<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 March 31, 1999
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 March 31, 1999: 32,303,098
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
REVENUES 1999 1998
---- ------
<S> <C> <C>
Services $16,164 $6,418
Sales of equipment 4,066 3,604
------- -------
Total Revenues 20,230 10,022
COSTS AND EXPENSES
Cost of service and operations 17,870 7,728
Cost of equipment sold 4,528 3,881
Sales and advertising 4,749 3,022
General and administrative 4,769 3,631
Depreciation and amortization 13,772 10,163
------- -------
Operating Loss (25,458) (18,403)
INTEREST EXPENSE (15,930) (6,638)
INTEREST AND OTHER INCOME 1,739 141
EQUITY IN LOSS OF XM RADIO -- (342)
-------- -------
NET LOSS ($39,649) ($25,242)
========= =========
BASIC AND DILUTED LOSS PER SHARE OF COMMON
STOCK ($1.23) ($1.00)
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING DURING THE PERIOD (000'S) 32,225 25,241
</TABLE>
See notes to consolidated condensed financial statements.
-1-
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands) March 31, December 31,
ASSETS 1999 1998
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $8,131 $2,285
Inventory 17,440 18,593
Prepaid in-orbit insurance 1,932 3,381
Accounts receivable - net 16,752 15,325
Restricted short-term investments 41,038 41,038
Note receivable from XM Radio 21,687 --
Other current assets 15,055 13,231
------ ------
Total current assets 122,035 93,853
PROPERTY & EQUIPMENT - net 239,017 246,553
GOODWILL & INTANGIBLES - net 52,772 53,235
RESTRICTED INVESTMENTS 68,623 67,199
DEFERRED CHARGES & OTHER ASSETS - net 26,151 28,954
------ ------
Total assets $508,598 $489,794
======== ========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
(In thousands) March 31, December 31,
LIABILITIES & STOCKHOLDERS' DEFICIT 1999 1998
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable & accrued expenses $41,839 $33,797
Obligations under capital leases due within one year 4,816 5,971
Vendor financing due to related party within one year 1,569 543
year
Deferred trade payables due within one year 2,584 4,498
Other current liabilities -- 162
--------- ---------
Total current liabilities 50,808 44,971
LONG-TERM LIABILITIES
Obligations under New Bank Financing 159,000 132,000
Obligations under Notes, net of discount 327,359 327,147
Capital lease obligations 5,657 5,824
Net assets acquired in excess of purchase price 1,855 2,028
Vendor financing due to related party 3,031 1,069
Note payable to related party 21,769 --
Deferred trade payables 442 620
Other long-term liabilities 535 540
--------- ---------
Total long-term liabilities 519,648 469,228
--------- ---------
Total liabilities 570,456 514,199
STOCKHOLDERS' DEFICIT
Preferred Stock -- --
Common Stock 324 322
Additional paid-in capital 509,074 508,084
Deferred compensation (2,305) (1,528)
Common Stock purchase warrants 60,588 59,108
Unamortized guarantee warrants (33,177) (33,678)
Cumulative loss (596,362) (556,713)
--------- ---------
Total stockholders' deficit (61,858) (24,405)
--------- ---------
Total liabilities and stockholders' deficit $508,598 $489,794
========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<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>
Three Months Ended
March 31
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($39,649) ($25,242)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization of guarantee warrants, debt discount
and issuance costs 4,552 2,524
Depreciation and amortization 13,772 10,163
Equity in loss in XM Radio -- 342
Changes in assets and liabilities:
Inventory 1,153 1,986
Prepaid in-orbit insurance 1,449 1,675
Trade accounts receivable (1,427) 3,744
Other current assets (1,369) (661)
Accounts payable and accrued expenses 8,568 (12,197)
Deferred trade payables (2,092) 6,436
Deferred items - net (931) 293
---------- ---------
Net cash used in operating activities (15,974) (10,937)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (2,541) (1,126)
Purchase of XM Radio note receivable (21,419) --
Acquisition of ARDIS -- (51,382)
Purchase of long-term, restricted investments (1,424) (140,892)
---------- ---------
Net cash used in investing activities (25,384) (193,400)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 162 103
Principal payments under capital leases (1,322) (135)
Principal payments under Vendor Financing (90) --
Proceeds from New Bank Financing 27,000 2,000
Proceeds from note payable to related party 21,500 --
Repayment of Bank Financing -- (100,000)
Proceeds from bridge financing -- 10,000
Repayment of bridge financing -- (10,000)
Proceeds from Notes and Stock Purchase Warrants -- 335,000
Debt issuance costs (46) (13,458)
---------- ---------
Net cash provided by financing activities 47,204 223,510
Net increase in cash and cash equivalents 5,846 19,173
CASH AND CASH EQUIVALENTS, beginning of period 2,285 2,106
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $8,131 $21,279
========== =========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. Organization and Business
American Mobile Satellite Corporation (with its subsidiaries, "American Mobile"
or the "Company") is a nationwide provider of wireless communications services,
including data, dispatch, and voice services, primarily to business customers in
the United States.
Additionally, the Company has an investment in XM Satellite Radio Inc., which,
through its subsidiary XM Satellite Radio Holdings Inc. (together with XM
Satellite Radio Inc., "XM Radio"), is one of two entities awarded a license by
the FCC to provide satellite-based Digital Audio Radio Service ("DARS")
throughout the United States. XM Radio is currently engaged in efforts to
construct its satellite system. The Company's investment in XM Radio is
currently not material to the Company's financial position, results of
operations or cash flows. The Company is not required to provide any additional
funding.
American Mobile is devoting its efforts to expanding its business. This effort
involves substantial risk. 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.
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
1998 Annual Report on Form 10-K
The consolidated balance sheet as of March 31, 1999, and the consolidated
statements of operations and cash flows for the three months ended March 31,
1999 and 1998, 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, results of operations and
cash flows at March 31, 1999, and for all periods presented have been made. The
balance sheet at December 31, 1998 has been taken from the audited financial
statements.
-5-
<PAGE>
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. As of March 31, 1999, there were approximately 84,000 options and
warrants that would have been included in this calculation had the effect not
been antidilutive.
Comprehensive Income
SFAS No. 130, "Reporting of Comprehensive Income" 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
"comprehensive income" for the three months ended March 31, 1999 and 1998.
Segment Disclosures
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," the Company has only one operating segment which is
engaged in the provision of nationwide wireless communication. The Company
provides services within North America and parts of Central America and the
Caribbean, and all revenues are derived from customers within the United States.
The following summarizes service revenue by major product lines:
<TABLE>
<CAPTION>
Revenue for the
Three Months Ended
March 31,
<S> <C> <C>
(in millions) 1999 1998
---- ----
Voice Service $3.0 $3.2
Data Service 12.0 2.3
Capacity Resellers and Other 1.2 0.9
</TABLE>
-6-
<PAGE>
Recently Adopted Accounting Pronouncements
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the recognition of all
derivatives as either assets or liabilities measured at fair value. This
statement is effective for year ending December 31, 2000. The Company does not
believe that the adoption of this statement will have a material impact on its
financial position, results of operations and cash flows.
In March 1999, FASB issued an Exposure Draft on an Interpretation of Accounting
Principles Board Opinion No. 25 Accounting for Certain Transactions involving
Stock Compensation. This proposed Interpretation would make it more likely that
expense would be required to be recognized in the case of, among other things,
stock (including stock options) issued to non-employee members of an entity's
board of directors. The Company has assessed the impact of this proposed
Interpretation and does not believe that adoption of this Interpretation would
have a material impact on its financial position, results of operations and cash
flows.
Other
The Company paid approximately $2.1 million and $1.5 million in the three-month
periods ended March 31, 1999 and 1998, respectively, to related parties for
capital assets, service-related obligations, and payments under pre-existing
financing agreements. There were no payments from related parties in the
three-month period ended March 31, 1999, as compared to $1.1 million for
communication services and equipment purchases in the three-month period ended
March 31, 1998. Total indebtedness to related parties as of March 31, 1999
approximated $27.5 million, with amounts due from related parties as of March
31, 1999 totaling $21.7 million.
3. Liquidity and Financing
Liquidity and Financing Requirements
Adequate liquidity and capital are critical for the Company to continue as a
going concern and to fund subscriber acquisition programs necessary to achieve
positive cash flow and profitable operations. The Company expects to continue to
make significant capital outlays for the foreseeable future to fund interest
expense, capital expenditures and working capital prior to the time that it
begins to generate positive cash flow from operations and for the foreseeable
future thereafter.
On March 31, 1998, AMSC Acquisition Company, Inc. ("Acquisition Company"), a
wholly-owned subsidiary of American Mobile Satellite Corporation, issued $335
million of units consisting of 12 1/4% Senior Notes due 2008 (the "Senior
Notes"), and one warrant to purchase 3.75749 shares of Common Stock of the
Company for each $1,000 principal amount of Senior Notes (the "Warrants"), and
also restructured its existing bank financing (the "New Bank Financing"). The
New Bank Financing of $200 million consists of a $100 million unsecured
five-year reducing Revolving Credit Facility maturing March 31, 2003 and a $100
million five-year Term Loan Facility with up to three additional one-year
extensions subject to lender approval. Additionally, on March 29, 1999, the Bank
Facility Guarantors (as defined in Item 2 under the caption "Liquidity and
Capital Resources") agreed to eliminate certain covenants relating to the
Company's future earnings before interest, depreciation, amortization and taxes
("EBITDA") and service revenue. In exchange for this elimination of covenants,
the Company agreed to reprice their Guarantee Warrants (as defined in Item 2
under the caption "Liquidity and Capital Resources"), effective April 1, 1999,
from $12.51 to $7.50. The value of the repricing was approximately $1.5 million.
As of April 30, 1999, the Company had $41.0 million available for borrowing
under the Revolving Credit Facility. Additionally, Motorola has agreed to
provide the Company with up to $10 million of vendor financing (the "Vendor
Financing Commitment"), which is available to finance up to 75% of the purchase
price of additional base stations needed to meet ARDIS' buildout requirements
under certain customer contracts. As of March 31, 1999, $4.6 million was
outstanding under this facility.
-7-
<PAGE>
The Company's current operating assumptions and projections, which reflect
management's best estimate of subscriber and revenue growth and operating
expenses, indicate that anticipated capital expenditures, operating losses,
working capital and debt service requirements through 1999, and beyond, can be
met by cash flows from operations, the net proceeds from the sale of the $335
million Senior Notes and Warrants, together with the borrowings under the $200
million New Bank Financing, the Vendor Financing Commitment and deferred terms
on certain trade payables; however, the Company's ability to meet its
projections is subject to numerous uncertainties and 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 if the Company's cash
requirements are more than projected, the Company may require additional
financing in amounts which may be material. The type, timing and terms of
financing selected by the Company will be dependent upon the Company's cash
needs, the availability of other financing sources and the prevailing conditions
in the financial markets. There can be no assurance that any such sources will
be available to the Company at any given time or available on favorable terms.
XM Radio
As previously mentioned (see "Organization and Business"), the Company has an
investment in XM Satellite Radio Inc., which, through its subsidiary XM
Satellite Radio Holdings Inc. (together with XM Satellite Radio Inc., "XM
Radio"), is one of two entities awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States. XM Radio is currently engaged in efforts to construct its satellite
system. The Company's investment in XM Radio is currently not material to the
Company's financial position, results of operations or cash flows. The Company
is not required to provide any additional funding.
On January 15, 1999, the Company issued to Baron Asset Fund ("Baron") a $21.5
million note convertible into shares of XM Radio common stock (the "Baron XM
Radio Convertible Note"). The Company subsequently loaned approximately $21.4
million to XM Radio in exchange for XM Radio common stock and a note convertible
into XM Radio shares (the "XM Radio Note Receivable"). The Baron XM Radio
Convertible Note ranks subordinate to all other securities of the Company and is
fully collateralized by approximately one-half of the shares received by the
Company as a result of this transaction. The XM Radio Note Receivable is a
non-recourse note and is exchangeable into approximately half of the additional
XM Radio common stock to be received by the Company as a result of the January
15 transaction. Assuming conversion of all convertible notes and exercise of
outstanding options to purchase XM Radio common stock held by World Space, the
Company's ownership in XM Radio would be 22.6%. The XM Radio Note Receivable
earns interest at LIBOR plus 5% and is due on the September 30, 2006 maturity
date, and the Baron XM Radio Convertible Note accrues interest at the rate of 6%
annually, with all payments deferred until maturity or extinguished upon
conversion. The Company has the option to satisfy the Baron XM Radio Convertible
Note by tendering the shares into which it would have been convertible in lieu
of any cash payments.
-8-
<PAGE>
Summarized financial information for XM Radio as of March 31, 1999, and for the
three months ended March 31, 1999 and 1998, and for the period from December 15,
1992 (date of inception) through March 31, 1999 is set forth below.
<TABLE>
<CAPTION>
December 15, 1992
Three Months through
dollars in thousands Ended March 31, March 31,
1999 1998 1999
---- ---- -----
<S> <C> <C> <C>
Gross sales $ -- $ -- $ --
Operating expenses 4,421 1,367 21,724
Loss from operations 4,421 1,367 21,724
Interest expense (55) 39 468
Net loss 4,366 1,406 22,192
</TABLE>
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Current assets $ 4,401 $ 482
Noncurrent assets 218,804 170,003
Current liabilities 155,842 130,823
Noncurrent liabilities 78,913 46,845
Total stockholders' deficit (11,550) (7,183)
</TABLE>
4. Legal and Regulatory Matters
The ownership and operation of the mobile satellite services system and
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 operates
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 its 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.
-9-
<PAGE>
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 Mobile Satellite
Services ("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 ("STA") to use TMI's space segment to conduct market
tests in the U.S. for six months using up to 500 mobile terminals. On July 30,
1998, American Mobile filed an Application for Review and a Motion for Stay of
this STA grant with the FCC, and these filings remain pending. On December 18,
1998, SatCom filed a request for a six-month extension of this STA, which was
extended to July 12, 1999.
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
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 for 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.
-10-
<PAGE>
5. Commitments
At March 31, 1999, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory in the
maximum amount of $12.0 million during 1999. Additionally, the Company had
remaining contractual commitments in the amount of $635,000 for the development
of certain next generation data terminals. 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 starting in 1999. 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 of
next generation wireless data terminals to be delivered beginning mid-1999. The
contract contains a 50% cancellation penalty. Additionally, the Company has
remaining contractual commitments for the purchase of $392,000 of base stations
required to complete certain necessary site build-outs, and $1.2 million for
certain software development.
6. AMSC Acquisition Company Financial Statements
In connection with the Company's acquisition of ARDIS Company in March 1998 (the
"Acquisition") and related financing discussed above, the Company formed a new
wholly-owned subsidiary, AMSC Acquisition Company, Inc. ("Acquisition Company").
The Company contributed all of its inter-company notes receivables and
transferred 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 Acquisition Company, and Acquisition
Company was the acquirer of ARDIS and the issuer of the $335 million of Notes.
American Mobile Satellite Corporation ("American Mobile Parent") is a guarantor
of the Notes. 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 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, and holds the inter-company notes receivable from its
subsidiaries. Separate company financial statements for Acquisition Company have
not been prepared, as management believes the differences between the
Acquisition Company and the Subsidiary Guarantors statements to be immaterial,
and therefore not material information to the investors.
-11-
<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 March 31, 1999 and for the three months ended March 31, 1999 and
1998 is as follows (unaudited):
<TABLE>
<CAPTION>
American Mobile Parent Acquisition Company
Three months Ended March 31, Three Months Ended March 31,
Operating Statement Data 1999 1998 1999 1998
---- ---- ----- ----
(in thousands)
<S> <C> <C> <C> <C>
Net Revenue $ 300 $ 300 $ -- $ --
Equity in loss of subsidiaries (37,197) (32,613) (29,818) --
Operating income (loss) 110 526 190 --
Net loss (39,649) 25,242 (37,197) --
</TABLE>
<TABLE>
<CAPTION>
As of As of
Balance Sheet Data March 31, 1999 March 31, 1999
-------------- --------------
(in thousands)
<S> <C> <C>
Current assets $ 27,651 $ 41,038
Non-current assets 34,182 394,009
Current liabilities 421 20,988
Non-current liabilities 123,270 386,359
Shareholders' (Deficit) Equity (61,858) 27,700
</TABLE>
<TABLE>
<CAPTION>
Combined Subsidiary Guarantors
Three Months Ended March 31,
Operating Statement Data 1999 1998
---- ----
(in thousands)
<S> <C> <C>
Net Revenue $ 20,230 $ 10,022
Equity in loss of subsidiaries -- --
Operating loss (25,758) (18,928)
Net loss (29,818) (32,613)
</TABLE>
<TABLE>
<CAPTION>
As of
Balance Sheet Data March 31, 1999
--------------
(in thousands)
<S> <C>
Current assets $ 53,346
Non-current assets 312,901
Current liabilities 29,399
Non-current liabilities 728,449
Shareholders' Deficit (391,601)
</TABLE>
-12-
<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 March 31, 1999, and (ii) certain immaterial inter-company management
fees and expenses between the Parent and Acquisition Company are not eliminated
at the Acquisition Company level.
The consolidated condensed unaudited financial statements of Acquisition Company
are set forth below.
-13-
<PAGE>
AMSC Acquisition Company, Inc.
Combined Condensed Statements of Operations
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
REVENUES
<S> <C> <C>
Services $16,164 $6,418
Sales of equipment 4,066 3,604
----- -----
Total Revenues 20,230 10,022
COSTS AND EXPENSES:
Cost of service and operations 17,870 7,728
Cost of equipment sold 4,528 3,881
Sales and advertising 4,749 2,993
General and administrative 4,879 3,659
Depreciation and amortization 13,772 10,689
------ ------
Operating Loss (25,568) (18,928)
INTEREST AND OTHER INCOME 1,181 141
INTEREST EXPENSE (12,810) (13,826)
-------- --------
NET LOSS $(37,197) $(32,613)
========= =========
</TABLE>
-14-
<PAGE>
AMSC Acquisition Company, Inc.
Combined Condensed Balance Sheets
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $8,131 $2,285
Inventory 17,440 18,593
Accounts receivable 16,752 15,325
Restricted short-term investments 41,038 41,038
Prepaid in-orbit insurance 1,932 3,381
Other current assets 9,091 7,212
----- -----
Total current assets 94,384 87,834
PROPERTY AND EQUIPMENT - NET 239,017 246,553
GOODWILL - NET 52,772 56,439
RESTRICTED INVESTMENTS 57,678 53,235
DEFERRED CHARGES AND OTHER ASSETS - NET 32,672 33,846
------ ------
Total assets $476,523 $477,907
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $41,418 $33,718
Obligations under capital leases due within one year 4,816 5,971
Current portion of long-term debt 4,153 5,041
Other current liabilities -- 162
------- ---
Total current liabilities 50,387 44,892
DUE TO PARENT 557 --
LONG-TERM LIABILITIES:
Obligations under New Bank Financing 59,000 32,000
Senior Notes, net of discount 327,359 327,147
Capital lease obligations 5,657 5,824
Other long-term debt 3,473 1,689
Net assets acquired in excess of purchase price 1,855 2,028
Other long-term liabilities 535 540
--- ---
Total long-term liabilities 397,879 369,228
Total liabilities 448,823 414,120
------- -------
STOCKHOLDERS' EQUITY 27,700 63,787
------ ------
Total liabilities and stockholders' equity $476,523 $477,907
======== ========
</TABLE>
-15-
<PAGE>
AMSC Acquisition Company, Inc.
Combined Condensed Statements of Cash Flows
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
CASH FLOWS USED IN OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(37,197) $(32,613)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 1,786 2,524
Depreciation and amortization 13,772 10,689
Changes in assets and liabilities:
Inventory 1,153 1,986
Prepaid in-orbit insurance 1,449 1,675
Trade accounts receivable (1,427) 3,744
Other current assets (1,424) (661)
Accounts payable and accrued expenses 8,147 (12,182)
Deferred trade payables (2,092) 6,436
Deferred items - net (542) 293
-------- --------
Net cash used in operating activities (16,375) (18,109)
Additions to property and equipment (2,541) (1,126)
Acquisition of ARDIS -- (51,382)
Purchase of long-term restricted cash securities (1,239) (113,000)
-------- ---------
Net cash used in investing activities (3,780) (165,508)
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding from Parent 413 (12,127)
Principal payments under capital leases (1,322) (135)
Proceeds from Bank Financing 27,000 2,000
Repayment of Bank Financing -- (100,000)
Proceeds from bridge financing -- 10,000
Repayment of bridge financing -- (10,000)
Proceeds from Senior Notes -- 326,510
Principal payments under vendor Financing (90) --
Debt issuance costs -- (13,458)
------- --------
Net cash provided by financing activities 26,001 202,790
Net increase in cash and cash equivalents 5,846 19,173
CASH AND CASH EQUIVALENTS, beginning of period 2,285 2,106
------- --------
CASH AND CASH EQUIVALENTS, end of period $8,131 $21,279
======= ========
</TABLE>
-16-
<PAGE>
PART I-FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
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 Quarterly Report, including, without limitation, in
conjunction with the forward-looking statements included in this Quarterly
Report. 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 filed on March 30, 1999, the Registration
Statement on Form S-3, No. 333-71423, filed on March 30, 1999, and Form 10-Q
Quarterly Reports to be filed by the Company 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.
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").
The Company and its subsidiaries are parties to the following financings and
refinancings: (1) $335 million of Senior Notes due 2008 (the "Senior Notes");
(2) the $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 "Liquidity and Capital Resources."
-17-
<PAGE>
XM Radio is one of two entities awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States. XM Radio is currently engaged in efforts to construct its satellite
system and negotiate contracts with third party vendors and other partners. The
operations and financing of XM Radio are maintained separate and apart from the
operations and financing of American Mobile (see "Liquidity and Capital
Resources"). Through its investment in XM Radio, WorldSpace has an option to
increase its ownership in XM Radio 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 of the World
Space options. On January 15,1999, the Company provided an additional $21.4
million of convertible financing for XM Radio through an issuance of a $21.5
million subordinated, non-recourse note of the Company to Baron Asset Fund. The
Company's note issued to Baron Asset Fund is exchangeable into approximately
half of the additional XM Radio common stock to be received by the Company as a
result of the January 15 transaction. Assuming conversion of all convertible
notes and exercise of the outstanding WorldSpace options, the Company's
ownership in XM Radio would be 22.6%.
Given the acquisition of ARDIS, 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.
Overview
The Company 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 the Networks and the cost of developing,
selling and providing its products and services. The Company is, and will
continue to be, highly leveraged.
The Company's future operating results could be adversely affected by a number
of uncertainties and factors, including:
-18-
<PAGE>
(a) the timely completion and deployment of future products and
related services, including among other things, availability
of an adequate supply 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,
(b) the market's acceptance of the Company's services,
(c) the ability and the commitment of the Company's distribution
channels to market and distribute the Company's services,
(d) the Company's ability to modify its organization, strategy and
product mix to maximize the market opportunities in light of
changes therein,
(e) competition from existing companies that provide services
using existing communications technologies and the possibility
of competition from companies using new technology in the
future,
(f) capacity constraints arising from the reconfiguration of
MSAT-2, subsequent anomalies affecting MSAT-2, or power
management recommendations affecting MSAT-2, each as
previously reported,
(g) additional technical anomalies that may occur within the
Satellite Network, including those relating to MSAT-2, which
could impact, among other things, the operation of the
Satellite Network and the cost, scope or availability of
in-orbit insurance,
(h) subscriber equipment inventory commitments assumed by the
Company including the ability of the Company to realize the
value of its inventory in a timely manner,
(i) the Company's ability to fund its anticipated capital
expenditures, operating losses and debt service requirements
and its ability to secure additional financing as may be
necessary,
(j) the Company's ability to respond and react to changes in its
business and the industry as a result of being highly
leveraged,
(k) the timely roll-out of certain key customer initiatives and
products,
(l) the ability of the Company to successfully integrate ARDIS and
to achieve certain business synergies, and
(m) the ability of the Company to manage growth effectively.
The Company's operating results and capital and liquidity needs have been
materially affected by delays experienced in the acquisition of subscribers and
the related equipment sales. The impact of this delay has substantially
decreased the Company's anticipated revenues and increased the Company's capital
and liquidity needs. No assurance can be given that additional delays relating
to the acquisition of subscribers and equipment sales will not be encountered in
the future and will not have an adverse impact on the Company.
As of March 31, 1999, there were approximately 113,000 units on the Network.
-19-
<PAGE>
Three Months Ended March 31, 1999 and 1998
Service revenues, which includes both the Company's voice and data services,
approximated $16.2 million for the three months ended March 31, 1999, which is a
$9.8 million, or 153%, increase over the same period in 1998. The significant
increase in service revenues year over year was primarily attributable to the
inclusion, in the three months ended March 31, 1999, of revenues attributable to
the ARDIS data service.
<TABLE>
<CAPTION>
Three Months Ended
Summary of Revenue March 31,
(in millions) 1999 1998 Change % Change
---- ---- ------ --------
<S> <C> <C> <C> <C>
Voice Service $3.0 $3.2 ($0.2) (6)%
Data Service 12.0 2.3 9.7 422
Capacity Resellers and Other 1.2 0.9 0.3 33
Equipment Sales 4.1 3.6 0.5 14
</TABLE>
The decrease in service revenue from voice services was primarily a result of
reduced per-minute rates as a result of the sale of the assets of our maritime
division, in October 1998, to a reseller, partially offset by a 21% increase in
voice customers in the first quarter of 1999 as compared to 1998. The increase
in service revenue from the Company's data services was due principally to the
inclusion in the three months ended March 31, 1999 of approximately $9.4 million
from the ARDIS data service. Service revenue from capacity resellers, who handle
both voice and data services, increased primarily as a result of increased
contract commitments from current customers.
Revenue from the sale of subscriber equipment increased as a result of increased
sales of certain data products.
<TABLE>
<CAPTION>
Three Months Ended
Summary of Expenses March 31,
(in millions) 1999 1998 Change % Change
---- ---- ------ --------
<S> <C> <C> <C> <C>
Cost of Service & Operations $17.9 $7.7 $10.2 132%
Cost of Equipment Sales 4.5 3.9 0.6 15
Sales & Advertising 4.7 3.0 1.7 57
General & Administrative 4.8 3.6 1.2 33
Depreciation & Amortization 13.8 10.2 3.6 35
</TABLE>
-20-
<PAGE>
As of January 1999, as a result of the completion of the integration of the
ARDIS acquisition and the achievement of certain related cost synergies, the
Company ceased to report separate company information for ARDIS. Consequently,
ARDIS costs are no longer distinguished from those of the remaining business,
and the first quarter discussion reflects the costs of the consolidated entity.
Cost of service and operations for the first quarter of 1999 includes costs to
support subscribers and to operate the network. As a percentage of total
revenues, cost of service and operations was 88% and 77% for the first quarter
of 1999 and 1998, respectively. The increase in cost of service and operations
was primarily attributable to (i) additional headcount, primarily as a result of
the ARDIS acquisition, (ii) increased communication charges associated with
increased service usage and costs to support the ARDIS terrestrial network,
(iii) system and base station maintenance to support the ARDIS terrestrial
network, (iv) site rental costs associated with the terrestrial network, and (v)
incremental Year 2000 costs. As a percentage of revenue, cost of service and
operations has increased as a result of the variable costs incurred within the
ARDIS terrestrial network, such as site rent and telecommunications costs.
The increase from the first quarter of 1998 to the first quarter of 1999 in the
cost of equipment sold was primarily attributable to the increase in the volume
of sales of the various data products.
Sales and advertising expenses were 23% of total revenue during the first
quarter of 1999 and 30% of total revenue in the same period in 1998. The 57%
increase in sales and advertising expenses from the first quarter of 1998 to the
first quarter of 1999 was primarily attributable to increased headcount costs
resulting from the ARDIS acquisition.
-21-
<PAGE>
General and administrative expenses represented 24% and 36% of total revenue in
the first quarter of 1999 and 1998, respectively. The $1.1 million increase in
general and administrative expenses quarter over quarter for 1999 compared to
1998 was primarily attributable to (i) headcount costs related to additional
staffing as a result of the ARDIS acquisition, and (ii) occupancy costs
resulting from the leasing of the two ARDIS office locations.
Depreciation and amortization expense represented approximately 68% of total
revenue in the first quarter of 1999, as compared to 101% of total revenue in
the first quarter of 1998. The $3.6 million increase in depreciation and
amortization expense was primarily attributable to the addition of ARDIS assets
and step-up in the basis of ARDIS licenses.
Interest and other income was $1.7 million for first quarter of 1999 as compared
to $0.1 million for same period in 1998. The increase was primarily a result of
interest earned on certain required escrows established with the proceeds from
the Senior Notes. The Company incurred $15.9 million of interest expense in the
first quarter of 1999 compared to $6.6 million in the same period of 1998,
reflecting (i) interest expense on the Senior Notes at 12.25%, offset by lower
debt balances on our bank loans (comprising the term loan facility and the
revolving credit facility) and (ii) the amortization of debt discount, prepaid
interest and debt offering costs in the amount of $4.6 million in the first
quarter of 1999, compared to $2.5 million in the first quarter of 1998. It is
anticipated that interest costs will continue to be significant as a result
Senior Notes and of the borrowings under our term loan and revolving credit
facilities. (See "Liquidity and Capital Resources").
Net capital expenditures for the first quarter of 1999 for property and
equipment were $2.5 million compared to $1.1 million in 1998. The increase was
largely attributable to the acquisition of assets necessary to continue the
build-outs of the ARDIS network.
Liquidity and Capital Resources
Adequate liquidity and capital are critical to the ability of the Company to
continue as a going concern and to fund subscriber acquisition programs
necessary to achieve positive cash flow and profitable operations. The Company
expects to continue to make significant capital outlays to fund interest
expense, capital expenditures and working capital prior to the time that it
begins to generate positive cash flow from operations. These outlays are
expected to continue for the foreseeable future thereafter.
On March 31, 1998, AMSC Acquisition Company, Inc. ("Acquisition Company"), a
wholly-owned subsidiary of American Mobile Satellite Corporation, issued $335
million of units consisting of 12 1/4% Senior Notes due 2008 (the "Senior
Notes"), and one warrant to purchase 3.75749 shares of Common Stock of the
Company for each $1,000 principal amount of Notes (the "Warrants"), and also
restructured its existing bank financing (the "New Bank Financing"). The New
Bank Financing of $200 million consists of a $100 million unsecured five-year
reducing Revolving Credit Facility maturing March 31, 2003 and a $100 million
five-year Term Loan Facility with up to three additional one-year extensions
subject to lender approval. As of April 30, 1999, the Company had $41.0 million
available for borrowing under the Revolving Credit Facility. Additionally,
Motorola has agreed to provide the Company with up to $10 million of vendor
financing (the "Vendor Financing Commitment"), which is available to finance up
to 75% of the purchase price of additional base stations needed to meet ARDIS'
buildout requirements under certain customer contracts. As of March 31, 1999,
$4.6 million was outstanding under this facility.
-22-
<PAGE>
In connection with the New Bank Financing, each of Hughes Electronics
Corporation, Singapore Telecommunications Ltd. and Baron Capital Partners, L.P.
(collectively, the "Bank Facility Guarantors") extended separate guarantees of
the obligations of each of the Acquisition Company and the Company to the Banks,
which on a several basis aggregated to $200 million. In their agreement with
each of the Acquisition Company and the Company (the "Guarantee Issuance
Agreement"), the Bank Facility Guarantors agreed to make their guarantees
available for the New Bank Financing. 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 repricing of 5.5
million warrants previously issued (together, the "Guarantee Warrants"). The
Guarantee Warrants were issued with an exercise price of $12.51 and were valued
at approximately $17.7 million. Additionally, on March 29, 1999, the Bank
Facility Guarantors agreed to eliminate certain covenants contained in the
Guarantee Issuance Agreement relating to earnings before interest, depreciation,
amortization and taxes ("EBITDA") and service revenue. In exchange for this
elimination of covenants, the Company agreed to reprice their Guarantee
Warrants, effective April 1, 1999, from $12.51 to $7.50. The value of the
repricing was approximately $1.5 million. As of April 30, 1999, the Company had
outstanding borrowings of $100 million of the Term Loan Facility at 5.5%, and
$59 million under the Revolving Credit Facility at rates ranging from 5.4375% to
5.6875%.
Further, in connection with the Guarantee Issuance Agreement, the Company has
agreed to reimburse the Bank Facility Guarantors in the event that the
Guarantors are required to make payment under the New Bank Financing guarantees,
and, in connection with this reimbursement commitment has provided the Bank
Facility Guarantors a junior security interest with respect to the assets of the
Company, principally its stockholdings in XM Radio and the Acquisition Company.
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 directly to the banks on a quarterly basis, on a notional
amount of $100 million until the termination date of March 31, 2001. The Company
-23-
<PAGE>
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.
Deferred Trade Payables
The Company has arranged the financing of certain trade payables, and as of
March 31, 1999, $3.0 million of deferred trade payables were outstanding at
rates ranging from 6.10% to12.0% and are generally payable by the end of 1999.
The Company's current operating assumptions and projections, which reflect
management's best estimate of subscriber and revenue growth and operating
expenses, indicate that anticipated capital expenditures, operating losses,
working capital and debt service requirements through 1999, can be met by cash
flows from operations, the net proceeds from the sale of the Senior Notes and
Warrants, together with the borrowings under the $200 million New Bank
Financing, the Vendor Financing Commitment and deferred terms on certain trade
payables; however, the Company's ability to meet its projections is subject to
numerous uncertainties and 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 if the Company's cash requirements are more than
projected, the Company may require additional financing in amounts which may be
material. The type, timing and terms of financing selected by the Company will
be dependent upon the Company's cash needs, the availability of other financing
sources and the prevailing conditions in the financial markets. There can be no
assurance that any such sources will be available to the Company at any given
time or available on favorable terms.
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 received, and is
expected to continue to receive, substantially all of the funding for this
business from independent sources in exchange for debt and equity interests 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.
On January 15, 1999, the Company issued to Baron Asset Fund ("Baron") a $21.5
million note convertible into shares of XM Radio common stock (the "Baron XM
Radio Convertible Note"). The Company subsequently loaned approximately $21.4
million to XM Radio in exchange for XM Radio common stock and a note convertible
into XM Radio shares (the "XM Radio Note Receivable"). The Baron XM Radio
Convertible Note ranks subordinate to all other securities of the Company and is
fully collateralized by approximately one-half of the shares received by the
Company as a result of this transaction. The XM Radio Note Receivable is a
non-recourse note collateralized by the additional XM Radio shares that would be
received by the Company upon conversion of the note. The XM Radio Note
Receivable earns interest at LIBOR plus 5% and is due on the September 30, 2006
maturity date, and the Baron XM Radio Convertible Note accrues interest at the
rate of 6% annually, with all payments deferred until maturity or extinguished
upon conversion. The Company has the option to satisfy the Baron XM Radio
Convertible Note by tendering the shares into which it would have been
convertible in lieu of any cash payments.
-24-
<PAGE>
Commitments
At March 31, 1999, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory in the
maximum amount of $12.0 million during 1999. Additionally, the Company had
remaining contractual commitments in the amount of $635,000 for the development
of certain next generation data terminals. 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 starting in 1999. 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 of
next generation wireless data terminals to be delivered beginning mid-1999. The
contract contains a 50% cancellation penalty. Additionally, the Company has
remaining contractual commitments for the purchase of $392,000 of base stations
required to complete certain necessary site build-outs, and $1.2 million for
certain software development.
All wholly owned subsidiaries of the Company are subject to financing agreements
that limit the amount of cash dividends and loans that can be advanced to the
Company. At March 31, 1999, all of these subsidiaries' net assets were
restricted under these agreements. These restrictions will have an impact on the
Company's ability to pay dividends.
-25-
<PAGE>
Cash used in operating activities was $16.0 million for the first quarter of
1999 compared to $10.9 million for the comparable period in 1998. The increase
in cash used in operating activities was primarily attributable to (i)
approximately $3.0 million of increased operating losses, primarily as a result
of additional net expenses incurred as a result of the ARDIS acquisition and
Year 2000 compliance programs and (ii) increases in net working capital
resulting primarily from increased data service revenues. Cash used in investing
activities was $25.4 for the first quarter of 1999 compared to $193.4 million
for the first quarter of 1998, representing (i) the acquisition of ARDIS in
March 1998, and the funding of certain escrows required in connection with the
Acquisition and issuance of Senior Notes, offset by the issuance in January 1999
of the XM Radio Note Receivable. Cash provided by financing activities was $47.2
million in the first quarter of 1999 as compared to $223.5 million in the first
quarter of 1998 reflecting the issuance of the Notes in March 1998, offset by
the repayment of other long-term debt in the first quarter of 1998, and the
proceeds from the issuance of the Baron XM Radio Convertible Note and draws
under the New Bank Financing in the first quarter of 1999. Proceeds from the
sale of Common Stock were $162,000 and $103,000 for the first three months of
1999 and 1998, respectively. Payments on long-term debt and capital leases were
$1.3 million and $100,000 for the first three months of 1999 and 1998,
respectively. In addition, the Company incurred $40,000 of debt issuance costs
in the first quarter of 1999, as compared to $13.5 million in the first quarter
of 1998, which resulted from the placement of the Notes and amendments to the
New Bank Financing. As of March 31, 1999, the Company had $8.1 million of cash
and cash equivalents, working capital of $21.7 million of securities, and $41.0
million of investments restricted for the payment of interest.
Regulation
The ownership and operations of the Company's communication systems are subject
to significant regulation by the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the "Communications Act"), and related
federal laws. A number of the Company's licenses are subject to renewal by the
FCC and, with respect to the Company's satellite operations, are subject to
international frequency coordination. In addition, current FCC regulations
generally limit the ownership and control of American Mobile by non-U.S.
citizens or entities to 25%. There can be no assurances that the rules and
regulations of the FCC will continue to support the Company's operations as
presently conducted and contemplated to be conducted in the future, or that all
existing licenses will be renewed and requisite frequencies coordinated.
Year 2000 Readiness
American Mobile has developed and is implementing a Year 2000 Readiness Program
("Year 2000 Readiness Program") to address Year 2000 issues. "Year 2000 Ready,"
or "Year 2000 Readiness," means that customers will experience no material
difference in performance and functionality of the Company's networks prior to,
during or after the year 2000.
The Company's Year 2000 Readiness Program uses the phased approach that is
standard in its industry. The Awareness, Inventory and Assessment phases have
been completed, and American Mobile is at various stages of the Renovation,
Validation/Test and Implementation/Rollout phases, depending on the particular
system involved.
The Inventory and Assessment Phases concentrated on the Company's core business
systems: those systems, both hardware and software, whose failure could have a
material impact on its financial condition and operations. Vendors providing
critical products and services to American Mobile are also included in this
definition of core business systems. Although the core business systems are the
top priority in the Company's Year 2000 Readiness Program, American Mobile
assessed all of its software and hardware for Year 2000 Readiness.
-26-
<PAGE>
American Mobile's plans for the Renovation, Validation/Test and
Implementation/Rollout Phases call for it to be Year 2000 Ready by the end of
the third quarter of 1999. In addition, the Company is currently scheduled to
complete renovations, implementation and rollout of its internal systems
(including its voice customer billing software, CMIS), in the fourth quarter
1999; these internal software systems do not affect the Company's ability to
pass customer traffic and therefore will not affect Year 2000 Readiness.
The complex of hardware and software that the Company maintains consists of
commercial off-the-shelf (COTS) software, as well as custom software developed
specifically for American Mobile's networks. In certain cases, American Mobile's
Year 2000 Readiness Program involves upgrading COTS software that is unsupported
by the vendor or whose Year 2000 Readiness could not be determined. Upgrading
such COTS software, as planned, provides greater certainty regarding the Year
2000 Readiness of such products and ensures that vendor support will be
available.
The total cost of American Mobile's Year 2000 Readiness Program was
approximately $2.4 million in 1998. Expenditures for the Year 2000 Readiness
Program in 1999 are estimated to be up to $7.4 million, of which approximately
$1.5 million was incurred as of March 31, 1999. 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 American Mobile believes its network will
be Year 2000 Ready are based on management's best estimates. However, there is
no guarantee that the Company will achieve these results and actual results
could differ materially from those anticipated. Some of American Mobile's
critical business systems depend significantly on software programs and third
party services that are not within the Company's control. Failure to solve Year
2000 errors within American Mobile's critical business systems could result in
-27-
<PAGE>
possible service outages, miscalculations or disruption of operations that could
have a material impact on the Company's business. Because of the Company's heavy
dependence on software, some Year 2000 problems may not be found or the
remediation efforts may introduce new bugs that are not identified before they
impact operations. This applies to both COTS software and custom software.
If American Mobile's customers fail to become Year 2000 ready on time with their
own hardware and software systems, their applications may not function even if
American Mobile's systems are Year 2000 Ready. This will result in reduced
traffic and revenues. Also, suppliers of goods and services may suffer Year
2000-related failures from which the Company cannot adequately protect its
business.
While management believes that the Company will be able to achieve Year 2000
Readiness in a timely manner, the schedule for completing the implementation of
several core business systems extends to the third quarter 1999 and there is a
possibility that American Mobile may not become Year 2000 Ready on time 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.
American Mobile has contingency plans in place to minimize service interruptions
that can 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 American
Mobile has contracted with more than one service provider. These plans, systems
and services are being incorporated into the Company's Year 2000 contingency
planning. To the extent that it is commercially reasonable to do so, American
Mobile will include other redundant or alternative sources of services in its
Year 2000 contingency planning efforts. American Mobile anticipates having
additional Year 2000 contingency plans in place by June 1999.
Accounting Standards
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the recognition of all
derivatives as either assets or liabilities measured at fair value. The Company
does not believe that the adoption of this statement will have a material impact
on its financial position and results.
In March 1999, FASB issued an Exposure Draft on an Interpretation of Accounting
Principles Board Opinion No. 25 Accounting for Certain Transactions involving
Stock Compensation. This proposed Interpretation would make it more likely that
expense would be required to be recognized in the case of, among other things,
stock (including stock options) issued to non-employee members of an entity's
board of directors. The Company has assessed the impact of this proposed
Interpretation and does not believe that adoption of this Interpretation would
have a material impact on its financial position and results.
-28-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.33a - Amendment No. 1, dated as of May 10, 1999, to Amended and
Restated Registration Rights Agreement among American Mobile
Satellite Corporation and Hughes Electronics Corporation,
Singapore Telecommunications Ltd., and Baron Capital Partners,
L.P. (filed herewith)
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 -- Financial Data Schedule (filed herewith)
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MOBILE SATELLITE CORPORATION
(Registrant)
Date: May 13, 1999 By: /s/Walter V. Purnell, Jr.
------------------------------------
Walter V. Purnell, Jr.
President and Chief Executive Officer
/s/W. Bartlett Snell
-------------------------------------
W. Bartlett Snell
Senior Vice President and
Chief Financial Officer
(principal financial and accounting officer)
-30-
<PAGE>
EXHIBIT INDEX
Number Description
10.33a - Amendment No. 1, dated as of May 10, 1999, to Amended and
Restated Registration Rights Agreement among American Mobile
Satellite Corporation and Hughes Electronics Corporation,
Singapore Telecommunications Ltd., and Baron Capital Partners,
L.P. (filed herewith)
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 - Financial Data Schedule (filed herewith)
<PAGE>
EXHIBIT 10.33a
AMENDMENT NO. 1 TO
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 1, dated as of May 10, 1999 (this "Amendment"), by and among
American Mobile Satellite Corporation, a Delaware corporation (the "Company"),
Hughes Electronics Corporation ("Hughes"), Singapore Telecommunications Ltd.
("Singapore Telecom"), and Baron Capital Partners, L.P. ("Baron," and
collectively with Hughes and Singapore Telecom, the "Guarantors"), to the
Amended and Restated Registration Rights Agreement dated as of March 31, 1998
(said Agreement, as the same may be amended, supplemented or otherwise modified
from time to time, being the "Registration Rights Agreement," and the terms
defined therein being used herein as therein defined unless otherwise defined
herein), by and among the Company and the Guarantors.
WITNESSETH:
WHEREAS, the Guarantors have certain piggyback registration rights under
the Registration Rights Agreement; and
WHEREAS, the Company filed a registration statement on Form S-3 with the
Securities and Exchange Commission (the "SEC") on January 29, 1999 in connection
with an offering of its common stock (the "Offering"), which registration
statement was declared effective by the SEC on March 31, 1999; and
WHEREAS, Hughes declined to exercise its piggyback rights under the
Registration Rights Agreement with respect to the Offering.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto hereby agree as follows:
Section 1. Consideration for Amendment. The Company has agreed to this
Amendment in consideration for Hughes's election not to exercise its piggyback
rights under the Registration Rights Agreement with respect to the Offering.
<PAGE>
Section 2. Extension of Period for Demand Registration in Section 2.1(a).
Section 2.1(a) of the Registration Rights Agreement is hereby amended so that
each and every reference therein to "March 31, 2005" is replaced with "March 31,
2007."
Section 3. Additional Demand Registration for Hughes. Subject to the terms
and conditions contained herein, Hughes may, at any time prior to March 31,
2007, make a written request of the Company for a Demand Registration with
respect to its Registrable Securities (the "Hughes Demand Registration"), which
request shall be in addition to the two Demand Registrations provided for in
Section 2.1 of the Registration Rights Agreement (the "Guarantor Group Demand
Registrations"). The Hughes Demand Registration may not be exercised by Hughes
(or its permitted assignee) until the earlier of (i) both of the Guarantor Group
Demand Registrations having been exercised and completed in accordance with the
terms of Section 2.1, and (ii) such time as when Guarantors other than Hughes
(or such Guarantors' assignees) do not own any Registrable Securities. In order
to exercise the Hughes Demand Registration, Hughes shall follow the procedures
set forth in Section 2.1, and Hughes's election to exercise the Hughes Demand
Registration shall be subject to all of the terms and conditions contained in
Section 2.1; provided, that, in the case of a Hughes Demand Registration, the
first paragraph of Section 2.1(a) shall not be applicable, and all references in
Section 2.1 to the "Demanding Group" shall be deemed, where applicable, to refer
solely to "Hughes." If the Hughes Demand Registration is exercised by Hughes in
accordance with the terms hereof, the Guarantors other than Hughes will be
entitled to exercise piggyback rights pursuant to Section 2.2 of the
Registration Rights Agreement, with respect to any Registrable Securities owned
by such Guarantors at that time. In the case of a Hughes Demand Registration in
which the Guarantors other than Hughes wish to exercise their piggyback rights,
Registrable Securities owned by such other Guarantors and desired to be included
in such Hughes Demand Registration shall be accorded the priority set forth in
Section 2.1(c)(x)(iv), in the case of registrations occurring up to and
including the Subordination Termination Date, or Section 2.1(c)(y)(ii), in the
case of registrations occurring after the Subordination Termination Date. For
the avoidance of doubt, in the case of a Hughes Demand Registration, the
Guarantors other than Hughes shall not be deemed to be part of the "Demanding
Group" for the purpose of determining priority of registration in accordance
with Section 2.1(c), or for any other purpose.
Section 4. Assignment of Rights Under Registration Rights Agreement. The
Company and each of the Guarantors hereby agrees that the Registration Rights
Agreement (as amended hereby) and the rights of any Guarantor thereunder may be
transferred and assigned to any entity that acquires any Registrable Securities
from time to time; provided, that no such assignment shall be effective unless
(i) the assigning Guarantor (or its permitted assignee) notifies the Company in
writing of such assignment, and (ii) the prospective assignee agrees in writing
to be bound by, and become a party to, the Registration Rights Agreement.
Section 5. Miscellaneous.
(a)Upon the effectiveness of this Amendment, each reference in the
Registration Rights Agreement to "this Agreement," "hereunder," "herein," or
words of like import shall mean and be a reference to the Registration Rights
Agreement as amended hereby.
(b)Except as specifically amended hereby, the Registration Rights Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
(c)The execution and delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power, or remedy which the Company or any Guarantor may have under the
Registration Rights Agreement.
(d)This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute but one and the same instrument.
(e)The Company acknowledges its obligation, under Section 4 of the Guaranty
Issuance Agreement, to pay, upon demand, to each Guarantor, the amount of any
<PAGE>
and all reasonable expenses, including, without limitation, the reasonable fees
and expenses of such Guarantor's counsel and of any experts and agents, which
such Guarantor has incurred or may incur in connection with the negotiation,
preparation or administration of this Amendment.
(f)This Amendment shall be governed by and construed in accordance with the
laws of the state of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
AMERICAN MOBILE SATELLITE CORPORATION
By: /s/ Randy S. Segal
------------------
Name: Randy S. Segal
Title: Senior Vice President and General Counsel
HUGHES ELECTRONICS CORPORATION
By: /s/ Mark McEachen
-----------------
Name: Mark McEachen
Title: Senior Vice President
SINGAPORE TELECOMMUNICATIONS LTD.
By: /s/ Hoh Wing Chee
-----------------
Name: Hoh Wing Chee
Title: VP (International Network)
<PAGE>
BARON CAPITAL PARTNERS, L.P.
By: Baron Capital Management Inc.,
A General Partner
By: /s/ Linda S. Martinson
----------------------
Name: Linda S. Martinson
Title: Vice President and General Counsel
<PAGE>
EXHIBIT 11.1
AMERICAN MOBILE SATELLITE CORPORATION
---------------------------------------
COMPUTATIONS OF EARNINGS PER COMMON SHARE
---------------------------------------
(in thousands, except per share amounts)
---------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
BASIC EARNINGS PER SHARE CALCULATION
<S> <C> <C>
Net Loss ($39,649) ($25,242)
========= =========
Net Loss per common share ($1.23) ($1.00)
======= =======
Weighted-average common shares outstanding 32,225 25,241
======= ======
DILUTED EARNINGS PER SHARE CALCULATION
Net Loss ($39,649) ($25,242)
========= =========
Net Loss per common share ($1.23) ($1.00)
======= =======
Weighted-average common shares (1) 32,309 25,336
====== ======
(1) Calculated as follows:
Historical weighted average number of
shares outstanding 32,225 25,241
Assumed exercise of stock options -- 33
Assumed exercise of stock purchase 84 62
-------- --------
warrants
32,309 25,336
====== ======
</TABLE>
<PAGE>
<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 three months
ended March 31, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 8,131
<SECURITIES> 131,348
<RECEIVABLES> 16,752
<ALLOWANCES> 0
<INVENTORY> 17,440
<CURRENT-ASSETS> 122,035
<PP&E> 239,017
<DEPRECIATION> 0
<TOTAL-ASSETS> 508,598
<CURRENT-LIABILITIES> 50,598
<BONDS> 526,227
0
0
<COMMON> 324
<OTHER-SE> (62,182)
<TOTAL-LIABILITY-AND-EQUITY> 508,598
<SALES> 4,066
<TOTAL-REVENUES> 20,230
<CGS> 4,528
<TOTAL-COSTS> 27,388
<OTHER-EXPENSES> 13,772
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,930
<INCOME-PRETAX> (39,649)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,649)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,649)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> 0
</TABLE>
