<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number 0-23044
AMERICAN MOBILE SATELLITE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0976127
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
10802 Parkridge Boulevard
Reston, VA 20191-5416
(Address of principal (Zip Code)
executive offices)
(703) 758-6000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of Common Stock outstanding at October 31, 1998: 32,129,163
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF LOSS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- -------------- --------------
REVENUES
<S> <C> <C> <C> <C>
Services $17,661 $ 5,626 $ 40,749 $ 14,758
Sales of equipment 4,141 5,169 13,485 15,475
------ ------- ---------- ---------
Total Revenue 21,802 10,795 54,234 30,233
COSTS AND EXPENSES
Cost of service and operations 16,435 7,910 41,081 24,984
Cost of equipment sold 4,826 6,348 14,122 18,930
Sales and advertising 4,539 2,860 12,272 9,140
General and administrative 4,514 3,058 13,918 10,863
Depreciation and amortization 13,864 10,441 38,484 31,461
-------- ----------- --------- ----------
Operating Loss ( 22,376) ( 19,822) ( 65,643) ( 65,145)
INTEREST EXPENSE ( 15,504) ( 6,654) ( 37,848) (16,305)
INTEREST AND OTHER INCOME 1,582 212 2,988 1,263
------- ------------ --------- ---------
NET LOSS ($36,298) ($26,264) ($100,503) ($80,187)
========= ========= ========== =========
BASIC AND DILUTED NET LOSS PER SHARE OF
COMMON STOCK ($1.14) ($1.04) ($3.39) ($3.19)
======== ========= ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING DURING THE PERIOD (000'S) 31,773 25,145 29,604 25,125
======== ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $10,595 $2,106
Inventory 35,838 40,321
Accounts receivable-trade, net 13,094 8,140
Restricted cash-current portion 41,038 --
Prepaid in-orbit insurance 4,830 4,564
Other current assets 20,401 9,608
------ -----
Total current assets 125,796 64,739
PROPERTY AND EQUIPMENT - NET 256,016 233,174
GOODWILL AND INTANGIBLES - NET 51,398 --
DEFERRED CHARGES AND OTHER ASSETS 33,368 13,534
RESTRICTED CASH - NON-CURRENT 85,382 --
------ --------
Total assets $551,960 $311,447
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $47,370 $35,861
Obligations under capital leases due within one year 5,513 798
Current portion of long-term debt 5,630 15,254
Other current liabilities 7,668 7,520
------ ------
Total current liabilities 66,181 59,433
LONG-TERM LIABILITIES:
Obligations under Bank Financing 137,000 198,000
Obligations under Senior Notes, net of discount 326,934 --
Capital lease obligations 7,427 3,147
Net assets acquired in excess of purchase price 2,203 2,725
Other long-term debt 1,076 1,364
Other long-term liabilities 565 647
------- -------
Total long-term liabilities 475,205 205,883
------- -------
Total liabilities 541,386 265,316
------- -------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $0.01; no shares issued -- --
Common Stock, voting, par value $0.01 318 252
Additional paid-in capital 502,635 451,892
Common Stock purchase warrants 62,547 36,338
Unamortized guarantee warrants (35,659) (23,586)
Retained loss (519,267) (418,765)
--------- ---------
Total stockholders' equity 10,574 46,131
------- -------
Total liabilities and stockholders' equity $551,960 $311,447
======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-------------------------
<S> <C> <C>
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($100,503) ($80,187)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of guarantee warrants and debt related costs 11,622 6,825
Depreciation and amortization 38,484 31,461
Changes in assets and liabilities:
Inventory 3,938 (10,989)
Prepaid in-orbit insurance (266) 5,080
Trade accounts receivable 2,126 (1,029)
Other current assets 281 11,448
Accounts payable and accrued 7,961 (8,671)
expenses
Deferred trade payables (5,330) 2,934
Deferred and other items - net 348 25
---------- ---------
Net cash used in operating activities (41,339) (43,103)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (7,376) (6,370)
Acquisition of ARDIS (51,440) --
Purchase of long-term, restricted cash securities (143,312) --
Investment in XM Radio -- (1,229)
---------- ---------
Net cash used in investing activities (202,128) (7,599)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 412 284
Principal payments under capital leases (2,541) (2,335)
Proceeds from Bank Financing 39,000 59,000
Repayment of Bank Financing (100,000) --
Proceeds from bridge financing 10,000 --
Repayment of bridge financing (10,000) --
Proceeds from Senior Notes and Warrants 335,000 --
Payments on long-term debt (4,933) (5,225)
Debt issuance costs (14,982) (612)
---------- ---------
Net cash provided by financing activities 251,956 51,112
Net increase in cash and cash equivalents 8,489 410
CASH AND CASH EQUIVALENTS, beginning of period 2,106 2,182
------ ------
CASH AND CASH EQUIVALENTS, end of period $ 10,595 $ 2,592
========== =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Organization and Business
- ----------------------------
American Mobile Satellite Corporation (with its subsidiaries, "American Mobile"
or the "Company") was incorporated on May 3, 1988, by eight of the initial
applicants for the mobile satellite services license, following a determination
by the Federal Communications Commission ("FCC") that the public interest would
be best served by granting the license to a consortium of all willing, qualified
applicants. The FCC has authorized American Mobile to construct, launch, and
operate a mobile satellite services system (the "Satellite Network ") to provide
a full range of mobile voice and data 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, U.S. coastal
waters, international waters and airspace and any foreign territory where the
local government has authorized the provision of service. In March 1991,
American Mobile Satellite Corporation transferred the mobile satellite services
license ("MSS license") to a wholly owned subsidiary, American Mobile Subsidiary
Corporation ("AMSC Subsidiary"). On April 7, 1995, the Company successfully
launched its first satellite ("MSAT-2"), from Cape Canaveral, Florida.
On March 31, 1998 the Company (through its newly-formed, wholly-owned
subsidiary, AMSC Acquisition Company, Inc. ("Acquisition Company")) acquired
ARDIS Company ("ARDIS"), a wholly-owned subsidiary of Motorola Inc. that owns
and operates a two-way wireless data communications network, for a purchase
price of approximately $50 million in cash and $50 million in the Company's
Common Stock and warrants (the "Purchase Price"). The Company, through the
acquisition of ARDIS, becomes a nationwide provider of wireless communications
services, including data, dispatch, and voice services, primarily to business
customers in the United States.
On October 16, 1997, XM Satellite Radio Inc., formerly American Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings, Inc., (together with XM
Satellite Radio Inc., "XM Radio"), was awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States, following its successful $89.9 million bid at auction on April 2, 1997.
XM Radio has and will continue to receive funding for this business from an
independent source in exchange for debt and an equity interest in XM Radio.
Accordingly, it is not expected that the development of this business will have
a material impact on the Company's financial position, results of operations, or
cash flows.
American Mobile is devoting its efforts to expanding a developing business. This
effort involves substantial risk, including successfully integrating ARDIS.
Specifically, future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. Depending on their extent and timing, these factors, individually
or in the aggregate, could have an adverse effect on the Company's financial
condition and future results of operations.
<PAGE>
2. Significant Accounting Policies
- ----------------------------------
Basis of Presentation
- ---------------------
The unaudited consolidated condensed financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While the Company believes
that the disclosures made are adequate to make the information not misleading,
these consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1997 Annual Report on Form 10-K
The consolidated balance sheet as of September 30, 1998, and the consolidated
statements of loss and cash flows for the three months and nine months ended
September 30, 1998 and 1997, have been prepared by the Company without audit. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, result of
operations and cash flows at September 30, 1998, and for all periods presented
have been made. Certain amounts for the three months and nine months ended
September 30, 1997 have been reclassified to conform with the current period
presentation. The balance sheet at December 31, 1997 has been taken from the
audited financial statements.
Acquisition
- -----------
The Company acquired ARDIS for a purchase price of approximately $50 million in
cash and $50 million in the Company's Common Stock (the "Purchase Price").
Approximately 1.5 million of the shares that were issuable to Motorola
(representing approximately $11.5 million) were contingent upon stockholder
approval at the May 20, 1998 annual meeting of shareholders. Such approval was
duly received and the remaining shares issued. The purchase method of accounting
for business combinations was used for the recording of the acquisition. The
operating results of ARDIS have only been included in the Company's consolidated
statements of loss from the date of acquisition. The Company's preliminary
estimate of the excess of the purchase price over the fair market value of net
assets acquired is $54.3 million.
The goodwill, intangibles and licenses are being amortized over twenty years.
The unaudited pro forma results give effect to (i) the Acquisition, (ii) the
Offering and (iii) the New Bank Financing as if such transactions had been
consummated on January 1 of each of the periods presented.
Nine Months Ended
September 30,
(dollars in thousands, except per share data) 1998 1997
---- ----
Revenues $64,166 $63,264
Net loss ($114,110) ($125,069)
Loss per share ($3.60) ($3.98)
Weighted-average shares outstanding 31,731 31,387
Net Loss Per Share
- ------------------
Basic and diluted loss per common share is based on the weighted-average number
of shares of Common Stock outstanding during the period. Stock options and
common stock purchase warrants are not reflected since their effect would be
antidilutive.
<PAGE>
Recently Adopted Accounting Pronouncements
- ------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted both of these standards during the
nine month period ended September 30, 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income" to be reported in the financial statements and/or notes
thereto. Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "total comprehensive income" for the
three months and nine months ended September 30, 1997 and 1998.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is not required for interim financial
reporting purposes during 1998. The Company is in the process of assessing the
additional disclosures, if any, required by SFAS No. 131. However, such adoption
will not impact the Company's results of operations or financial position, since
it relates only to disclosures.
Other
- -----
The Company paid approximately $7.6 million and $2.0 million in the nine-month
periods ended September 30, 1998 and 1997, respectively, to related parties for
capital assets, service-related obligations, and payments under financing
agreements. Payments from related parties for communication services and
equipment purchases totaled $4.3 million in the nine-month period ended
September 30, 1998 and $1.8 million in the nine-month period ended September 30,
1997. Total net indebtedness to related parties as of September 30, 1998
approximated $850,000.
3. Liquidity and Financing
- --------------------------
Million Unit Offering
- --------------------------
In connection with the acquisition of ARDIS, discussed above, the Company issued
$335 million of Units (the "Units") consisting of 12 1/4% Senior Notes due 2008
(the "Notes"), and Warrants to purchase shares of Common Stock of the Company.
Each Unit consists of $1,000 principal amount of Notes and one Warrant to
purchase 3.75749 shares of Common Stock at an exercise price of $12.51 per
share. A value of $8.5 million was assigned to the Warrants and is reflected in
the balance sheet as a debt discount. A portion of the net proceeds of the sale
of the Units were used to finance the Acquisition. In connection with the Notes,
the Company has purchased approximately $112.3 million of pledged securities
that are intended to provide for the payment of the first six interest payments
on the Notes. The Company incurred approximately $15 million in costs associated
with the placement of the Notes and the Acquisition.
Interest payments are due semi-annually, in arrears, beginning October 1, 1998.
The Notes contain covenants that, among other things, limit the ability of
Acquisition Company and its Subsidiaries to incur additional indebtedness, pay
dividends or make other distributions, repurchase any capital stock or
subordinated indebtedness, make certain investments, create certain liens, enter
into certain transactions with affiliates, sell assets, enter into certain
mergers and consolidations, and enter into sale and leaseback transactions.
Acquisition Company consummated its offer to exchange up to $335 million
aggregate principal amount of its registered 12 1/4 percent Senior Notes (due
2008, Series B) (the "New Notes") for outstanding unregistered 12 1/4 percent
Senior Notes (due 2008, Series A) (the "Old Notes"). Holders tendered for
exchange $334.75 million aggregate principal amount of the Old Notes as of the
expiration of the offer.
New Bank Financing
- ------------------
In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries restructured the existing $200 million Bank Financing (the "Bank
Financing") to provide for two facilities: (i) the Revolving Credit Facility, a
$100 million unsecured five-year reducing revolving credit facility, and (ii)
the Term Loan Facility, a $100 million five-year, term loan facility with up to
three additional one-year extensions subject to the lenders' approval. The
Revolving Credit Facility bears an interest rate, generally, of 50 basis points
above LIBOR and is unsecured, with a negative pledge on the assets of the
Acquisition Company and its subsidiaries ranking pari passu with the Notes. The
<PAGE>
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. 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 revolving Credit Facility ranks pari
passu with the Notes. The Term Loan Facility is secured by the assets of the
Company, principally its stockholdings in XM Radio and the Acquisition Company,
and is effectively subordinated to the Revolving Credit Facility and the Notes.
The New Bank Financing is severally guaranteed by Hughes Electronics Corporation
("Hughes"), Singapore Telecommunications Ltd. ("Singapore Telecom") and Baron
Capital Partners, L.P. (collectively, the "Bank Facility Guarantors"). In
exchange for the additional risks undertaken by the Bank Facility Guarantors in
connection with the New Bank Financing, the Company agreed to compensate the
Bank Facility Guarantors, principally in the form of 1 million additional
warrants and re-pricing of 5.5 million warrants previously issued (together, the
"Guarantee Warrants"). The Guarantee Warrants have an exercise price of $12.51
and have been valued at approximately $17.7 million. As of October 31, 1998, the
Company had outstanding borrowings of $100 million of the Term Loan Facility at
5.8125%, and $32.0 million under the Revolving Credit Facility at rates ranging
from 5.75% to 6.1875%.
In connection with the New Bank Financing, the Company entered into an interest
rate swap agreement, with an implied annual rate of 6.51%. The swap agreement
reduces the impact of interest rate increases on the Term Loan Facility. The
Company paid a fee of approximately $17.9 million for the swap agreement. Under
the swap agreement, the Company will receive an amount equal to LIBOR plus 50
basis points, paid on a quarterly basis, on a notional amount of $100 million
until the termination date of March 31, 2001. The Company has reflected as an
asset the unamortized fee paid for the swap agreement in the accompanying
financial statements. The Company is exposed to a credit loss in the event of
non performance by the counter party under the swap agreement. The Company does
not believe there is a significant risk of non performance as the counter party
to the swap agreement is a major financial institution.
Motorola Vendor Financing
- -------------------------
Motorola has entered into an agreement with a subsidiary of Acquisition Company,
the ARDIS Company, to provide up to $10 million of vendor financing (the "Vendor
Financing Commitment"), which will be available to finance up to 75% of the
purchase price of additional network base stations. Loans under this facility
will bear interest at a rate equal to LIBOR plus 7.0% and will be guaranteed by
the Company and each subsidiary of the Acquisition Company. The terms of the
facility require that amounts borrowed be secured by the equipment purchased
therewith. As of October 31, 1998, $591,707 was outstanding under this facility.
Financing Summary
- -----------------
The Company believes the proceeds from the issuance of the Notes, net of cash
used for the Acquisition, together with the borrowings under the New Bank
Financing and the Vendor Financing Commitment, will be sufficient to fund
operating losses, capital expenditures, working capital, and scheduled principal
and interest payments on debt through 1998 and beyond; however, there can be no
assurance that the Company's current projections regarding the timing of its
ability to achieve positive operating cash flow will be accurate, and that the
Company will not need additional financing in the future.
XM Radio
- --------
As previously mentioned (see "Organization and Business"), XM Radio was a
winning bidder for, and on October 16, 1997, was awarded an FCC license to
provide DARS throughout the United States. XM Radio has and will continue to
receive funding for this business from an independent source in exchange for
debt and an equity interest in XM Radio. Accordingly, it is not expected that
the development of this business will have a material impact on the Company's
financial position, results of operations, or cash flows. Through its investment
in XM Radio, WorldSpace has an option to increase its ownership in XM Radio to
approximately 82%, subject to FCC approval. On October 30, 1998 the Company and
WorldSpace jointly filed an application for consent to the transfer of control
of XM Radio in anticipation of future exercise, subject to FCC approval, of the
WorldSpace options which, if exercised, would reduce the Company's ownership in
XM Radio to 18.3%. The Company's equity interest in XM Radio may, however, even
on a fully diluted basis, become a material asset of the Company.
<PAGE>
Summarized unaudited financial information for XM Radio as of September 30,
1998, and for the nine month periods ended September 30, 1998 and 1997, and for
the period from December 15, 1992 (date of inception) through September 30, 1998
is set forth below.
<PAGE>
<TABLE>
<CAPTION>
December 15, 1992
Nine Months through
dollars in thousands Ended September 30, September 30,
(unaudited) (unaudited)
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Gross sales $ -- $ -- $ --
Operating expenses 11,989 236 13,099
Loss from operations 11,989 236 13,099
Interest expense -- 464 549
Net loss 11,989 700 13,648
</TABLE>
<TABLE>
<CAPTION>
As of September 30, As of December 31,
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Current assets $ 101 $ --
Noncurrent assets 140,253 91,933
Current liabilities 120,984 82,949
Noncurrent liabilities 22,375 --
Total stockholders' equity (3,005) 8,984
</TABLE>
Deferred Trade Payables
- -----------------------
The Company has arranged the financing of certain trade payables, and as of
September 30, 1998, $6.4 million of deferred trade payables were outstanding at
rates ranging from 6.22% to 12% and are generally payable by the end of 1999.
Purchase and Lease Agreement
- ----------------------------
As previously disclosed, the Company has entered into certain agreements to
acquire a one-half ownership interest in TMI Communications and Company, Limited
Partnership's ("TMI") satellite, MSAT-1, at a cost of $60 million payable over a
five-year period, as well as entered into a five-year lease of the Company's
satellite, MSAT-2, with African Continental Telecommunications Ltd. that
provides for aggregate lease payments to the Company of $182.5 million. Closing
under the agreements is subject to a number of conditions, including: a
successful financing by ACTEL of at least $120 million and completion of certain
satellite testing, inversion and relocation activities with respect to AMSC-1.
It is anticipated that if the conditions are met, closing under both the
purchase and lease agreements would occur simultaneously in the first half of
1999; however, there can be no assurances that these conditions will be met and
the transactions consummated.
Other
- -----
On October 29, 1998, the Company announced that it reached an agreement with
Stratos Global Corporation to consolidate American Mobile's marine distribution
channel, resulting in the transfer of inventory and contracts in exchange for
$8.5 million. Apart from the initial cash inflow, it is not expected that this
transaction will have a material impact on the Company's financial position,
results of operations, or cash flows.
On July 2, 1998, American Mobile filed an application for authority to launch
and operate its second-generation mobile satellite system. This satellite is
intended to support the Company's existing satellite services and also allow the
provision of an expanded array of services, such as higher data rate services
and services to lower-power terminals. There can be no assurance that the FCC
<PAGE>
will grant this application. If the Company proceeds with deployment of this
second-generation satellite system, the Company would be required to raise
substantial additional capital to finance this project.
4. Legal and Regulatory Matters
- -------------------------------
Like other mobile service providers in the telecommunications industry, the
Company is subject to substantial domestic, foreign and international regulation
including the need for regulatory approvals to operate and expand the Satellite
Network and operate and modify subscriber equipment.
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 the spectrum. American Mobile and ARDIS
operate pursuant to various licenses granted by the FCC.
The successful operation of the Satellite Network is dependent on a number of
factors, including the amount of L-band spectrum made available to the Company
pursuant to an international coordination process. The United States is
currently engaged in an international process of coordinating the Company's
access to the spectrum that the FCC has assigned to the Company. While the
Company believes that substantial progress has been made in the coordination
process and expects that the United States government will be successful in
securing the necessary spectrum, the process is not yet complete. The inability
of the United States government to secure sufficient spectrum could have an
adverse effect on the Company's financial position, results of operations and
cash flows.
The Company has the necessary regulatory approvals, some of which are pursuant
to special temporary authority, to continue its operations as currently
contemplated. The Company has filed applications with the FCC and expects to
file applications in the future with respect to the continued operations, change
in operation and expansion of the Network and certain types of subscriber
equipment. Certain of its applications pertaining to future service have been
opposed. While the Company, for various reasons, believes that it will receive
the necessary approvals on a timely basis, there can be no assurance that the
requests will be granted, will be granted on a timely basis or will be granted
on conditions favorable to the Company. Any significant changes to the
applications resulting from the FCC's review process or any significant delay in
their approval could adversely affect the Company's financial position, results
of operations and cash flows.
There are applications now pending before the FCC to use the Inmarsat system and
TMI's Canadian-licensed system, both of which operate in the MSS L-band and have
satellite footprints covering the United States, to provide service in the
United States. American Mobile has opposed these filings. In addition to
providing additional competition to American Mobile, a grant of domestic
authority by the FCC to use any of these foreign systems may increase the demand
by these systems for spectrum in the international coordination process and
could adversely affect American Mobile's ability to coordinate its spectrum
access.
On July 20, 1998, the International Bureau of the FCC granted an application for
Special Temporary Authority to use TMI's space segment to conduct market tests
in the U.S. for the next six months using up to 500 mobile terminals. American
Mobile has asked the full Commission to review this decision and stay the
effectiveness of the temporary authorization. There can be no assurance that the
FCC will stay the effectiveness of this decision or rescind the International
Bureau's grant of Special Temporary Authority.
On October 23, 1998, the FCC issued an order permitting Comsat Corporation via
Inmarsat to provide aeronautical services to the domestic legs of the same
aircraft in international flight. As the FCC noted, this action has a minimal
effect on AMSC's access to L-band spectrum. Additionally, the Company does not
believe this action will have any effect on revenues.
American Mobile is authorized to build, launch, and operate three geosynchronous
satellites in accordance with a specific 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
<PAGE>
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 authorization to MSAT-2 is likely to be extended in
due course to correspond to the useful life of the satellite and a new license
granted for any replacement satellites, there is no assurance of such extension
or grants.
On July 2, 1998, American Mobile filed an application for authority to launch
and operate its second-generation mobile satellite system. This satellite is
intended to support the Company's existing satellite services and, also, allow
the provision of an extended array of services, such as higher data rate
services and services to lower-power terminals. There is no guarantee that the
FCC will grant this application. The filing of the application does not commit
the Company to expend any resources toward this project; however, should the
Company decide to proceed with the construction of the follow-on satellite, the
Company would be required to raise substantial additional capital to fund this
project.
As a provider of interstate telecommunications services, the Company is required
to contribute to the FCC's universal service fund for certain of its services,
which supports the provision of telecommunication services to high-cost areas,
and establishes funding mechanisms to support the provision of service to
schools, libraries and rural health care providers. The regulation became
effective on January 1, 1998. This cost generally is not borne by the Company,
but passed on to its customers.
On June 5, 1996, the FCC waived its one-year construction requirement and
granted ARDIS extensions of time to complete buildouts of approximately 190
sites, as required to maintain previously granted licenses. The extended
construction deadlines vary by site until March 31, 1999. While management
believes that all buildouts will continue to be completed in a timely manner,
there can be no assurances that future delays will not occur. Failure to
complete the buildouts in a timely manner could result in a loss of licenses for
such sites from the FCC.
In 1992, a former director of American Mobile filed an Amended Complaint against
the Company alleging violations of the Communications Act of 1934, as amended,
and of the Sherman Act and breach of contract. The suit was dismissed on
November 10, 1998, prior to the commencement of trial pursuant to an agreement
to settle the suit by payment of $250,000, the Company's estimate of its cost of
trial.
5. Other Matters
- ----------------
At October 31, 1998, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory in
the maximum amount of $11.1 million over the next year. Additionally, the
Company had remaining contractual commitments in the amount of $1.3 million for
the development of certain next generation data terminal inventory. Contingent
upon the successful research and development efforts, the Company would have
maximum additional contractual commitments for mobile communications data
terminal inventory in the amount of $27.0 million over a three-year period. The
Company has the right to terminate the research and development and inventory
commitment by paying cancellation fees of between $1 million and $2.5 million,
depending on when the termination option is exercised during the term of the
contract. The Company also has the right to terminate the inventory commitment
by incurring a cancellation penalty representing a percentage of the unfulfilled
portion of the contract. The Company has also contracted for the purchase of
$26.2 million next generation wireless data terminals to be delivered beginning
early 1999. The contract contains a 50% cancellation penalty. Additionally, the
Company has remaining contractual commitments for the purchase of $6.4 million
of base stations necessary to complete the required site build-outs.
6. AMSC Acquisition Company Financial Statements
- ------------------------------------------------
In connection with the Acquisition and related financing discussed above, the
Company formed a new wholly-owned subsidiary, AMSC Acquisition Company, Inc. The
Company transferred all of its inter-company notes receivables and its rights,
title and interests in AMSC Subsidiary Corporation, American Mobile Satellite
Sales Corporation, and AMSC Sales Corp. Ltd. (together with ARDIS, the
"Subsidiary Guarantors") to AMSC Acquisition Company, Inc., and AMSC Acquisition
Company, Inc. was the acquirer of ARDIS and the issuer of the $335 million of
Senior Notes. American Mobile Satellite Corporation ("American Mobile Parent")
is a guarantor of the Senior Notes. The Senior Notes contain covenants that,
among other things, limit the ability of Acquisition Company, Inc. and its
Subsidiaries to incur additional indebtedness, pay dividends or make other
distributions, repurchase any capital stock or subordinated indebtedness, make
certain investments, create
<PAGE>
certain liens, enter into certain transactions with affiliates, sell assets,
enter into certain mergers and consolidations, and enter into sale and leaseback
transactions.
Acquisition Company is a holding company with no material operations. It holds
the Senior Notes and Revolving Credit Facility, both of which are fully and
unconditionally guaranteed on a joint and several basis by all of its
Subsidiaries. Separate company financial statements for Acquisition Company have
not been prepared, as management believes the differences between the two
statements to be immaterial, and therefore not material information to the
investors.
<PAGE>
Summarized financial information with respect to American Mobile Parent,
Acquisition Company and with respect to the Subsidiary Guarantors on a combined
basis as of September 30, 1998 and for the months ended September 30, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
American Mobile Parent Acquisition Company
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Operating Statement Data
(in thousands):
<S> <C> <C> <C> <C>
Net Revenue $900 $900 -- --
Equity in loss of subsidiaries 102,879 102,893 89,561 --
Operating income (loss) 519 1,393 (71) --
Net loss 100,503 80,187 102,537 --
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Current assets $6,374 $41,066
Non-current assets 105,768 442,666
Current liabilities 67 20,910
Non-current liabilities 101,501 363,935
Shareholders' Equity 10,574 98,887
</TABLE>
<TABLE>
<CAPTION>
Combined Subsidiary Guarantors
September 30, 1998 September 30, 1997
------------------ ------------------
Operating Statement Data
(in thousands):
<S> <C> <C>
Net revenue $54,234 $30,233
Equity in loss of subsidiaries -- --
Operating loss 66,091 66,538
Net loss 89,561 103,070
Balance Sheet Data
(in thousands):
Current assets $78,356
Non-current assets 325,926
Current liabilities 45,203
Non-current liabilities 693,563
Shareholders' equity (334,484)
</TABLE>
<PAGE>
Major differences between the financial statements of Parent and Acquisition
Company include (i) the Term Loan Facility which, as of the Acquisition, is an
obligation of Parent and, as such, the related debt and interest costs are not
included in the Acquisition Company financial statements for the periods ended
and as of September 30, 1998, as discussed in Note 3, and (ii) certain
immaterial intercompany management fees and expenses between the Parent and
Acquisition Company are not eliminated at the Acquisition Company level.
The combined condensed unaudited financial statements of Acquisition Company are
set forth below.
<PAGE>
AMSC Acquisition Company, Inc.
Consolidated Condensed Statements of Loss
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Services $ 17,661 $ 5,626 $40,749 $ 14,758
Sales of equipment 4,141 5,169 13,485 15,475
-------- ------- ------- ---------
Total Revenues 21,802 10,795 54,234 30,233
COSTS AND EXPENSES:
Cost of service and operations 16,435 7,879 41,081 24,953
Cost of equipment sold 4,827 6,365 14,123 18,930
Sales and advertising 4,474 2,846 12,160 9,109
General and administrative 4,556 3,104 14,022 10,739
Depreciation and amortization 13,864 10,968 39,010 33,040
------- -------- -------- -------
Operating Loss (22,354) (20,367) (66,162) (66,538)
INTEREST AND OTHER INCOME 1,497 55 3,129 1,086
INTEREST EXPENSE (12,885) (13,346) (39,504) (37,618)
-------- -------- -------- --------
NET LOSS ($33,742) ($33,658) ($102,537) ($103,070)
========= ========= ========== ==========
</TABLE>
<PAGE>
AMSC Acquisition Company, Inc.
Consolidated Condensed Balance Sheets
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 10,595 $ 2,106
Inventory 35,838 40,321
Accounts receivable-trade, net of allowance for doubtful accounts 13,094 8,140
Restricted cash-current portion 41,038 --
Prepaid in-orbit insurance 4,830 4,564
Other current assets 14,027 9,608
-------- --------
Total current assets 119,422 64,739
PROPERTY AND EQUIPMENT - NET 256,016 250,335
GOODWILL AND INTANGIBLES - NET 51,398 --
RESTRICTED CASH - Non-Current 75,122 --
DEFERRED CHARGES AND OTHER ASSETS - NET 38,248 36,722
-------- --------
Total assets $ 540,206 $ 351,796
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 47,303 $ 35,825
Obligations under capital leases due within one year 5,513 798
Current portion of long-term debt 5,630 15,254
Other current liabilities 7,668 7,520
-------- ---------
Total current liabilities 66,114 59,397
DUE TO PARENT -- 441,836
LONG-TERM LIABILITIES:
Obligations under Bank Financing 37,000 198,000
Senior Notes, net of discount 326,934 --
Capital lease obligations 7,427 3,147
Other long-term debt 1,076 1,364
Net assets acquired in excess of purchase price 2,203 2,725
Other long-term liabilities 565 647
-------- ---------
Total long-term liabilities 375,205 205,883
Total liabilities 441,319 707,116
-------- -------
STOCKHOLDERS' EQUITY 98,887 (355,320)
-------- ---------
Total liabilities and stockholders' equity $ 540,206 $ 351,796
========= =========
</TABLE>
<PAGE>
AMSC Acquisition Company, Inc.
Consolidated Condensed Statements of Cash Flows
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
---- ----
CASH FLOWS USED IN OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($102,537) ($103,070)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 8,072 6,825
Depreciation and amortization 39,010 33,040
Changes in assets and liabilities:
Inventory 3,938 (10,989)
Prepaid in-orbit insurance ( 266) 5,080
Trade accounts receivable 2,126 (1,029)
Other current assets 84 11,448
Accounts payable and accrued expenses 7,932 (9,427)
Deferred trade payables ( 5,330) 2,934
Deferred items - net 6 202
---------- ----------
Net cash used in operating activities (46,965) (64,986)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property and equipment (7,376) (6,370)
Acquisition of ARDIS (51,440) --
Purchase of long-term restricted cash securities (115,159) --
--------- -------
Net cash used in investing activities (173,975) (6,370)
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding (to) from Parent (22,115) 20,938
Principal payments under capital leases (2,541) (2,335)
Proceeds from Bank Financing 39,000 59,000
Repayment of Bank Financing (100,000) --
Proceeds from bridge financing 10,000 --
Repayment of bridge financing (10,000) --
Proceeds from Senior Notes 335,000 --
Payments on long-term debt (4,933) (5,225)
Debt issuance costs (14,982) (612)
-------- --------
Net cash provided by financing activities 229,429 71,766
Net increase in cash and cash equivalents 8,489 410
CASH AND CASH EQUIVALENTS, beginning of period 2,106 2,182
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $10,595 $2,592
======== ======
</TABLE>
<PAGE>
PART I-FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of
Interim Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "believes,"
"intended," "will be positioned," "expects," "expected," "estimates,"
"anticipates" and "anticipated." These forward-looking statements are based on
the Company's current expectations. All statements other than statements of
historical facts included in this Quarterly Report, including those regarding
the Company's financial position, business strategy, projected costs and
financing needs, and plans and objectives of management for future operations,
are forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
Because forward-looking statements involve risks and uncertainties, the
Company's actual results could differ materially. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed under "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Form 10-Q, including, without limitation, in conjunction with
the forward-looking statements included in this Form 10-Q. These forward-looking
statements represent the Company's judgment as of the date hereof and readers
are cautioned not to place undue reliance on these forward-looking statements.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including the Form 10-K Annual
Report and Form 10-Q Quarterly Reports filed by the Company prior to and
subsequent to this Form 10-Q Quarterly Report and any Current Reports on Form
8-K and registration statements filed by the Company.
General
- -------
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the financial
condition and consolidated results of operations of American Mobile Satellite
Corporation (with its subsidiaries, "American Mobile" or the "Company"). The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
American Mobile Satellite Corporation was incorporated in May 1988 and, until
1996, was a development stage company, engaged primarily in the design,
development, construction, deployment and financing of a mobile satellite
communication system. On March 31, 1998 the Company (through its newly-formed,
wholly-owned subsidiary, AMSC Acquisition Company, Inc., ("Acquisition
Company")) acquired ARDIS Company ("ARDIS"), a wholly-owned subsidiary of
Motorola Inc. that owns and operates a two-way wireless data communications
network, for a purchase price of approximately $50 million in cash and $50
million in the Company's Common Stock and warrants (the "Purchase Price"). With
the acquisition of ARDIS, the Company becomes 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
(the "ARDIS Network") and a satellite in geosynchronous orbit (the "Satellite
Network") (together, the "Network").
In connection with the Acquisition, the Company and its subsidiaries entered
into agreements with respect to the following financings and refinancings: (1)
$335 million of Units; (2) the restructuring of its existing $200 million
Revolving Credit Facility and Term Loan Facility (collectively, the "New Bank
Financings"); and (3) $10 million commitment with respect to Motorola vendor
financing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources." Additionally, in
connection with the Acquisition and related financing, the Company transferred
all of its rights, title and interests in AMSC Subsidiary Corporation, American
Mobile Satellite Sales Corporation, and AMSC Sales Corp. Ltd. (together,
"American Mobile Subsidiaries") to Acquisition Company.
<PAGE>
On October 16, 1997, XM Satellite Radio Inc., formerly American Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings, Inc., (together with XM
Satellite Radio Inc., "XM Radio"), was awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States, following its successful $89.9 million bid at auction on April 2, 1997.
The operations and financing of XM Radio are maintained separate and apart from
the operations and financing of American Mobile (see "Liquidity and Financing").
Through its investment in XM Radio, WorldSpace has an option to increase its
ownership in XM Radio to approximately 82%, subject to FCC approval. On October
30, 1998 the Company and WorldSpace jointly filed an application for consent to
the transfer of control of XM Radio in anticipation of future exercise, subject
to FCC approval, of the WorldSpace options which, if exercised, would reduce the
Company's ownership in XM Radio to 18.3%.
Management believes the period to period comparison of the Company's financial
results are not necessarily meaningful and should not be relied upon as an
indication of future operating performance due to the Company's historically
high growth rate and the acquisition of ARDIS.
Overview
- --------
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. The
Company is, and will continue to be, highly leveraged. As of September 30, 1998,
the Company had indebtedness of approximately $483.6 million.
The Company's future operating results could be adversely affected by a number
of uncertainties and factors, including (i) the timely completion and deployment
of future products and related services, including among other things,
availability of mobile telephones, data terminals and other equipment to be used
with the Network ("Subscriber Equipment") being manufactured by third parties
over which the Company has limited control, (ii) the market's acceptance of the
Company's services, (iii) the ability and the commitment of the Company's
distribution channels to market and distribute the Company's services, (iv) the
Company's ability to modify its organization, strategy and product mix to
maximize the market opportunities in light of changes therein, (v) competition
from existing companies that provide services using existing communications
technologies and the possibility of competition from companies using new
technology in the future, (vi) capacity constraints arising from the
reconfiguration of MSAT-2, subsequent anomalies affecting MSAT-2 and MSAT-1, or
the power management recommendation affecting both MSAT-2 and MSAT-1 previously
reported, (vii) additional technical anomalies that may occur within the
Satellite Network, including those relating to MSAT-1 and MSAT-2, which could
impact, among other things, the operation of the Satellite Network and the cost,
scope or availability of in-orbit insurance, (viii) subscriber equipment
inventory responsibilities and liabilities assumed by the Company including the
ability of the Company to realize the value of its inventory in a timely manner,
(ix) the Company's ability to secure additional financing as may be necessary,
(x) the Company's ability to respond and react to changes in its business and
the industry as a result of being highly leveraged, (xi) the ability of the
Company to successfully integrate ARDIS and to achieve certain business
synergies, and (xii) the ability of the Company to manage growth effectively.
As of September 30, 1998, there were approximately 101,500 units on the Network.
Quarter and Nine Months Ended September 30, 1998 and 1997
- ---------------------------------------------------------
Service revenues, which include both the Company's voice and data services,
approximated $17.7 million and $40.7 million for the three-month and nine-month
periods ended September 30, 1998, respectively, which constitutes an $12.0
million and $26.0 million increase over the three-month and nine-month periods
ended September 30, 1997, respectively. The significant increase in service
revenues year over year is primarily attributable to the income of the ARDIS
data service. Absent the acquisition of ARDIS on March 31, 1998, service
revenues for the three-month and nine-month period ended September 30, 1998,
respectively, increased 29% and 39% year to year, from $5.6 million and $14.8
million for the three and nine-month periods ended September 30, 1997, to $7.2
million and $20.4 million for the three and nine-month periods ended September
30, 1998, respectively. Service revenue from voice services increased 34% and
47% from approximately $2.9 million and $7.2 million in the third quarter and
<PAGE>
nine-months of 1997, respectively, to approximately $3.9 million and $10.6
million in the comparable periods of 1998. The increases were primarily a result
of a 42% increase in voice customers during the nine months of 1998 as compared
to the same period in 1997. Service revenue from the Company's data services
approximated $12.8 million and $27.3 million for the three-month and nine-month
periods ended September 30, 1998, respectively, as compared to $2.0 million and
$5.5 million for the comparable periods of 1997. The dollar increases of $10.8
million and $21.8 million are primarily a result of a 32% increase in mobile
data units during the nine months of 1998 and $20.3 million from the ARDIS data
service. Service revenue from capacity resellers, who handle both voice and data
services, approximated $966,000 in the third quarter of 1998 and $2.6 million
for the nine-months ended September 30, 1998, as compared to $745,000 and $1.9
million for the same periods of 1997, an increase of $221,000 and $752,000, or
30% and 40%, respectively.
Revenue from the sale of mobile data terminals and mobile telephones decreased
13% from $15.5 million in the first nine months of 1997 to $13.5 million in the
same period of 1998 and, similarly, by 21% from $5.2 million to $4.1 million in
the third quarter of 1997 and 1998, respectively. The decrease was primarily
attributable to reduced sales of voice products, as well as certain price
reductions made in the first quarter of 1998. ARDIS equipment sales for the
third quarter and nine months ended September 30, 1998 were $491,000 and
$875,000, respectively.
Cost of service and operations for the three-months and the nine-months ended
September 30, 1998, which includes costs to support subscribers and to operate
the Network, was $16.4 million and $41.1 million compared to $7.9 million and
$25.0 million for the same periods of 1997. Cost of service and operations, as a
percentage of revenues, was 75% and 73% for the third quarters of both 1998 and
1997, respectively, and 76% and 83% for the first nine-months of 1998 and 1997,
respectively. The increase in cost of service and operations was primarily
attributable to (i) $17.7 million of ARDIS costs (ii) increased interconnect
charges associated with increased service usage offset by (iii) a reduction in
information technology costs affected by reducing the dependence on outside
consultants. Absent the acquisition of ARDIS on March 31, 1998, cost of service
and operations for the three-month and nine-month period ended September 30,
1998, respectively, was $7.8 million and $23.4 million, and represented
approximately 36% and 43% of revenue, compared to $7.9 million and $25.0 million
for the same periods in 1997.
The cost of equipment sold decreased 24% from $6.3 million for the three-months
ended September 30, 1997, to $4.8 million for the three-months ended September
30, 1998, and 25% from $18.9 million for the nine-month period ended September
30, 1997, to $14.1 million for the same period in 1998. The dollar decrease in
the cost of equipment sold was primarily attributable to (i) a corresponding
decrease in voice equipment sales and (ii) the impact of the inventory
write-down in the fourth quarter of 1997.
Sales and advertising expenses were $4.5 million and $12.3 million for the
three-months and the nine-months ended September 30, 1998, respectively,
compared to $2.9 million and $9.1 million for the same periods in 1997. Sales
and advertising expenses as a percentage of revenue were 21% and 23% in the
third quarter and nine months of 1998, respectively, as compared to 27% and 30%
during the same periods of 1997. The increase in sales and advertising expenses
was primarily attributable to ARDIS. Absent the acquisition of ARDIS, sales and
advertising expenses for the three-month and nine-month period ended September
30, 1998 were $3.0 million and $9.4 million, respectively, and represented 14%
and 17% of revenue, respectively, compared to $2.9 million and $9.1 million, or
27% and 30% of revenue, for the same periods in 1997.
General and administrative expenses for the three-months and the nine-months
ended September 30, 1998, were $4.5 million and $13.9 million, respectively,
compared to $3.1 million and $10.9 million in the same periods of 1997. As a
percentage of revenue, general and administrative expenses represented 21% and
26% in the third quarter and nine months of 1998, respectively, compared to 29%
and 36% in the same periods of 1997. The dollar increase in general and
administrative expenses for the nine months ended September 30, 1998 compared to
the same period in 1997 was primarily attributable to $3.6 million of ARDIS
costs offset by a $341,000 reduction in personnel expenses as a result of
reduced headcount. Absent the acquisition of ARDIS, general and administrative
expenses for the three-month and nine-month period ended September 30, 1998 were
$3.0 million and $10.3 million, respectively, approximating 14% and 19% of
revenue, compared to $3.1 million and $10.9 million for the same periods in
1997.
Depreciation and amortization expense was $13.9 million and $38.5 million for
the three-months and the nine-months ended September 30, 1998, respectively,
representing approximately 64% and 71% of revenue for the respective periods.
During the same periods of 1997 depreciation and amortization expense was $10.4
million and $31.5 million, approximating 96% and 104% of revenue. The increase
<PAGE>
in depreciation and amortization expense was primarily attributable to the
addition of ARDIS assets and amortization of goodwill associated with the ARDIS
acquisition. Absent the acquisition of ARDIS, depreciation and amortization
expense for the three-month and nine-month period ended September 30, 1998 was
$14.2 million and $34.7 million, respectively, approximating 65% and 64% of
revenue, compared to $10.4 million and $31.5 million for the same periods in
1997.
Interest and other income was $1.6 million and $3.3 million for the third
quarter and nine months of 1998, respectively, as compared to $212,000 and $1.3
million for the same periods in 1997. The increase was primarily a result of
interest earned on escrows required under the terms of the $335 million debt
offering at the end of the first quarter. The Company incurred $15.5 million and
$37.9 million of interest expense in the third quarter and nine months of 1998,
respectively, compared to $6.7 million and $16.3 million for the same periods in
1997, reflecting (i) the amortization of debt discount and debt offering costs
in the amount of $8.6 million in 1998, compared to $6.8 million in 1997 and (ii)
higher outstanding loan balances as compared to 1997.
Interest expense in the first nine months of 1998 was significant as a result of
borrowings under the Bank Financing, the amortization of borrowing costs
incurred in conjunction with securing the facility, and interest accrual on the
Notes issued in the ARDIS acquisition. It is anticipated that interest costs
will continue to be significant as a result of the Bank Financing and
Acquisition, (see "Liquidity and Capital Resources").
Net capital expenditures, for the first nine months of 1998 for property and
equipment were $7.4 million compared to $6.4 million for the same period in
1997.
Liquidity and Capital Resources
- -------------------------------
$335 Million Unit Offering
- --------------------------
In connection with the Acquisition, discussed above, the Company issued $335
million of Units (the "Units") consisting of 12 1/4% Senior Notes due 2008 (the
"Notes"), and Warrants to purchase shares of Common Stock of the Company. Each
Unit consists of $1,000 principal amount of Notes and one Warrant to purchase
3.75749 shares of Common Stock at an exercise price of $12.51 per share. The
Warrants were valued at $8.5 million and are reflected in the balance sheet as a
debt discount. A portion of the net proceeds of the sale of the Units were used
to finance the Acquisition. In connection with the Notes, the Company has
purchased approximately $112.3 million of pledged securities that are intended
to provide for the payment of the first six interest payments on the Notes. The
Company incurred approximately $15 million in costs associated with the
placement of the Notes and the Acquisition. Interest payments are due
semi-annually, in arrears, beginning October 1, 1998.
The Notes contain covenants that, among other things, limit the ability of
Acquisition Company and its Subsidiaries to incur additional indebtedness, pay
dividends or make other distributions, repurchase any capital stock or
subordinated indebtedness, make certain investments, create certain liens, enter
into certain transactions with affiliates, sell assets, enter into certain
mergers and consolidations, and enter into sale and leaseback transactions.
Acquisition Company consummated its offer to exchange up to $335 million
aggregate principal amount of its registered 12 1/4 percent Senior Notes (due
2008, Series B) (the "New Notes") for outstanding unregistered 12 1/4 percent
Senior Notes (due 2008, Series A) (the "Old Notes"). Holders tendered for
exchange $334.75 million aggregate principal amount of the Old Notes as of the
expiration of the offer.
New Bank Financing
- ------------------
In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries restructured the existing $200 million Bank Financing (the "Bank
Financing") to provide for two facilities: (i) the Revolving Credit Facility, a
$100 million unsecured five-year reducing revolving credit facility, and (ii)
the Term Loan Facility, a $100 million five-year, term loan facility with up to
three additional one-year extensions subject to the lenders' approval. The
Revolving Credit Facility bears an interest rate, generally, of 50 basis points
above LIBOR and is unsecured, with a negative pledge on the assets of the
Acquisition 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. Borrowings under the Revolving Credit Facility are subject to certain
conditions beginning in the fourth quarter of 1998. In the event the Company is
<PAGE>
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 revolving Credit Facility ranks pari
passu with the Notes. The Term Loan Facility is secured by the assets of the
Company, principally its stockholdings in XM Radio and the Acquisition Company,
and is effectively subordinated to the Revolving Credit Facility and the Notes.
The New Bank Financing is severally guaranteed by Hughes Electronics Corporation
("Hughes"), Singapore Telecommunications Ltd. ("Singapore Telecom") and Baron
Capital Partners, L.P. (collectively, the "Bank Facility Guarantors"). In
exchange for the additional risks undertaken by the Bank Facility Guarantors in
connection with the New Bank Financing, the Company agreed to compensate the
Bank Facility Guarantors, principally in the form of 1 million additional
warrants and re-pricing of 5.5 million warrants previously issued (together, the
"Guarantee Warrants"). The Guarantee Warrants have an exercise price of $12.51
and have been valued at approximately $17.7 million. As of October 31, 1998, the
Company had outstanding borrowings of $100 million of the Term Loan Facility at
5.8125%, and $32.0 million under the Revolving Credit Facility at rates ranging
from 5.75% to 6.1875%.
In connection with the New Bank Financing, the Company entered into an interest
rate swap agreement, with an implied annual rate of 6.51%. The swap agreement
reduces the impact of interest rate increases on the Term Loan Facility, and
fixes The Company paid a fee of approximately $17.9 million for the swap
agreement. Under the swap agreement, the Company will receive an amount equal to
LIBOR plus 50 basis points, paid on a quarterly basis, on a notional amount of
$100 million until the termination date of March 31, 2001. The Company has
reflected as an asset the unamortized fee paid for the swap agreement in the
accompanying financial statements. The Company is exposed to a credit loss in
the event of non performance by the counter party under the swap agreement. The
Company does not believe there is a significant risk of non performance as the
counter party to the swap agreement is a major financial institution.
Motorola Vendor Financing
- -------------------------
Motorola has entered into an agreement with a subsidiary of Acquisition Company,
the ARDIS Company, to provide up to $10 million of vendor financing (the "Vendor
Financing Commitment"), which will be available to finance up to 75% of the
purchase price of additional network base stations. Loans under this facility
will bear interest at a rate equal to LIBOR plus 7.0% and will be guaranteed by
the Company and each subsidiary of the Acquisition Company. The terms of the
facility require that amounts borrowed be secured by the equipment purchased
therewith. As of October 31, 1998, $591,707 was outstanding under this facility.
Financing Summary
- -----------------
The Company believes the proceeds from the issuance of the Notes, net of cash
used for the Acquisition, together with the borrowings under the New Bank
Financing and the Vendor Financing Commitment, will be sufficient to fund
operating losses, capital expenditures, working capital, and scheduled principal
and interest payments on debt through 1998 and beyond; however, there can be no
assurance that the Company's current projections regarding the timing of its
ability to achieve positive operating cash flow will be accurate, and that the
Company will not need additional financing in the future.
XM Radio
- --------
As previously mentioned (see "Organization and Business"), XM Radio was a
winning bidder for, and on October 16, 1997, was awarded an FCC license to
provide DARS throughout the United States. XM Radio has and will continue to
receive funding for this business from an independent source in exchange for
debt and an equity interest in XM Radio. Accordingly, it is not expected that
the development of this business will have a material impact on the Company's
financial position, results of operations, or cash flows. The Company's equity
interest in XM Radio may, however, even on a fully diluted basis, become a
material asset of the Company.
Deferred Trade Payables
- -----------------------
The Company has arranged the financing of certain trade payables, and as of
September 30, 1998, $6.4 million of deferred trade payables were outstanding at
rates ranging from 6.22% to 12% and are generally payable by the end of 1999.
<PAGE>
Purchase and Lease of Satellite
- -------------------------------
As previously disclosed, the Company has entered into certain agreements to
acquire a one-half ownership interest in TMI Communications and Company, Limited
Partnership's ("TMI") satellite, MSAT-1, at a cost of $60 million payable over a
five-year period, as well as entered into five-year lease of the Company's
satellite, MSAT-2, with African Continental Telecommunications Ltd. that
provides for aggregate lease payments to the Company of $182.5 million. Closing
under the agreements is subject to a number of conditions, including: a
successful financing by ACTEL of at least $120 million and completion of certain
satellite testing, inversion and relocation activities with respect to AMSC-1.
It is anticipated that if the conditions are met, closing under both the
purchase and lease agreements would occur simultaneously in the first half of
1999; however, there can be no assurances that these conditions will be met and
the transactions consummated.
Other
- -----
At October 31, 1998, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory in
the maximum amount of $11.1 million over the next year. Additionally, the
Company had remaining contractual commitments in the amount of $1.3 million for
the development of certain next generation data terminal inventory. Contingent
upon the successful research and development efforts, the Company would have
maximum additional contractual commitments for mobile communications data
terminal inventory in the amount of $27.0 million over a three-year period. The
Company has the right to terminate the research and development and inventory
commitment by paying cancellation fees of between $1 million and $2.5 million,
depending on when the termination option is exercised during the term of the
contract. The Company also has the right to terminate the inventory commitment
by incurring a cancellation penalty representing a percentage of the unfulfilled
portion of the contract. The Company has also contracted for the purchase of
$26.2 million next generation wireless data terminals to be delivered beginning
early 1999. The contract contains a 50% cancellation penalty. Additionally, the
Company has remaining contractual commitments for the purchase of $6.4 million
of base stations necessary to complete the required site build-outs.
On July 2, 1998, the Company filed an application with the Federal
Communications Commission ("FCC") to construct and launch a follow-on
geostationary mobile satellite for its business. The filing of the application
does not commit the Company to expend any resources toward this project;
however, should the Company decide to proceed with the construction of the
follow-on satellite, the Company would be required to raise substantial
additional capital to fund this project.
On October 29, 1998, the Company announced that it reached an agreement with
Stratos Global Corporation to consolidate American Mobile's marine distribution
channel, resulting in the transfer of inventory and contracts in exchange for
$8.5 million. Apart from the initial cash inflow, it is not expected that this
transaction will have a material impact on the Company's financial position,
results of operations, or cash flows.
Cash used in operating activities for the first nine months of 1998 was $41.3
million as compared to $43.1 million for the same period of 1997. The decrease
in cash used in operating activities was primarily attributable to reduced
inventory spending. Cash used by investing activities was $202.1 million for the
first nine months of 1998 compared to $7.6 million during the first six months
of 1997. The increase was primarily attributable to the acquisition of ARDIS and
the funding of certain escrows required in connection with the Acquisition and
issuance of Notes. Cash provided by financing activities was $252.0 million
during the first nine months of 1998 as compared to $51.1 million during the
first nine months of 1997, reflecting (i) the proceeds from the Notes, offset by
(ii) the repayment of a portion of the Bank Financing and (iii) payment of
financing fees associated with the acquisition of the Notes. As of September 30,
1998, the Company had $10.6 million of cash and cash equivalents and working
capital of $59.6 million.
Year 2000
- ---------
The Company has developed and is implementing a Year 2000 Compliance Program
("Year 2000 Program") to address Year 2000 issues. Under the Year 2000 Program,
the Company has prioritized the systems that are undergoing an assessment of
Year 2000 vulnerability and, if necessary, remediation of the problem. The
Company's core business systems are those systems--both hardware and
software--that could have a material impact on the Company's financial condition
and results of operations. Vendors that provide critical products and services
to American Mobile are also included in this assessment of core business
systems. Although the core business systems are the top priority in the Year
2000 Program, the Company is assessing all software and hardware for Year 2000
Compliance.
The Company is tracking its progress on the Year 2000 Program with reference to
the following phases:
<PAGE>
Awareness Phase: educating employees about the problem and how the
----------------
Year 2000 Plan will be implemented;
Inventory Phase identifying all software programs and hardware systems
---------------
and business relationships with third parties;
Assessment Phase contacting the vendors of commercial off the shelf
-----------------
software and hardware regarding Year 2000 compliance; contacting
business partners and service providers regarding their company's Year
2000 compliance status; analyzing software source code if available to
the Company; prioritizing non-compliant software and systems based on
criticality to the business;
Renovation Phase obtaining and installing software upgrades or patches
----------------
for software that is not Year 2000 compliant; replacing software or
hardware that is not Year 2000 compliant;
Validation/Testing Phase conducting testing of upgraded/repaired
------------------
software and hardware systems;
Implementation/Rollout Phase installing upgraded/repaired software and
----------------------
hardware systems; conducting user training; updating documentation;
The Inventory of all systems, including software and hardware, that are in use
by the Company was completed in August 1998. Although many systems that are not
Year 2000 Compliant are currently in the Renovation Phase, overall, the Company
is nearing the completion of the Assessment Phase and anticipates that it will
be complete by the end of 1998. Management believes that when completed, the
Assessment Phase will enable the completion of planning currently underway for
the Renovation and Validation/Testing Phases and provide sufficient timing and
planning for the Implementation/Rollout Phase.
The Company anticipates that it will complete the Implementation/Rollout Phase
for all core business systems and will be Year 2000 Compliant by fourth quarter
1999, with compliance with respect to its voice operations and deployment of
certain of its renovated data terminals to customers to present the most
significant schedule completion risk.
While there can be no assurances that the Company will be successful in its
efforts to make all core business systems Year 2000 Compliant by December 31,
1999, the Company believes it will be able to successfully complete the required
remediation of its core business systems in a timely manner.
The total cost of the Company's Year 2000 Compliance Program is estimated to be
$2.4 million for 1998 of which approximately $1.2 million has been incurred
through October 1998. Expenditures for the Year 2000 Compliance Program in 1999
are estimated to be up to $13 million. Some modification costs--including the
purchase of software upgrades and consulting services--are expensed as incurred
while other modification costs--such as hardware purchases--are being treated as
capital expenditures.
The estimated cost and date on which the Company believes it will be Year 2000
compliant are based on management's best estimates, yet there is no guarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated.
Some of the Company's critical business systems are dependent on a significant
number of software programs and on services provided by third parties that are
not within the Company's control. Failure to solve Year 2000 errors within its
critical business systems could result in possible service outages,
miscalculations or disruption of operations that could have a material impact on
the Company's business. While management believes that the Company will be able
to achieve Year 2000 Compliance in a timely manner the schedule for completing
the implementation of several core business systems extends to the third or
fourth quarter 1999 and there is a possibility that compliance may not be
accomplished in a timely manner or within budget. Contingency planning, as
discussed below, is currently underway to minimize the risk of business
interruptions caused by Year 2000 problems within the core business systems.
<PAGE>
Certain contingency plans already existing within the company to minimize
service interruptions are expected to mitigate--although not
eliminate--interruptions caused by problems resulting from Year 2000 issues. For
example, the Company has backup power supplies and generators in place for
certain portions of its networks in the event of electrical power outages. In
addition, for some services the Company has contracted with more than one
service provider. These systems already in place are being incorporated into the
Company's Year 2000 contingency planning. To the extent that it is commercially
reasonable to do so, the Company will include other redundant or alternative
sources of services in its Year 2000 contingency planning efforts. The Company
anticipates having its additional Year 2000 contingency plans in place by June
1999.
Other Matters
- -------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted both of these standards during the
nine month period ended September 30, 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income" to be reported in the financial statements and/or notes
thereto. Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "total comprehensive income" for the
three months and nine months ended September 30, 1997 and 1998.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is not required for interim financial
reporting purposes during 1998. The Company is in the process of assessing the
additional disclosures, if any, required by SFAS No. 131. However, such adoption
will not impact the Company's results of operations or financial position, since
it relates only to disclosures.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
3.1 - Restated Certificate of Incorporation of AMSC (as restated
effective May 1, 1996) (Incorporated by reference to Exhibit 3.1
to the Company's Annual Report on Form 10-K for the period ending
December 31,1997 (File No. 0-23044))
3.2 - Amended and Restated Bylaws of AMSC (as amended and restated
effective May 20, 1998) (Incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1997 (File No. 0-23044))
10.62a - Letter Agreement dated October 8, 1998 regarding the Satellite
Lease Agreement for the AMSC-1 Satellite by and among AMSC
Subsidiary Corporation, American Mobile Satellite Corporation and
African Continental Telecommunications Ltd. dated December 2,
1997 and the Satellite Purchase Agreement dated December 2, 1997
among TMI Communications and Company, Limited Partnership and
AMSC Subsidiary Corporation and American Mobile Satellite
Corporation (filed herewith).
10.63a - Amendment No. 1 to Satellite Purchase Agreement dated as of
October 9, 1998 between TMI Communications and Company, Limited
Partnership and AMSC Subsidiary Corporation and American Mobile
Satellite Corporation (filed herewith).
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 - Financial Data Schedule (filed herewith)
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MOBILE SATELLITE CORPORATION
(Registrant)
Date: November 13, 1998 By: /s/ STEPHEN D. PECK
-------------------------------------
Stephen D. Peck
Vice President and Chief Financial Officer
principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Number Description
3.1 - Restated Certificate of Incorporation of AMSC (as restated
effective May 1, 1996) (Incorporated by reference to Exhibit 3.1
to the Company's Annual Report on Form 10-K for the period ending
December 31,1997 (File No. 0-23044))
3.2 - Amended and Restated Bylaws of AMSC (as amended and restated
effective May 20, 1998) (Incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1997 (File No. 0-23044))
10.62a - Letter Agreement dated October 8, 1998 regarding the Satellite
Lease Agreement for the AMSC-1 Satellite by and among AMSC
Subsidiary Corporation, American Mobile Satellite Corporation and
African Continental Telecommunications Ltd. dated December 2,
1997 and the Satellite Purchase Agreement dated December 2, 1997
among TMI Communications and Company, Limited Partnership and
AMSC Subsidiary Corporation and American Mobile Satellite
Corporation (filed herewith).
10.63a - Amendment No. 1 to Satellite Purchase Agreement dated as of
October 9, 1998 between TMI Communications and Company, Limited
Partnership and AMSC Subsidiary Corporation and American Mobile
Satellite Corporation (filed herewith).
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 - Financial Data Schedule (filed herewith)
EXHIBIT 10.62a
October 8, 1998
Mr. Ernest G. DeNigris
African Continental Telecommunications Ltd.
57/63 Line Wall Road
Gibraltar
Copy By Telecopier: 973/543-2559
Dear Mr. DeNigris:
Reference is made to (i) the Satellite Lease Agreement for the AMSC-1 Satellite
by and among AMSC Subsidiary Corporation ("American Mobile"), American Mobile
Satellite Corporation and African Continental Telecommunications Ltd. ("ACTEL")
dated December 2, 1997 (the "ACTEL Lease Agreement") and (ii) to the Satellite
Purchase Agreement dated December 2, 1997 among TMI Communications and Company,
Limited Partnership and AMSC Subsidiary Corporation and American Mobile
Satellite Corporation (the "TMI Purchase Agreement"). Capitalized terms used
herein without definition shall have the respective meanings set forth in the
ACTEL Lease Agreement.
This letter agreement will confirm our understanding that, contingent upon
receipt by American Mobile of $2,500,000 from TMI, American Mobile will refund
to ACTEL $2,500,000 of the $7,500,000 Initial Payment received from ACTEL. ACTEL
and American Mobile agree that: (1) the ACTEL Lease Agreement will in all cases
be interpreted to account for this repayment; (2) in no event shall American
Mobile be liable to ACTEL for repayment of any further portion of the Initial
Payment, regardless of cause and whether the ACTEL Lease Agreement is terminated
by American Mobile or ACTEL; and (3) no public statements or filings by ACTEL
will assert any liability or cause for repayment.
In addition, American Mobile and ACTEL agree to continue to negotiate in good
faith towards the goal of achieving the following by November 30, 1998: (a)
ACTEL's receipt of a commitment by a strategic investor, reasonably satisfactory
to American Mobile, on terms sufficient to provide a reasonable basis to support
commencement of the Initial Lease Term prior to March 1, 1998; (b) agreement
between American Mobile and ACTEL on any changes to the ACTEL Lease Agreement to
obtain the commitment and commencement of the Initial Lease Term as described in
(a) above; and (c) agreement between American Mobile and TMI on any changes to
the TMI Purchase Agreement which would, in American Mobile's good faith
judgment, be required to implement the changes sought by ACTEL under (b) above.
American Mobile and ACTEL recognize that American Mobile's agreement to continue
negotiations is subject to the receipt by American Mobile of the agreement of
TMI to act pursuant to or to amend the TMI Purchase Agreement in a manner that
would reasonably support such negotiations.
<PAGE>
Mr. Ernest G. DeNigris
October 8, 1998
Page Two
All other terms of the ACTEL Lease Agreement shall remain in full force and
effect and unamended (except as set out above), no waivers of any provisions or
existing defaults under the ACTEL Lease Agreement shall be deemed to have been
made, and time shall remain of the essence.
Very truly yours,
/s/Gary M. Parsons
Gary M. Parsons
Agreed and Accepted this 9th day of October, 1998
AFRICAN CONTINENTAL TELECOMMUNICATIONS LTD.
/s/ Ernest G. DeNigris
- ---------------
By: Ernest G. DeNigris
Its: President
<PAGE>
EXHIBIT 10.63a
SATELLITE PURCHASE AGREEMENT AMENDMENT NO. 1 dated as of October 9, 1998 between
- --------------------------------------------
TMI COMMUNICATIONS AND COMPANY, LIMITED PARTNERSHIP ("TMI"), a limited
- ---------------------------------------------------------
partnership organized under the laws of the Province of Quebec, with its
principal executive office in the City of Gloucester, Province of Ontario, and
AMSC SUBSIDIARY CORPORATION ("AMSC"), a corporation dually incorporated under
- ----------------------------
the laws of the States of Delaware and Virginia, respectively, with its
principal executive office in Reston, Virginia (and a wholly-owned subsidiary of
American Mobile Satellite Corporation), and AMERICAN MOBILE SATELLITE
----------------------------
CORPORATION ("AMSC Parent Corp."), a Delaware corporation.
- -----------
WHEREAS:
- --------
A. Pursuant to a Satellite Purchase Agreement dated as of December 2,
--
1997 and made between AMSC, TMI and AMSC Parent Corp. (the "Satellite Purchase
Agreement"), AMSC agreed to purchase a 50% undivided interest in the Shared
Satellite owned by TMI;
B. AMSC, TMI and AMSC Parent Corp. wish to amend the terms of the
--
Satellite Purchase Agreement;
NOW THEREFORE in consideration of the mutual covenants and agreements herein
- -------------
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto covenant and agree as
follows:
ARTICLE 1
---------
DEFINITIONS
-----------
1.1 Definitions. In this Satellite Purchase Agreement Amendment No. 1, the
- -----------------
following words and expressions shall have the meanings ascribed to them below:
"Satellite Purchase Agreement Amendment No. 1" means this agreement to
amend the Satellite Purchase Agreement and all schedules and instruments in
amendment or confirmation of it.
1.2 Incorporation of Definitions. In this Satellite Purchase Agreement Amendment
- ---------------------------------
No. 1, including the recitals hereto, all capitalized terms used herein but not
otherwise defined herein shall have the meaning ascribed thereto in the
Satellite Purchase Agreement.
ARTICLE 2
---------
EXTENSION AND AMENDMENTS
------------------------
2.1 Amendment to Section 2.2(a). Section 2.2(a) of the Satellite Purchase
- -----------------------------------
Agreement is hereby amended by deleting it in its entirety and replacing it with
the following:
"(a) the amount of U.S.$2,500,000 (the "Purchase Price
----------------
Prepayment"). Each of TMI and AMSC acknowledges and agrees that: (1) on
----------
or about December 2, 1997 AMSC paid $5,000,000 to TMI as the original
amount of the Purchase Price Prepayment; (2) the parties have
subsequently agreed to reduce the amount of the Purchase Price
Prepayment to $2,500,000; and (3) accordingly, TMI has returned the
amount of $2,500,000 from the original Purchase Price Prepayment to
AMSC, and retained the remaining amount of $2,500,000 as the Purchase
Price Prepayment;".
2.2 Amendment to Section 2.3(b). Section 2.3(b) of the Satellite Purchase
- -----------------------------------
Agreement is hereby amended by deleting it in its entirety and replacing it with
the following:
"(b) notwithstanding any other provision of this Agreement to the
------------------------------------------------------------------
contrary, the Purchase Price Prepayment (together with all interest
-----------------------------------------------------------------------
earned thereon, and on the original amount of the Purchase Price
-----------------------------------------------------------------------
Prepayment) is irrevocable and non-refundable, and TMI is
-----------------------------------------------------------------------
unconditionally entitled to retain it.".
----------------------------------------
<PAGE>
2.3 Amendment to Section 7.2(j). Section 7.2(j) of the Satellite Purchase
- -----------------------------------
Agreement is hereby amended by deleting it in its entirety and replacing it with
the following:
"(j) at any time on and after 4:00 p.m.(Montreal time) on March 1,
------------------------------------------------------------------
1999, by either party if the transactions contemplated hereunder to
-----------------------------------------------------------------------
occur on or before the Traffic Transfer Date have not been consummated
-----------------------------------------------------------------------
for any reason; or".
--------------------
2.4 Amendment to Section 7.2(k). Section 7.2(k) of the Satellite Purchase
- -----------------------------------
Agreement is hereby amended by deleting it in its entirety and replacing it with
the following:
"(k)at any time prior to the Traffic Transfer Date, by AMSC if the
------------------------------------------------------------------
AMSC Satellite Contract is terminated for any reason other than an
-----------------------------------------------------------------------
event specified in Section 7.2; or".
------------------------------------
2.5 Amendment to Section 7.2. Section 7.2 of the Satellite Purchase Agreement is
- -----------------------------
hereby amended by adding the following new Section 7.2(l) to it:
"(l)at any time on or after 4:00 p.m. (Montreal time) on November
------------------------------------------------------------------
30, 1998, by either party, if the party so terminating, acting
-----------------------------------------------------------------------
reasonably, has not been provided with satisfactory evidence that the
-----------------------------------------------------------------------
AMSC Satellite Lessee has received an equity financing commitment from
-----------------------------------------------------------------------
a strategic investor on terms sufficient to provide a reasonable basis
-----------------------------------------------------------------------
to support the occurrence of the Traffic Transfer Date prior to March
-----------------------------------------------------------------------
1, 1999.".
----------
2.6 Amendment to Section 7.5. Section 7.5 of the Satellite Purchase Agreement is
- -----------------------------
hereby amended by deleting it in its entirety and replacing it with the
following:
"Section 7.5. Liquidated Damages. (1) Upon any termination of
---------------------------------
this Agreement pursuant to Section 7.2(j) due to the wilful misconduct
or bad faith of TMI in failing to satisfy or deliver, or arranging for
the satisfaction or delivery of, any of the conditions set forth in
Section 2.6 (other than the failure to obtain consents to be obtained
by AMSC under Section 2.6(a)), TMI shall indemnify AMSC, subject to the
exclusion of liability in Section 6.3, from and against all losses,
damages and costs it may have suffered or incurred, directly or
indirectly, as a result of the termination of this Agreement under
Section 7.2(j) due to the wilful misconduct or bad faith of TMI in
failing to satisfy or deliver, or arranging for the satisfaction or
delivery of, any of the conditions set forth in Section 2.6 (other than
the failure to obtain consents to be obtained by AMSC under Section
2.6(a)); provided, however that the maximum amount for which TMI shall
be liable under this Section 7.5(1) or otherwise under this Agreement
with respect to any such termination is U.S.2,500,000.
(2) The provisions of Sections 4.4(2), 5.2(1), 5.4, 6.3, 7.4,
7.5, 7.7, 8.7 and 8.18 shall survive any termination pursuant to
Section 7.2.".
ARTICLE 3
---------
MISCELLANEOUS
-------------
3.1 Waiver. The amendments to the Satellite Purchase Agreement set forth herein
- -----------
are limited precisely as written and shall not operate as a waiver of or modify
or amend any other term or condition of the Satellite Purchase Agreement or any
of the instruments or agreements referred to therein or prejudice or operate as
a waiver of any rights or remedies which any of the parties may now or in the
future have under or in connection with the Satellite Purchase Agreement as
amended hereby or any of the instruments or agreements referred to therein.
3.2 Applicable Law. This Satellite Purchase Agreement Amendment No.1 shall
- ------------------------
be construed and interpreted in accordance with and governed by the laws of the
Province of Ontario, without giving effect to the principles of conflicts of
laws thereof, and the federal laws of Canada applicable therein.
3.3 Execution in Counterparts. This Satellite Purchase Agreement Amendment
- -----------------------------------
No. 1 may be executed in one or more counterparts, each of which shall be deemed
an original and all of which, taken together, shall constitute one and the same
instrument.
<PAGE>
3.4 Execution by Facsimile. This Satellite Purchase Agreement Amendment No.
- --------------------------------
1 may be executed by any party by facsimile and if so executed shall be legal,
valid and binding on any party executing in such manner.
IN WITNESS WHEREOF, the parties hereto have caused this Satellite Purchase
- --------------------------------------------------------------------------------
Agreement Amendment No. 1 to be duly executed by their respective authorized
- --------------------------------------------------------------------------------
officers as of the day and year first above written.
- ----------------------------------------------------
TMI COMMUNICATIONS AND COMPANY,
-------------------------------
LIMITED PARTNERSHIP
-------------------
By: TMI COMMUNICATIONS INC.,
its General Partner
By: /s/Larry J. Boisvert
--------------------
Name: Larry J. Boisvert
Title: President and Chief Operating Officer
By: /s/Ted Ignacy
-------------
Name: Ted Ignacy
Title: Chief Financial Officer
AMSC SUBSIDIARY CORPORATION
---------------------------
By: /s/Gary M. Parsons
------------------
Name: Gary M. Parsons
Title: Chief Executive Officer and President
AMERICAN MOBILE SATELLITE
-------------------------
CORPORATION
-----------
By:/s/Gary M. Parsons
------------------
Name: Gary M. Parsons
Title: Chief Executive Officer and President
<PAGE>
Exhibit 11.1
AMERICAN MOBILE SATELLITE CORPORATION
--------------------------------------
COMPUTATIONS OF EARNING PER COMMON SHARE
---------------------------------------
(in thousands, except per share amounts)
---------------------------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
BASIC EARNINGS PER SHARE CALCULATION
<S> <C> <C> <C> <C>
Net Loss ($36,298) ($26,264) ($100,503) ($80,187)
========= ========= ========== =========
Net Loss per common share ($1.14) ($1.04) ($3.39) ($3.19)
======= ======= ======= =======
Weighted-average common shares outstanding 31,773 25,145 29,604 25,125
======= ======= ======= =======
DILUTED EARNINGS PER SHARE CALCULATION
Net Loss ($36,298) ($26,264) ($100,503) ($80,187)
========= ========= ========== =========
Net Loss per common share ($1.14) ($1.04) ($3.39) ($3.18)
======= ======= ======= =======
Weighted-average common shares (1) 31,836 25,213 29,670 25,189
======= ======= ======= ======
(1) Calculated as follows:
Historical weighted average number of
shares outstanding 31,773 25,145 29,604 25,125
Assumed exercise of stock options -- 6 2 2
Assumed exercise of stock purchase warrants 63 62 64 62
---------- ---------- ---------- ----------
31,836 25,213 29,670 25,189
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited Consolidated Statement of Loss, Consolidated Balance Sheet,
and Consolidated Statement of Cash Flows, in each case for the Nine Months Ended
September 30, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 10,595
<SECURITIES> 135,366
<RECEIVABLES> 13,094
<ALLOWANCES> 0
<INVENTORY> 35,838
<CURRENT-ASSETS> 125,796
<PP&E> 256,016
<DEPRECIATION> 0
<TOTAL-ASSETS> 551,960
<CURRENT-LIABILITIES> 66,181
<BONDS> 483,580
0
0
<COMMON> 318
<OTHER-SE> 10,256
<TOTAL-LIABILITY-AND-EQUITY> 551,960
<SALES> 4,141
<TOTAL-REVENUES> 21,802
<CGS> 4,826
<TOTAL-COSTS> 30,314
<OTHER-EXPENSES> 13,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,504
<INCOME-PRETAX> (36,298)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,298)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,298)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> 0
</TABLE>
