SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 20191-5416
(Address of principal (Zip Code)
executive offices)
(703) 758-6000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s)), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares of Common Stock outstanding at October 31, 1996: 25,091,846
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF LOSS
-------------------------------
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended May 3, 1988
September 30 September 30 (date of inception)
1996 1995 1996 1995 through September 30, 1996
--------------------- --------------------- ---------------------------
Revenues:
Services $2,480 $1,619 $ 6,071 $5,220 $17,735
Sales of equipment 4,925 438 12,452 504 14,376
------ ------ ------ ------ -------
Total Revenues $7,405 $2,057 $18,523 $5,724 $32,111
Costs and Expenses:
Cost of service and operations 7,616 4,357 23,258 12,561 82,478
Cost of equipment sold 6,227 599 23,116 757 27,792
Sales and advertising 5,729 5,418 18,048 8,950 57,178
General and administrative 4,242 4,032 13,635 11,642 73,340
Depreciation and amortization 10,101 1,179 32,975 2,917 65,410
------ ------ ------ ------ -------
Operating Loss (26,510) (13,528) (92,509) (31,103) (274,087)
Interest Income 180 1,026 485 4,139 19,498
Interest Expense (3,673) -- (11,364) -- (12,347)
------ ------ ------- ------ -------
Loss before extraordinary item (30,003) (12,502) (103,388) (26,964) (266,936)
Extraordinary gain on early
extinguishment of debt -- -- -- -- (1,372)
------ ------ ------- ------ -------
Net Loss $(30,003) $(12,502) $(103,388) $(26,964) $(268,308)
========= ========= ========== ========= ==========
Loss per share of common stock $ (1.20) $ (0.50) $ (4.13) $ (1.08)
========= ========= ========== =========
Weighted-average number
of common shares outstanding
during the period 25,065 24,941 25,024 24,884
========= ========= ========== =========
See notes to consolidated financial statements.
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)
September 30, December 31,
1996 1995
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 2,388 $ 8,865
Short term investments 1,000 --
Inventory 39,960 15,104
Prepaid in-orbit insurance -- 4,823
Accounts receivable-trade 7,043 1,375
Other current assets 1,482 2,860
------ ------
Total current assets 51,873 33,027
PROPERTY AND EQUIPMENT IN SERVICE - NET 274,758 362,105
DEFERRED CHARGES AND OTHER ASSETS - NET 16,298 3,219
------- -------
Total assets $342,929 $398,351
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 51,739 34,462
Obligations under capital leases due within one year 4,245 2,446
Obligation to related party for equipment financing 6,297 6,874
Current portion of long-term debt 11,113 60,990
------- -------
Total current liabilities 73,394 104,772
Long-term Liabilities:
Obligations under Term Loan Facility 77,000 --
Capital lease obligations 3,566 6,052
----- -----
Total liabilities 153,960 110,824
Stockholders' Equity:
Preferred stock, par value $0.01; no shares issued -- --
Common stock, voting, par value $0.01 251 250
Additional paid-in capital 451,178 448,757
Common stock purchase warrants 23,848 3,440
Unamortized guarantee warrants (18,000) --
Deficit accumulated during the development stage (268,308) (164,920)
--------- ---------
Total stockholders' equity 188,969 287,527
--------- ---------
Total liabilities and stockholders' equity $342,929 $398,351
========= =========
See notes to consolidated financial statements.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months Ended May 3, 1988
September 30, (date of inception)
1996 1995 through September 30, 1996
---- ---- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(103,388) $(26,964) $(268,308)
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 4,015 -- 4,015
Depreciation and amortization 32,975 2,917 65,410
Deferred and other items, net 1,621 (1,252) 800
Changes in assets and liabilities:
Prepaid in-orbit insurance 4,823 -- --
Trade accounts receivable (5,668) 887 (4,293)
Other current assets 944 (7,029) (3,436)
Inventory (24,856) (2,122) (39,960)
Accounts payable and
accrued expenses 14,891 4,221 44,070
------- ------- --------
Net cash used in operating
activities (74,643) (29,342) (200,330)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property under
construction -- (71,527) (288,435)
Insurance proceeds applied to
equipment in service 66,000 -- 66,000
Additions to property
and equipment in service (10,418) (6,304) (29,253)
Proceeds from sales of short-term
investments -- 28,717 202,756
Purchases of short-term investments (1,000) -- (203,756)
Deferred charges and other assets -- (1,089) (11,999)
Non-inventory asset sales - net -- -- 2,176
Net cash provided by (used in) ------ ------- --------
investing activities 54,582 (50,203) (262,511)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 1,248 2,040 391,331
Principal payments under capital leases (2,671) (304) (3,461)
Payments on notes payable -- -- (34,667)
Proceeds from short-term borrowings 70,000 -- 70,000
Payments on short-term borrowings (70,000) -- (70,000)
Proceeds from Term Loan Facility 77,000 -- 77,000
Proceeds from debt 1,700 7,630 143,330
Payments on long-term debt (53,098) (11,665) (96,584)
Debt issuance costs (10,595) -- (11,676)
Redemption of Common Stock -- -- (44)
------ ------ -------
Net cash provided by (used in)
financing activities 13,584 (2,299) 465,229
Net (decrease) increase in cash and
cash equivalents (6,477) (81,844) 2,388
CASH AND CASH EQUIVALENTS,
beginning of period 8,865 137,287 --
------- ------- -------
CASH AND CASH EQUIVALENTS,
end of period $ 2,388 $ 55,443 $2,388
======== ========= ========
See notes to consolidated financial statements.
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
September 30, 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 best be 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,
liquidity, 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 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 September 30, 1996, and the
consolidated statements of loss and cash flows for the nine months ended
September 30, 1996 and 1995, and for the period May 3, 1988 through September
30, 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 September 30, 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 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 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 $6.6 million and $3.6 million in the
nine-month periods ended September 30, 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 September 30, 1996, aggregated approximately $163.7 million. Total
indebtedness to related parties as of September 30, 1996 approximated $8.5
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 and nine months ended September 30,
1995 and for the period from inception to September 30, 1996 have been
reclassified to conform with the current period presentation.
3. Liquidity and Financing
Adequate liquidity and capital are critical to the ability of the Company
to transition successfully from being a development stage company to deploying
and operating the SKYCELL System. As previously reported, on June 28, 1996, the
Company established a $225 million debt facility with Morgan Guaranty Trust
Company and Toronto Dominion Bank (the "Bank Financing") consisting of two
facilities: (i) a $150 million five-year, multi-draw term loan facility (the
"Term Loan Facility") and (ii) a $75 million five-year revolving credit facility
with a bullet maturity on June 30, 2001 (the "Working Capital Facility"). As of
October 28, 1996, the Company had drawn down $93.0 million of the Term Loan
Facility at annual interest rates ranging from 5.6875% to 5.75%. $200 million of
the Bank Financing is guaranteed (the "Guarantee") by three of the Company's
principal stockholders: Hughes Electronics Corporation ("Hughes"), Singapore
Telecommunications, Ltd. and Baron Capital Partners, L.P. (collectively, the
"Guarantors"). The Guarantors received compensation consisting principally of
cash fees and warrants (the "Guarantee Warrants"). The Guarantee Warrants have
been valued at $19.0 million.
Under the terms of the Bank Financing and the Guarantee, borrowings under
the Bank Financing in excess of prescribed levels are contingent upon the
satisfaction by the Company of certain performance tests relating to net
revenues, number of subscribers, operating cash flow and earnings before
interest, taxes, depreciation and amortization. During the third quarter of
1996, the Company met the required performance tests except for the test
relating to net revenues. The Company has received a waiver relating to
satisfaction of that performance test and of a limitation on borrowing, thereby
permitting the Company to borrow up to $155 million under the Bank Financing.
This is expected to meet the Company's financing needs through the remainder of
1996 and into 1997.
Because of the slower than anticipated build-up in subscribers and related
revenues, it is currently expected that the Company will not meet the remaining
quarterly Guarantor performance tests under the Bank Financing. Therefore,
additional Guarantor waivers will be required under the Bank Financing. Even if
the Company is successful in receiving additional waivers, the Company may need
additional financing in 1997 beyond the Bank Financing. No assurance can be
given that additional waivers will be granted or that the terms of such waivers
will not be adverse to the Company, or that if additional financing is required,
that such financing will be available or that the terms thereof will be
favorable to the Company. If waivers are not granted, or the Bank Financing is
not sufficient, the Company may not have adequate capital to fund its future
operations.
Following negotiations of certain existing vendor debt arrangements (the
"Vendor Financing") and ground segment obligations ("Ground Segment
Obligations"), aggregating $11.1 million, the Company has arranged to defer
repayment of the Vendor Financing and a portion of the Ground Segment Obligation
from September 30, 1996, until various dates in 1997.
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
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 any 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
June 30, 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, or its cash flows.
In October 1996, a vendor filed a complaint against the Company concerning
the production of approximately 7,500 mobile data terminals. The suit seeks
damages in as yet an undetermined amount. Management believes that it will not
incur any material liabilities or obligations as a result of this suit in excess
of any existing contractual obligations to such vendor which are reflected in
the Company's maximum contractual inventory commitments described in Note 5
below.
5. Other Matters
At September 30, 1996, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory
in the maximum amount of $44.4 million.
As previously reported, the satellite has, in the past, experienced certain
technological anomalies, most significantly with respect to its eastern beam. On
August 1, 1996, the Company reached a resolution of the claims under its
satellite insurance contracts and policies and received proceeds in the amount
of $66.0 million which were used to repay the Working Capital Facility and
portions of the Term Loan Facility and the Vendor Financing. The carrying value
of the satellite was reduced by the net insurance proceeds, which will result in
a reduction of future depreciation charges beginning in the third quarter of
1996. There can be no assurance that the satellite will not experience
subsequent anomalies that could adversely impact the Company's financial
condition, results of operations and cash flows.
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.
In addition to historical information, this Form 10-Q Quarterly Report
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the "Factors that could affect Future Operating
Results" and "Liquidity and Capital Resources" sections. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. 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 to be filed by the Company subsequent to this Form 10-Q and any
Current Reports on Form 8-K filed by the Company.
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 previously reported, (vi) additional technical
anomalies that may occur within the SKYCELL System, including those relating to
AMSC-1, which could impact, among other things, the operation of the SKYCELL
System and the cost, scope or availability of in-orbit insurance, (vii) the
ability of the Company to fully integrate certain components of the mobile data
service, and (viii) the Company's ability to obtain additional waivers from the
Bank Financing Guarantors or secure additional financing as may be necessary.
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 not available until the second and third
quarters of 1996. In addition, the CGS currently does not support facsimile
capability. The Company anticipates that facsimile capability will become
available in the first quarter of 1997. 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 not 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 shift its marketing focus away from its initial
dual-mode consumer product business to targeted business applications, such as
the maritime, natural resources, transportation, and telecommunications
industries. The Company continues to expect that sales and marketing expenses
will continue to increase from previous levels in 1995 as increased resources
are devoted to its subscriber acquisition programs and sales personnel. As of
September 30, 1996, there were approximately 13,400 subscribers on the SKYCELL
System. 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 a result of borrowings under the Interim Financing, the
Short-Term Notes, and the Bank Financing.
Results of Operations
Operating Revenues
Service revenues, which include both the Company's voice and data services,
approximated $2.5 million and $6.1 million for the three-month and nine-month
periods ended September 30, 1996, respectively. Service revenue from voice
services approximated $1.1 million and $2.9 million for the three-month and
nine-month periods ended September 30, 1996 including approximately $1.3 million
for the nine-month period ended September 30, 1996 attributable to satellite
capacity leased to TMI Communications and Company, Limited Partnership ("TMI"),
a Canadian limited partnership, under a commitment which was completed in May
1996. Service revenue from the Company's data services approximated $1.4 million
and $3.2 million for the three-month and nine-month periods ended September 30,
1996, respectively, compared to $1.6 million and $5.2 million for the same
period in 1995, a reduction of $256,000 and $2.0 million respectively. Prior to
1996, the Company provided its 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 in data service
revenue of $2.0 million for the nine-month period ended September 30,1996
reflects the reduced revenue from the Major Customer resulting from lower
billings for the use of the lower cost AMSC-1 versus billings attributable to
the leased COMSAT satellite applied on a pass-through basis. Of the data service
revenues, 29% and 39% were attributable to the Major Customer for the three
months and nine months ended September 30, 1996, respectively, compared to 80%
and 75% for the respective periods in 1995. Revenue from the sale of mobile data
terminals and mobile telephones increased from $438,000 for the three months
ended September 30, 1995 to $4.9 million for the three months ended September
30, 1996, and increased to $12.5 million for the nine months ended September 30,
1996 compared to $504,000 for the same period in 1995. This increase is
attributable to (i) the Company's introduction of certain voice products in the
fourth quarter of 1995 and the resulting sale of mobile telephones, and (ii) the
increased availability of mobile data terminals in 1996 compared to the first
nine 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 for the three-month and nine-month periods ended
September 30, 1996, which includes costs to support subscribers and to operate
the SKYCELL System, were $7.6 million and $23.3 million, respectively, $3.3
million and $10.7 million greater than the comparable periods in 1995. Cost of
service and operations for the three-month and nine-month periods ended
September 30, 1996 were 22% and 21%, as a percentage of operating expenses,
compared to 28% and 34% for the comparable periods in 1995. 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) $4.8 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 $6.2 million from $599,000 for the three
months ended September 30, 1996 and 1995, respectively, and to $23.1 million
from $757,000 for the nine months ended September 30, 1996 and 1995,
respectively, and represented 18% and 4% of total operating expenses for the
three months ended September 30, 1996 and 1995, and 21% and 2% for the
nine-month periods ended September 30, 1996 and 1995, respectively. 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 voice products in the fourth quarter of 1995 and the resulting sale of
mobile telephones, (ii) the availability of mobile data terminals in 1996
compared to the first nine months of 1995, (iii) a $4.0 million charge in the
second quarter of 1996 for the reconfiguration of certain inventory components
to better meet customer requirements, and (iv) $4.8 million writedowns in the
second and third quarters of 1996 of certain assets, including inventory, to net
realizable value. Sales and advertising expenses were $5.7 million and $18.0
million for the three-month and nine-month periods ended September 30, 1996,
respectively, compared with $5.4 million and $8.9 million for the same periods
in 1995. Sales and advertising expenses for the three-month and nine-month
periods ended September 30, 1996 were 17% and 16%, respectively, as a percentage
of operating expenses, compared to 35% and 24% for the comparable periods in
1995. The dollar increase of sales and advertising expenses were primarily
attributable to (i) additional head count and personnel related costs associated
with the increase in sales staff, and (ii) increased costs directly associated
with the increased subscriber acquisition programs, offset by a $1.4 million
charge, in 1995, associated with the re-acquisition of defective equipment
located at a customer site and settlement of related disputes. The decrease as a
percentage of operating expenses was attributable to the overall increase in
total operating expenses. General and administrative expenses for the
three-month and nine-month periods ended September 30, 1996 were $4.2 million
and $13.6 million, respectively, $210,000 and $2.0 million greater than the
comparable periods in 1995. General and administrative expenses for the
three-month and nine-month periods ended September 30, 1996 were 13% and 12%,
respectively, as a percentage of operating expenses, compared to 26% and 32% for
the same periods in 1995. The dollar increase in general and administrative
expenses for the first nine months of 1996 compared to 1995 was primarily
attributable to a $2.1 million increase in personnel-related costs associated
with (i) hiring and training staff to support full commercial service and
increased facilities and related support costs approximating $1.4 million and
(ii) approximately $675,000 of severance costs associated with a management
restructuring. The decrease of general and administrative expenses as a
percentage of operating expenses was attributable to the overall increase in
total operating expenses. Depreciation and amortization expense was $10.0
million and $33.0 million for the three-month and nine-month periods ended
September 30, 1996, respectively, compared with $1.2 million and $2.9 million
for the same periods in 1995. Depreciation and amortization for both the
three-month and nine-month periods ended September 30, 1996 were 30%, as a
percentage of operating expenses, compared with 7% and 8%, respectively, for the
comparable periods in 1995. 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 $180,000 and $485,000 in the three-month and nine-month
periods ended September 30, 1996, respectively, compared to $1.0 million and
$4.1 million in the same periods in 1995. The decreases were a result of lower
average cash balances in the first nine months of 1996. The Company incurred
$3.7 million and $11.4 million of interest expense for the three-month and
nine-month periods ended September 30, 1996, respectively, compared to no
interest expense for the comparable periods 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 nine months of 1996 of approximately
$4.0 million.
Capital Expenditures
Net capital reductions, including additions financed through vendor
financing arrangements, for the first nine months of 1996 were $61.9 million
compared to capital expenditures of $71.6 million for the same period in 1995.
The decrease was largely attributable to (i) the net proceeds of $65.3 million
from the resolution of the claims under the Company's satellite insurance
contracts and policies (see "Liquidity and Capital Resources"), (ii) the
purchase, in the first quarter of 1995, of launch insurance at a cost to the
Company of $42.8 million in connection with the Company's launch contract with
Martin Marietta Commercial Launch Services, Inc., and (iii) the decrease in
construction activity as certain components of the Communications System were
completed in 1995.
Liquidity and Capital Resources
Adequate liquidity and capital are critical to the ability of the Company
to transition successfully from being a development stage company to deploying
and operating the SKYCELL System. As previously reported, on June 28, 1996, the
Company established a $225 million debt facility with Morgan Guaranty Trust
Company and Toronto Dominion Bank (the "Bank Financing") consisting of two
facilities: (i) a $150 million five-year, multi-draw term loan facility (the
"Term Loan Facility") and (ii) a $75 million five-year revolving credit facility
with a bullet maturity on June 30, 2001 (the "Working Capital Facility"). As of
October 28, 1996, the Company had drawn down $93.0 million of the Term Loan
Facility at annual interest rates ranging from 5.6875% to 5.75%. $200 million of
the Bank Financing is guaranteed (the "Guarantee") by three of the Company's
principal stockholders: Hughes Electronics Corporation ("Hughes"), Singapore
Telecommunications, Ltd. and Baron Capital Partners, L.P. (collectively, the
"Guarantors"). The Guarantors received compensation consisting principally of
cash fees and warrants (the "Guarantee Warrants"). The Guarantee Warrants have
been valued at $19.0 million.
Under the terms of the Bank Financing and the Guarantee, borrowings under
the Bank Financing in excess of prescribed levels are contingent upon the
satisfaction by the Company of certain performance test relating to net
revenues, number of subscribers, operating cash flow and earnings before
interest, taxes, depreciation and amortization. During the third quarter of
1996, the Company met the required performance tests except for the test
relating to net revenues. The Company has received a waiver relating to
satisfaction of that performance test and of a limitation on borrowing, thereby
permitting the Company to borrow up to $155 million under the Bank Financing.
This is expected to meet the Company's financing needs through the remainder of
1996 and into 1997.
Because of the slower than anticipated build-up in subscribers and related
revenues, it is currently expected that the Company will not meet the remaining
quarterly Guarantor performance tests under the Bank Financing. Therefore,
additional Guarantor waivers will be required under the Bank Financing. Even if
the Company is successful in receiving additional waivers, the Company may need
additional financing in 1997 beyond the Bank Financing. No assurance can be
given that additional waivers will be granted or that the terms of such waivers
will not be adverse to the Company, or that if additional financing is required,
that such financing will be available or that the terms thereof will be
favorable to the Company. If waivers are not granted, or the Bank Financing is
not sufficient, the Company may not have adequate capital to fund its future
operations.
Following negotiations of certain existing vendor debt arrangements (the
"Vendor Financing") and ground segment obligations ("Ground Segment
Obligations"), aggregating $11.1 million, the Company has arranged to defer
repayment of the Vendor Financing and a portion of the Ground Segment Obligation
from September 30, 1996, until various dates in 1997.
As previously reported, the Company filed a claim for indemnity under its
launch insurance with respect to the anomalies leading to the reconfiguration of
AMSC-1.On August 1, 1996, the Company reached a resolution of the claims under
its satellite insurance contracts and policies, and received gross proceeds in
the amount of $66.0 million which were used to repay the Working Capital
Facility and portions of the Term Loan Facility and the Vendor Financing. The
carrying value of the satellite was reduced by the amount of the net insurance
proceeds, which will result in a reduction of future depreciation charges
beginning in the third quarter of 1996.
At September 30, 1996, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory
in the maximum amount of $44.4 million.
For the period from inception through September 30, 1996, the Company has
used $200.3 million of cash in operating activities and $262.5 million of cash
in investing activities and has generated $465.2 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 $74.6 million for the first nine
months of 1996 compared to cash used of $29.3 million for the same period in
1995, an increase of $45.3 million. The increase in cash used in operating
activities was primarily attributable to (i) increased operating losses, (ii)
increased trade receivables as a result of increased equipment and service
revenue, and (iii) increased inventory acquisitions of subscriber equipment,
partially offset by the net increase in operating accounts payable and accrued
expenses. Cash provided by investing activities was $54.6 million for the first
nine months of 1996 compared to cash used of $50.2 million for the same period
in 1995, an increase of $104.8 million. The increase was primarily attributable
to (i) the receipt of proceeds from the resolution of the claims under the
Company's satellite insurance contracts and policies, (ii) the decrease in
construction activity in 1996, and (iii) the purchases, in the first quarter of
1995, of $42.8 million of launch insurance, 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 $13.6 million for the first nine months of
1996 compared to cash used in financing activities of $2.3 million for the same
period in 1995, an increase of $15.9 million. The increase was largely
attributable to the $77.0 million of borrowings under the Term Loan Facility,
offset by the repayment of $40.0 million of long-term debt and the payment of
$10.6 million of costs associated with the acquisition of the Term Loan
Facility. As of September 30, 1996, the Company had $2.4 million of cash and
cash equivalents and a working capital deficit of $21.5 million.
Technological Developments
As previously reported, the satellite has, in the past, experienced certain
technological anomalies, most significantly with respect to its eastern beam
which resulted in the Company's receipt of $66.0 million of insurance proceeds
as discussed above (see "Liquidity and Capital Resources"). There can be no
assurance that the satellite will not experience subsequent anomalies that could
adversely impact the Company's financial condition, results of operations and
cash flows.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 -- Restated Certificate of Incorporation of AMSC (as restated effective May
1, 1996) (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the periods ending March 31,1996 and June 30, 1996 (File
No. 0-23044))
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))
10.23c -- Third Amendment to Term Loan Agreement, dated November 7, 1995,
between AMSC Subsidiary Corporation and Northern Telecom Finance Corporation
(filed herewith)
10.23d -- Fourth Amendment to Term Loan Agreement, dated October 1, 1996,
between AMSC Subsidiary Corporation and Northern Telecom Finance Corporation
(filed herewith)
11.1 -- Computation of Net Loss Per Share (filed herewith)
27.0 -- Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report dated July 2, 1996 on Form
8-K, describing in response to Item 5 - Other Events, in the
form of a press release, regarding the finalization by the
Company of a $225 million credit facility with Morgan Guaranty
Trust Company of New York and Toronto Dominion (Texas), Inc.
The Company filed a Current Report dated July 25, 1996 on Form
8-K describing in response to Item 5 - Other Events, in the
form of a press release, announcing the election of Jack Shaw
as a director and as chairman of the board of directors of the
Company, to replace Anthony J. Iorillo, who resigned from the
positions assumed by Mr. Shaw to pursue retirement activities.
The Company filed a Current Report dated July 31, 1996 on Form
8-K, describing in response to Item 5 - Other Events, in the
form of a press release, announcing the appointment of Gary M.
Parsons as president, chief executive officer and director of
the Company, to succeed Brian B. Pemberton.
The Company filed a Current Report dated October 24, 1996 on
Form 8-K, describing in response to Item 5 - Other Events, in
the Form of the appointment of David A. Juliano to the
Company's Board of Directors filling the vacancy left by the
resignation of Jordan Roderick from the Company's Board of
Directors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MOBILE SATELLITE CORPORATION
(Registrant)
Date: November 14, 1996 /s/Patrick C. FitzPatrick
Patrick C. FitzPatrick
Chief Financial Officer and Vice President
(principal financial officer)
/s/Christopher Colavito
Christopher Colavito
Controller and Vice President
(principal accounting officer)
EXHIBIT INDEX
Exhibit
Number Exhibit
3.1 -- Restated Certificate of Incorporation of AMSC (as restated effective
May 1, 1996) (Incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the periods ending March
31,1996 and June 30, 1996 (File No. 0-23044))
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))
10.23c -- Third Amendment to Term Loan Agreement, dated November 7, 1995,
between AMSC Subsidiary Corporation and Northern Telecom Finance
Corporation (filed herewith)
10.23d -- Fourth Amendment to Term Loan Agreement, dated October 1, 1996,
between AMSC Subsidiary Corporation and Northern Telecom Finance
Corporation (filed herewith)
11.1 -- Computation of Net Loss Per Share (filed herewith)
27.0 -- Financial Data Schedule