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, 1996
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 22091
(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, 1996: 25,010,627
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF LOSS
-------------------------------
(in thousands, except per share data)
(Unaudited)
Three Months Ended May 3, 1988
March 31 (date of inception)
1996 1995 through March 31, 1996
Revenues:
Services $1,793 $1,808 $13,457
Sales of equipment 2,576 46 4,500
------ ------ -------
Total Revenues $4,369 $1,854 $17,957
Costs and Expenses:
Cost of service and operations 6,803 4,097 66,023
Cost of equipment sold 2,443 38 7,119
Sales and advertising 6,018 1,616 45,148
General and administrative 4,963 3,341 64,668
Depreciation and amortization 11,144 865 43,579
------ ------ -------
Operating Loss (27,002) (8,103) (208,580)
Interest Income 109 1,774 19,122
Interest Expense (2,984) -- (3,967)
------ ------ -------
Loss before extraordinary item (29,877) (6,329) (193,425)
Extraordinary gain on early extinguishment of debt -- -- (1,372)
------ ------ -------
Net Loss $(29,877) $(6,329) $(194,797)
========= ======== ==========
Loss per share of common stock $(1.20) $(0.26)
======= =======
Weighted-average number of common shares outstanding
during the period 24,995 24,808
====== ======
See notes to consolidated financial statements.
- 1 -
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands)
(Unaudited)
March 31, December 31,
1996 1995
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $3,708 $8,865
Inventory 19,425 15,104
Prepaid in-orbit insurance 3,215 4,823
Accounts receivable-trade, net of allowance 2,307 1,375
Other current assets 5,233 2,860
------ ------
Total current assets 33,888 33,027
PROPERTY AND EQUIPMENT IN SERVICE - NET 356,369 362,105
DEFERRED CHARGES AND OTHER ASSETS - NET 3,441 3,219
------- -------
Total assets $393,698 $398,351
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings, net of discount (including $ 8.8 million owed to
related party) $33,744 $ --
Accounts payable and accrued expenses 27,688 34,462
Obligations under capital leases due within one year 3,706 2,446
Obligation to related party for equipment financing 6,529 6,874
Current portion of long-term debt 55,226 60,990
------- -------
Total current liabilities 126,893 104,772
Long-term Liabilities:
Capital lease obligations 5,943 6,052
----- -----
Total liabilities 132,836 110,824
Stockholders' Equity:
Preferred stock, par value $0.01; no shares issued -- --
Common stock, voting, par value $0.01 250 250
Additional paid-in capital 449,717 448,757
Common stock purchase warrants 5,692 3,440
Deficit accumulated during the development stage (194,797) (164,920)
--------- ---------
Total stockholders' equity 260,862 287,527
------- -------
Total liabilities and stockholders' equity $393,698 $398,351
======== ========
See notes to consolidated financial statements.
- 2 -
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months Ended May 3, 1988
March 31, (date of inception)
1996 1995 through March 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(29,877) $(6,329) $(194,797)
Adjustments to reconcile net loss to net cash used in
operating activities:
Extraordinary loss on early extinguishment of debt -- -- 1,372
Amortization of debt discount 996 -- 996
Depreciation and amortization 11,144 865 43,579
Deferred and other items, net 645 (289) (176)
Changes in assets and liabilities:
Prepaid in-orbit insurance 1,608 -- (3,215)
Trade accounts receivable (932) (1,028) 443
Other current assets (735) 2,734 (5,115)
Inventory (4,321) (2,532) (19,425)
Accounts payable and accrued expenses (6,709) (545) 22,470
-------- ------- --------
Net cash used in operating activities (28,181) (7,124) (153,868)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property under construction -- (49,942) (288,435)
Additions to property and equipment in service (4,893) (2,861) (23,728)
Proceeds from sales of short-term investments -- 28,717 202,756
Purchases of short-term investments -- -- (202,756)
Deferred charges and other assets -- -- (11,999)
Non-inventory asset sales - net -- -- 2,176
------ ------ -------
Net cash used in investing activities (4,893) (24,086) (321,986)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 818 159 390,901
Principal payments under capital leases (577) (77) (1,367)
Payments on notes payable -- -- (34,667)
Proceeds from short-term borrowings 35,000 -- 35,000
Proceeds from debt 1,700 -- 143,330
Payments on long-term debt (8,754) (11,000) (52,240)
Debt issuance costs (270) -- (1,351)
Redemption of Common Stock -- -- (44)
------ ------ -------
Net cash provided by (used in) financing activities 27,917 (10,918) 479,562
Net (decrease) increase in cash and cash equivalents (5,157) (42,128) 3,708
CASH AND CASH EQUIVALENTS, beginning of period 8,865 137,287 --
------ ------- -------
CASH AND CASH EQUIVALENTS, end of period $3,708 $95,159 $3,708
====== ======= =======
See notes to consolidated financial statements.
- 3 -
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
(A Development Stage Company)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
March 31, 1996
(Unaudited)
1. Organization and Business
American Mobile Satellite Corporation 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 Satellite
Corporation to construct, launch, and operate a mobile satellite services system
(the "SKYCELL System") 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, AMSC
Subsidiary Corporation ("AMSC Subsidiary"). American Mobile Satellite
Corporation has six other subsidiaries, two of which are inactive and four whose
limited activities do not require material resources at this time. On April 7,
1995, the Company successfully launched its first satellite ("AMSC-1"), from
Cape Canaveral, Florida.
American Mobile Satellite Corporation (together with its subsidiaries "AMSC" or
the "Company") is devoting its efforts to establishing a new business. As
further discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations, this effort involves substantial risk. Specifically,
future operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies. The
integration of the components of the SKYCELL System is a complex undertaking.
Delays in the integration of the SKYCELL System have already occurred and there
can be no assurance
- 4 -
that further delays will not occur. 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 operating results.
2. Basis of Presentation
The consolidated balance sheet as of March 31, 1996, and the consolidated
statements of loss and cash flows for the three months ended March 31, 1996 and
1995, and for the period May 3, 1988 through March 31, 1996, 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, 1996, and
for all periods presented have been made. The balance sheet at December 31, 1995
has been taken from the audited financial statements.
The unaudited consolidated 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 presented not misleading,
these consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1995 Annual Report on Form 10-K ("1995 Annual Report").
The Company paid approximately $2.1 million and $1.2 million in the three-month
period ended March 31, 1996 and 1995, respectively, to related parties for
construction and service-related obligations and payments under financing
agreements. Payments to related parties from May 3, 1988 (date of inception) to
March 31, 1996, aggregated approximately $156.2 million. Total indebtedness to
related parties as of March 31, 1996 approximated $17.5 million.
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.
Certain amounts for the three months ended March 31, 1995 and for the period
from inception to March 31, 1996 have been reclassified to conform with current
period presentation.
- 5 -
3. Liquidity and Financing
Adequate liquidity and capital are critical to the ability of the Company
to continue as a going concern and to transition successfully from being a
development stage company to deploying and operating the SKYCELL System. During
1996, the Company will require significant additional financing aggregating
approximately $150.0 million to cover expected substantial operating losses,
debt service requirements, capital expenditures, inventory purchases and other
working capital. The Company does not expect to be in compliance with certain
financial covenants of its existing vendor debt arrangements (the "Vendor
Financing") at September 30, 1996. Debt service requirements during 1996 are
therefore expected to include the repayment of existing Vendor Financing which
approximates $55.2 million at March 31, 1996.
To satisfy its near term financing requirements, the Company on January 19,
1996 established a $40.0 million note purchase facility (the "Interim
Financing") with Morgan Guaranty Trust Company of New York ("Morgan"), Toronto
Dominion Investments, Inc. (an affiliate of The Toronto Dominion Bank) and
Hughes Communications Satellite Services, Inc. ("Hughes"), an AMSC stockholder.
The Company commenced borrowings under the Interim Financing on January 24,
1996, and had borrowed the full $40.0 million available under that facility at
April 4, 1996. To satisfy its financing requirements beyond April 1996, the
Company on April 22, 1996 issued notes (the "Short-Term Notes") in the aggregate
principal amount of $20.0 million to Morgan and Toronto Dominion (Texas) Inc.
(an affiliate of The Toronto Dominion Bank). The proceeds from the issuance of
the Short-Term Notes are expected to satisfy the Company's liquidity needs into
June 1996. In connection with its near term financing, the Company recognized
that it could not obtain such financing on commercially reasonable terms without
substantial credit support from its principal stockholders. In April 1996, the
Company entered into an agreement with Hughes Electronics Corporation ("HEC"),
pursuant to which HEC agreed to guaranty the Company's performance of its
obligations under the Interim Financing and the Short-Term Notes. HEC is the
parent company of Hughes. In consideration of such guaranty, the Company has
agreed to pay to HEC compensation consisting of cash fees and the issuance of
warrants exercisable for shares of the Company's Common Stock. The amount of
such fees and the number of such warrants is contingent on the timing of the
repayment of the Interim Financing and the Short-Term Notes, and whether HEC
guarantees the facility through which the Interim Financing and the Short-Term
Notes would be repaid.
- 6 -
The terms of the Interim Financing were amended in connection with HEC's
guaranty of that facility. As amended, the Interim Financing bears interest at
an annual rate increasing from 11% to 15% until April 18, 1996, and at an annual
rate of 5.75% thereafter. The Interim Financing matures on June 30, 1996, unless
(i) converted at the election of the lenders into Common Stock, (ii) prepaid by
the Company, or (iii) the obligations are accelerated by the lenders for an
event of default. Additionally, the lenders received 100,000 warrants (the
"Interim Financing Warrants"), valued at $2.2 million at date of issue, that
allow them to purchase Common Stock at $.01 per share. The Interim Financing
Warrants expire January 2001. The Short-Term Notes bear interest at an annual
rate of 5.6914%, and mature on May 31, 1996, unless (i) prepaid by the Company,
or (ii) the obligations are accelerated by the lenders for an event of default.
To satisfy its ongoing financing needs, the Company has been negotiating a
$200 million debt facility with Morgan and The Toronto Dominion Bank (the "Bank
Financing"). The Company has concluded that it cannot complete the Bank
Financing without substantial credit support from its principal stockholders.
HEC has proposed that it and certain of the Company's other principal
stockholders guaranty (the "Guaranty") $150.0 to $200.0 million of the Bank
Financing in exchange for compensation consisting principally of warrants to
purchase 5 million shares of the Company's Common Stock at a price of $24 per
share. The Company and its principal stockholders are continuing negotiations
regarding the Guaranty and the terms of the Bank Financing. If obtained, it is
expected that the Bank Financing would be secured by the pledge of substantially
all of the assets of the Company. It is also anticipated that the Bank
Financing, if consummated, will contain certain financial and operational
covenants. No assurance can be given that the terms of the Bank Financing, if it
is obtained, or of the Guaranty agreement, if negotiated, will be favorable to
the Company. If the Company is able to complete the Bank Financing, as to which
no assurance can be given, the Company believes that the proceeds from the Bank
Financing, together with anticipated proceeds from certain claims under its
launch insurance as described in Note 5, would provide it with sufficient
liquidity for its operations through its peak financing requirements.
In February 1995, in return for a $10.0 million prepayment of certain of
the Company's ground segment obligations ("Ground Segment Obligations"), the
contractor agreed to reduce the cost of the ground segment asset being
- 7 -
constructed by waiving $2.0 million of the amounts owed. At the time of the
$10.0 million prepayment, the Company reduced the ground segment asset by $1.4
million representing unpaid interest on its Ground Segment Obligations.
As the Company expected that in the first quarter of 1996 it would not be in
compliance with certain financial covenants under its remaining financing
agreements, the agreements were amended to defer compliance with such financial
covenants to September 30, 1996.
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 both complete and operate the
SKYCELL System and operate mobile data terminals and mobile telephones.
The successful operation of the SKYCELL System 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
its cash flows.
The Company has filed applications with the FCC and expects to file
applications in the future with respect to the operation of its SKYCELL System
and certain types of mobile data terminals and mobile telephones. 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
- 8 -
timely basis, there can be no assurance that the requests will be granted on a
timely basis or that they 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 its cash flows.
The Company's license requires that it comply with a construction and launch
schedule specified by the FCC for each of the three authorized satellites. The
second and third satellites are not in compliance with the schedule for
commencement of construction. The Company has asked the FCC to grant extensions
of the deadlines for the second and third satellites. Certain of these extension
requests have been opposed by third parties. The FCC has not acted on the
Company'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 the Company's license. The Company believes
that the exercise of such authority to rescind the license is unlikely.
In 1992, a former director of AMSC 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 seeks damages for not less
than $100 million trebled under the antitrust laws plus punitive damages,
interest, attorneys' fees and costs. In mid-1992, the Company filed its response
denying all allegations. The Company's motion for summary judgement, filed on
March 31, 1994, was denied on April 18, 1996. The matter has now been set for
trial beginning November 25, 1996. Management believes that the ultimate outcome
of this matter will not be material to the Company's financial position, results
of operations, and its cash flows.
5. Other Matters
At March 31, 1996, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory approximating
$63.8 million.
In connection with testing of the Communications Ground Segment ("CGS") in May
1995, a transmission was sent to AMSC-1 which caused certain components of the
communications payload to overheat, damaging one of the eight hybrid matrix
amplifier output ports that serve the spotbeams covering the eastern and central
United States. Beginning in December 1995, AMSC-1 experienced an intermittent
degradation of power in the eastern spotbeam. Although the Company attempted to
make adjustments to the SKYCELL System to compensate and correct for this
power loss, it was unable to eliminate recurrences of this power degradation.
- 9 -
Accordingly, in March 1996 the Company decided to stop using the eastern
spotbeam and to expand the coverage of the other three CONUS spotbeams to
include the territory previously covered by the eastern spotbeam. The Company
believes that the reconfiguration will provide substantially the same
geographical coverage as the original four spotbeam configuration without
affecting the quality of the service provided by AMSC-1. The reconfiguration
will not significantly change the coverage of the AMSC-1's two other spotbeams,
which cover Alaska, Hawaii, the Caribbean and portions of South America.
Expanding the three CONUS spotbeams to cover the territory previously covered by
the eastern spotbeam will require the use of additional power for subscriber
channels in certain locations. This power adjustment will not affect the
anticipated in-orbit life of AMSC-1, but will eventually result in the
availability of fewer channels for the SKYCELL System when the full capacity of
AMSC-1 is approached. Any reduction in the number of available channels will
depend on a variety of factors including the actual geographical mix of the
Company's subscriber base and the types of Subscriber Equipment used. Based on
its analyses to date, the Company believes that AMSC-1's channel capacity will
not be reduced by more than 15%. The Company also believes that any such
reduction will not affect its anticipated revenue growth until early 1998. The
timing and amount of any impact on revenue growth cannot be predicted with
precision and will depend upon, among other things, the results of the Company's
marketing efforts and the availability of alternative satellite capacity,
including capacity from a second generation satellite, should the Company decide
to proceed with its development, or pursuant to the Company's Satellite Capacity
Agreement with TMI Communications and Company, Limited Partnership, which
launched a satellite similar to AMSC-1 in April 1996. The Company has filed a
claim for indemnity under its launch insurance with respect to the events
leading to the reconfiguration of AMSC-1.
In occurrences not directly related to testing and deployment of the CGS,
AMSC-1 has experienced on separate occasions the failure of two solid state
power amplifiers ("SSPA") serving the Mountain, West, Alaska/Hawaii and
Caribbean spotbeams. These spotbeams were designed to be served by eight SSPA's
with two spares. The Company is currently operating these spotbeams in a seven
SSPA configuration and preserving one spare SSPA. AMSC-1 has also experienced
the failure of an L-band receiver supporting the Alaska/Hawaii spotbeam. While
the Company and its contractors have been unable to identify the specific cause
of the failure, it is believed that it may be attributable to a defective
receiver and not a problem inherent in the design of AMSC-1. The Company is
using a spare back-up L-band receiver on AMSC-1 to service the Alaska/Hawaii
spotbeam. As a result of reconfiguring AMSC-1 to operate with five spotbeams,
there is one other back-up L-band receiver on AMSC-1.
- 10 -
PART I--FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Interim Financial Condition and Results of Operations
General
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the consolidated
financial condition and results of operations of American Mobile Satellite
Corporation (with its subsidiaries, "AMSC" 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. Since May
1988, the Company has been a development stage company, engaged primarily in the
design, development, construction, deployment and financing of a mobile
satellite communications system (the "SKYCELL System"). The SKYCELL System
includes the Company's first satellite ("AMSC-1") launched successfully in April
1995, and a fixed communications ground segment (the "CGS"). In December 1995,
the Company began to introduce certain voice products and services, including
its Satellite Telephone Service.
Factors that could affect Future Operating Results
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 all the Company's products and related services, including among other
things, availability of mobile telephones, data terminals and other equipment to
be used with the SKYCELL System ("Subscriber Equipment") being manufactured by
third parties over which the Company has limited control, (ii) the market
acceptance of the Company's services, (iii) the ability and the commitment of
the Company's Authorized Service Providers and Authorized Sales Agents to market
and distribute the Company's services, (iv) competition from existing companies
which provide services using existing communications technologies and the
possibility of competition from companies using new technology in the future,
(v) capacity constraints arising from the reconfiguration of AMSC-1 discussed
below, and (vi) additional technical anomalies that may occur within the SKYCELL
System, including those relating to AMSC-1, which could impact, among other
- 11 -
things, the operation of the SKYCELL System and the cost, scope or availability
of in-orbit insurance.
The Company's operating results and capital and liquidity needs have been
materially affected by delays experienced in the development and deployment of
the SKYCELL System. In particular, the Company's marketing efforts have been
materially affected by delays experienced in the development and availability of
Subscriber Equipment. Initial Subscriber Equipment for Satellite Telephone
Service ("STS") use did not become commercially available until December 1995
with additional configurations expected to be available commencing in the second
quarter of 1996. In addition, the CGS currently does not support facsimile
capability. The Company anticipates that facsimile capability will become
available during the course of 1996. The impact of these delays on the Company's
marketing efforts 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 SKYCELL System or Subscriber
Equipment will not be encountered in the future and have an adverse impact on
the Company.
In addition, the markets for wireless communications services are characterized
by rapid technological and other changes. The Company's success depends, in
part, on its ability to respond and adapt to such changes. The delays
experienced in the deployment of the SKYCELL System and the availability of
Subscriber Equipment, together with changes in market conditions, have already
caused the Company to redefine its focus on various products and markets, and to
modify its intended distribution arrangements. For instance, the rapid build-out
of cellular and other terrestrial-based wireless communications systems has
impacted the Company's SRS business by preempting the attention of the cellular
carriers who are the Company's Authorized Service Providers. To date, the ASPs
have not expended significant efforts in marketing the Company's services. By
contrast, perceived demand has resulted in more emphasis on the maritime market.
The Company expects that sales and marketing expenses will increase from
previous levels in 1996 as part of its subscriber acquisition programs. Charges
to operations for depreciation expense for the SKYCELL System began in the
fourth quarter of 1995 and accordingly, it is expected that future charges will
be significant. Additionally, the Company discontinued capitalization of
interest costs in the fourth quarter of 1995 upon the commencement of full
commercial service. Interest expense in 1996 is expected to be significant as
- 12 -
a result of borrowings under the Interim Financing, the Short-Term Notes,
and anticipated borrowings under the Bank Financing, if finalized, as
discussed below.
In March 1996, due to certain technical anomalies, the Company reconfigured
AMSC-1 to provide service using five, instead of the previous six, spotbeams.
Although this reconfiguration will not affect the in-orbit life of AMSC-1 or the
quality of service provided, it will eventually result in the availability of
fewer subscriber channels as full capacity of AMSC-1 is approached. Although any
actual reduction in the number of available channels will be dependent on a
variety of factors, based on its analyses to date, the Company believes that
AMSC-1's channel capacity will not be reduced by more than 15%, or that any such
reduction will affect the Company's anticipated revenue growth until early 1998.
See "Technological Developments."
Results of Operations
Operating Revenues
Service revenues, which includes both the Company's Satellite Telephone
Services and its Fleet Management Data services, approximated $1.8 million for
both the three months ended March 31, 1996 and 1995. Service revenue from
Satellite Telephone Services approximated $960,000 for the three months ended
March 31, 1996 including approximately $841,000 attributable to satellite
capacity leased to TMI Communications and Company, Limited Partnership ("TMI"),
a Canadian limited partnership, under a commitment which is expected to be
completed in May 1996. Service revenue from Fleet Management Data Services
approximated $805,000 for the three months ended March 31, 1996 compared to $1.8
million for the same period in 1995, a reduction of $995,000. Prior to 1996, the
Company provided its Fleet Management Data Service using satellite capacity
leased from the Communications Satellite Corporation ("COMSAT"), the cost of
which was passed through to one customer ("Major Customer"). The decrease of
$995,000 reflects the reduced revenue from the Major Customer reflecting higher
prices attributable to the leased COMSAT satellite compared to AMSC-1. Of the
Fleet Management Data Services revenues, 53% and 71% were attributable to the
Major Customer for the quarters ended March 31, 1996 and 1995. Revenue from the
sale of mobile data terminals and mobile telephones increased to $2.6 million
for the three months ended March 31, 1996 compared to $46,000 for the same
period in 1995. The increase is attributable to (i) the Company's introduction
of certain of the Company's voice products in the fourth quarter of 1995 and the
resulting sale of mobile telephones, and (ii) the increased availability of
- 13 -
mobile data terminals in 1996 compared to the first three months of 1995
following a contract signed with a mobile data terminal manufacturer in February
1995.
Costs and Expenses
The Company's costs and expenses have primarily increased in connection with the
commencement of full commercial service in December 1995. Cost of service and
operations, which includes costs to support subscribers and to operate the
SKYCELL System, were $6.8 million and $4.1 million representing approximately
22% and 41% of total operating expenses for the first three months of 1996 and
1995, respectively. The dollar increase in cost of service and operations was
primarily attributable to (i) additional personnel and related costs to support
both existing and anticipated customer demand, (ii) increased costs associated
with the on-going maintenance of the Company's billing systems and the CGS, and
(iii) $1.6 million of insurance expense for in-orbit insurance coverage for
AMSC-1, offset by the elimination of COMSAT lease expense reflecting the
transition of the Company's customers from the leased satellite to AMSC-1. The
decrease as a percentage of operating expenses was attributable to the overall
increase in total operating expenses. The cost of equipment sold increased to
$2.4 million from $38,000 for the quarters ended March 31, 1996 and 1995,
respectively, and represented 8% and less than 1% of total operating expenses
for the respective periods. The increase in both dollars and as a percentage of
operating expenses of the cost of equipment sold is primarily attributable to
(i) the Company's introduction of certain of the Company's voice products in the
fourth quarter of 1995 and the resulting sale of mobile telephones, and (ii) the
availability of mobile data terminals in 1996 compared to the first three months
of 1995. Sales and advertising expenses were $6.0 million and $1.6 million,
representing approximately 19% and 16% of total operating expenses for the first
three months of 1996 and 1995, respectively. Both the dollar increase and the
increase as a percentage of operating expenses of sales and advertising expenses
were primarily attributable to (i) additional headcount and personnel related
costs associated with the increase in sales staff, and (ii) increased costs
directly associated with the increased subscriber acquisition programs. General
and administrative expenses were $5.0 million and $3.3 million, representing
approximately 16% and 34% of total operating expenses for the first three months
of 1996 and 1995, respectively. The dollar increase in general and
administrative expenses for the first three months of 1996 compared to 1995 was
primarily attributable to a $700,000 increase in personnel related
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costs associated with hiring and training staff to support full commercial
service and increased facilities and related support costs approximating
$640,000. Depreciation and amortization expense was $11.1 million and $865,000
for the first three months of 1996 and 1995, respectively, representing
approximately 35% and 9% of total operating expenses for the respective periods.
Both the dollar increase and the increase as a percentage of operating expenses
in depreciation and amortization expense were attributable to the commencement
of depreciation of both AMSC-1 and related assets and the CGS in the fourth
quarter of 1995.
Interest
Interest income was $109,000 in the first quarter of 1996 compared to $1.8
million for the same period in 1995 reflecting lower average cash balances in
the first three months of 1996. The Company incurred $3.0 million of interest
expense in the first quarter of 1996 compared to no interest expense for the
comparable period of 1995 reflecting (i) the discontinuation of interest cost
capitalization as a result of substantially completing the SKYCELL System in the
fourth quarter of 1995, and (ii) the amortization of debt discount in the first
three months of 1996 of approximately $996,000.
Capital expenditures
Capital expenditures, including additions financed through vendor financing
arrangements, for the first three months of 1996 were $5.4 million compared to
$48.0 million for the same period in 1995. The decrease was largely attributable
to the purchase, in the first quarter of 1995, of launch insurance at a cost to
the Company of $42.8 million in connection with the Company's launch contract
with Martin Marietta Commercial Launch Services, Inc.
Liquidity and Capital Resources
Adequate liquidity and capital are critical to the ability of the Company
to continue as a going concern and to transition successfully from being a
development stage company to deploying and operating the SKYCELL System. During
1996, the Company will require significant additional financing aggregating
approximately $150.0 million to cover expected substantial operating losses,
debt service requirements, capital expenditures, inventory purchases and other
working capital. The Company does not expect to be in compliance with certain
financial covenants of its existing vendor debt arrangements (the "Vendor
-15-
Financing") at September 30, 1996. Debt service requirements during 1996 are
therefore expected to include the repayment of existing Vendor Financing which
approximates $55.2 million at March 31, 1996. In addition, the Company expects
that operating revenues will be insufficient to cover operating expenses until
sometime in 1997.
The effect of these matters, among others, is that the Company estimates
that its peak financing requirement will be approximately $200.0 million in late
1997. The Company's actual peak financing requirements may differ materially
from this estimate based on, among other factors, shortfalls from estimated
levels of operating cashflows due to delays in the introduction of certain
products and services, the unavailability of Subscriber Equipment, insufficient
demand for the Company's services and receipt of proceeds from certain insurance
claims. See "Factors that could affect Future Operating Results."
To satisfy its near term financing requirements, the Company on January 19,
1996 established a $40.0 million note purchase facility (the "Interim
Financing") with Morgan Guaranty Trust Company of New York ("Morgan"), Toronto
Dominion Investments, Inc. (an affiliate of The Toronto Dominion Bank) and
Hughes Communications Satellite Services, Inc. ("Hughes"), an AMSC stockholder.
The Company commenced borrowings under the Interim Financing on January 24,
1996, and had borrowed the full $40.0 million available under that facility at
April 4, 1996. To satisfy its financing requirements beyond April 1996, the
Company on April 22, 1996 issued notes (the "Short-Term Notes") in the aggregate
principal amount of $20.0 million to Morgan and Toronto Dominion (Texas) Inc.
(an affiliate of The Toronto Dominion Bank). The proceeds from the issuance of
the Short-Term Notes are expected to satisfy the Company's liquidity needs into
June 1996.
In connection with its near term financing, the Company recognized that it
could not obtain such financing on commercially reasonable terms without
substantial credit support from its principal stockholders. In April 1996, the
Company entered into an agreement with Hughes Electronics Corporation ("HEC"),
pursuant to which HEC agreed to guaranty the Company's performance of its
obligations under the Interim Financing and the Short-Term Notes. HEC is the
parent company of Hughes. In consideration of such guaranty, the Company has
agreed to pay to HEC compensation consisting of cash fees and the issuance of
warrants exercisable for shares of the Company's Common Stock. The amount of
such fees and the number of such warrants is contingent on the timing of the
repayment of the Interim Financing and the Short-Term Notes, and whether HEC
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guarantees the facility through which the Interim Financing and the Short-Term
Notes will be repaid. If such repayment is made with the proceeds of the Bank
Financing (described below) or comparable longer-term financing, and such Bank
Financing is guaranteed by HEC, no compensation will be payable to HEC in
connection with its guaranty of the Interim Financing and the Short-Term Notes.
If the Interim Financing and the Short-Term Notes are repaid with the proceeds
of borrowings not guaranteed by HEC, the Company will issue to HEC warrants
exercisable for 125,000 shares of Common Stock at an exercise price of $0.01 per
share, and will pay to HEC a guaranty fee equal to (i) the difference between
11% per annum and the amount of interest paid by the Company on the Short-Term
Notes, plus (ii) the difference between 11% per annum and the amount of interest
paid by the Company on 75% of the Interim Financing, in each case, during the
period HEC's guaranty is outstanding. If the Interim Financing and the
Short-Term Notes are not repaid by May 31, 1996 (subject to extension to June
30, 1996 if the Company is pursuing completion of definitive documentation of
longer-term financing on such date), the Company will (i) issue to HEC warrants
exercisable for 2 million shares of Common Stock at an exercise price of $24 per
share, (ii) pay to HEC guaranty fees of 1 1/2% of the aggregate principal amount
of the Interim Financing and the Short-Term Notes as of such date, and (iii) pay
to HEC the difference between 11% per annum and the amount of interest paid by
the Company on the Short-Term Notes and the Interim Financing from June 1, 1996
until repayment in full.
The terms of the Interim Financing were amended in connection with HEC's
guaranty of that facility. As amended, the Interim Financing bears interest at
an annual rate increasing from 11% to 15% until April 18, 1996, and at an annual
rate of 5.75% thereafter. The Interim Financing, as amended, matures on June 30,
1996, unless (i) converted at the election of the lenders into Common Stock,
(ii) prepaid by the Company, or (iii) the obligations are accelerated by the
lenders for an event of default. The number of shares of Common Stock obtainable
upon conversion of the Interim Financing is determined by dividing the
outstanding amount thereof by the applicable exchange price of the Common Stock,
as defined in the Interim Financing documents, to be obtained upon such
conversion.
The terms of the Interim Financing were also amended to delete certain covenants
the Company had not satisfied, including certain covenants relating to the
attainment of certain numbers of subscribers. The lenders under the Interim
Financing had previously waived compliance with those covenants.
- 17 -
The Short-Term Notes bear interest at an annual rate of 5.6914%, and mature on
May 31, 1996, unless (i) prepaid by the Company, or (ii) the obligations are
accelerated by the lenders for an event of default.
To satisfy its ongoing financing needs, the Company has been negotiating a
$200 million debt facility with Morgan and The Toronto Dominion Bank (the "Bank
Financing"). The Company has concluded that it cannot complete the Bank
Financing without substantial credit support from its principal stockholders.
HEC has proposed that it and certain of the Company's other principal
stockholders guaranty ("the Guaranty") $150.0 to $200.0 million of the Bank
Financing in exchange for compensation consisting principally of warrants to
purchase 5 million shares of the Company's Common Stock at a price of $24 per
share. The Company and its principal stockholders are continuing negotiations
regarding the Guaranty and the terms of the Bank Financing. If obtained, it is
expected that the Bank Financing would be secured by the pledge of substantially
all of the assets of the Company. It is also anticipated that the Bank
Financing, if consummated, will contain certain financial and operational
covenants. No assurance can be given that the terms of the Bank Financing, if it
is obtained, or of the Guaranty agreement, if negotiated, will be favorable to
the Company. If the Company is able to complete the Bank Financing, as to which
no assurance can be given, the Company believes that the proceeds from the Bank
Financing, together with anticipated proceeds from certain claims under its
launch insurance as described below, would provide it with sufficient liquidity
for its operations through its peak financing requirements.
On February 7, 1996, the Company filed a registration statement relating to the
offering of up to 4,600,000 shares of the Company's Common Stock. In light of
the current market price of its Common Stock, the Company has concluded that
such offering cannot presently be completed on commercially reasonable terms.
The Company has filed a claim for indemnity under its launch insurance with
respect to the anomalies leading to the reconfiguration of AMSC-1 discussed
below. See "Technological Developments." The Company anticipates that the
proceeds, if any, with respect to the claim would be received in 1996 and would
be applied to repay debt, although no assurance can be given as to the timing of
the receipt of such proceeds.
- 18 -
At March 31, 1996, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory approximating
$63.8 million.
For the period from inception through March 31, 1996, the Company has used
$153.9 million of cash in operating activities and $322.0 million of cash in
investing activities and has generated $479.6 million of cash from financing
activities. The Company's primary investing activity since inception has been
capital expenditures related to the SKYCELL System. The Company has financed its
capital and operating requirements through a combination of private debt and
equity placements, a public equity offering, borrowings from financial
institutions, and vendor financing arrangements.
Cash used in operating activities was $28.2 million for the first three months
of 1996 compared to cash used of $7.1 million for the same period in 1995, an
increase of $21.1 million. The increase in cash used in operating activities was
primarily attributable to (i) increased operating losses, (ii) and the reduction
of accounts payable and accrued expense, and inventory purchases. Cash
used in investing activities was $4.9 million for the first three months of 1996
compared to $24.1 million for the same period in 1995, a decrease of $19.2
million. The decrease was primarily attributable to the decrease in construction
activity, which included a $42.8 million purchase of launch insurance in the
first quarter of 1995, offset partially by the sale of $28.7 million of
short-term investments in the first quarter of 1995. Cash provided by financing
activities was $27.9 million for the first three months of 1996 compared to cash
used in financing activities of $10.9 million for the same period in 1995, an
increase of $38.8 million. The increase was largely attributable to the $35
million of borrowings under the Interim Financing in the first quarter of 1996.
As of March 31, 1996, the Company had $3.7 million of cash and cash equivalents
and a working capital deficit of $93.0 million.
Technological Developments
In connection with testing of the CGS in May 1995, a transmission was sent to
AMSC-1 which caused certain components of the communications payload to
overheat, damaging one of the eight hybrid matrix amplifier output ports that
serve the spotbeams covering the eastern and central United States. Beginning in
December 1995, AMSC-1 experienced an intermittent degradation of
- 19 -
power in the eastern spotbeam. Although the Company attempted to make
adjustments to the SKYCELL System to compensate and correct for this power loss,
it was unable to eliminate recurrences of this power degradation. Accordingly,
in March 1996 the Company decided to stop using the eastern spotbeam and to
expand the coverage of the other three CONUS spotbeams to include the territory
previously covered by the eastern spotbeam. The Company believes that the
reconfiguration will provide substantially the same geographical coverage as the
original four spotbeam configuration without affecting the quality of the
service provided by AMSC-1. The reconfiguration will not significantly change
the coverage of AMSC- 1's two other spotbeams, which cover Alaska, Hawaii, the
Caribbean and portions of South America.
Expanding the three CONUS spotbeams to cover the territory previously covered by
the eastern spotbeam will require the use of additional power for subscriber
channels in certain locations. This power adjustment will not affect the
anticipated in-orbit life of AMSC-1, but will eventually result in the
availability of fewer channels for the SKYCELL System when the full capacity of
AMSC-1 is approached. Any reduction in the number of available channels will
depend on a variety of factors including the actual geographical mix of the
Company's subscriber base and the types of Subscriber Equipment used. Based on
its analyses to date, the Company believes that AMSC-1's channel capacity will
not be reduced by more than 15%. The Company also believes that any such
reduction will not affect its anticipated revenue growth until early 1998. The
timing and amount of any impact on revenue growth cannot be predicted with
precision and will depend upon, among other things, the results of the Company's
marketing efforts and the availability of alternative satellite capacity,
including capacity from a second generation satellite, should the Company decide
to proceed with its development, or pursuant to the Company's Satellite Capacity
Agreement with TMI, which launched a satellite similar to AMSC-1 in April 1996.
In occurrences not directly related to testing and deployment of the CGS,
AMSC-1 has experienced on separate occasions the failure of two solid state
power amplifiers ("SSPA") serving the Mountain, West, Alaska/Hawaii and
Caribbean spotbeams. These spotbeams were designed to be served by eight SSPA'S
with two spares. The Company is currently operating these spotbeams in a seven
SSPA configuration and preserving one spare SSPA. AMSC-1 has also experienced
the failure of an L-band receiver supporting the Alaska/Hawaii spotbeam. While
the Company and its contractors have been unable to identify the specific cause
of the failure, it is believed that it may be attributable to a defective
receiver and not a problem inherent in the design of AMSC-1. The Company is
using a spare back-up L-band receiver on AMSC-1 to service the Alaska/Hawaii
spotbeam. As a result of reconfiguring AMSC-1 to operate with five spotbeams,
there is one other back-up L-band receiver on AMSC-1.
-20-
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) At the annual meeting of the stockholders of AMSC held on April 25,
1996, the matters described under (b), (c), (d), (e) and (f) below were
voted upon.
(b) The following nominees, constituting all of the Company's
directors, were elected to the Company's board of directors
by the following vote:
Votes For Votes Against Votes Withheld
Chia Choon Wei 18,593,963 777,168 294,565
Steven D. Dorfman 19,354,796 16,335 294,565
Anthony J. Iorillo 19,356,304 14,900 294,565
Lim Toon 18,593,931 777,200 294,565
Billy J. Parrott 19,371,001 130 294,565
Brian B. Pemberton 19,307,501 63,630 294,565
Andrew A. Quartner 19,315,031 56,100 294,565
Jordan Roderick 19,315,031 56,100 294,565
Roderick M. Sherwood 19,357,031 14,100 294,565
Michael T. Smith 19,356,801 14,330 294,565
Albert L. Zesiger 19,370,531 600 294,565
(c) The amendment to the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock
authorized for issuance from 33,409,040 to 75,000,000 was approved by
the following vote:
Votes For Votes Against Abstain
18,079,802 1,579,226 6,668
(d) The amendment to the Company's 1989 Stock Option Plan to increase the
number of shares authorized for issuance was approved by the following
vote:
Votes For Votes Against Abstain
17,830,713 1,348,563 486,420
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(e) The issuance of Common Stock upon the conversion of
securities held by certain of the Company's lenders was
authorized by the following vote:
Broker Non-Votes Votes For Votes Against Abstain
2,605,282 16,943,751 106,736 9,927
(f) The appointment of Arthur Andersen LLP as independent
accountants for the Company for 1996 was ratified by the
following vote:
Votes For Votes Against Abstain
19,652,973 6,843 5,880
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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)(filed herewith)
3.2 -- Amended and Restated Bylaws of AMSC (as amended and
restated effective February 29, 1996)(Incorporated by
reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the fiscal year ending December 31,
1995 (File No. 0-23044))
10.50 -- Securities Purchase Agreement dated as of January 19,
1996 among AMSC Subsidiary Corporation, American Mobile
Satellite Corporation, Toronto Dominion Investments,
Inc., Morgan Guaranty Trust Company of New York, Hughes
Communications Satellite Services, Inc. and The Toronto
Dominion Bank. (Incorporated by reference to Exhibit
10.50 to Company's Current Report on Form 8-K filed
February January 23, 1996 (File No. 0-23044))
11.1 -- Computation of Net Loss Per Share (filed herewith)
27.0 -- Financial Data Schedule
(b) Reports on Form 8-K
On January 23, 1996, the Company filed a Current Report on Form 8-K
describing in response to Item 5 - Other Events of such Form the Company's
execution of a $40 million bridge financing facility with Morgan Guaranty Trust
Company of New York, Toronto Dominion Investments, Inc., and Hughes
Communications Satellite Services, Inc.
On March 6, 1996, the Company filed a Current Report on Form 8-K
describing in response to Item 5 - Other Events of such Form the reconfiguration
of the spotbeams of the Company's satellite.
- 23 -
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: May 14, 1996 /s/Patrick C. FitzPatrick
Patrick C. FitzPatrick
Chief Financial Officer
and Vice President (principal
financial officer and principal
accounting officer)
- 24 -
EXHIBIT INDEX
Exhibit
Number Exhibit
3.1 Restated Certificate of Incorporation of
AMSC (as restated effective May 1,
1996)(filed herewith)
3.2 Amended and Restated Bylaws of AMSC (as
amended and restated effective February
29, 1996)(Incorporated by reference to
Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year
ending December 31, 1995 (File No. 0-
23044))
10.50 Securities Purchase Agreement dated as
of January 19, 1996 among AMSC
Subsidiary Corporation, American Mobile
Satellite Corporation, Toronto Dominion
Investments, Inc., Morgan Guaranty Trust
Company of New York, Hughes
Communications Satellite Services, Inc.
and The Toronto Dominion Bank.
(Incorporated by reference to Exhibit
10.50 to Company's Current Report on
Form 8-K filed February January 23, 1996
(File No. 0-23044))
11.1 Computation of Net Loss Per Share (filed herewith)
27.0 Financial Data Schedule