 million for 1995. Service revenue from voice services approximated $5.0
million in 1996, including approximately $1.3 million attributable to
satellite capacity leased to TMI, a Canadian Limited Partnership, under a
commitment, which was completed in May 1996. Service revenue from American
Mobile's data and position location services ("Mobile Data Communications
Service") approximated $4.0 million in 1996, as compared to $6.9 million for
1995, a reduction of $2.9 million. Prior to 1996, American Mobile provided its
Mobile Data Communications Service using satellite capacity leased from the
COMSAT Corporation ("COMSAT"), the cost of which was passed through to one
customer, Rockwell.
26
<PAGE>
The decrease in Mobile Data Communications Service revenue reflects the
reduced revenue from Rockwell resulting from lower billings for the use of the
lower cost MSAT-2 versus billings attributable to the leased COMSAT satellite
applied on a pass-through basis. Of the data service revenues, 36% and 75%
were attributable to Rockwell for 1996 and 1995, respectively. As previously
mentioned, American Mobile acquired the multi-mode mobile messaging and global
positioning and monitoring service of Rockwell in November 1996. At December
31, 1996 and 1995, receivables relating to service revenues were $1.8 million
and $405,000, respectively.
Revenue from the sale of mobile data terminals and mobile telephones
increased from $1.9 million in 1995 to $18.5 million in 1996, primarily
attributable to (i) American Mobile's introduction of certain voice products
in the fourth quarter of 1995 and the resulting sale of mobile telephones, and
(ii) the increased availability of mobile data terminals in 1996 compared to
1995 following a contract signed with a mobile data terminal manufacturer in
February 1995.
Costs and Expenses. American Mobile's costs and expenses increased primarily
in connection with the start of full commercial service in December 1995. Cost
of service and operations for 1996, which includes costs to support units and
to operate the satellite network, were $30.5 million for 1996, an increase of
$6.6 million from 1995. Cost of service and operations for 1996 and 1995, as a
percentage of operating expenses, were 21% and 30%, respectively. The dollar
increase in cost of service and operations was primarily attributable to (i)
additional personnel and related costs to support both existing and
anticipated customer demand, (ii) increased costs associated with the ongoing
maintenance of American Mobile's billing systems and the communications ground
segments ("CGS"), and (iii) $6.5 million of insurance expense for inorbit
insurance coverage for MSAT-2, offset by the elimination of COMSAT lease
expense reflecting the transition of American Mobile's customers from the
leased satellite to MSAT-2. The decrease as a percentage of operating expenses
was attributable to the overall increase in total operating expenses. The cost
of equipment sold increased to $31.9 million in 1996 from $4.7 million in
1995, and represented 21% of total operating expenses in 1996 versus 6% of
total operating expenses in 1995. The increase in both dollars and as a
percentage of operating expenses of the cost of equipment sold is primarily
attributable to (i) American Mobile's introduction of certain voice products
in the fourth quarter of 1995 and the resulting sale of mobile telephones,
(ii) the availability of mobile data terminals in 1996 compared to 1995, (iii)
a $4.2 million charge in 1996 for the reconfiguration of certain components to
better meet customer requirements, and (iv) a $6.9 million write down of
inventory to net realizable value. Sales and advertising expenses were $24.5
million in 1996, compared to $22.7 million in 1995. Sales and advertising
expenses as a percentage of operating expenses were 17% in 1996 and 28% in
1995. The dollar increase of sales and advertising expenses was primarily
attributable to (i) additional head count and personnel related costs
associated with the increase in sales staff, and (ii) increased costs directly
associated with the increase in subscriber acquisition programs, offset by a
$1.4 million charge, in 1995, associated with the reacquisition of defective
equipment located at a customer site and settlement of related disputes. The
decrease as a percentage of operating expenses was attributable to the overall
increase in total operating expenses. General and administrative expenses for
1996 were $16.2 million, a decrease of $1.1 million as compared to 1995. As a
percentage of operating expenses, general and administrative expenses
represented 11% in 1996 and 22% in 1995. The dollar increase in general and
administrative expenses for 1996 compared to 1995 was primarily attributable
to (i) approximately $675,000 of severance costs associated with a management
restructuring and (ii) an increase in facilities rents and utilities of
$236,000. The decrease of general and administrative expenses as a percentage
of operating expenses was attributable to the overall increase in operating
expenses. Depreciation and amortization expense was $45.5 million and $11.6
million in 1996 and 1995, respectively, representing approximately 31% and 14%
of operating expenses for 1996 and 1995, respectively. Both the dollar
increase and the increase as a percentage of operating expenses in
depreciation and amortization expense was attributable to the commencement of
depreciation of both MSAT-2 and related assets and the CGS in the fourth
quarter of 1995.
Interest and Other Income. Interest and other income was $552,000 in 1996
compared to $1.2 million in 1995. The decrease was a result of lower average
cash balances. American Mobile incurred $44.6 million of interest expense,
including $29.5 million related to intercompany loans, in 1996 compared to
$3.3 million of
27
<PAGE>
interest expense, including $2.4 million interest related to intercompany
loans, in 1995 reflecting (i) the discontinuation of interest cost
capitalization as a result of substantially completing the satellite network
in the fourth quarter of 1995, (ii) the amortization of debt discount and debt
offering costs relating to the Bridge Financing and Bank Financing (see
"Liquidity and Capital Resources"), and (iii) higher outstanding loan balances
as compared to 1995.
Capital Expenditures. Capital expenditures, including additions financed
through vendor financing arrangements, for 1996 for property and equipment
were $14.1 million compared to capital expenditures of $83.8 million in 1995.
The decrease was largely attributable to (i) the net proceeds of $65.8 million
from the resolution of the claims under American Mobile's satellite insurance
contracts and policies (see "--Liquidity and Capital Resources"), (ii) the
purchase, in the first quarter of 1995, of launch insurance at a cost to
Holdings of $42.8 million in connection with Holdings' launch contract with
Martin Marietta Commercial Launch Series, Inc., and (iii) the decrease in
construction activity as certain components of the CGS were completed.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Operating Revenues. Service revenues increased $3.2 million to $6.9 million
for 1995 compared with $3.7 million for 1994. The increase in revenues was
primarily attributable to additional satellite capacity leased by a customer.
Until December 1995, American Mobile provided its Mobile Data Communications
Service using satellite capacity leased from COMSAT that American Mobile
resold to its customers. In December 1995, American Mobile transitioned all
Mobile Data Communications Service customers from the COMSAT satellite to
MSAT-2. All of American Mobile's service revenues through 1995 are
attributable to its Mobile Data Communications Service that commenced revenue
service in 1992. Of these service revenues, 75% and 70% were attributable to
one customer for the years ended December 31, 1995 and 1994, respectively. At
December 31, 1995 and 1994, receivables relating to operating revenues were
$405,000 and $446,000, respectively. Equipment revenues increased to $1.9
million in 1995, as compared to $1.6 million in 1994, primarily as a result of
increased Mobile Data Communications Service customers.
Costs and Expenses. Operating expenses were $80.1 million for 1995, an
increase of $44.9 million from 1994. American Mobile's operating expenses
increased primarily in connection with the commencement of full commercial
service in December 1995. Cost of service and operations expenses were $23.9
million and $10.2 million, representing approximately 30% and 29% of operating
expenses for 1995 and 1994, respectively. The dollar increase in service and
operations expenses was primarily attributable to additional customer demand
for American Mobile's Mobile Data Communications Service requiring (i)
additional satellite capacity leased from COMSAT, commencing in December 1994,
(ii) additional personnel and related costs to support both existing and
anticipated demand and (iii) $1.8 million of insurance expense attributable to
the 1995 portion of the in-orbit insurance premium for coverage of MSAT-2.
Cost of equipment sales increased from $2.3 million in 1994 to $4.7 million in
1995, and represented approximately 6% of operating expenses in both 1995 and
1994. The increase in the cost of equipment sold reflected (i) an increased
demand for Mobile Data Communications Service and (ii) a $1.9 million write
down of certain inventory components to net realizable value. The decrease in
cost of equipment sales as a percentage of operating expenses was attributable
to the overall increase in operating expenses. Sales and marketing expenses
were $22.7 million and $5.9 million, representing approximately 28% and 17% of
operating expenses for 1995 and 1994, respectively. Both the dollar increase
and the increase as a percentage of operating expenses in sales and marketing
expenses were primarily attributable to (i) significant increases in head
count and personnel related costs, including an increase in the sales staff
and the development and staffing of a customer service center to support the
commencement of full commercial service, (ii) increased advertising and
promotional costs associated with the commencement of full commercial service,
including $2.5 million of inventory charges associated with a promotional
program to promote sales of mobile telephones and mobile data terminal
inventory, (iii) a $1.8 million write-down of certain assets to net realizable
value, (iv) a $1.8 million charge associated with the temporary delay in the
delivery of certain subscriber equipment, (v) a $1.4 million charge associated
with the reacquisition of defective equipment located at a customer site and
settlement of related claims, and (vi) additional costs associated with the
transition of customers from COMSAT leased space capacity to MSAT-2. General
and administrative expenses were
28
<PAGE>
$17.3 million and $12.2 million, representing approximately 22% and 35% of
operating expenses for 1995 and 1994, respectively. The dollar increase in
general and administrative expenses was primarily attributable to an increase
of $5.9 million in personnel-related costs associated with hiring and training
staff to support American Mobile's information systems and technology needs
and to operate the billing systems developed by American Mobile to support the
commencement of full commercial service. The decrease as a percentage of
operating expenses in general and administrative expenses was attributable to
the overall increase in operating expenses. Depreciation and amortization
expense was $11.6 million and $4.5 million in 1995 and 1994, representing
approximately 14% and 13% of operating expenses for 1995 and 1994,
respectively. Both the dollar increase and the increase as a percentage of
operating expenses in depreciation and amortization expense was attributable
to the commencement of depreciation of both MSAT-2 and related assets and the
CGS in the fourth quarter of 1995.
Interest and Other Income. Interest and other income was $1.2 million in
1995 compared to $0.8 million in 1994. The increase was primarily attributable
to increased cash available as a result of funding from Holdings. Interest
expense in 1995 was $3.3 million, including $2.4 million related to
intercompany loans. Interest costs in 1994 were capitalized as part of
American Mobile's construction activities. American Mobile incurred $29.0
million and capitalized $25.7 million of interest costs in 1995 compared to
$12.9 million incurred and capitalized in 1994. The increase in interest costs
was primarily attributable to both higher borrowing rates and higher
outstanding loan balances.
Capital Expenditures. Capital expenditures, including additions financed
through vendor financing arrangements, for 1995 for property under
construction were $83.8 million compared to $50.8 million in 1994. The
increase in capital expenditures was primarily attributable to the purchase of
launch insurance at a cost to American Mobile of $42.8 million in connection
with American Mobile's launch contract with Martin Marietta Commercial Launch
Services, Inc., offset by the decrease in construction activity as the
components of the satellite network were readied for full commercial service.
ARDIS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Operating Revenues. Services revenues were $31.7 million for the nine months
ended September 30, 1997 compared to $33.2 million for the same period in
1996. The decrease in revenue reflects reduced usage during 1997 by several
large accounts, including UPS whose usage was reduced by a strike in 1997.
Revenue from the sale of equipment increased to $1.6 million for the nine
months ended September 30, 1997 compared from $1.3 million for the same period
in 1996. Devices made available from RIM during 1997 and continued demand for
the Motorola PCMCIA modem contributed to the increase.
Costs and Expenses. Total costs and expenses for the nine months ended
September 30, 1997 decreased approximately 20% from the same period in 1996.
Cost of services and operations for the nine months ended September 30, 1997
were $23.1 million, a decrease from $24.8 million for the same period in 1996.
This decline was due primarily to continuing cost savings derived from the
consolidation of network operations which were commenced in 1996. Costs of
services and operations for the nine months ended September 30, 1997 and 1996
as a percentage of operating expenses were 52% and 45%, respectively. The
increase as a percent of operating expenses was attributable to overall
decreases in other operating expenses.
The cost of equipment sold for the nine months ended September 30, 1997
increased to $1.8 million from $1.3 million which represented 4% and 2%,
respectively, of total operating expenses.
Sales and marketing expenses for the nine months ended September 30, 1997
were $4.3 million, a decline from $9.5 million for the same period in 1996.
This decline was attributable primarily to ARDIS' shift from a consumer market
focus in 1996 to its traditional vertical business market focus in 1997. Sales
and marketing costs as a percentage of operating expenses were 10% in 1997 and
17% in 1996.
29
<PAGE>
General and administrative expenses for the nine months ended September 30,
1997 were $4.4 million, a decline from $7.3 million for the same period in
1996. This decline was attributable primarily to (i) reduced headcount and
personnel related costs which had supported horizontal marketing efforts, (ii)
reduced software license expenses and (iii) reduced reserve requirements. As a
percentage of operating expenses, general and administrative expenses
represented 10% in 1997 and 13% in 1996.
Depreciation and amortization expense for the nine months ended September
30, 1997 was $10.9 million, a decline from $12.8 million for the same period
in 1996. This decline was attributable to the originally contributed network
assets in 1990 becoming fully depreciated in 1997. Depreciation and
amortization expense as a percentage of operating expenses was 25% for 1997
and 23% for 1996.
Interest and Other Income. Net interest expense for the nine month period
ended September 30, 1997 was $0.9 million compared to $1.0 million for the
same period in 1996, as a result of lower capital lease balances.
Capital Expenditures. Capital expenditures for the nine months ended
September 30, 1997 were $1.3 million compared to $4.0 million for the same
period in 1996. The decrease in capital expenditure amounts reflects the
significant capital expenditures made in 1996 and prior periods that provided
sufficient network capacity and therefore reduced capital expenditure
requirements during 1997.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Operating Revenues. Services revenues were $43.4 million in 1996 compared to
$40.0 million for 1995. The increase in revenue reflects a 21% increase in
active units that resulted from the signing of several new contracts.
Revenue from the sale of radio data terminals and consulting services
increased to $1.9 million in 1996 from $1.3 million in 1995. The introduction
of wireless PCMCIA modems in 1996 contributed to this increase.
Costs and Expenses. Total costs and expenses decreased approximately 9%
during 1996 compared to 1995. Cost of services and operations for 1996 were
$32.8 million, a decline from $39.9 million in 1995. This dollar decrease was
attributable to (i) reduced headcount and personnel related costs as a result
of network consolidation completed during the first quarter of 1996, (ii)
reduced consulting expenses related to network enhancements for horizontal
applications anticipated during 1995, and (iii) reduced support costs
associated with fewer capital expenditure installations. Costs of services and
operations for 1996 and 1995 as a percentage of operating expenses were 44%
and 49%, respectively.
The cost of equipment sold in 1996 decreased to $1.4 million from $1.9
million in 1995, representing 2% of operating expenses in both periods.
Sales and marketing expenses were $13.7 million in 1996, a decline from
$15.2 million in 1995. This decline was attributable primarily to (i) reduced
headcount and personnel related costs associated with decreases in sales and
marketing staff supporting horizontal market programs and (ii) decreased
advertising and promotion activities. Sales and marketing costs as a
percentage of operating expenses were 18% in 1996 and 19% in 1995.
General and administrative expenses for 1996 were $9.4 million, a decline
from $10.6 million in 1995. This decline was attributable to reduced headcount
and personnel related costs associated with the operations consolidations and
other restructuring activities in the fourth quarter of 1995. As a percent of
operating expenses, general and administrative expenses represented 13% in
1996 and 1995.
Depreciation and amortization expense in 1996 was $17.3 million, compared to
$14.4 million in 1995, representing approximately 23% and 18% of operating
expenses in 1996 and 1995. The dollar and percent increase in depreciation and
amortization was the result of depreciation of network assets installed and
frequencies purchased in 1994 and 1995.
30
<PAGE>
Interest and Other Income. Net interest expense was $1.4 million in 1996
compared to $0.2 million in 1995. Lower available cash balances in 1996
reduced the amount of interest income earned during the period.
Capital Expenditures. Capital expenditures, including additions financed
through capital leases, were $4.8 million in 1996 compared to $42.4 million in
1995. The decrease reflects (i) the build-out of several 19.2 protocol base
station layers in 1995, (ii) the replacement of the system's network
controllers during 1995, and (iii) the acquisition, in 1995, of a capital
lease for switching equipment in the amount of $18.8 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Operating Revenues. Services revenues were $40.0 million in 1995 as compared
to $48.6 million for 1994. The reduction in revenue reflects a 25% price
reduction implemented by ARDIS on January 1, 1996, to meet competitive pricing
pressures in the marketplace, as well as the signing of a new contract with
ARDIS' largest customer that replaced a fixed price contract which expired in
1994.
Revenue from the sale of radio data terminals and consulting services
decreased to $1.3 million in 1995 from $2.3 million in 1994. This decline was
due primarily to a reduction in ARDIS' consulting revenue associated with
vertical customer application development and installations following ARDIS'
shift from vertical to horizontal distribution and marketing in 1995.
Costs and Expenses. Total costs and expenses increased approximately 11%
during 1995 compared to 1994. Cost of services and operations in 1995 were
$39.9 million compared to $38.9 million in 1994. This dollar increase was
attributable to (i) increased staffing and related costs related to the
installation of additional base stations with 19.2 protocol and the
replacement of the system's network controllers, (ii) incremental run-rate
network costs for the aforementioned additional network equipment, and (iii)
increased personnel and consulting expense related to network enhancements
necessitated by ARDIS' increased horizontal marketing efforts. Costs of
services and operations for 1995 and 1994 as a percentage of operating
expenses were 49% and 53%, respectively.
The cost of equipment sold in 1995 increased slightly to $1.9 million from
$1.6 million in 1994, representing 2% of operating expenses in both periods.
Sales and marketing expenses were $15.2 million in 1995 and $14.3 million in
1994. This increase was attributable primarily to (i) increased headcount and
personnel related costs associated with staff supporting horizontal markets
and (ii) increased advertising and promotion activities incurred with
Motorola's introduction of personal digital assistants ("PDAs") in 1995. Sales
and marketing costs as a percentage of operating expenses were 19% in both
periods.
General and administrative expenses in 1995 were $10.6 million compared to
$8.8 million in 1994. This increase was attributable to (i) increased
headcount and personnel related costs associated with the supporting
horizontal marketing efforts and (ii) increased facility costs to support
additional staffing. As a percentage of operating expenses, general and
administrative expenses were 13% in 1995 and 12% in 1994.
Depreciation and amortization expense in 1995 was $14.4 million compared to
$10.1 million in 1994, representing approximately 18% and 14% of operating
expenses in 1995 and 1994. The dollar and percent increase in depreciation and
amortization was the result of depreciation on network assets installed and
frequencies purchased in 1994 and 1995.
Interest and Other Income. Net interest expense was $0.2 million in 1995
compared to interest income of $0.3 million in 1994. Interest expense of $0.7
million, associated with a capitalized lease entered into in 1995, caused this
variation.
31
<PAGE>
Capital Expenditures. Capital expenditures for 1995, including those items
financed through capital lease arrangements, were $42.4 million compared to
$17.3 million in 1994. ARDIS continued the expansion of network capacity
through the installation of 19.2 protocol base stations and continued the
replacement of the network controllers begun in 1994. In addition, during June
1995, ARDIS signed a sixty-six month lease agreement for switching equipment.
LIQUIDITY AND CAPITAL RESOURCES
American Mobile and ARDIS have incurred significant operating losses and
negative cash flows in each year since they commenced operations, due
primarily to start-up costs, the costs of developing and building their
networks and the cost of developing, selling and providing products and
services. American Mobile historically has financed its cash requirements for
operations and investments through private equity contributions, sales of
public equity securities, equipment financing arrangements and other
borrowings, including its existing $200 million Bank Facility. ARDIS has
financed its cash requirements primarily through equity contributions from
Motorola since 1994.
From 1994 to 1996, American Mobile and ARDIS have generated combined
historical cumulative negative cash flow from operations of $(280.6) million.
However, as the result of increased subscribers, reduced overhead and cost-
cutting efforts, negative combined cash flow from operations declined to
$(68.1) million for the nine months ended September 30, 1997 from $(107.2)
million for the comparable period in 1996. In addition, American Mobile's and
ARDIS' combined historical capital expenditures, which totaled $213.1 million
from 1994 to 1996, have declined from $126.1 million in 1995 to $18.9 million
in 1996. Combined historical capital expenditures for the nine months ended
September 30, 1997 were $7.7 million compared to $14.4 million for the
comparable period in 1996. Management anticipates that the cash required to
fund capital expenditures for fiscal 1998 will be $14.0 million, the majority
of which will be spent in connection with the continued buildout and upgrade
of the terrestrial network to accommodate increased subscribers and FCC
mandated site installations.
The following tables summarize the historical cash flow statements of
American Mobile and ARDIS.
AMERICAN MOBILE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
-------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash used in operations.... $(25,587) $(60,412) $(141,826) $(95,727) $(67,920)
Cash (used in) provided by
investing (1)............. (51,087) (83,945) 50,946 54,582 (6,370)
Cash provided by financing
activities................ 83,523 142,360 84,198 34,668 74,700
</TABLE>
- --------
(1) In the third quarter of 1996, American Mobile received $66.0 million in
proceeds for insurance claims filed in connection with an anomaly in MSAT-
2.
ARDIS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
----------- -------- -------- --------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash used in operations... $(5,858) $(28,215) $(18,666) $ (11,448) $(222)
Cash (used in) provided by
investing................ (17,303) (23,535) (4,806) (3,958) (1,302)
Cash provided by (used in)
financing activities..... 30,300 42,700 21,776 11,696 (1,144)
</TABLE>
32
<PAGE>
The Company believes the net proceeds from the Offering, together with
borrowings under the Revolving Credit Facility and the Vendor Financing
Commitment, will be sufficient to pay the cash portion of the Acquisition and
fund operating losses, capital expenditures, working capital, and scheduled
principal and interest payments on debt through the time when the Company
expects to generate positive free cash flow (operating cash flow less capital
expenditures). If the Company does not meet its projections or if the
Revolving Credit Facility or the Vendor Financing Commitment is not available
for any reason, it would require any additional financing to meet its business
plan. There can be no assurance that the Company's current projection of
operating cash flow will be accurate.
Upon consummation of the Offering, the Company will not have a significant
source of liquidity other than the Revolving Credit Facility and the Vendor
Financing Commitment. Following the consummation of this Offering (and the
application of the proceeds thereof) the Company will have $57.9 million
available to be borrowed under the Revolving Credit Facility. However,
borrowings under the Revolving Credit Facility are subject to certain
conditions beginning in the fourth quarter of 1998. In the event the Company
is unable to borrow amounts under the Revolving Credit Facility, the Company's
cash needs will significantly exceed its available resources, which would have
a material adverse effect on the Company. The obligations of the Company under
the Revolving Credit Facility are guaranteed by Hughes, Singapore Telecom and
Baron Capital Partners, L.P., each of whom has substantially greater resources
than the Company. However, such guarantees are subject to certain conditions,
including the continuing compliance by the Company with certain financial and
other covenants. Failure to continue to satisfy such covenants could result in
the termination of such guarantees, which would constitute an event of default
under the Revolving Credit Facility. In such event, the lenders under the
Revolving Credit Facility would not be obligated to advance funds thereunder
and would have the right to accelerate the indebtedness thereunder. There can
be no assurance that the Company would be in a position to refinance the
Revolving Credit Facility in such circumstances. See "Risk Factors--Liquidity;
Need for Additional Capital," and "--Substantial Leverage."
The Revolving Credit Facility will be a $100.0 million line of credit that
will be available for capital expenditures, working capital requirements and
general corporate purposes. The commitment under the Revolving Credit Facility
will be reduced $10.0 million per quarter beginning the quarter ending June
30, 2002 and will mature on March 31, 2003. See "Description of New Bank
Financing."
On December 4, 1997, Holdings and American Mobile entered into an agreement
with ACTEL to lease the Company's satellite for deployment over sub-Saharan
Africa. The five year lease provides for aggregate payments to Holdings of
$182.5 million. Simultaneously, Holdings agreed with TMI to acquire a one-half
ownership interest in TMI's satellite at an aggregate cost of $60.0 million to
be paid over five years. Management expects that if both agreements are
consummated, the net cash benefit to Holdings after the payment of associated
net expenses will be approximately $41.0 million in 1998 and approximately
$66.0 million over the remaining terms of the agreements. The first $25.0
million of net proceeds plus 75% of any net proceeds in excess of $25.0
million will be utilized to pay down the Revolving Credit Facility and reduce
commitments. The remaining 25% of the net proceeds in excess of $25.0 million
will be utilized to support the Company's operations. While it is anticipated
that these transactions will improve the Company's leverage and liquidity,
there can be no assurance that such transactions will be consummated
simultaneously, if at all.
Motorola has agreed to provide the Company with up to $10.0 million of
vendor financing, which will be available to finance up to 75% of the purchase
price of additional base stations needed to meet the buildout requirements of
the UPS Contract. Loans under this facility will bear interest at a rate equal
to LIBOR plus 7.0% and will be guaranteed by Holdings and each subsidiary of
the Company. The terms of such facility will require that amounts borrowed be
secured by the equipment purchased therewith. This commitment is subject to
customary conditions, including due diligence, and there can be no assurance
that the facility will be obtained by the Company on these terms or at all.
See "Risk Factors--Liquidity; Need for Additional Capital."
33
<PAGE>
Following the Acquisition, the Company will be a wholly-owned subsidiary of
Holdings, which will have $100.0 million in aggregate principal amount of
indebtedness under the Term Loan Facility. Holdings is a holding company which
will have no assets other than the capital stock of the Company and AMRC.
Holdings currently owns 80% of the capital stock of AMRC. In October 1997,
WorldSpace, Inc. ("WorldSpace") provided additional financing to AMRC that
AMRC utilized to pay for its Digital Audio Radio Services ("DARS") license.
Through its investment in AMRC, WorldSpace has an option to increase its
ownership in AMRC to 72%, subject to FCC approval. It is anticipated that the
proceeds resulting from the exercise of the option will not be available to
either Holdings or the Company. As a result of its arrangements and
discussions with WorldSpace, AMRC will not be consolidated with the financial
results of Holdings. See "Business--AMRC." The Company will utilize
approximately $17.2 million of the proceeds of this Offering to repay advances
from Holdings, which is intended to provide for the payment of Holdings'
interest payments on the Term Loan Facility for three years. Holdings
anticipates that such amount, together with interest earned thereon, will be
sufficient to fund debt service on the Term Loan Facility for a period of
approximately three years. From and after , 2001 (three years after the
date of the Indenture), it is expected that the Indenture will permit the
Company to make dividend payments to Holdings in amounts which are sufficient
to permit Holdings to service its cash interest requirements under the Term
Loan Facility, subject to certain restrictions. The Company may pay other
dividends to Holdings for routine administrative expenses. See "Description of
the Notes--Certain Covenants--Restricted Payments."
The obligations of Holdings under the Term Loan Facility are severally
guaranteed by Hughes, Singapore Telecom and Baron Capital Partners, L.P., each
of whom has substantially greater resources than the Company. However, such
guarantees require the Company to meet certain conditions, including the
continuing compliance of Holdings with certain financial and other covenants.
Failure to continue to satisfy such covenants could result in an event of
default under the Term Loan Facility. In such event, the lenders under the
Term Loan Facility would not be obligated to advance funds thereunder and
would have the right to accelerate the indebtedness thereunder. There can be
no assurance that Holdings would be in a position to refinance the Term Loan
Facility in such circumstances. See "Risk Factors--Holdings' Guarantee."
Upon consummation of the Offering, the Company will be highly leveraged. The
Indenture will permit the Company and its subsidiaries to incur additional
Indebtedness under certain circumstances and, to a limited extent, to secure
such Indebtedness with liens on the assets securing such Indebtedness. The
ability of the Company and its subsidiaries to make scheduled payments with
respect to Indebtedness (including the Notes) will depend upon, among other
things, the Company's ability to complete any necessary additional financing,
the continued deployment of its network on a timely and cost-effective basis,
the market acceptance and customer demand for the Company's products and
services and the future operating performance of the Company. Each of these
factors is, to a large extent, subject to economic, financial, competitive,
regulatory and other factors, many of which are beyond the Company's control.
If the Company does not generate sufficient increases in cash flow from
operations to repay the Notes at maturity, it could attempt to refinance the
Notes; however, no assurance can be given that such a refinancing would be
available on terms acceptable to the Company, or at all. Any failure by the
Company to satisfy its obligations with respect to the Notes at maturity (with
respect to payments of principal) or prior thereto (with respect to payments
of interest or required repurchases) would constitute a default under the
Indenture and could cause a default under agreements governing other
Indebtedness, if any, of the Company. See "Risk Factors--Substantial and
Continuing Operating Losses;" "--Liquidity; Need for Additional Capital;"
"Description of the Notes--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
34
<PAGE>
BUSINESS
OVERVIEW
The Company, formed through the combination of American Mobile and ARDIS, is
a leading provider of nationwide wireless communications services, including
data, dispatch, and voice services, primarily to business customers in the
United States. The Company offers a broad range of end-to-end wireless
solutions utilizing a seamless network consisting of the nation's largest,
most fully-deployed terrestrial wireless data network and a satellite in
geosynchronous orbit. On a pro forma basis, the Company had service revenue of
$61.8 million in 1997 and approximately 81,300 customer units in service at
December 31, 1997. In addition, the Company has recently signed customer
contracts, subject to certain conditions, that it believes will result in the
activation of in excess of 100,000 new units over the next three years.
Through Holdings, the Company's major equity investors include Hughes,
Motorola, Singapore Telecom and AT&T Wireless, who in the aggregate will own
approximately 63.7% of Holdings on a fully diluted basis.
American Mobile, a leading provider of nationwide mobile data and voice
dispatch service, operates North America's first high-powered, satellite-based
digital mobile communications system. American Mobile provides a broad range
of integrated end-to-end wireless solutions to land, sea and air-based
customers in a service area consisting of the continental United States,
Alaska, Hawaii, Puerto Rico, the U.S. Virgin Islands, and U.S. coastal waters
and airspace.
ARDIS, a leading provider of nationwide wireless data service, markets its
service primarily to business customers with a need for reliable, two-way
wireless data communications in the field services and transportation markets.
The ARDIS wireless data network provides the widest breadth of coverage of any
single provider of terrestrial wireless services in the United States. The
network incorporates over 1,700 radio towers (base stations) that provide
service to 425 of the largest cities and towns in the United States, including
virtually all metropolitan urban areas.
MARKET OPPORTUNITY
The Company expects to capitalize on the substantial and growing market for
wireless data communications services, which Strategis estimates grew at a
compound annual unit growth rate of 28% from 1994 to 1997. Strategis further
estimates that the addressable market for wireless data products is composed
of approximately 12.5 million mobile workers in occupations such as
transportation and field services, with significant wireless communication and
data access needs, and that approximately 10.4 million of these workers will
use some form of mobile data service by 2001. Strategis estimates that
approximately 2.0 million workers currently use some form of mobile data
service, primarily analog cellular service. The Company believes this growth
is being driven by the widespread acceptance of Internet and intranet
applications, logistical requirements for just-in-time delivery and position
location services, development of more compact, less expensive user devices,
and a significant increase in the use of data applications such as e-mail.
The following table identifies the Company's target markets for its services
and provides an estimate, based on the market research of Strategis, of the
potential addressable market size:
<TABLE>
<CAPTION>
FIELD OTHER
TRANSPORTATION SERVICES MOBILE WORKERS TOTAL
-------------- -------- -------------- ------
<S> <C> <C> <C> <C>
Market Size:
(Units in thousands) 1,600 1,700 9,200 12,500
</TABLE>
In addition to these targeted mobile workers, there is a significant market
for the Company's products in non-mobile environments such as wireless
telemetry. Strategis estimates that there are over 96 million control and data
collection points, such as utility meters, which are directly addressable by
the Company's services. Further, the Company markets its services to the
maritime industry, which is estimated to have an addressable market of 218,000
vessels.
35
<PAGE>
Transportation
In the transportation industry, the Company focuses primarily on wireless
data solutions for the trucking market. The types of companies that comprise
this market are private and for-hire fleet operators and owner-operators. For-
hire carriers are companies whose primary business is trucking and whose
revenues are from transporting goods via trucks on a contractual basis.
Private fleets are operated by non-trucking firms that haul their own freight.
Owner/operators are individuals who own and operate their own trucks. Some
owner/operators work for a single company under a lease agreement while others
work with transportation brokers to find loads or operate their own small
transportation businesses. Leasing for hire companies generally lease their
vehicles on a temporary basis ranging from hours to weeks or more. Owner
operators, private fleets, and leasing-for-hire operators provide services in
both the long-haul and less-than-truckload ("LTL") segments. Package Delivery
carriers are firms engaged in the delivery of documents, small packages and
freight on a time sensitive basis.
TRANSPORTATION--1.6 MILLION ADDRESSABLE UNITS
<TABLE>
<CAPTION>
LESS THAN OWNER PRIVATE LEASING FOR PACKAGE
TRUCKLOAD TRUCKLOAD OPERATORS CARRIERS HIRE DELIVERY
--------- --------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Characteristics: Point-to- Short haul, Contract Internal Outsourced Largest
point, haul irregular service company suppliers of overnight
lengths route, to long- fleets private and 2-3 day
greater than multiple haul and fleet delivery
100 miles stop LTL services firms, high
logistic
requirements
Market Size:
(Units in thousands) 347 200 62 439 284 230
</TABLE>
In addressing the trucking market, the Company initially focused on the
needs of the long-haul trucking segment. This segment is characterized by
large trucks hauling loads in excess of 100 miles with shipments being sent
directly from sender to receiver. In order to meet the data and location
positioning demands resulting from regulatory and environmental initiatives
and just-in-time inventory requirements, this segment was the first to adopt
two-way wireless communication systems. At the present time, it is estimated
that there exists an installed base of approximately 200,000 mobile
communications units (including those sold by the Company) in trucking fleets
operating in the United States. The Company's customers in this segment employ
the Company's products to improve fleet asset utilization, reduce non-revenue
producing miles and achieve on-time deliveries.
The Company believes that the pressures for regulatory compliance and on-
time delivery will also affect the LTL market. This market is characterized by
shipments that are typically picked up by a carrier at a terminal, moved as
part of a larger load, sorted at a destination terminal and then delivered. It
is expected that as LTL carriers respond to the need for improved operating
efficiencies and responsiveness they will adopt wireless communications
solutions. The Company believes that its multi-mode product is well matched to
the higher volume data requirements of LTL carriers given its ability to
provide service in areas not covered by existing satellite-only and
terrestrial-only competitors and the lower average usage charges of the
Company's terrestrial and satellite network.
Field Services
The "mobile workforce," that portion of U.S. workers whose occupations
require them to spend significant portions of their time outside of their
offices, has grown rapidly in response to customer demands for greater
responsiveness and flexibility. Companies' ability to meet these demands have
been enhanced by the emergence of distributed computing and mobile
communications. The field service market, which is a subset of the overall
mobile workforce, is comprised of groups of workers who install, move and
maintain property, plant, and equipment in field operations or at customer
premises. Field service organizations realize significant benefits
36
<PAGE>
from the use of wireless applications. Typically, these organizations are able
to improve the speed and quality of their work while reducing costs through
the applications of wireless technology.
Strategis estimates that there are approximately 1.7 million field service
workers who are directly addressable by the Company's products. The field
service category can be subdivided into two broad subsegments, in-building and
vehicle-based, each of which has different product requirements.
FIELD SERVICE--1.7 MILLION ADDRESSABLE UNITS
<TABLE>
<CAPTION>
IN-BUILDING VEHICLE-BASED
----------- -------------
<S> <C> <C>
Characteristics: Repair personnel, Primarily outdoor, team-
installers, contractors, oriented and contingency
and engineers using based operators in the
primarily data telecommunications,
applications for single utility and petroleum
worker dispatch and industries typically
database query using voice dispatch
applications. applications.
Market Size:
(Units in thousands) 1,100 600
</TABLE>
There are approximately 1.1 million field service workers in the United
States who spend a significant amount of time maintaining in-building assets,
such as computer systems. Real-time dispatching allows for the dynamic
redistribution of service calls and ready access to offsite databases and
technical expertise, thereby improving the productivity of a customer's field
service force by eliminating non-productive time spent away from the worksite.
There are approximately 0.6 million vehicle-based field service workers in
the United States who maintain field assets, such as an oil pipeline, over
wide geographic regions. These employees often work in remote areas and
frequently operate on a contingency, rather than scheduled, basis. Operators
of vehicle-based field service fleets employ mobile communications in order to
resolve contingencies through coordination of activity and to increase
productivity through prompt access to technical support.
Other Mobile Workers
The remaining addressable market for mobile data services consists of a
broad array of mobile workers with significant requirements for mobile data
communication and access capabilities. This larger market segment contains
approximately 9.2 million mobile workers in industries and functions including
manufacturing, wholesale and retail trade, and insurance. The majority of
users within this segment do not require integrated connection with
centralized systems, but still have a need for wireless data communication,
such as email. Because these applications are generic across numerous
industries, the segment is horizontally addressable. The Company intends to
address these workers through a broad distribution strategy, offering its
small, low priced two-way messaging product.
Other mobile workers also include employees of federal, state and local
governments and public safety organizations who employ mobile communications
to coordinate both daily activities and disaster responses. These agencies and
organizations generally make use of a combination of various self-provided and
commercially available wireless services in order to ensure high levels of
availability and reliability.
37
<PAGE>
Maritime
The maritime market consists of three major addressable segments: merchant
vessels, fishing vessels, and recreational vessels.
MARITIME--218,000 ADDRESSABLE UNITS
<TABLE>
<CAPTION>
MERCHANT FISHING RECREATIONAL
-------- ------- ------------
<S> <C> <C> <C>
Characteristics: U.S.-flagged Fishing vessels over Large recreational
commercial merchant 5 gross tons vessels
vessels
Market Size:
(Units in
thousands) 16 35 167
</TABLE>
Merchant vessels are operated by firms to transport goods and perform other
functions. As with truck transportation firms, merchant vessels utilize mobile
communications to increase operating efficiencies and load factors. The
Company targets approximately 16,000 large, U.S.-flagged vessels. Fishing
vessels weighing over 5 gross tons and operated by individuals and firms in
U.S. waters number approximately 35,000. Fishing operators who have adopted
mobile communications gain increased efficiencies from coordination with other
vessels and with shore-based personnel. Recreational vessels are comprised of
approximately 167,000 craft that make use of mobile communications both to
extend the utility of terrestrial wireless communications and for navigational
and safety purposes.
Wireless Telemetry
Wireless telemetry applications facilitate data connectivity between remote
equipment and a central monitoring facility. The wireless telemetry market
consists of several major industry applications, including automatic meter
reading, business alarm monitoring, oil and gas wellhead and pipeline
monitoring, and vending machine, agricultural, and environmental asset
monitoring. Strategis estimates that approximately 96 million control and data
collection points will be connected to monitoring facilities via wireless data
communications services by 2002. As of mid-1997, according to Strategis, in
excess of 8.4 million control and data points had been connected to monitoring
facilities via wireless data communications services.
Other Market Segments
Electronic funds transfer and point-of-sale ("EFT/POS") applications are
creating an emerging market segment for wireless communications. There are two
segments within the broad market where a wireless solution can be applied to
EFT/POS applications. The first segment is an environment in which the
wireless EFT/POS solution can replace the wireline offering, such as fast food
franchises, for example. The second segment includes those applications for
which wireline connectivity is not an option, such as taxi and limousine
services. MasterCard and VISA predict over 800,000 wireless POS terminals to
be in use in the next 2 to 5 years.
Other market segments addressed by the Company's offerings include remote
fixed site, news gathering, recreational vehicles, and business and general
aircraft. The common application among these segments is satellite telephony,
including facsimile and circuit switched data. The Company has developed a
customer base in each of these segments, and has in some cases sponsored the
development of unique equipment configurations designed to meet the needs of
specific user environments.
BUSINESS STRATEGY
The Company's objective is to maximize its revenues by delivering value-
added services to end users in specific segments. To meet this objective and
to capitalize upon the competitive advantages resulting from the combination
of American Mobile and ARDIS, the Company intends to: (i) offer business
customers a broad range of nationwide wireless service and end-to-end data
solutions; (ii) integrate and leverage the advantages of
its nationwide terrestrial and satellite data networks; (iii) enhance market
penetration by lowering the customers' "total cost of ownership"; and (iv)
expand the use of alternative distribution channels to accelerate network
loading.
38
<PAGE>
Offer Business Customers a Broad Range of Nationwide Wireless Solutions. The
Company believes its corporate customers prefer a single-source service
provider capable of delivering a broad range of efficient and cost effective
solutions to meet their need for mobile wireless communications. The Company
believes that it has and will continue to have a unique strategic advantage in
being able to provide one-stop shopping across a broad range of products,
including two-way paging and advanced messaging, packaged e-mail and LAN
solutions, custom data applications, dual mode terrestrial/satellite data, and
satellite voice and dispatch functions. Through its staff of approximately 230
direct sales, engineering support and customer service professionals, the
Company provides a suite of bundled wireless services, and a single point of
contact for sales, service, billing and project management, all on a national
basis.
Integrate and Leverage Network Advantages. The Company has spent over a
decade developing and deploying its nationwide terrestrial and satellite
networks and now seeks to accelerate its growth by leveraging its integrated
network. Unlike many competitors with plans to build out limited city-wide or
regional terrestrial networks or to launch satellites, the Company's
technology infrastructure is in place and operational today, with future
network expansion requirements arising primarily from increased customer
demand. The Company believes that this integrated terrestrial/satellite
network provides key competitive advantages currently unmatched by any
competitor: virtually 100% nationwide geographic coverage, guaranteed message
delivery, and, in the areas covered by the ARDIS network, deep in-building
penetration. By integrating the operations of its terrestrial and satellite
networks, the Company expects to achieve operating efficiencies and economies
of scale that it believes will lead to improved operating margins.
Enhance Market Penetration By Reducing Customers "Total Cost of
Ownership." Historically, the most significant obstacle to the implementation
of enterprise-wide wireless data applications has been the relatively high
total cost of ownership. The total cost of ownership is comprised of three
primary elements: the cost of the subscriber unit, the required investment in
software development, and the monthly cost of network access and usage. In
most of the Company's applications, the monthly cost of network access and
usage has been the least prohibitive of these elements. Until recently,
subscriber unit costs in excess of $3,000 and custom software investments of
up to several million dollars were common. By working with business partners
and vendors, and making strategic software investments, the Company has
succeeded in significantly lowering customers' total cost of ownership. New
subscriber units, including low-cost two-way messaging units and laptop modem
cards, are now available for $500 or less and substantial development work is
underway with several of the Company's vendors to accelerate reductions of
equipment cost, unit weight and size. In the future, the Company expects that
the increased subscriber unit volumes associated with recent large contract
awards will lead to additional unit price reductions. In addition, customers
can now use off-the-shelf software applications that are relatively
inexpensive, or in the case of the Company's two-way messaging service, free.
The Company believes that these lower price points will accelerate the
adoption of the Company's services in its historical markets, and will enable
the Company to develop new markets, such as wireless point-of-sale and
telemetry.
Expand Alternate Distribution Channels. The Company sells its services
primarily through a direct sales force and resellers. In order to accelerate
network loading, the Company expects to expand its use of indirect
distribution channels. To date, the Company has entered into agreements with
Enron. (utility monitoring), Ameritech SecurityLink (alarm monitoring), Global
Payment Systems (point-of-sale), GE Logisticom (asset tracking and
dispatching) and other value-added resellers to penetrate markets where such
resellers have a market presence and significantly greater resources than the
Company, including dedicated sales personnel. In addition, the Company is in
the process of establishing relationships with existing paging companies,
paging resellers, and other targeted distribution partners to market two-way
guaranteed messaging services. The Company believes that the resale of its
network is an alternative that paging companies will consider when assessing a
move from one-way to two-way messaging because it may reduce or eliminate the
need for additional investment in network infrastructure. The Company intends
to utilize paging companies and other similar partners with well established
distribution capabilities to develop markets outside of the Company's
historical market segments.
PRODUCTS AND SERVICES
The Company believes that it is well-positioned to provide a broad range of
end-to-end wireless data and voice solutions to business customers in the
United States.
39
<PAGE>
Data Services
The Company's data messaging services enable communications between groups
of mobile or fixed data terminals and a single "hub." Current applications
include one-way and two-way messaging, wireless Internet e-mail and integral
GPS and reporting of such data.
<TABLE>
<CAPTION>
NETWORK APPLICATION PRIMARY MARKET SEGMENTS CUSTOMERS AND RESELLERS SERVICE BENEFITS
------------------- ----------------------- ----------------------- ----------------
<S> <C> <C> <C>
Multi-Mode Transportation Sitton Motor Lines Least cost routing
CRST and ubiquitous
Tandem Transport satellite coverage
Terrestrial Field services IBM Nationwide coverage
only Sears and deep in-
Lucent building
Pitney Bowes penetration
NCR
Transportation UPS Fully deployed
Conway nationwide two-way
GE Logisticom network
Two-Way Messaging ConectUS Nationwide coverage
IKON Office Systems and deep in-
building
penetration
Telemetry Enron Energy Services Low cost off-peak
Ameritech SecurityLink transmission
Satellite Transportation Cannon Express Conway Less expensive
only Truckload Services equipment costs
relative to multi-
mode
</TABLE>
Multi-mode Messaging. The Company's multi-mode communications system uses
its terrestrial and satellite network to provide "least-cost routing" for
customers' two-way data communications by actively seeking connections to the
lower cost terrestrial network before automatically using the Company's
satellite network thereby providing nationwide coverage. The Company believes
that its multi-mode data and global position tracking services will enable it
to bring cost-effective solutions to the long-haul trucking customers as well
as the broader transportation industry, including the less-than-truckload and
package delivery segments.
Terrestrial-Only Data. The Company offers a variety of end-to-end wireless
data solutions to customers primarily in vertical market segments, including
the field service and transportation markets. The Company's network provides a
breadth of coverage that the Company believes is significantly greater than
that of any competing network and offers deep in-building penetration,
efficient frequency reuse, and reliable two-way data communications. Typical
applications of the service include call dispatch, asset tracking, peer-to-
peer communications, Internet e-mail and fax capabilities. The Company
recently introduced a two-way messaging service that provides guaranteed
message delivery, personal acknowledgment, pre-set and custom message reply
and complete custom message origination using the RIM Interactive Pager(TM).
In addition, software firms such as Nettech, Racotek, IBM and BHA have
developed "middleware" which helps to significantly minimize the customer's
development effort in connecting the customer's application to the Company's
network. A number of off-the-shelf software packages such as Motorola's
AirMobile Wireless Software for Lotus cc:Mail(TM), Lotus Notes(TM) and IKON's
Mobile CHOICE(TM) for Windows enable popular e-mail software applications on
the Company's network.
Satellite Messaging. The Company's satellite mobile messaging service is
offered as an alternative to the multi-mode product for customers in the long-
haul trucking segment. Customers with broad network coverage
40
<PAGE>
requirements but relatively low usage requirements can reduce their total cost
of ownership by subscribing to the Company's satellite messaging service.
Voice Services
The Company offers mobile voice services through two primary services:
nationwide dispatch service and satellite telephone service.
<TABLE>
<CAPTION>
NETWORK APPLICATION PRIMARY MARKET SEGMENTS CUSTOMERS SERVICE BENEFITS
------------------- ----------------------- --------- ----------------
<S> <C> <C> <C>
Dispatch Field Services AT&T Only provider of
MCI nationwide dispatch
Williams Companies services
Telephony Maritime Maritime Cellular Low cost maritime
Seven Seas telephony service
Other CBS Reliable, remote
Red Cross mobile coverage
FEMA
</TABLE>
Nationwide Dispatch Service. Nationwide dispatch service provides point-to-
multi-point voice communications among users in a customer-defined group using
a push-to-talk device. This service is designed to facilitate team-based,
contingency-driven operations of groups operating over wide and/or remote
areas. The Company markets the dispatch service to businesses that have wide-
area operational requirements that are under-served by a similar point-to-
multi-point capability. These targets include: oil and gas pipeline companies;
utilities and telecommunications companies with outside maintenance fleets;
state and local public safety organizations operating in under-served areas;
and public service organizations with a requirement to seamlessly link
resources on a nationwide basis.
Satellite Telephone Service. Satellite telephone service supports two-way
circuit-switched voice, facsimile and data services. The Company offers a wide
range of satellite phone configurations developed to address the particular
communications needs of customers. The Company markets the telephone service
to businesses that have nationwide coverage requirements, including those
operating in geographic areas that lack significant terrestrial coverage,
including natural resource companies, utilities and telecommunications
companies that require backup and restoral support, public safety
organizations, and maritime users seeking expanded or less costly coverage for
both commercial and recreational vessels.
PRICING
The Company prices its services on an access fee and variable usage fee
basis. Volume packages that include increments of free usage in exchange for
higher, fixed access fees, as well as volume discounting plans are also
available.
Data Products
Multi-mode users are charged a monthly access fee that includes a fixed
increment of both terrestrial and satellite usage, as well as a set number of
vehicle location reports. Usage beyond the fixed increment is metered and
charged on a variable basis depending on the length and mode of transmissions.
Customers are typically charged less for terrestrial usage than for satellite
usage. Satellite and terrestrial messaging services are priced under similar
structures, and offer a wide variety of volume packaging and discounts,
consistent with the demands of the targeted markets. The average monthly bills
for the Company's data customers range from below $10 for high unit quantity,
low traffic volume, off-peak telemetry users, to over $60 for high volume,
peak users in the field service market. The Company's average monthly revenue
per data user in the fourth quarter of 1997 was approximately $55.
41
<PAGE>
Voice Products
The Company's nationwide dispatch users are charged a fixed access fee for
virtually unlimited usage, while satellite telephone users are charged both
fixed access and variable usage fees. Monthly bills for satellite voice
customers range from over $150 for high volume maritime users to a low of $50
for certain public safety and emergency restoral applications. The Company's
current average monthly revenue per voice user in the fourth quarter of 1997
was approximately $135.
MARKETING AND DISTRIBUTION
The Company markets its services through four primary distribution channels:
direct sales, vertical resellers, horizontal resellers and dealers.
Direct Sales
The Company has a direct sales force of 60 employees who focus on the
requirements of business customers. This sales organization is comprised of a
national accounts group that profiles and targets specific Fortune 500
accounts, and a network of regionally based representatives who specialize in
specific industry segments. The direct sales representatives have acquired
significant industry expertise, and use that expertise in a solutions-oriented
sales approach. Sales to national account targets generally require a
sustained marketing effort lasting several months. Prior to making a buying
decision, a majority of the accounts exercise a due diligence process where
competitive alternatives are evaluated. The Company's employees often assist
in developing justification studies, application design support, hardware
testing, planning and training.
Vertical Resellers
In order to penetrate quickly certain market segments characterized by
specialized technical requirements and/or unique business applications, the
Company leverages the capabilities of specialized distribution partners. These
relationships enable the Company to penetrate new market segments without
investing in the product, training and development requirements typically
associated with entry into a new market segment.
The Company's resale arrangements are specifically designed to accelerate
entry into the wireless telemetry (utility and alarm monitoring), point-of-
sale, maritime and government market segments. Resellers of the Company's
products within the wireless telemetry market include Enron for commercial
utility meter reading, and Ameritech SecurityLink for alarm monitoring. The
Company also has a relationship with Global Payment Systems for wireless
point-of-sale applications. These business partners are responsible for
development of the end-user solutions, and purchase capacity on the Company's
data network.
VASPs represent one of the Company's primary distribution channels for
maritime satellite telephony. VASPs purchase bulk minutes, resell at a margin,
set the price, take risk of collection and perform all service and billing
functions.
The Company currently utilizes three specialized government resellers, one
of which has included the Company's products on the general services
administration schedule. The Company intends to expand the distribution
opportunities for its terrestrial data products by also including them in
these programs.
The Company also has various PNCs that purchase bulk satellite capacity from
the Company in the form of dedicated capacity increments or channels. PNCs use
this capacity to support their own proprietary networks and products, and
maintain all associated business risks and responsibilities.
Horizontal Resellers
The Company utilizes a series of resale relationships designed to reach a
large segment of the mobile workforce that does not require integration with
centralized systems, but still has a broad need for two-way messaging and
wireless e-mail access. Because these applications are generic across numerous
industries, the
42
<PAGE>
segment is horizontally addressable, and requires some level of retail
presence. To achieve this presence, the Company is in the process of
establishing relationships with existing paging companies, paging resellers
and other targeted distribution partners to market two-way guaranteed
messaging services. The Company also maintains relationships with
manufacturers of personal handheld computing devices, who include the
Company's marketing material with the device packaging to provide the
purchaser the option of wirelessly enabling a handheld computing device.
Dealer Channels
The Company also uses land mobile and maritime dealers who distribute the
Company's nationwide dispatch and satellite telephony products. These dealers
typically have strong business relationships with regional public safety
entities, as well as with smaller field service fleets and maritime users. The
Company believes that opportunities exist to capitalize on the strengths of
this channel by introducing a low cost terrestrial data device with minimum
integration requirements, such as the RIM Interactive Pager(TM). Typically
these dealers serve as agents for sales and service and do not set pricing or
provide billing and collection services. These dealers are generally
compensated with a modest percentage of the service revenue for which they are
responsible.
CUSTOMERS
As of December 31, 1997, the Company had approximately 81,300 units in
service and an established customer base of large, established corporations
including AT&T, Avis, Bank of America, IBM, JB Hunt, Lucent, MCI, NCR, Otis
Elevator, Pitney Bowes, Sears, Siemens and The Williams Companies. The
Company's products also have been adopted by various emergency response
organizations such as the Federal Emergency Management Agency ("FEMA") and the
American Red Cross. The majority of the Company's customers sign long-term
contracts and make significant capital investments to initiate service. As a
result, the Company typically experiences low turnover of its customer base.
Additionally, during the fourth quarter of 1997, the Company was awarded two
significant new customer contracts: Enron and UPS. Enron will utilize the
Company as the network provider for a wireless utility monitoring service
targeted at commercial power users. Enron has committed to place a minimum of
55,000 units into service over the next three years. Management believes that
the UPS contract will result in approximately 50,000 units operating on the
terrestrial data network by the end of the year 2000. See "Risk Factors--UPS
Contract."
As of December 31, 1997, the Company's customer base included the following
market and product segments:
<TABLE>
<CAPTION>
PERCENT OF
MARKET SEGMENTS TOTAL UNITS
--------------- -----------
<S> <C>
Field Services.......... 48%
Transportation.......... 26
Telemetry............... 8
Maritime................ 4
Other................... 14
---
Total................... 100%
===
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF
PRODUCT SEGMENTS TOTAL UNITS
---------------- -----------
<S> <C>
Data:
Terrestrial............. 60%
Satellite............... 12
Multi-mode.............. 8
Private Networks........ 7
---
Total Data............ 87
Voice:
Telephony............... 7%
Dispatch................ 4
Private Networks........ 2
---
Total Voice........... 13
Total..................... 100%
===
</TABLE>
43
<PAGE>
THE NETWORK
The Company's integrated network consists of (i) a satellite in
geosychronous orbit with coverage of the continental United States, Alaska,
Hawaii, Puerto Rico, the U.S. Virgin Islands and U.S. coastal waters and
airspace, and (ii) the largest two-way terrestrial data network in the United
States with coverage of over 425 of the largest cities and towns in the United
States, including virtually all metropolitan areas. The network provides a
wide range of mobile data and voice services in multi-mode and single-mode
configurations.
Users of the Company's terrestrial and satellite communications network
access the network through subscriber units that may be portable, mobile or
stationary devices. Generally, subscriber units enable either data or voice
communications and are designed to operate over either the terrestrial data-
only network or the satellite network, which provide both voice and data
communications. In addition, the Company's multi-mode subscriber equipment is
designed to provide least-cost routing of data messages over both the
terrestrial and satellite networks.
Subscriber units receive and transmit wireless data or voice messages from
either terrestrial base stations or the Company's satellite, MSAT-2.
Terrestrial messages are routed to their destination via Company-owned data
switches, which connect to the public data network. Satellite messages are
routed to their destination via satellite data and voice switches, located at
the Company's headquarters, which connect to the public data and switched
voice networks. A data switch located in Cedar Rapids links the terrestrial
and satellite networks for the delivery of the Company's multi-mode data
service. The terrestrial, satellite and multi-mode network interconnections
are depicted below.
[GRAPHIC APPEARS HERE]
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The Company's terrestrial network delivers superior in-building penetration,
completion rates and response times compared to other wireless data networks
through the use of a patented SFR technology developed by Motorola. As
illustrated below, SFR technology enables multiple base stations in a given
area to use the same frequency. As a result, a message sent by a subscriber
can be received by a number of base stations. This technology contrasts with
more commonly used multiple frequency reuse ("MFR") systems which provide for
only one transmission path for a given message at a particular frequency. In
comparison with MFR systems, the Company's technology provides superior in-
building penetration and response times and enables the Company to
incrementally deploy additional capacity as required, instead of in larger
increments as required by most wireless networks.
[GRAPHIC OF SINGLE FREQUENCY RE-USE APPEARS HERE]
SINGLE FREQUENCY RE-USE
SATELLITE LEASE AND SATELLITE PURCHASE AGREEMENTS
On December 4, 1997, Holdings and American Mobile entered into an agreement
with ACTEL to lease the Company's satellite, MSAT-2, for deployment over sub-
Saharan Africa. The five-year lease provides for aggregate payments to the
Company of up to $182.5 million. Simultaneously, Holdings and American Mobile
agreed with TMI to acquire a one-half ownership interest in TMI's satellite at
an aggregate cost to American Mobile of $60.0 million.
Under the Satellite Purchase Agreement, TMI and the Company will each own a
50% undivided ownership interest in MSAT-1, will be jointly responsible for
the operation of the MSAT-1, and will share certain satellite operating
expenses, but will otherwise maintain their separate business operations.
Closing under the Satellite Purchase Agreement and Satellite Lease Agreement
is subject to a number of conditions, including: United States and Canadian
regulatory approvals; a successful financing by ACTEL of at least $120
million; completion of certain satellite testing, inversion and relocation
activities with respect to American Mobile's satellite, to support the
contemplated services over Africa; receipt of various government
authorizations from Gibraltar, South Africa and other jurisdictions to support
satellite relocation, including
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authorization with respect to orbital slot and spectrum coordination; and
completion of certain system development activities sufficient to support
satellite redeployment. It is anticipated that the closing under both
agreements will occur simultaneously in the spring of 1998. While the Company
believes that if ACTEL defaults under the Satellite Lease Agreement, the
Company would be able to achieve the return of MSAT-2 from ACTEL to its
operation in the United States and terminate its payment obligations to TMI
under the Satellite Purchase Agreement, there can be no assurances that such
actions can be achieved. In addition, there can be no assurance, however, that
such transactions will be consummated simultaneously, or at all.
If consummated, the transactions are expected to increase substantially the
Company's cash flow, without affecting its ability to serve and grow its
customers based on expected capacity available on MSAT-1 (including excess TMI
capacity available to the Company for purchase). Net proceeds from the
transactions will be used to reduce amounts outstanding under the Company's
Revolving Credit Facility and provide for additional liquidity. See "Risk
Factors--Satellite Lease and Purchase Agreement Risks," "Management's
Discussion and Analysis of Financial Condition and Result of Operations--
Liquidity and Capital Resources" and "Description of New Bank Financing."
EQUIPMENT; SUPPLIER RELATIONSHIPS
The Company has contracts with multiple vendors to supply equipment
configurations designed to operate on each of its operating platforms. These
devices are designed to meet the requirements of specific end-user
applications. The Company continues to pursue enhancements to these devices
that will result in additional desirable features and reduced cost of
ownership. Although many of the components of the Company's products are
available from a number of different suppliers, the Company does rely upon a
few key suppliers. See "Risk Factors--Reliance on Third Party Vendors."
In connection with its mobile data communications service, the Company
presently has an agreement with Trimble Navigation, Inc. to supply its
satellite data unit. In addition, multi-mode data terminals are sourced from
Rockwell. The Company also has contracted with Vistar, Inc., a Canadian
company, for the development of a new multi-mode terminal. The new terminal
will incorporate design changes that will simplify the installation process
and allow for the addition of enhancements in a modular fashion. The Company
believes that the price of multi-mode terminals will continue to decline in
the coming years.
There are currently over 30 different types of subscriber units available
from 15 manufacturers that can operate on the terrestrial network. Examples of
portable subscriber units include ruggedized laptop computers, small external
modems, handheld or palmtop "assistants," pen based "tablets," and two-way
messaging devices, such as the RIM Interactive Pager(TM). Significant
developers of devices that are compatible with the network include Motorola,
RIM and Itronix. Motorola and RIM manufacture modems designed to be integrated
into handheld field service terminals, telemetry devices, utility monitoring
and security systems as well as other computing systems. RIM recently has
developed the Interactive Pager(TM) that supports the Company's two-way
messaging service. Itronix manufactures the XC-6000, a fully ruggedized laptop
computer with a standard keyboard and an integrated wireless modem.
Mobile satellite voice telephones are offered in a number of different
configurations that deliver a variety of features and options to meet specific
market needs. Mobile satellite telephones are currently available in land
mobile vehicle installed, fixed site, maritime, aeronautical, dual mode
voice/direct to home satellite television and fully transportable (i.e.,
battery powered and packaged in a briefcase) configurations. Subscriber
equipment for satellite telephone service and nationwide dispatch service
includes data interface ports to allow connection to communications
accessories such as personal computers, and global positioning satellite
("GPS") tracking devices. Recent enhancements allow users to utilize the
dispatch product remotely from the vehicle, via a wireless tether. American
Mobile continues to add enhancements based upon customer requirements, and has
several initiatives that could result in the reduced cost of end-user devices.
The primary suppliers for the voice equipment are Westinghouse Electric, Inc.
and Mitsubishi.
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Tandem computer provides the ARDIS network switching computers under a
multi-year lease that extends through the year 2000, while AT&T provides
network services including a nationwide wireline data network, and leased
sites which house regional ARDIS switching equipment. The Company also has a
relationship with AT&T as its vendor for switched inbound and outbound public
switched telephone network services. The satellite system terminates calls
from its telephone product via both the AT&T and Sprint networks.
ARDIS has executed multiple agreements with Motorola that provide for
certain continued support from Motorola with respect to: supply and support
for the ARDIS DataTAC network infrastructure; ongoing maintenance and service
of the ARDIS base stations; and lease administration services for
approximately 37% of ARDIS' base station site leases. Additionally, Motorola
is expected to continue to manufacture modems compatible with the ARDIS
network infrastructure for use in end-user devices.
Hughes Network Systems Ltd, of the United Kingdom, manufactures and supports
the key component to the Company's multi-mode and satellite messaging
products, which is the Land Earth Station ("LES"). There are currently 4 LES's
operational. The platform for the Company's voice products, the communications
ground segment ("CGS"), depends upon products from multiple vendors, most of
which are generally commercially available. Northern Telecom manufactures and
supports the core voice switch. Digital Equipment Corporation supplies the
computing platform that runs the CGS.
COMPETITION
The wireless communications industry is highly competitive and is
characterized by frequent technological innovation. The Company competes on
the basis of providing comprehensive, end-to-end solutions and a premium level
of service in the markets it serves. End-to-end solutions have been assembled
working with a select group of business partners who develop and manufacture
software, middleware and hardware components. The Company differentiates
itself and provides a premium level of service due to its unmatched geographic
coverage, in-building penetration, guaranteed message delivery, and guaranteed
reliability.
The Company competes with a full array of companies, from small startups to
Fortune 500 companies. Many of these competitors have financial, technical and
marketing resource in excess of the Company's. Because the Company competes in
several market segments with a broad range of services, competing technologies
may address one or more of the market segments. The Company has identified six
major classes of technologies or services that offer capabilities competitive
with the Company's services: Terrestrial Packetized Data; Cellular/PCS;
Specialized Mobile Radio ("SMR")/Enhanced Specialized Mobile Radio ("ESMR");
Private Systems; Paging/Narrowband PCS; and Mobile Satellite Services.
Terrestrial Packetized Data. Companies using packetized data technologies
provide wireless data services that compete directly with a number of the
Company's data products. Packetized data technology relies on radio
frequencies to transmit short-burst data messages. Primary competitors using
this technology include RAM Mobile Data ("RAM"), Metricom, Teletrac and
Cellnet. RAM, a wholly-owned subsidiary of BellSouth enterprises, operates a
terrestrial-only network that provides data services to customers primarily in
the field service, transportation and utility industries. The Company believes
that its network provides broader coverage, and superior in-building
penetration compared to RAM's network. In addition, the Company is upgrading
its network in major cities so that it will operate at faster speeds than the
RAM network. Metricom's Ricochet service provides wireless, mobile access to
the Internet, private intranets, local area networks and e-mail. Metricom
currently offers its service in limited regions comprised of San Francisco,
Seattle, Houston and Washington, D.C. Teletrac provides primarily location and
vehicle monitoring and two-way data transfer services in major metropolitan
areas and Cellnet provides wireless meter reading services and has a contract,
similar to the Company's with Enron, to provide meter reading for residential
customers. The Company's contract with Enron is for commercial meter reading
that typically requires a large volume of data to be sent from each meter.
Cellular and PCS. Cellular and PCS services compete with the Company's
satellite and terrestrial voice and data services, and presently serve the
majority of mobile communications users in the United States, with
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approximately 55,000,000 units. Cellular and PCS systems operated by
approximately 1,500 companies collectively provide service throughout most of
the United States, with no single competitor providing the breadth of coverage
that is available through the Company's network. Cellular Digital Packet Data
("CDPD"), the cellular industry's standard packet data service, is available
principally in metropolitan areas containing approximately 44% of the nation's
population at the end of 1997. PCS carriers, many of which offer short message
capabilities and expect to offer larger capacity packet data services in the
near future, presently offer service which in the aggregate covers
approximately 60% of the U.S. population.
Most cellular and PCS providers have structured their services and
distribution principally to meet switched voice service requirements of broad-
market users. However, HighwayMaster Communications, Inc. offers data and
voice communications to the long-haul trucking industry through the
application of its proprietary messaging and billing technologies to circuit-
switched cellular capacity which it purchases in bulk from a number of large
cellular carriers. Differences in equipment and service pricing and product
characteristics result in minimal direct competition between the Company's
voice products and most other cellular carriers.
Specialized Mobile Radio (SMR) and Enhanced Specialized Mobile Radio (ESMR)
Services. Within the limitations of available spectrum and technology, SMR
operators compete with the Company's voice dispatch services by providing
mobile communications services, including mobile telephone, dispatch, paging
and limited data services. For certain applications, such as mobile telephone
interconnect, SMR systems presently are less expensive than the Company's
services, although the shared channel configuration and the economics of these
systems have traditionally caused SMR systems to be less frequently utilized
for voice telephone services.
SMR radio services have been expanding rapidly over the past ten years and
converting from analog to digital technology. ESMR systems compete with the
Company's voice and data dispatch services in metropolitan areas. NEXTEL
Communications, Inc. provides ESMR services in numerous large metropolitan
service areas in the United States and is the leading provider of SMR using
digital technology, frequency reuse and lower power transmitters to transform
its current SMR service into cellular-like services, including voice telephone
services. Geotek Communications, Inc. offers voice and data communication
networks for the trunked mobile radio market. Targeted primarily to small and
medium-sized businesses managing fleets of vehicles and mobile workforces,
Geotek is focused on providing metropolitan area voice and data services.
Currently, Geotek's service is available in 11 markets. Neither Nextel nor
Geotek provide nationwide voice dispatch or data services comparable to those
offered by the Company.
Private Land Mobile Frequencies. Individual companies that have chosen to
develop their own private wireless data network constitute a large percentage
of the wireless marketplace for corporate fleets. An example of such a
customer is Federal Express. While these companies already have made
significant investments in their systems, in some cases recurring maintenance,
upgrade and expansion costs, coupled with recent steps by the FCC to charge
private system owners for the use of the radio frequencies, have caused these
organizations to turn to commercial providers such as the Company.
Narrowband PCS/Enhanced Paging. There are a large number of paging companies
that offer messaging services on a regional or nationwide basis. Despite the
low cost of one-way paging, most traditional paging services do not provide
full-function two-way communications. Although some paging companies, such as
MTel, have begun to offer limited time-delayed two-way messaging services,
initial challenges in coverage, responsiveness and throughput currently limit
their adoption by the Company's targeted business customers.
Mobile Satellite Services. The Company's voice and data services face
competition from a number of companies that are selling or are developing
services using a variety of satellite technologies. The principal alternative
satellite-based communications system available to the trucking market is
Qualcomm Incorporated's ("Qualcomm") OmniTracs nationwide data service.
Qualcomm currently provides low-speed mobile data services using terminals
which are priced competitively with the Company's satellite-only terminals.
Qualcomm's OmniTracs service does not provide a terrestrial communications
path or least-cost routing capabilities similar to the Company's multi-mode
product. As a result, transmissions to and from a vehicle must
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be routed exclusively over a satellite network and are subject to line of
sight blocking and higher transmission costs, limiting the product's
functionality and cost-effectiveness in segments that require urban coverage
or large volumes of data transmission.
NORCOM Networks Inc. ("NORCOM") is in the process of commercially deploying
a satellite-based packet data service that competes with the Company's data
services in the transportation and field service segments. NORCOM currently
purchases channel capacity on the Company's satellite over which it operates
its network, and combines its satellite data service product with terrestrial
services provided by RAM Mobile Data and by the Company.
The Company's satellite services also compete for mobile maritime
subscribers with TMI, a Canadian company operating a satellite comparable to
MSAT-2, and with Inmarsat, a consortium of 70 countries that is authorized to
provide maritime voice and data services along the North American coasts.
Because Inmarsat's current system operates at a much lower power level than
does the Company's satellite, its mobile terminals must be equipped with
antenna systems that are larger and more expensive than those required for the
Company's network. The Inmarsat system also has per minute charges
significantly higher than those charged by the Company. Comsat, the U.S.
signatory for Inmarsat, applied to the FCC for authority to provide mobile
satellite services ("MSS") in the United States through Inmarsat facilities.
While TMI has not applied for such authority, TMI has previously announced its
desire to serve the U.S. market and can reasonably be expected to file such
applications. Although the FCC has consistently denied Comsat's application,
most recently on January 9, 1998, there can be no assurances that Comsat, or
any other satellite provider, will not become authorized to provide MSS in the
United States (See "Regulation").
Recently, several Low Earth Orbit ("LEO") and Medium Earth Orbit ("MEO")
satellite systems have been announced or have commenced deployment. Examples
of these systems, which are more complex and costly than the Company's
geosynchronous network, include Iridium LLC; Globalstar Telecommunications,
LTD, and ICO Global. When deployed, these systems will offer certain
advantages over the Company's voice telephony service, including the ability
to support small handheld telephones and, in certain instances, reduced
transmission delay. However, the Company does not expect that these systems
will provide a nationwide dispatch service or support data service in excess
of 2,400 bps. Moreover, these companies are focused primarily on consumer-
oriented and global traveler applications and not the business markets which
are the focus of the Company. Further, because these companies will deploy
satellite systems, they are not expected to compete against urban in-building
data services provided by the Company.
In addition to relatively complex LEO systems designed to provide mobile
voice services, there are a number of proposals for relatively simple "little"
LEO systems that would provide only low-speed packet data services. These
systems, including ORBCOMM Global, L.P., Final Analysis and LEO One USA, have
access to comparatively limited spectrum and are expected to compete for
customers who require specialty applications such as asset tracking services
for unpowered trailers.
AMRC
The Company is one of two primary operating subsidiaries of Holdings. The
second subsidiary, AMRC has been granted a license from the FCC to construct,
launch and operate a domestic satellite system for the provision of satellite-
based DARs. AMRC made a payment of $90 million to fully pay for its DARS
license in October 1997. Holdings currently owns 80% of the capital stock of
AMRC. The remainder of AMRC is owned by WorldSpace, a leading international
DARS company that is planning to provide DARS service to Latin America, Africa
and Asia. Through its investment in AMRC, WorldSpace has an option to increase
its ownership in AMRC to 72%, subject to FCC approval. It is anticipated that
the proceeds resulting from the exercise of the option will not be available
to either Holdings or the Company.
EMPLOYEES
At December 31, 1997, the Company employed approximately 477 individuals, of
which 117 were sales and marketing, 279 were network and operations, and 81
were general and administrative employees. None of
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the Company's employees is represented by a labor union, and the Company
considers its relations with its employees to be good.
PROPERTIES
The Company leases approximately 94,000 square feet at its headquarters
office space and network operations center in Reston, Virginia. The lease has
a term which runs through August 3, 2003 (which may be extended at the
Company's election for an additional five years). In addition, the Company
leases a back-up Ku-band radio frequency facility in Alexandria, Virginia. The
Company also leases approximately 86,000 square feet of space for an
operations center in Lincolnshire, Illinois, the lease for which expires
December 31, 2000, and approximately 7,800 square feet for a remote data
center in Lexington, Kentucky, the lease for which expires April 30, 2001. The
Company also leases site space for over 1,700 base stations across the country
under one- to five-year lease contracts with renewal provisions. The Company
anticipates that it will be able to gain access to additional base station
sites when necessary on acceptable terms.
LEGAL PROCEEDINGS
In 1992, a former director of Holdings filed an Amended Complaint against
Holdings alleging violations of the Communications Act and of the Sherman Act
and breach of contract. The suit seeks damages for not less than $100 million
trebled under the antitrust laws plus punitive damages, interest, attorneys'
fees and costs. In mid-1992, Holdings filed its response denying all
allegations. Holdings' motion for summary judgment, filed on June 30, 1994,
was denied on April 18, 1996. The trial in this matter, previously set for
December 1997, has been postponed to a date to be determined in 1998.
Management believes that the complaint is without merit, and the ultimate
outcome of this matter will not be material to the Company's financial
position, results of operations, or its cash flow.
REGULATION
American Mobile's MSS system and ARDIS' ground-based two-way wireless data
system are regulated to varying degrees at the federal, state, and local
levels. Various legislative and regulatory proposals under consideration from
time to time by Congress and the FCC have in the past materially affected and
may in the future materially affect the telecommunications industry in
general, and American Mobile and ARDIS in particular. In addition, many
aspects of regulation at the federal, state and local level currently are
subject to judicial review or are the subject of administrative or legislative
proposals to modify, repeal, or adopt new laws and administrative regulations
and policies. The following is a summary of significant laws, regulations and
policies affecting the operation of American Mobile's and ARDIS' businesses.
GENERAL
The ownership and operation of American Mobile's (MSS) system and ARDIS'
ground-based two-way wireless data system are subject to the rules and
regulations of the FCC, which acts under authority granted by the
Communications Act and related federal laws. Among other things, the FCC
allocates portions of the radio frequency spectrum to certain services and
grants licenses to and regulates individual entities using that spectrum.
American Mobile and ARDIS operate pursuant to various licenses granted by the
FCC. The acquisition of ARDIS by the Company requires prior approval by the
FCC for the transfer of control of the ARDIS licenses.
Both American Mobile and ARDIS are Commercial Mobile Radio Service ("CMRS")
providers and therefore are regulated as common carriers. The companies must
offer service at just and reasonable rates on a first-come, first-serve basis,
without any unjust or unreasonable discrimination, and they are subject to the
FCC's complaint processes. The FCC has forborne from applying numerous common
carrier provisions of the Communications Act to CMRS providers. In particular,
American Mobile and ARDIS are not subject to traditional public utility rate-
of-return regulation, and the companies are not required to file tariffs with
the FCC for their domestic services.
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As providers of interstate telecommunications services, American Mobile and
ARDIS are required to contribute to the FCC's universal service fund, which
supports the provision of telecommunications services to high-cost areas, and
establishes funding mechanisms to support the provision of service to schools,
libraries, and rural health care providers. Under the FCC's current rules,
American Mobile and ARDIS are required to contribute a percentage of their
end-user telecommunications revenues resulting from the sale of
telecommunications services. The extent of this obligation is subject to
change. A number of parties have filed petitions for review of the FCC's
universal service policy and these appeals have been consolidated in the U.S.
Court of Appeals for the Fifth Circuit. Both companies may also be required to
contribute to state universal service programs. The requirement to make these
payments, the amount of which in some cases may be subject to change and is
not yet determined, may have a material adverse impact on the conduct of their
businesses.
American Mobile and ARDIS are subject to the Communications Assistance for
Law Enforcement Act ("CALEA"). Under CALEA, American Mobile and ARDIS must
ensure that law enforcement agencies can intercept certain communications
transmitted over their networks. American Mobile and ARDIS must also ensure
that law enforcement agencies are able to access certain call-identifying
information relating to communications over their networks. The companies must
comply with the CALEA requirements and any rules subsequently promulgated by
October 25, 1998 or face possible sanctions, including substantial fines and
possible imprisonment of company officials. The FCC currently has a proceeding
underway to establish rules for the implementation of these requirements. This
proceeding primarily addresses record-keeping and security-related issues. The
telecommunications industry, which has been charged with establishing detailed
technical standards for compliance with CALEA's requirements, has not yet been
able to adopt final standards that are acceptable to law enforcement. While
both Congress and the FCC have the authority to extend the compliance
deadline, both have thus far declined to do so. It is not clear whether the
companies will be able to comply with CALEA's requirements or will be able to
do so in a timely manner. CALEA establishes a federal fund to compensate
telecommunications carriers for all reasonable costs directly associated with
modifications performed by carriers in connection with equipment, facilities,
and services installed or deployed on or before January 1, 1995. For
equipment, facilities, and services deployed after January 1, 1995, the CALEA
fund is supposed to compensate carriers for any reasonable costs associated
with modifications required to make compliance "reasonably achievable." It is
possible that all necessary modifications will not qualify for this
compensation and that the available funds will not be sufficient to reimburse
the companies. The requirement to comply with CALEA could have a material
adverse effect on the conduct of their businesses.
As a matter of general regulation by the FCC, both of the companies are
subject to, among other things, payment of regulatory fees, restrictions on
the level of radio frequency emissions of their systems' mobile terminals and
base stations, and "rate integration" regulations requiring that providers of
interstate interexchange telecommunications services charge the same rates for
these services in every state, including Puerto Rico and the U.S. Virgin
Islands. Any of these regulations may have an adverse impact on the conduct of
their businesses.
The FCC licenses of American Mobile and ARDIS are subject to restrictions in
the Communications Act that (i) certain FCC licenses may not be held by a
corporation of which more than 20% of its capital stock is directly owned of
record or voted by non-U.S. citizens or entities or their representatives and
(ii) that no such FCC license may be held by a corporation controlled by
another corporation ("indirect ownership") if more than 25% of the controlling
corporation's capital stock is owned of record or voted by non-U.S. citizens
or entities or their representatives, if the FCC finds that the public
interest is served by the refusal or revocation of such license. However, with
the implementation of the Basic Telecommunications Agreement ("BTA"),
negotiated under the auspices of the World Trade Organization ("WTO") and to
which the United States is a party, the FCC will presume that indirect
ownership interests in excess of 25% by non-U.S. citizens or entities will be
permissible to the extent that the ownership interests are from WTO-member
countries. The BTA took effect on February 5, 1998, and the FCC's implementing
regulations took effect on February 9, 1998.
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AMERICAN MOBILE
American Mobile is licensed by the FCC to provide a broad range of mobile
voice, data and dispatch services via satellite to land, air and sea-based
customers in a service area consisting of the continental United States,
Alaska, Hawaii, Puerto Rico, the U.S. Virgin Islands and U.S. coastal waters
and airspace. American Mobile is also authorized to provide fixed site voice
and data services via satellite to locations within this service area, so long
as such services remain incidental to American Mobile's mobile communications
services. American Mobile is authorized to build, launch and operate three
geosynchronous satellites in accordance with a specified schedule. American
Mobile is not in compliance with the schedule for commencement and
construction of its second and third satellites and has petitioned the FCC for
changes to the schedule. Certain of these extension requests have been opposed
by third parties. The FCC has not acted on American Mobile's requests. The FCC
has the authority to revoke the authorizations for the second and third
satellites and, in connection with such a revocation, could exercise its
authority to rescind American Mobile's license. American Mobile believes that
the exercise of such authority to rescind the license is unlikely. The term of
the license for each of American Mobile's three authorized satellites is ten
years, beginning when American Mobile certifies that the respective satellite
is operating in compliance with American Mobile's license. The ten-year term
of MSAT-2 began August 21, 1995. Although American Mobile anticipates that the
authorizations are likely to be extended in due course to correspond to the
useful lives of the satellites and that new licenses will be granted for
replacement satellites, there is no assurance of such extension or grant.
Holdings' current foreign ownership level, for which the indirect ownership
limits are applicable, is approximately 21%. Singapore, which is the domicile
of Singapore Telecom, one of Holdings' largest shareholders, is a WTO-member
country.
On December 4, 1997, American Mobile filed an application with the FCC
requesting the modification of its license to permit American Mobile to
implement the Satellite Purchase Agreement and Satellite Lease Agreement. The
FCC placed this application on public notice on December 23, 1997 and,
following the completion of a public comment period, American Mobile replied
to the two comments filed in response to the application. While there can be
no assurances, American Mobile believes that FCC approval is likely to be
received on a schedule consistent with that contemplated in the Satellite
Purchase Agreement and the Satellite Lease Agreement.
MSAT-2, like MSAT-1, is designed to be able to operate over the 1530-
1559/1631.5-1660.5 MHz bands (the "L-band"). American Mobile is currently
licensed to operate in the 1544-1559/1645-1660.5 MHz bands (the "upper L-
band"). The FCC has designated American Mobile as the licensee for both MSS
and Aeronautical Mobile Satellite (Route) Service ("AMS(R)S"). AMS(R)S
includes satellite communications related to air traffic control, as well as
aeronautical safety-related operational and administrative functions. As a
condition to its authorization, American Mobile is required by the FCC to be
capable of providing priority and preemptive access for AMS(R)S traffic in the
upper Lband and to be interoperable with and capable of transferring AMS(R)S
traffic to international and foreign systems providing such service. American
Mobile currently anticipates it will be able to meet these requirements
without any material adverse effect on its business. If American Mobile is
unable to meet these requirements, the FCC may authorize and give priority
spectrum access to one or more additional satellite systems that meet the
specified requirements.
American Mobile has applied for authorization to operate in the additional
1530-1544/1631.5-1645.5 MHz bands (the "lower L-band"). If American Mobile is
assigned spectrum in the lower L-band, it will be required by the FCC to
provide similar priority and preemptive access in that spectrum to maritime
distress and safety communications. With respect to its mobile voice
terminals, American Mobile currently anticipates it will be able to meet this
requirement without any material adverse effect on its business. The Federal
Aviation Administration ("FAA") filed comments, however, in connection with
American Mobile's application to operate up to 30,000 mobile data terminals
that were transitioned from leased space segment to MSAT-2 in late 1995,
stating its concern that the mobile data terminals cannot be operated in
compliance with American Mobile's obligation to provide priority and
preemptive access in the upper L-band. The FAA has proposed that American
Mobile operate the mobile data terminals in the lower L-band. American Mobile
has received successive six-
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month grants of special temporary authority ("STA"), under a two-year waiver
of the FCC's rules on priority and preemptive access, to operate up to 15,100
mobile data terminals in the lower L-band. This number was increased to 33,100
terminals pursuant to American Mobile's acquisition of the mobile data
equipment and services previously licensed to Rockwell. The two-year waiver
expired on August 1, 1997, but remains in effect while American Mobile's
request for a two-year extension of that waiver is pending at the FCC.
American Mobile will need additional authority to increase the number of
mobile data terminals that it is authorized to operate if it is to fulfill
contracts with GE Logisticom and others. American Mobile will also need
permission from the FCC to operate mobile data terminals with a different
transmission design than those operated under its current lower L-band
authorization. Transmissions from these terminals require a wider band width
than do transmissions from American Mobile's existing terminals. There can be
no assurance that American Mobile will continue to receive authority to
operate these new mobile data terminals or any other additional mobile data
terminals in the lower L-band.
American Mobile's mobile terminal authorizations are subject to compliance
with certain requirements regarding interference protection to the Global
Positioning System ("GPS"). With the consent of the FAA, the FCC granted
American Mobile's application subject to certain conditions, including that
the grant may be modified after the interference issue is studied. The FCC is
now considering a proposal from the National Telecommunications and
Information Administration to impose more stringent limits on the out-of-band
emissions from certain mobile terminals, including those used in connection
with American Mobile's system, in order to protect GPS and the Russian Global
Navigation Satellite System ("Glonass"). This proposal would require that
mobile terminals used on American Mobile's system be manufactured according to
a new design by 2002, and that existing terminals and any terminals not
meeting the new specifications be retired or retrofitted by 2005. American
Mobile has opposed this proposal. If adopted by the FCC, this policy could
have a material adverse effect on American Mobile's business.
American Mobile's license authorizes MSAT-2 to operate using certain
telemetry, transfer and control frequencies in the Ku-band, and American
Mobile proposes to operate MSAT-1 using similar frequencies. American Mobile
operates MSAT-2 at the 101(degrees) W.L. orbital location, and, under the
Satellite Purchase Agreement, would also operate MSAT-1 at 101(degrees) W.L.
GE American Communications, Inc. ("GE American"), also operates a satellite at
the 101(degrees) W.L. orbital location. American Mobile and GE American have
an agreement covering both MSAT-1 and MSAT-2 that may require American Mobile
to modify its operations or make certain payments to GE American if American
Mobile's operations cause interference to those of GE American. While there
can be no assurances, the Company does not anticipate any interference in the
operations of either MSAT-1 or MSAT-2 and those of GE American.
American Mobile's subscriber equipment will operate in L-band frequencies
that are limited in available bandwidth. The feeder-link earth stations and
the network communications controller of the CGS operate in the more plentiful
fixed satellite service Ku-band frequencies. Of the 30 MHz in the upper L-band
frequencies, American Mobile is currently licensed to operate in the 1544-
1559/1645.5-1660.5 MHz bands. Of the 30 MHz assigned to American Mobile by the
FCC, one MHz is limited to AMS(R)S and one-way paging and two MHz are limited
to distress and safety communications. American Mobile does not plan to
operate on these three MHz of bandwidth.
In June 1996, the FCC issued a notice of proposed rulemaking proposing to
assign to American Mobile the first 28 MHz of internationally coordinated L-
band spectrum from either the upper or lower portion of the MSS L-band. Under
the FCC's proposal, American Mobile would have first priority access to use
the lower L-band spectrum as necessary to compensate for spectrum unavailable
for coordination in the upper L-band. In the event the United States is able
to coordinate more than 28 MHz of L-band spectrum, the FCC has proposed
allowing other applicants to apply for assignment of those frequencies.
Certain entities have filed with the FCC petitions to deny American Mobile's
application and comments opposing the assignment of additional frequencies to
American Mobile. While there can be no assurances, American Mobile believes
the FCC is likely to grant American Mobile's application.
53
<PAGE>
In the Ku-band frequencies, American Mobile is currently licensed to operate
MSAT-2 using 200 MHz within the bands 10.75-10.95 GHz for downlink
transmissions and 13.0-13.15 GHz and 13.2-13.25 GHz for uplink transmissions.
American Mobile has applied for authority to operate using an additional 200
MHz of spectrum within the same bands.
Spectrum availability, particularly in the L-band, is a function not only of
how much spectrum is assigned to American Mobile by the FCC, but also the
extent to which the same frequencies are used by other systems in the North
American region, and the manner of such use. All spectrum use must be
coordinated with other parties that are providing or plan to provide mobile
satellite-based communications in the same geographical region using the same
spectrum. At this time, the other parties with which spectrum use must be
coordinated include Canada, Mexico, the Russian Federation and Inmarsat.
Use of the spectrum is determined through a series of negotiations between
the United States government and the other user agencies, pursuant to the
rules and regulations of the International Telecommunication Union ("ITU").
For the past several years, each of the countries and international
organizations that have used or will use L-band frequencies within the North
American region have been meeting regularly to negotiate and coordinate their
current and future use of that spectrum. American Mobile estimates that
international coordination will make approximately 20 MHz of L-band spectrum
available to the United States for MSAT-2. Since the coordination process
involves many parties and there is uncertainty about the total outcome, the
actual amount of spectrum available may be more or less than that estimated.
In addition, the proposed Satellite Sharing Agreement may make the
coordination of spectrum for American Mobile's system more difficult. Some of
the spectrum that may be available to American Mobile may include a portion of
the 28 MHz lower L-band spectrum adjacent to the frequencies already assigned
to American Mobile by the FCC.
The ITU's Radio Regulations include a table of frequency allocations that
prescribe the permitted uses of the radio spectrum. As a result of the ITU
satellite plan for parts of the Ku-band, there also may be restrictions on
American Mobile's ability to deploy feederlink earth stations in Alaska,
Hawaii, Puerto Rico, and the U.S. Virgin Islands.
During the course of the licensing process for American Mobile and several
times since, the FCC has stated that there is only enough spectrum in the MSS
L-band for the FCC to authorize a single MSS system to provide service in the
United States. In 1995, however, Comsat applied for authority to provide MSS
in the United States over the Inmarsat satellite system. Comsat subsequently
filed an application seeking a blanket authorization for the operation of
5,000 mobile terminals in the United States, as well as a request for an STA
to operate 50 mobile terminals in the United States. On January 9, 1998, the
FCC denied Comsat's request for an STA and required that Comsat amend its
underlying applications to conform with the requirements established in the
FCC's November 1997 order on market access by foreign-licensed satellite
systems. This order conforms the FCC's regulations with the BTA and makes it
easier for foreign satellite systems from WTO-member countries to access the
United States market, while at the same time making clear that the FCC may
deny access to such satellite applicants on the basis of spectrum
availability, applicants' technical, legal, or financial qualifications, or
foreign or domestic policy factors. The order also requires Comsat to make an
appropriate waiver of immunity from any suit as part of any application to
provide domestic services over Inmarsat's system. On February 6, 1998, Comsat
filed an application for review of the FCC's denial of its request for an STA,
and a petition for waiver of the FCC's new market access rules to permit it to
offer MSS on a temporary basis in the United States. American Mobile will
oppose these filings.
In its January 9, 1998 denial of Comsat's STA request, the FCC stated that
it would be willing to authorize Comsat to provide international service if
Comsat amended its blanket license application to show that service through
its terminals and Inmarsat's MSS system could be limited to international
traffic. Comsat has amended its application in order to make this showing. The
deadline for comments on this amendment is March 12, 1998. American Mobile
will oppose this application. In addition, Comsat has applied for authority
under Section 214 of the Communications Act to provide satellite paging and
tracking services in the United States. The deadline for comments on this
application is March 6, 1998, and American Mobile will also oppose this
application. TMI,
54
<PAGE>
which is technically capable of providing service within the United States,
has also expressed an interest in providing MSS to domestic customers over
MSAT-1. On February 10, 1998, the FCC granted a thirty-day STA to Sat Com
Systems, Inc. for the testing of up to 30 mobile terminals in the United
States using TMI's system.
In addition to providing additional competition to American Mobile, a grant
of domestic authority by the FCC to one of these foreign systems would
significantly increase the demand for spectrum in the international
coordination process and could adversely affect American Mobile's business.
American Mobile is operating under waivers of certain FCC rules. In 1996,
the FCC issued an order requiring all CMRS providers to offer what are known
as "enhanced 9-1-1 services" including the ability to automatically locate the
position of all transmitting mobile terminals. American Mobile would not have
been able to offer this automatic location information without adding
substantially to the cost of its mobile equipment and reconfiguring its CGS
software. The FCC decided not to impose specific new requirements on MSS
providers, including American Mobile, at that time. The FCC did state its
expectation that such providers eventually would be required to provide
"appropriate access to emergency services." A decision to impose this
requirement on MSS providers would have a material adverse effect on American
Mobile.
The FCC enacted "rate integration" regulations requiring that providers of
interstate interexchange telecommunications services charge the same rates for
these services in every state, including Puerto Rico and the U.S. Virgin
Islands. American Mobile has opposed the imposition of this rate integration
requirement on its MSS system, so that it may preserve the flexibility to
charge more for service in areas covered by satellite beams that require more
satellite power. The FCC has denied American Mobile's request for a permanent
exemption from its rate integration requirement, but has not yet ruled on
American Mobile's request for a temporary waiver of a year or more. The FCC
has granted American Mobile an interim waiver from its rate integration
requirement until its decision on American Mobile's temporary waiver request.
ARDIS
ARDIS' wireless data network consists of base stations licensed in the
Business Radio and Specialized Mobile Radio Service, all operating in the 800
MHz frequency band. The ARDIS system is interconnected with the public
switched network.
The FCC's licensing regime in effect when it issued ARDIS' licenses provided
for the issuance of individual licenses for specific channels at specific
sites. With respect to the part of the band in which all of ARDIS' base
stations operate, however, the FCC has implemented a new licensing regime. The
new licensing regime involves the auctioning of licenses for specific channels
for wide geographic areas, within which the licensee will have substantial
flexibility to operate any number of base stations, including base stations
that may operate on the same channels as incumbent licensees such as ARDIS.
The FCC has proposed to conduct the auctions for additional channel capacity
of the kind used by ARDIS beginning in the third quarter of 1998. The FCC
proposes to prohibit the new geographic licensees from causing interference to
incumbents, but there is concern that such interference may occur and that
practical application of these rules is uncertain.
ARDIS believes that it has licenses for sufficient channels to meet its
current needs for capacity. To the extent that it needs additional capacity,
it may be required to either participate in the upcoming auctions or acquire
channels from other licensees. As part of its new licensing regime, the FCC
permits a wide-area geographic licensee, with prior FCC approval, to sell a
portion of its geographic area to another entity. This partitioning authority
may increase ARDIS' flexibility to operate additional base stations, but the
practical utility of this option is uncertain at this time.
ARDIS operates its system under a number of waivers of the FCC's technical
rules, including rules on station identification, for-profit use of excess
capacity, system loading, and multiple station ownership. Several of these
waivers were first obtained individually by IBM and Motorola, which operated
separate wireless data systems until forming the ARDIS joint venture in 1990.
The FCC incorporated a number of these waivers into
55
<PAGE>
its regulations when it implemented Congress' statutory provision creating the
CMRS classification, and ARDIS no longer requires those waivers. On June 5,
1996, the FCC waived its one-year construction requirement and granted ARDIS
extensions of time to complete the buildouts of approximately 190 sites, as
required to maintain previously granted licenses. As of March 9, 1998, ARDIS
intends but has yet to construct 104 of these sites. The extended construction
deadlines vary by site between June 27, 1998 and March 31, 1999. Failure to
complete the buildouts in a timely manner could result in a loss of licenses
for such sites from the FCC. In addition, at 11 of 104 uncompleted sites ARDIS
is required to erect a new tower, and there is no assurance that local zoning
regulations will not affect the timetable for the completion of these sites.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulation and legislation relating to the industries in
which American Mobile and ARDIS operate. Other existing federal, state, and
local regulations currently are the subject of a variety of judicial
proceedings, legislative hearings, and administrative and legislative proposal
which could change, in varying degrees, the manner in which American Mobile
and ARDIS operate. Neither the outcome of these proceedings nor their impact
on American Mobile's and ARDIS' operations can be predicted at this time.
56
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the directors
and executive officers of Holdings after giving effect to the Acquisition.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gary M. Parsons......... 47 Chairman of the Board of Directors and Chief Executive Officer
Walter V. Purnell, Jr... 52 President
Robert L. Goldsmith..... 54 Executive Vice President and Chief Operating Officer
Randy S. Segal.......... 41 Vice President, General Counsel and Secretary
Stephen D. Peck......... 52 Vice President, Chief Financial Officer
Jack A. Shaw............ 59 Director
Douglas I. Brandon...... 39 Director
Steven D. Dorfman....... 62 Director
Ho Siaw Hong............ 48 Director
Billy J. Parrott........ 62 Director
Andrew A. Quartner...... 44 Director
Roderick M. Sherwood,
III.................... 44 Director
Michael T. Smith........ 54 Director
Yap Chee Keong.......... 37 Director
Albert L. Zesiger....... 68 Director
</TABLE>
Set forth below are descriptions of the backgrounds and principal
occupations of each of Holdings' executive officers and directors.
EXECUTIVE OFFICERS
Gary M. Parsons, 47. Holdings' Chairman of the Board of Directors and Chief
Executive Officer effective upon the consummation of the Acquisition, Mr.
Parsons has been a Holdings director, the Chief Executive Officer and
President of Holdings since July 1996. Mr. Parsons joined Holdings from MCI
Communications Corporation ("MCI") where he served in a variety of executive
roles from 1990 to 1996, including most recently as Executive Vice President
of MCI Communications, and as Chief Executive Officer of MCI's subsidiary
MCImetro, Inc. From 1984 to 1990, Mr. Parsons was one of the principals of
Telecom*USA, which was acquired by MCI.
Walter V. Purnell, Jr., 52. Holdings' President effective upon the
consummation of the Acquisition. Prior to the Acquisition, Mr. Purnell was
President and Chief Executive Officer of ARDIS since September 1995.
Previously, Mr. Purnell had served as the chief financial officer of ARDIS
since its founding in 1990. Prior to 1990, Mr. Purnell held a broad range of
senior executive positions with IBM over 23 years, with financial
responsibility over significant telecommunications and other business
divisions, both domestically and internationally.
Robert L. Goldsmith, 54. Holdings' Executive Vice President and Chief
Operating Officer since February 1997. Prior to joining Holdings, Mr.
Goldsmith was the Senior Vice President of Sales and Marketing and General
Manager of the Commercial Services Division for Qwest Communications Company.
Prior to joining Qwest in 1995, Mr. Goldsmith was with MCI for nine years in
various executive sales and marketing positions.
57
<PAGE>
Randy S. Segal, 41. Holdings' Vice President, General Counsel and Secretary
since October 1992. From October 1983 to October 1992, Ms. Segal was
associated with the law firm of Debevoise & Plimpton in New York, New York.
Prior to joining Debevoise, Ms. Segal clerked for the Honorable Jerre S.
Williams of the United States Court of Appeals for the Fifth Circuit, and for
the Honorable Edmund L. Palmieri for the United States District Court for the
Southern District of New York.
Stephen D. Peck, 52. Holdings' Vice President and Chief Financial Officer
since July 1997, Mr. Peck was formerly Executive Vice President and Chief
Financial Officer at Phillips Publishing International ("PPI"), which he
joined in 1986. Prior to joining PPI, Mr. Peck was Senior Vice President for
Finance and Administration of the Viguerie Company, which he joined in 1977.
DIRECTORS
Gary M. Parsons, a Holdings director and Chairman of the Board of Directors,
has been a Holdings director since July 1996. See "Executive Officers."
Douglas I. Brandon, 39. A Holdings director as of January 1998, Mr. Brandon
is Vice President--External Affairs & Law, AT&T Wireless Services, Inc. Prior
to joining AT&T Wireless in 1993, Mr. Brandon was associated with the law firm
of Davis Polk & Wardwell beginning in 1986. Prior to Davis Polk, Mr. Brandon
clerked for the Honorable William H. Timbers of the United States Court of
Appeals for the Second Circuit.
Steven D. Dorfman, 62. A Holdings director since April 1996, Mr. Dorfman is
Vice Chairman of Hughes Electronics Corporation, Chairman of Hughes
Telecommunications and Space Company, and Chairman of Hughes Space and
Communications Company. Mr. Dorfman is a member of the Hughes Electronics
Executive Committee. Previously, Mr. Dorfman served as President of Hughes
Space and Communications Company, and President and Chief Executive Officer of
Hughes Communications, Inc. Mr. Dorfman has been with Hughes since 1957.
Ho Siaw Hong, 48. A Holdings director since April 1997 and from March 1993
to March 1994, Mr. Ho is Assistant Vice President of the Satellite Services
Group of Singapore Telecom. Since 1972 he has held a variety of positions at
Singapore Telecom in the areas of network control and management, cellular
radio, paging and satellite system planning and satellite business
development.
Billy J. Parrott, 62. A Holdings director since May 1988, Mr. Parrott is
President and Chief Executive Officer of Antifire, Inc., a manufacturer of
non-toxic fire retardants. Mr. Parrott is also the founder and co-founder of
several telecommunications companies, including Private Networks, Inc., a
builder and operator of telecommunications and broadcast properties, and
Roanoke Valley Cellular Telephone Company, a cellular communications company.
Mr. Parrott is owner of a production company where he functions as a writer,
producer, director and marketing consultant to Fortune 500 companies.
Andrew A. Quartner, 44. A Holdings director since May 1988, Mr. Quartner
also serves as corporate counsel of Nextlink Communications, Inc. and Vice
Chairman of CellPort Labs, Inc. Prior to his present positions, Mr. Quartner
was Senior Vice President, Law, of AT&T Wireless beginning in 1997, which he
joined in November 1985. Prior to joining AT&T Wireless, Mr. Quartner was
associated with the law firm of Debevoise & Plimpton in New York.
Jack A. Shaw, 59. A Holdings director since July 1996, and formerly Chairman
of the Board of Directors of Holdings, Mr. Shaw is Chairman and Chief
Executive Officer of Hughes Network Systems, Inc. and Senior Vice President of
Hughes Electronics Corporation. Mr. Shaw is a member of the Hughes Electronics
Corporation Executive Committee. Previously, Mr. Shaw held senior management
positions with companies including ITT Space Communications, Inc., Digital
Communications Corporation, and M/A-COM Telecommunications, Inc., which was
acquired by Hughes in 1987.
58
<PAGE>
Roderick M. Sherwood, III, 44. A Holdings director since April 1996, Mr.
Sherwood is a Vice President of Hughes Electronics Corporation and Executive
Vice President of DIRECTV International, Inc. Previously, Mr. Sherwood served
as Treasurer of Hughes Electronics Corporation, Senior Vice President--
Operations and Chief Financial Officer of Hughes Telecommunications and Space
Company, Chairman of Hughes Investment Management Company, and a member of the
Hughes Chairman's Forum. Prior to joining Hughes in May 1995, Mr. Sherwood
served in a variety of financial roles during his 14-year career with Chrysler
Corporation, where he served as assistant treasurer from 1991 to 1994.
Michael T. Smith, 54. A Holdings director since April 1996, Mr. Smith is
Chairman and Chief Executive of Hughes Electronics Corporation. Mr. Smith is a
member of the Hughes Electronics Corporation Executive Committee. Prior to his
current position, Mr. Smith served as Chairman of Hughes Aircraft Company and
Vice Chairman of Hughes Electronics Corporation. Mr. Smith served as Executive
Vice President and Chief Financial Officer of Hughes from 1989 until 1992. Mr.
Smith was the Chairman of Hughes Missile Systems Co. from 1992 to 1994.
Previously, Mr. Smith served in a variety of financial management positions
with Hughes and General Motors Corporation, beginning his career in 1968.
Yap Chee Keong, 37. A Holdings director since May 1997, Mr. Yap is the Group
Financial Controller/Vice President for the Corporate Finance Group of
Singapore Telecom with overall responsibility for the financial management and
control of the Singapore Telecom Group. Prior to joining Singapore Telecom in
1995, he was the General Manager and Group Financial Controller of United Pulp
& Paper Company Limited, and an Audit Manager of KPMG Peat Marwick LLP.
Albert L. Zesiger, 68. A Holdings director since May 1989, Mr. Zesiger is
Principal of the Zesiger Capital Group, LLC, an investment advisory firm.
Prior to forming Zesiger Capital, Mr. Zesiger was Managing Director of BEA
Associates ("BEA"), an investment advisory firm. He began his career with the
General Tire and Rubber Company, where he was Investment Funds Manager and
Chairman of the Real Estate Committee. Later, he was involved in mutual fund
management with both the Commonwealth Group and the Anchor Group of Mutual
Funds. Prior to joining BEA, he was Manager of Investment Advisory Services
and a member of the Investment Committee at Lazard Freres & Co.
59
<PAGE>
MANAGEMENT COMPENSATION
EXECUTIVE COMPENSATION
The following tables set forth (a) the compensation paid or accrued by the
Company to the Company's chief executive officer and its three other most
highly compensated executive officers receiving over $100,000 per year on an
annual basis (the "Executive Officers") for services rendered during the
fiscal years ended December 31, 1997, 1996 and 1995, and (b) certain
information relating to options granted to such individuals.
Summary Compensation Table
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- ------------ ALL OTHER
NAME AND ANNUAL OTHER OPTIONS/ COMPEN-
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) SARS(4) SATION(5)
------------------ ---- --------- -------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Gary M. Parsons.......... 1997 $317,692 $79,000 $ 9,600 100,000 $ --
Chief Executive Officer 1996 145,385 87,500 4,026 300,000 --
Robert L. Goldsmith(6)... 1997 189,807 38,203 8,800 100,000 --
Executive Vice Presi-
dent,
Chief Operating Officer
Randy S. Segal........... 1997 191,000 33,425 9,600 25,000 --
Vice President, General 1996 191,000 52,716 5,619 65,000 --
Counsel and Secretary 1995 183,750 55,000 40,341 20,000 54,493
Stephen D. Peck(6)....... 1997 88,154 15,659 4,465 50,000 --
Vice President, Chief
Financial Officer
</TABLE>
- --------
(1) Effective with the Acquisition, Messrs. Parsons', Purnell's, and
Goldsmith's, Ms. Segal's and Mr. Peck's annualized base salaries are
approximately $350,000, $225,000, $219,600, $204,400 and $195,400,
respectively.
(2) 1997 Bonus reflects 50% bonus potential allocable to individual
performance; 50% corporate bonus potential for 1997 to be awarded upon
successful consummation of Acquisition.
(3) All dollar amounts reported for fiscal year 1995 relate to payments to
cover the Executive Officers' increased taxes as a result of relocation
expense reimbursements. All dollar amounts reported for fiscal year 1997
and 1996 relate to the personal use of a company car and/or a car
allowance.
(4) The numbers reflect grants of options to purchase shares of Common Stock
under the Holdings 1989 Employee Stock Option Plan (the "Stock Option
Plan"). The Company has not granted stock appreciation rights ("SARs").
(5) Relates to relocation expense reimbursements.
(6) Messrs. Goldsmith and Peck joined the Company in February 1997 and July
1997, respectively.
60
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (3)
OPTIONS/SARS EMPLOYEES/ BASE PRICE ---------------------
NAME GRANTED(1)(2) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% 10%
- ---- ------------- ------------ --------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gary M. Parsons......... 100,000 7.7373% $12.81 Jan. 23, 2007 $ 806,021 $ 2,042,233
Robert L. Goldsmith..... 100,000 7.7373% 12.50 Feb. 3, 2007 786,118 1,992,178
Randy S. Segal.......... 25,000 1.9343% 12.81 Jan. 23, 2007 201,505 510,558
Stephen D. Peck......... 50,000 3.8686% 9.06 July 14, 2007 284,889 721,965
</TABLE>
- --------
(1) The numbers reflect the grant of options to purchase shares of Common
Stock under the Stock Option Plan. The Company has not granted SARs.
(2) The options become exercisable in three annual installments, vesting at
the rate of 33% per year for the first two years with the remaining 34%
vesting in the third year.
(3) Based on actual option term and annual compounding. The actual value an
Executive Officer may realize will depend upon the excess of the price of
the Common Stock over the exercise price on the date the option is
exercised. Accordingly, there is no assurance that the value ultimately
realized by an Executive Officer, if any, will be at or near the values
indicated.
THE COMPANY'S MANAGEMENT AND COMPENSATION AFTER THE ACQUISITION
Upon completion of the Acquisition, the networks, operations and sales
activities of American Mobile and ARDIS will be integrated such that the
Company will operate through a single management structure utilizing the
talents of the combined management team. Following the Acquisition, Mr.
Purnell will serve as President of the Company and of Holdings, and Mr.
Parsons will serve as Chief Executive Officer and Chairman of the Board of
Directors of the Company and of Holdings. The Company intends to blend the
management of both American Mobile and ARDIS in key technical, sales,
marketing and financial positions, in order to leverage the capabilities of
each organization.
Management Compensation Following the Acquisition
Holdings and the Company have, historically, maintained an executive
compensation program designed to align the interests of management with those
of its stockholders. In so doing, the goals of the compensation program have
been to attract and retain key employees with significant equity participation
in the performance of Holdings and the Company through the use of stock
incentive grants to executives and key employees, as well as to all employees
of the Company. At the same time, in keeping with the overall program
philosophy, a significant portion of the cash compensation is at-risk, with
discretionary bonus compensation based on attainment of both individual and
corporate performance objectives.
In January 1998, the Board of Directors granted restricted stock to senior
management for the first time. These grants include both a three-year vesting
schedule as well as specific corporate performance targets related to either
the successful fulfillment of the Company's lease of MSAT-2 or the Company's
achievement of positive EBITDA. Unless waived by the Board of Directors,
failure to meet a required performance target would prevent the vesting of the
restricted shares.
61
<PAGE>
The following table indicates the options and restricted stock granted to
the Executive Officers in January 1998, and their cumulative options and
restricted shares granted to date:
<TABLE>
<CAPTION>
JANUARY 1998 TOTAL STOCK OPTION
JANUARY 1998 STOCK OPTION SHARES GRANTED
RESTRICTED STOCK SHARES (INCLUDING JANUARY
EXECUTIVE OFFICER SHARES AWARDED GRANTED 1998 GRANT)
----------------- ---------------- ------------ ------------------
<S> <C> <C> <C>
Gary M. Parsons................ 111,111 100,000 500,000
Walter Purnell................. 80,000 80,000 80,000
Robert Goldsmith............... 75,000 0 100,000
Randy S. Segal................. 60,000 0 123,932
Stephen D. Peck................ 30,000 0 50,000
</TABLE>
Mr. Purnell's grants are contingent on the successful consummation of the
Acquisition and Mr. Purnell's employment as President of the Company and of
Holdings.
The companies also maintain broad-based employee stock ownership programs,
which also serve to align the interests of the employees with those of the
companies and their stockholders. These programs include an employee stock
purchase program and a company stock match for employees' contributions to a
401(k) savings plan. Holdings and the Company believe that the availability of
these broad-based programs offer additional benefits in recruiting and
retaining its employees.
Holdings and the Company intend to continue the existing compensation policy
following the Acquisition.
Management Employment Agreements Following the Acquisition
At December, 1997, Holdings was a party to change in control agreements
(collectively, the "Change in Control Agreements," and individually, a "Change
in Control Agreement") with each of Robert Goldsmith, Stephen Peck and Randy
S. Segal, as well as with other members of senior management (collectively,
"Key
Executives," and individually, a "Key Executive"). It is expected that a
similar agreement will be entered into with Walter Purnell following the
Acquisition. Under the Change in Control Agreements, the Company considers it
essential to its best interests and to the best interests of its stockholders
to retain its key management personnel. If a change in control occurs during
the term of the Change in Control Agreement and the Company terminates the
employment of the Key Executive within two years following the occurrence of
such change in control, (i) the Company will provide to each Key Executive a
lump-sum severance payment equal to the sum of the Key Executive's annual base
salary and the Key Executive's average bonus, (ii) all options to purchase
securities of the Company granted to the Key Executive pursuant to the
Company's Stock Option Plan or any other Company plan that are then held by
the Key Executive will be accelerated to the later of the date of termination
or six months after the date such option was granted, and shall continue to be
exercisable for a two-year period after such acceleration, and (iii) the
Company will provide the Key Executive with group term life insurance, health
insurance, accident and long-term disability insurance benefits, which shall
continue for a twelve-month period or until the date the Key Executive will
reach age sixty-five substantially similar in all respects to those that the
Key Executive was receiving immediately prior to the termination date. In
addition, the Company will pay to the Key Executive all reasonable legal fees
and expenses incurred by the Key Executive as a result of a termination.
Holdings also has entered into certain arrangements with Mr. Parsons with
respect to change in control of the companies. Mr. Parsons' agreements,
reflected in an initial employment letter agreement and in his subsequent
stock option and restricted stock agreements, provide that Mr. Parsons would
be entitled to one year's salary in the event his employment terminates
following a change in control, and all equity awards would vest upon the
occurrence of a change in control without regard to whether Mr. Parsons'
employment were terminated.
The Acquisition does not trigger a change in control under any of the
arrangements in effect for the Key Executives or for Mr. Parsons.
62
<PAGE>
SECURITY OWNERSHIP
The following table and the accompanying notes set forth certain information
concerning the beneficial ownership of Holdings' Common Stock at December 31,
1997 (except where otherwise indicated) after giving effect to the Acquisition
by each person who is known by Holdings to own beneficially more than five
percent of Holdings' Common Stock. Except as otherwise indicated, each person
listed in the table has informed Holdings that such person has, or following
the Acquisition will have in the case of the pro forma numbers (i) sole voting
and investment power with respect to such person's shares of Common Stock and
(ii) record and beneficial ownership with respect to such person's shares of
Common Stock.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, PRO FORMA PRO FORMA
NAME OF BENEFICIAL OWNER(1) NUMBER OF SHARES 1997 % OF CLASS NUMBER OF SHARES % OF CLASS
--------------------------- ---------------- ------------------ ---------------- ----------
<S> <C> <C> <C> <C>
AT&T Wireless Services,
Inc.................... 3,881,424(2) 14.9% 3,881,424 12.0%
1150 Connecticut Avenue,
N.W.
Washington, DC 20036
Singapore Telecommunica-
tions Ltd.............. 4,794,046(3) 18.5% 5,044,046(7) 15.6%
31 Exeter Road,
Comcentre..............
Singapore 239732
Republic of Singapore
Baron Capital, Inc...... 6,062,933(4) 23.4% 6,312,933(7) 19.5%
767 Fifth Avenue, 24th
Floor..................
New York, NY 10153
Motorola, Inc.(5)....... -- -- 6,549,217 20.6%
1303 East Algonquin Road
Schaumberg, IL 60196
Hughes Communications
Satellite 10,816,622(6) 36.9% 12,316,622(7) 33.2%
Services, Inc..........
Building S66/D468
Post Office Box 92424
Los Angeles, CA 90009
DIRECTORS AND EXECUTIVE
OFFICERS
-----------------------
Douglas I. Brandon...... 0 * 0 *
Steven A. Dorfman....... 1,000 * 1,000 *
Robert L. Gold-
smith(11).............. 35,844 * 35,844 *
Ho Siaw Hong............ 0 * 0 *
Billy J.
Parrott(9)(10)......... 12,000 * 12,000 *
Gary M. Parsons(8)(11).. 145,156 * 145,156 *
Stephen D. Peck......... 0 * 0 *
Andrew A.
Quartner(9)(12)........ 5,500 * 5,500 *
Randy S. Segal(8)(11)... 73,213 * 73,213 *
Jack A. Shaw............ 0 * 0 *
Roderick M. Sherwood
III.................... 0 * 0 *
Michael T. Smith........ 1,000 * 1,000 *
Yap Chee Keong.......... 0 * 0 *
Albert L. Zesiger(13)... 44,000 * 44,000 *
All Directors and
Executive Officers as a
group (14 persons)
(8)(9)(11)............. 317,713 1.3% 317,713 1.01%
</TABLE>
63
<PAGE>
- --------
* Less than 1%
(1) Certain holders of Common Stock, including each of the beneficial owners
of more than 5% of the Common Stock ("5% Stockholders") listed in the
table are parties to a stockholders' agreement dated December 1, 1993
(the "Stockholders' Agreement"). The 5% Stockholders who are parties to
the Stockholders' Agreement may be deemed to constitute a group having
beneficial ownership of all Common Stock held by members of such group.
Each such 5% Stockholder disclaims beneficial ownership as to shares of
Common Stock held by other 5% Stockholders.
(2) Through its subsidiaries, Transit Communications, Inc. (681,818 shares),
Satellite Communications Investments Corporation (1,344,067 shares), and
Space Technologies Investments, Inc. (1,855,539). Includes 649,347 shares
of Common Stock issuable upon exercise of warrants held by Space
Technologies Investments, Inc., and 230,932 shares of Common Stock
issuable upon exercise of warrants held by Satellite Communications
Investments Corporation. Such warrants are exercisable at any time
through December 20, 1998, at an exercise price of $21.00 per share,
subject to restriction if such exercise would cause the Company's foreign
ownership to exceed the levels permitted by the Communications Act. Transit
Communications, Inc. is indirectly 80%-owned by LIN Broadcasting
Corporation, which is an indirect subsidiary of AT&T Wireless. Satellite
Communications Investments Corporation and Space Technologies Investments,
Inc. are direct or indirect subsidiaries of AT&T Wireless.
(3) Singapore Telecom is approximately 81%-owned by Temasek Holdings
(Private) Ltd., a Singapore holding company that is wholly owned by the
Government of Singapore. Includes 687,500 shares of Common Stock issuable
upon exercise of warrants issued in connection with the Bank Financing
(exclusive of 250,000 additional warrants issued in connection with the
New Bank Financing).
(4) Includes 687,500 shares of Common Stock issuable upon exercise of
warrants issued in connection with the Bank Financing (exclusive of
250,000 additional warrants issued in connection with the New Bank
Financing).
(5) Assumes stockholder approval of the issuance of all Purchase Price shares
of Holdings' Common Stock and warrants for shares of Holdings' Common
Stock to Motorola. Includes 281,040 shares of Common Stock issuable upon
exercise of warrants issued to Motorola in connection with the
Acquisition.
(6) Hughes Communications Satellite Services, Inc. ("HCSSI") is an indirect
wholly-owned subsidiary of Hughes, which is a wholly-owned subsidiary of
General Motors Corporation. Includes 25,000 shares of Common Stock
issuable upon exercise of warrants issued to HCSSI on January 19, 1996,
in connection with a prior interim financing facility guarantee and
4,125,000 shares of Common Stock issuable upon exercise of warrants
issued in connection with the Bank Financing (exclusive of 1,500,000
additional warrants issued in connection with the New Bank Financing).
(7) Reflects additional warrants provided in the aggregate amount of 2
million shares of Common Stock to Hughes, Singapore Telecom and Baron
Capital Partners, L.P. in consideration for restructuring the New Bank
Financing.
(8) Includes shares owned through the Company's matching 401(k) Plan and/or
Employee Stock Purchase Plan.
(9) Includes shares issuable upon the exercise of options granted under the
Nonemployee Director Stock Option Plan which options are vested and
exercisable within sixty days after January 31, 1998, subject to
compliance with applicable securities laws.
(10) Includes 7,500 shares owned by Private Networks, Inc., a company in which
Mr. Parrott owns a one-third equity interest. Mr. Parrott disclaims
beneficial ownership as to all such shares of Common Stock.
(11) Includes shares issuable upon the exercise of options granted under the
Stock Option Plan which options are vested and exercisable within sixty
days after January 31, 1998, subject to compliance with applicable
securities laws.
(12) Includes 1,050 shares owned by trusts for the benefit of each of Mr.
Quartner's three children, of which Mr. Quartner is trustee, and 100
shares owned by Mr. Quartner's wife. Mr. Quartner disclaims beneficial
ownership as to all such shares of Common Stock.
(13) Includes 4,000 shares owned by ZCG Pension Fund managed by Mr. Zesiger.
Mr. Zesiger disclaims beneficial ownership as to all such shares of
Common Stock except to the extent of his pecuniary interest in ZCG
Pension Fund.
64
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Holdings and each holder of shares of Common Stock who acquired such shares
prior to Holdings' initial public offering of 8,500,000 shares of Common
Stock, which was completed December 20, 1993, are parties to a Stockholders'
Agreement, amended and restated as of December 1, 1993 (the "Stockholders'
Agreement"). The remaining parties to the Stockholders' Agreement (principally
Hughes, Singapore Telecom and AT&T Wireless) hold in excess of 44.7% of the
outstanding shares of Common Stock, on a fully diluted basis, without giving
effect to this Offering. The Stockholders' Agreement sets forth agreements
among the parties relating to the governance of Holdings, ownership of shares
and the voting and transferability of Common Stock and other matters. The
Stockholders' Agreement limits Holdings' activities to providing and marketing
mobile satellite service, designing, constructing, operating and maintaining
American Mobile's mobile satellite system, engaging in the communications
business, and engaging in activities necessary, appropriate or reasonably
related to the foregoing. Holdings does not currently intend to engage in any
other activities. The Stockholders' Agreement provides that the parties will
not vote to remove members of the Board of Directors except for cause and that
they will not elect or permit the election of a director who is not a U.S.
citizen, if such action would cause Holdings to violate applicable law,
regulations or FCC policy.
In the Stockholders' Agreement, stockholders who, together with their
affiliates, own in excess of five percent of the Common Stock ("Specified
Stockholders") have also agreed to cause their representatives on Holdings'
Board of Directors to appoint to the Executive Committee two directors (and
one alternate) nominated by each of the two Specified Stockholders which are
parties to the Stockholders' Agreement that hold the greatest number of shares
of Common Stock and one director (and one alternate) nominated by the
Specified Stockholder that holds the third greatest number of shares of Common
Stock, provided that each Specified Stockholder making such nomination holds
at least 15% (the "Threshold Percentage"), of the outstanding Common Stock.
Notwithstanding the foregoing, regardless of whether any other Specified
Stockholder which is a party to the Stockholders' Agreement holds the
Threshold Percentage of the outstanding shares of Common Stock, during the
period that any single Specified Stockholder or group of affiliated
stockholders which are parties to the Stockholders' Agreement are the record
holders of more than 50% of the outstanding Common Stock, the Specified
Stockholders have agreed to cause their Board representatives to vote for the
appointment to the Executive Committee of nominees of that Specified
Stockholder. The Stockholders' Agreement also provides that no person shall be
elected to the Board of Directors if such election would violate the
Communications Act or regulations thereunder. Furthermore, the Stockholders'
Agreement provides that no director shall be elected to the Executive
Committee if such election, in the opinion of counsel for Holdings, would
raise a reasonable prospect of violating the Communications Act or regulations
thereunder. Moreover, before any Specified Stockholder may elect a director of
Holdings who is not a United States citizen, it must first allow Singapore
Telecom to elect such a director, provided Singapore Telecom casts sufficient
cumulative votes to elect a director.
The Communications Act provides that certain FCC licenses may not be held by
a corporation of which more than 20% of its capital stock is directly owned of
record or voted by non-U.S. citizens or entities or their representatives
(Holdings' wholly-owned subsidiary, AMSC Subsidiary Corporation, as the holder
of the FCC license to construct and operate American Mobile's mobile satellite
services system, is subject to these restrictions). Further, the
Communications Act provides that certain FCC licenses may not be held by a
corporation controlled by another corporation if more than 25% of the
controlling corporation's capital stock is owned of record or voted by non-
U.S. citizens or entities or their representatives ("Alien Ownership"), if the
FCC finds that the public interest is served by the refusal or revocation of
such license (Holdings controls AMSC Subsidiary Corporation and therefore is
subject to these restrictions). The Stockholders' Agreement contains
procedures for reducing the risk that Holdings will fail to comply with the
FCC's Alien Ownership restrictions as a result of the ownership of the
stockholders party to that Agreement or their respective holdings in Holdings.
The Stockholders' Agreement provides that when a Specified Stockholder
transfers Common Stock not acquired by such Specified Stockholder in the open
market, the transferee shall become a party to the Stockholders' Agreement,
and shall assume all of the transferring Specified Stockholder's rights and
obligations
65
<PAGE>
under the Stockholders' Agreement, provided such transferee together with its
affiliates would, giving effect to such transfer, hold in excess of 5.0% of
the issued and outstanding Common Stock.
The Stockholders' Agreement continues until terminated by the affirmative
vote of the holders of three-fourths of the issued and outstanding Common
Stock held by parties to the Stockholders' Agreement. It may be amended by a
three-fourths' vote of the Specified Stockholders, except that amendments to
the provisions providing for registration rights and certain other matters
require the affirmative vote of the holders of three-fourths of the
outstanding Common Stock held by parties to the Stockholders' Agreement.
Stockholders Guarantees
As described below, certain of the principal stockholders of Holdings are
guarantors of the New Bank Financing, and have received certain warrants to
purchase shares of Holdings' Common Stock and other consideration in
connection with providing such guarantee. See "Description of New Bank
Financing."
Bridge Facility
On December 30, 1997, Holdings entered into a bridge facility (the "Bridge
Facility") with HCSSI in the principal amount of up to $10 million, secured by
a pledge of Holdings' interest in its 80%-owned subsidiary, AMRC Holdings,
Inc. The Bridge Facility bears an annual interest rate of 12% and a maturity
date of March 31, 1999, and requires mandatory repayment in the event net
proceeds are received from any asset disposition, lease agreement, financing
or equity transaction of Holdings. The Bridge Facility also includes a number
of conditions precedent to each borrowing thereunder, including a schedule for
permitted borrowings through February 1998. Management believes the Bridge
Facility will be fully drawn by the end of the first quarter of 1998, and it
is required to be repaid in full with a portion of the proceeds from the
Offering.
Motorola Agreements
In connection with the Acquisition, and pursuant to the Purchase Agreement,
Holdings, Motorola and certain of Holdings' principal stockholders (Hughes,
Singapore Telecom and AT&T Wireless) (the "Participating Stockholders") have
agreed to certain participation and registration rights with respect to
Holdings' Common Stock.
Pursuant to the terms of the Participation Rights Agreements entered into on
December 31, 1997 (the "Participation Rights Agreement"), in the event that
one of the Participating Stockholders seeks to transfer its shares of
Holdings' Common Stock other than in a Rule 144 or public stock exchange or
Nasdaq Stock Market transaction (a "Transfer") at a time at which Motorola
beneficially owns 5% or more of Holdings' Common Stock, Motorola would have a
right to receive notice of the intended Transfer by such Participating
Stockholder and a right to participate (proportionate to Motorola's
stockholdings relative to those of such Participating Stockholder) in such
contemplated Transfer. Under the Participation Rights Agreement, the
Participating Stockholders would be entitled to similar notice and
participation rights in the event of an intended transfer by Motorola of its
interests in Holdings' Common Stock.
The Participation Rights Agreement also provides that in connection with the
Acquisition, Motorola would be entitled to certain demand and participation
("piggyback") registration rights with respect to the shares of Common Stock
to be issued to Motorola (directly or following exercise of its warrants) as
part of the purchase price of ARDIS. Pursuant to the Agreement, after the
first year following the Acquisition of ARDIS, Motorola or its transferees
would be entitled to two demand registrations with respect to its shares of
Holdings' Common Stock, subject to certain registration priorities and
postponement rights of Holdings. In addition, Motorola would be entitled to
piggyback registration in connection with any registration of securities by
Holdings (whether or not for its own account) on a form which may be used for
registration of the Common Stock held by Motorola. Under the Participation
Rights Agreement, Motorola's piggyback registration rights would have certain
priorities for sale over those of other parties (including the Participating
Stockholders). Motorola's priority rights, however, would not extend to a
primary registration on behalf of Holdings or to the registration rights
relating to the Units.
66
<PAGE>
In addition, under the Participation Rights Agreement, the Participating
Stockholders and Baron agreed with Motorola to vote its shares of Common Stock
in favor of and take such other action as may be necessary to approve the
Acquisition, including the issuance of shares of Holdings' Common Stock to
Motorola in connection with the Acquisition.
As described below, Motorola has also agreed to provide the Company with a
$10.0 million Vendor Financing Facility. See "Description of Motorola Vendor
Financing."
DESCRIPTION OF NEW BANK FINANCING
In connection with the Acquisition, Holdings, the Company and its
subsidiaries renegotiated the existing $200.0 million Bank Financing with
Morgan Guaranty Trust Company of New York, Toronto Dominion Bank, Bank of
America National Trust and Savings Association and certain other lenders
(collectively, the "Banks") to provide for two facilities: (i) the Revolving
Credit Facility, a $100.0 million unsecured five-year reducing revolving
credit facility, and (ii) the Term Loan Facility, a $100.0 million five-year,
term loan facility with up to three additional one-year extensions subject to
the Banks' approval. The Revolving Credit Facility will rank pari passu with
the Notes. The Term Loan Facility is secured by the assets of Holdings,
principally its assets in AMRC and the Company, and will be effectively
subordinated to the Revolving Credit Facility and the Notes. The New Bank
Financing will be severally guaranteed by Hughes, Singapore Telecom and Baron
Capital Partners, L.P.
The Banks' placement fee for the New Bank Financing would be in an amount of
approximately $500,000. Each of the Revolving Credit Facility and the Term
Loan Facility will be severally guaranteed by Hughes, Singapore Telecom and
Baron (the "Bank Facility Guarantors"). In addition, in connection with the
New Bank Financing, the Bridge Facility will be repaid.
The Revolving Credit Facility
The Revolving Credit Facility bears an interest rate, generally, of 50.0
basis points above London Interbank Offered Rate ("LIBOR") and is unsecured,
with a negative pledge on the assets of the Company and its subsidiaries
ranking pari passu with the Notes. The Revolving Credit Facility will be
reduced $10 million each quarter, beginning with the quarter ending June 30,
2002, with the balance due on maturity of March 31, 2003. Certain proceeds
received by the Company would be required to repay and reduce the Revolving
Credit Facility, unless otherwise waived by the Banks and the Bank Facility
Guarantors: (1) 100% of excess cash flow obtained by the Company; (2) the
first $25.0 million net proceeds of the lease or sale of MSAT-2 received by
the Company, and thereafter 75% of the remaining proceeds received from such
lease or sale (the remaining 25% may be retained by the Company for business
operations); (3) 100% of the proceeds of any other asset sales by the Company;
(4) 50% of the net proceeds of any offerings of the Company's equity (the
remaining 50% to be retained by the Company for business operations); and (5)
100% of any major casualty proceeds. At such time as the Revolving Credit
Facility is repaid in full, and subject to satisfaction of the restrictive
payments provisions of the Notes, any prepayment amounts that would otherwise
have been used to prepay the Revolving Credit Facility will be dividended to
Holdings.
The Term Loan Facility
The Term Loan Facility bears an interest rate, generally, of 50.0 basis
points above LIBOR and is secured by the assets of Holdings, principally its
stockholdings in AMRC and the Company. The Term Loan Agreement does not
include any scheduled amortization until maturity, but does contain certain
provisions for prepayment based on certain proceeds received by Holdings,
unless otherwise waived by the Banks and the Bank Facility Guarantors: (1)
100% of excess cash flow obtained by Holdings; (2) the first $25.0 million net
proceeds of the lease or sale of MSAT-2 received by Holdings, and thereafter
75% of the remaining proceeds received from such lease or sale (the remaining
25% to be retained by the Company for business operations); (3) 100% of the
proceeds of any other asset sales by Holdings; (4) 50% of the net proceeds of
any equity offerings of Holdings (the remaining 50% to be retained by Holdings
for business operations); and (5) 100% of any major casualty proceeds of
Holdings. To the extent that the Term Loan Facility is repaid, the
aforementioned proceeds that would otherwise have been used to repay the Term
Loan Facility will be used to repay and reduce the commitment under the
Revolving Credit Facility.
67
<PAGE>
The Guarantees
In connection with the New Bank Financing, the Bank Facility Guarantors have
agreed to extend separate guarantees of the obligations of each of the Company
and Holdings to the Banks, which on a several basis aggregate to $200 million.
In their agreement with each of the Company and Holdings (the "Guarantee
Issuance Agreement"), the Bank Facility Guarantors have agreed to make their
guarantees available for the New Bank Financing. The Guarantee Issuance
Agreement will include certain additional agreements of the Company and of
Holdings including with respect to financial performance of the Company
relating to the ratio of debt to EBITDA and service revenue, which, if not
met, could, if not waived, limit the Company's ability to draw down on
additional amounts under the Revolving Credit Facility and result in a default
under the New Bank Financing beginning in 1999. In exchange for the additional
risks undertaken by the Bank Facility Guarantors in connection with the New
Bank Financing, Holdings has agreed to compensate the Bank Facility
Guarantors, principally in the form of 2 million additional warrants and
repricing of 5.5 million warrants previously issued (together, the "Guarantee
Warrants"). The Guarantee Warrants will be on terms substantially similar,
including with regard to pricing, as those issued as part of the Units.
Further, in connection with the Guarantee Issuance Agreement, Holdings has
agreed to reimburse the Bank Facility Guarantors in the event that the
Guarantors are required to make payment under the Revolving Credit Facility
guarantees, and, in connection with this Reimbursement Commitment has provided
the Bank Facility Guarantors a junior security interest with respect to the
assets of Holdings, principally its stockholdings in AMRC and the Company.
DESCRIPTION OF MOTOROLA VENDOR FINANCING
Motorola has agreed to provide the Company with up to $10.0 million of
vendor financing, which will be available to finance up to 75% of the purchase
price of additional base stations needed to meet the buildout requirements of
the UPS Contract. Loans under this facility will bear interest at a rate equal
to LIBOR plus 7.0% and will be guaranteed by Holdings and each subsidiary of
the Company. The terms of such facility will require that amounts borrowed be
secured by the equipment purchased therewith. This commitment is subject to
customary conditions, including due diligence, and there can be no assurance
that the facility will be obtained by the Company on these terms or at all.
See "Risk Factors--Liquidity; Need for Additional Capital."
DESCRIPTION OF CAPITAL STOCK OF HOLDINGS
Holdings' authorized capital stock consists of 75,000,000 shares of Common
Stock, par value $0.01 per share and 200,000 shares of preferred stock, par
value $0.01 per share ("Preferred Stock").
COMMON STOCK
At December 31, 1997, there were 25,176,726 shares of Common Stock
outstanding, held of record by 244 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders other than for
the election of directors, as to which cumulative voting applies. Subject to
preferences that may be applicable to any then-outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available
therefore. See "Price Range of Common Stock and Dividend Policy." In the event
of a liquidation, dissolution or winding-up of Holdings, holders of the Common
Stock are entitled to share ratably in all assets
68
<PAGE>
remaining after payment of liabilities and the liquidation preference of any
then-outstanding Preferred Stock. Except as described below under "Preferred
Stock" or provided in the Stockholders Agreement (as to redemption in the
event of alien ownership issues), there are no preemptive, subscription,
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the Offering will be, fully-paid and
nonassessable. See "Certain Relationships and Related Party Transactions."
Holdings' Certificate of Incorporation provides for cumulative voting in
connection with the election of directors. Under cumulative voting, each
stockholder is entitled to cast as many votes in the election as equals the
production of the number of directors to be elected and the aggregate number
of shares of Common Stock held by such stockholder and the stockholder may
cumulate such votes for one or more directors as the stockholder determines.
Under cumulative voting, assuming 11 directors were to be elected and
25,176,726 shares of Common Stock were outstanding, a stockholder would have
to hold at least 2,098,061 shares of Common Stock to be certain of electing
one director. After giving effect to the Acquisition, there will be
approximately 34,500,000 shares of Common Stock outstanding, in which case a
stockholder would have to hold at least 2,875,001 shares of Common Stock to be
certain of electing one director.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series and to fix the designations,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference, and to fix the number of shares to be included in any such series.
Any Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or
winding-up, or both. In addition, any such shares of Preferred Stock may have
class or series voting rights. Holdings does not have any shares of Preferred
Stock outstanding. Issuances of Preferred Stock, while providing Holdings with
flexibility in connection with general corporate purposes, may, among other
things, have an adverse effect on the rights of holders of Common Stock. The
Board of Directors of Holdings, without stockholder approval, can issue
Preferred Stock with voting and conversion rights that could adversely affect
the voting power and other rights of holders of Common Stock. Preferred Stock
could thus be issued quickly with terms calculated to delay or prevent a
change of control of Holdings or to make the removal of management more
difficult. In certain circumstances, this could have the effect of decreasing
the market price of the Common Stock.
CERTAIN PROVISIONS OF HOLDINGS' CERTIFICATE OF INCORPORATION AND BYLAWS
Certificate of Incorporation. As currently in effect, Holdings' Certificate
of Incorporation provides that it may not be amended, modified, rendered
ineffective or repealed except by the vote of the holders of two-thirds of the
issued and outstanding shares of Common Stock and that, except as required by
law, other classes or series of stock will not be entitled to vote on any such
amendment, modification or other change, unless and to the extent required by
applicable law. Holdings' Certificate of Incorporation currently provides that
the affirmative vote of the holders of two-thirds of the issued and
outstanding shares of Common Stock will be required to approve (i) the merger
or consolidation of Holdings with or into any other entity, (ii) the
dissolution or liquidating of Holdings, or (iii) the sale, exchange or lease
of all or substantially all of Holdings' property and assets. The Certificate
of Incorporation also provides that at each election of directors by the
holders of Common Stock, all directors shall be elected.
Bylaws. As currently in effect, Holdings' Bylaws provide that there shall be
11 directors. The Bylaws provide that special meetings of the Holdings
stockholders generally may be called by the president and shall be called at
the request of the holders of at least one-third of the Common Stock then
issued and outstanding. A
69
<PAGE>
special meeting solely to elect all directors of Holdings shall be called at
the written request of a holder or holders of sufficient shares of Common
Stock to then elect at least one director under principles of cumulative
voting. The Bylaws also provide that except as provided in Holdings'
Certificate of Incorporation or the Bylaws, the Bylaws may be altered, amended
or repealed or new Bylaws may be adopted only by the vote of either (i) three-
fourths of the members of the board of directors then in office or (ii) the
holders of two-thirds of the issued and outstanding shares of Common Stock.
70
<PAGE>
INDEX TO PRO FORMA FINANCIAL STATEMENTS OF HOLDINGS
<TABLE>
<S> <C>
Description of Pro Forma Financial Statements of Holdings................. P-2
Pro Forma Consolidated Condensed Balance Sheet for the period ended
September 30, 1997 (unaudited)........................................... P-3
Pro Forma Consolidated Income Statement for the nine months ended
September 30, 1997 (unaudited)........................................... P-4
Pro Forma Consolidated Income Statement for the nine months ended
September 30, 1996 (unaudited)........................................... P-5
Pro Forma Consolidated Income Statement for the year ended December 31,
1996 (unaudited)......................................................... P-6
Notes to Pro Forma Financial Statements................................... P-7
</TABLE>
71
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial information gives effect to (i) the
Acquisition, (ii) the Offering and (iii) the New Bank Financing as if such
transactions had been consummated on September 30, 1997 in the case of the
Unaudited Pro Forma Condensed Balance Sheet of Holdings, and on January 1 of
each of the periods presented in the case of the Unaudited Pro Forma Condensed
Statement of Operations of Holdings. The pro forma operating results for 1996
and the nine months ended September 30, 1996 also give effect to the
acquisition of MCSS as if such transaction had been consummated on January 1,
1996. The pro forma condensed financial information is presented for
illustrative purposes only and is not necessarily indicative of what Holdings'
actual financial position and results of operations would have been had the
above-referenced transactions been consummated as of the above-referenced
dates or of the financial position or results of operations that may be
reported by Holdings in the future.
The following data should be read in conjunction with Holdings' Consolidated
Financial Statements and related notes, ARDIS' Combined Financial Statements
and related notes, MCSS' Financial Statements and related notes included
elsewhere herein.
72
<PAGE>
HOLDINGS
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------------------------------------
PRO FORMA
ADJUSTMENT
------------------------- PRO FORMA
HOLDINGS ARDIS ACQUISITION OFFERING CONSOLIDATED
-------- ------- ----------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash
equivalents........... $ 2,592 $ 2,621 $(2,621)(2) $ 2,592
Inventory.............. 49,023 483 49,506
Accounts receivable-
trade, net of
allowance for doubtful
accounts.............. 7,632 8,276 (45)(4) 15,863
Pledged Securities..... -- -- 31,250 (1) 31,250
Other current assets... 2,799 3,761 6,560
-------- ------- --------
Total current assets... 62,046 15,141 105,771
Property and equipment,
net.................... 240,638 44,758 285,396
Goodwill................ -- 9,400 63,267 (2) 65,817
2,550 (1)(2)
(9,400)(2)
Deferred charges and
other assets, net ..... 32,127 6,175 (5,805)(2) 9,400 (1) 41,897
Pledged Securities...... -- -- 10,000 (1) 54,350 (1) 81,550
-------- ------- --------
17,200 (1)
Total assets........... $334,811 $75,474 $580,431
======== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses...... $ 32,562 $ 7,164 $ (45)(4) $(2,200)(1) $ 37,481
Current portion of
obligations under
capital leases........ 773 4,821 5,594
Current portion of
long-term debt........ 8,095 -- (5,000)(1) 3,095
-------- ------- --------
Total current
liabilities........... 41,430 11,985 46,170
Long-term liabilities:
Obligations under Bank
Facility.............. 186,000 -- (68,050)(1) 117,950(1)
% Senior Notes....... -- -- 250,000 (1) 250,000
Debt of subsidiary..... 15,072 -- 15,072
Capital lease
obligations........... 3,187 8,930 12,117
Fair value of assets
acquired in excess of
purchase price........ 2,898 -- 2,898
Other long-term debt... 772 -- 772
Other long-term
liabilities........... 2,069 -- 2,069
-------- ------- --------
Total long-term
liabilities........... 209,998 8,930 400,878
-------- ------- --------
Total liabilities.... 251,428 20,915 447,048
Stockholders' equity:
Net Assets of ARDIS.... 54,559 (54,559)(2) --
Preferred Stock, par
value $0.01:
authorized 200,000
shares; no shares
issued................ -- -- --
Common Stock, voting,
par value $0.01:
authorized 75,000,000
shares;............... 252 -- 63 (2) 315
Additional paid-in
capital............... 451,809 -- 47,747 (2) 499,556
Common Stock purchase
warrants.............. 36,337 -- 2,190 (2) 59,237
20,710 (3)
Unamortized Guarantee
Warrants.............. (25,270) -- (20,710)(3) (45,980)
Retained loss.......... (379,745) -- (379,745)
-------- ------- --------
Total stockholders'
equity................ 83,383 54,559 133,383
-------- ------- --------
Total liabilities and
stockholders' equity.. $334,811 $75,474 $580,431
======== ======= ========
</TABLE>
See Notes to Pro Forma Financial Information on following pages.
73
<PAGE>
HOLDINGS
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------ PRO FORMA
HOLDINGS ARDIS ACQUISITION OFFERING CONSOLIDATED
-------- ------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Services.............. $ 14,758 $31,747 $ (340)(9) $ 46,165
Equipment and
consulting........... 15,475 1,624 17,099
-------- ------- ---------
Total revenue....... 30,233 33,371 63,264
Cost of service and
operations............. 24,984 23,113 48,097
Cost of equipment sold.. 18,930 1,784 (340)(9) 20,374
Sales and advertising... 9,140 4,283 13,423
General and
administrative......... 10,863 4,431 15,294
Depreciation and
amortization........... 31,461 10,915 (973)(5) 43,871
-------- ------- ---------
2,468 (6)
Operating loss.......... (65,145) (11,155) (77,795)
Interest and other
income................. 1,263 101 375 (8) 3,041 (10) 5,391
611 (13)
Interest expense........ (16,305) (1,028) (22,643)(7) (39,976)
-------- ------- ---------
Net loss before income
tax benefit............ (80,187) (12,082) (112,380)
Income tax benefit...... -- 4,382 (4,382)(16) --
-------- ------- ---------
Net loss................ $(80,187) $(7,700) $(112,380)
======== ======= =========
Loss per share of Common
Stock.................. $ (3.19) $ (3.58)
======== =========
Weighted-average common
shares outstanding
during the period
(000's)................ 25,125 6,262 (15) 31,387
======== ========== =========
</TABLE>
See Notes to Pro Forma Financial Information on following pages.
74
<PAGE>
HOLDINGS
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------------
PRO FORMA
ADJUSTMENTS
------------------------ PRO FORMA
HOLDINGS MCSS ARDIS ACQUISITION OFFERING CONSOLIDATED
--------- -------- -------- ----------- -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services.............. $ 6,071 $ 2,628 $ 33,215 $ (296)(9) $ 41,618
Equipment and
consulting........... 12,452 2,975 1,336 16,763
--------- -------- -------- ---------
Total revenue....... 18,523 5,603 34,551 58,381
Cost of service and
operations............. 23,258 1,153 24,762 49,173
Cost of equipment sold.. 23,116 26,087 1,267 (14,200)(11) 35,974
(296)(9)
Sales and advertising... 18,048 4,669 9,521 32,238
General and
administrative......... 13,635 2,378 7,332 23,345
Restructuring charge.... -- 22,130 -- (22,130)(11) --
Depreciation and
amortization........... 32,975 2,399 12,752 (973)(5) 46,700
--------- -------- -------- ---------
2,468 (6)
(2,921)(12)
Operating loss.......... (92,509) (53,213) (21,083) (129,049)
Interest and other
income................. 485 51 160 375 (8) 3,041(10) 4,723
611(13)
Interest expense........ (11,364) -- (1,181) (28,513) (7) (41,058)
--------- -------- -------- ---------
Net loss before income
tax benefit............ (103,388) (53,162) (22,104) (165,384)
Income tax benefit...... -- -- 8,320 (8,320)(16) --
--------- -------- -------- ---------
Net loss................ $(103,388) $(53,162) $(13,784) $(165,384)
========= ======== ======== =========
Loss per share of Common
Stock.................. ($4.13) ($2.12) $ (5.29)
========= ======== =========
Weighted-average common
shares outstanding
during the
period (000's)......... 25,024 6,262 (15) 31,286
========= ======== =========
</TABLE>
See Notes to Pro Forma Financial Information on following pages.
75
<PAGE>
HOLDINGS
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
----------------------------- PRO FORMA
HOLDINGS MCSS(14) ARDIS ACQUISITION OFFERING CONSOLIDATED
--------- -------- -------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Services.............. $ 9,201 $ 2,628 $ 43,413 $ (386)(9) $ 54,856
Equipment and
consulting........... 18,529 2,975 1,884 23,388
--------- -------- -------- ---------
Total revenue....... 27,730 5,603 45,297 78,244
Cost of service and
operations............. 30,471 1,153 32,805 64,429
Cost of equipment sold.. 31,903 26,087 1,350 (14,200)(11) 44,754
(386)(9)
Sales and advertising... 24,541 4,669 13,677 42,887
General and
administrative......... 17,464 2,378 9,364 29,206
Restructuring charge.... -- 22,130 -- (22,130)(11) --
Depreciation and
amortization........... 43,390 2,399 17,269 (1,297)(5) 62,040
--------- -------- -------- ---------
3,291 (6)
(3,012)(12)
Operating loss.......... (120,039) (53,213) (29,168) (165,072)
Interest and other
income ................ 552 51 198 500 (8) 3,943 (10) 6,035
791 (13)
Interest expense........ (15,151) -- (1,556) (36,639)(7) (53,346)
--------- -------- -------- ---------
Net loss before income
tax benefit............ (134,638) (53,162) (30,526) (212,383)
Income tax benefit...... -- -- 11,528 (11,528)(16) --
--------- -------- -------- ---------
Net loss................ $(134,638) $(53,162) $(18,998) $(212,383)
========= ======== ======== =========
Loss per share of Common
Stock.................. $ (5.38) $ (2.12) $ (6.78)
========= ======== =========
Weighted-average common
shares outstanding
during the
period (000's)......... 25,041 6,262 (15) 31,303
========= =========== =========
</TABLE>
See Notes to Pro Forma Financial Information on following pages.
76
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
The pro forma financial information is based on the following assumptions
and adjustments:
(1) Reflects the consummation of the Offering and application of the proceeds
therefrom as if the Offering, the Acquisition and the New Bank Financing
had occurred on September 30, 1997, as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
Purchase of Pledged Securities............................... $ 85,600
Cash portion of the Acquisition.............................. 50,000
Cash escrow for UPS Guarantee................................ 10,000
Partial repayment of long-term debt of American Mobile....... 68,050(a)
Pre-funding of three years of interest on the Term Loan
Facility.................................................... 17,200
Repayment of other deferred obligations...................... 7,200(b)
Payment of acquisition and financing costs................... 11,950(c)
--------
Gross proceeds from the sale of the Units.................. $250,000
========
</TABLE>
--------
(a) Subsequent to September 30, 1997, American Mobile expects to incur
$24.0 million of additional long term debt prior to closing. Upon
consummation of the Offering, proceeds in the amount of $10.1 million
will be used to repay the Bridge Financing, including accrued interest
thereon, and $57.9 million will be used to partially repay the Bank
Financing. It is expected that the Company will have the ability,
subject to certain conditions, to borrow $57.9 million under the
Revolving Credit Facility.
(b) Consists of $2.2 million of accrued expenses and $5.0 million of
deferred vendor financing.
(c) Consists of $9.4 million of financing costs and $2.6 million of
acquisition costs.
(2) Reflects the Acquisition. All share and warrant amounts assume final
shareholder approval for the issuance of $50.0 million in shares and
warrants (see "The Acquisition"). No assumptions have been made regarding
any purchase price adjustments as outlined in the ARDIS Acquisition
Agreement.
Total acquisition costs are anticipated to be as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
6,262,000 shares of American Mobile Satellite Corporation at
$7.63 per share (average of closing price 20 days prior to
acquisition agreement) issued to Motorola.................... $ 47,810
287,000 warrants of American Mobile Satellite Corporation at a
strike price of $.01--valued at $7.63 per share issued to
Motorola..................................................... 2,190
Cash payment to Motorola...................................... 50,000
Estimated transaction costs................................... 2,550
--------
$102,550
========
</TABLE>
The anticipated acquisition costs have been allocated for pro forma
purposes as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current assets............................................... $ 12,520
Equipment and fixtures, net.................................. 44,758
Other assets, net............................................ 370
Excess of purchase price over fair market value.............. 65,817
Accounts payable, accrued expenses and other liabilities..... (7,164)
Capital leases............................................... (13,751)
--------
$102,550
========
</TABLE>
77
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
The above allocation of acquisition costs is preliminary and may change
upon final determination of the fair value of assets acquired. The Company
has not specifically identified amounts to assign to certain intangibles
and licenses; changes in the amounts allocated to such assets could result
in changes to the amount of goodwill recorded. A preliminary amortization
period of twenty years has been selected and utilized in the pro forma
financial information which is expected in all material respects to be
representative of the amortization expense that will result from the
ultimate allocation to the specific intangible assets.
(3) Reflects the re-pricing and extension of life of 5.5 million existing
Guarantee Warrants and issuance of 2.0 million additional Guarantee
Warrants in connection with the restructuring of the Bank Facility. The
existing 5.5 million Guarantee Warrants will be changed to reflect a 10%
premium over Holdings' closing Common Stock price on the date of closing
of the Offering. For purposes of the pro forma analysis, the exercise
price has been assumed to be $8.94, a 10% premium over Holdings' Common
Stock price on February 18, 1998. The 2.0 million additional Guarantee
Warrants will be issued with a seven-year life and exercise price equal
to the new exercise price of the existing 5.5 million Guarantee Warrants.
The Guarantee Warrants will be amortized over five years (the life of the
guarantee) to interest expense.
(4) Reflects the elimination of inter-company balances resulting from
transactions between American Mobile and ARDIS.
(5) Reflects the elimination of goodwill amortization recorded by ARDIS.
(6) Reflects the amortization, over a 20-year life, of the excess of purchase
price of ARDIS over fair market value of assets acquired.
(7) Reflects adjustments to interest expense as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
YEAR ENDED
DECEMBER 31, 1996 1996 1997
----------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
(a)Adjustment of interest expense and debt
costs on New Bank Financing...... $(3,247) $(2,227) $(3,058)
(b)Interest expense on the Notes.......... 31,250 23,438 23,438
(c)Amortization of Note issuance costs.... 940 705 705
(d)Amortization of Guarantee Warrants and
debt issuance costs.............. 7,696 6,597 1,558
-------- -------- --------
$ 36,639 $ 28,513 $ 22,643
======== ======== ========
</TABLE>
The assumptions in connection with the above pro forma interest expense
adjustments are as follows:
(a) Reflects (i) an increase of 25 basis points in the interest rate of the
New Bank Financing relative to the Bank Financing and (ii) the
elimination of interest expense applicable to the Bank Financing and
vendor financing which is to be partially repaid with the proceeds from
the sale of the Units.
(b) Reflects interest expense on the Notes at 12.5%. No pro forma
adjustments have been made for any warrants that may be issued in
connection with the Offering. A 0.125% increase or decrease in the
assumed interest rate would change the pro forma interest expense for
the nine months ended September 30, 1997 and 1996 by $234,000 and
$313,000 for the year ended December 31, 1996. The pro forma net loss
would change by $203,000 for the nine months ended September 30, 1997
and 1996 and by $274,000 for the year ended December 31, 1996.
78
<PAGE>
(c) Reflects the amortization, over a ten year period, of debt issuance
costs of approximately $9.4 million associated with the Notes.
(d) Reflects the amortization, over a five year period, of the Guarantee
Warrants and the amortization of capitalized costs related to the
New Bank Financing.
(8) Reflects interest earned on funds escrowed in connection with the UPS
Guarantee at an average interest rate of 5.0%.
(9) Reflects the elimination of revenues and related operating expenses on
transactions between American Mobile and ARDIS.
(10) Reflects interest income earned on the Pledged Securities at an average
interest rate of 5.0%.
(11) Reflects the elimination of the restructuring charges recorded by MCSS
for the write-down of inventory and fixed assets to net realizable value
which resulted directly from the sale of the assets to American Mobile.
(12) Reflects the elimination of the depreciation and amortization recorded by
MCSS and reflects the amortization of fair value of assets acquired in
excess of purchase price.
(13) Reflects interest income earned on cash at an average interest rate of
5.0%. Cash balances are assumed to be reduced by semi-annual interest
payments on outstanding debt.
(14) MCSS was acquired in November 1996. Financial information was only
available through September 1996; therefore, no information is included
regarding the results for the month of October 1996. Management does not
believe the results for the month of October are material to the pro
forma presentation.
(15) Reflects shares issued to Motorola in connection with the Acquisition.
(16) Reflects the elimination of a tax sharing arrangement between ARDIS and
Motorola.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN MOBILE SATELLITE CORPORATION
(Registrant)
Date: March 9, 1998
/s/ RANDY S. SEGAL
Randy S. Segal
Vice President, General Counsel
and Secretary
