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 June 30, 1997
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 July 31, 1997: 25,144,434
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
-------------------------------
(in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
REVENUES
Services $4,979 $1,798 $9,132 $3,591
Sales of equipment 5,774 4,951 10,306 7,527
------ ----- ------- -----
Total Revenue 10,753 6,749 19,438 11,118
COSTS AND EXPENSES
Cost of service and operations 8,201 8,839 17,074 15,642
Cost of equipment sold 7,140 14,446 12,582 16,889
Sales and advertising 3,059 6,302 6,280 12,320
General and administrative 2,937 4,430 7,805 9,393
Depreciation and amortization 11,083 11,730 21,020 22,874
------- ------ ------- ------
Operating Loss (21,667) (38,998) (45,323) (66,000)
INTEREST AND OTHER INCOME 86 196 1,031 305
INTEREST EXPENSE (5,281) (4,707) (9,651) (7,691)
MINORITY INTEREST 20 -- 20 --
--------- --------- -------- --------
NET LOSS ($26,842) ($43,509) ($53,923) ($73,386)
========= ========= ========= =========
NET LOSS PER COMMON SHARE ($1.07) ($1.74) ($2.15)
======= ======= =======
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
DURING THE PERIOD (000'S) 25,120 25,012 25,115 25,003
====== ====== ====== ======
See notes to consolidated financial statements.
1
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands)
(Unaudited)
June 30, December 31,
1997 1996
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $2,806 $2,182
Inventory 45,460 38,034
Prepaid in-orbit insurance 1,693 5,080
Accounts receivable-trade 8,745 6,603
Other current assets 8,682 14,247
------ ------
Total current assets 67,386 66,146
PROPERTY AND EQUIPMENT - NET 250,983 267,863
DEFERRED CHARGES AND OTHER ASSETS - NET 33,009 16,164
--------- ---------
Total assets $351,378 $350,173
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 32,809 $42,625
Obligations under capital leases due within one year 3,806 3,931
Current portion of long-term debt 5,933 11,113
------ ------
Total current liabilities 42,548 57,669
Long-term Liabilities:
Obligations under Bank Facility 180,000 127,000
Debt of subsidiary 14,978 ----
Capital lease obligations 756 2,557
Fair value of assets acquired in excess
of purchase price 3,072 3,395
Other long-term liabilities 794 852
--------- ---------
Total long-term liabilities 199,600 133,804
-------- -------
Total liabilities 242,148 191,473
Minority Interest 1,480 ---
Stockholders' Equity:
Preferred stock, par value $0.01; no shares issued -- ---
Common stock, voting, par value $0.01 251 251
Additional paid-in capital 451,598 451,259
Common stock purchase warrants 36,337 23,848
Unamortized guarantee warrants (26,955) (17,100)
Retained loss (353,481) (299,558)
--------- ---------
Total stockholders' equity 107,750 158,700
------- -------
Total liabilities and stockholders' equity $351,378 $350,173
======== ========
See notes to consolidated financial statements.
2
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($53,923) ($73,386)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount and issuance costs 4,297 2,253
Depreciation and amortization 21,020 22,874
Deferred and other items, net 285 707
Changes in assets and liabilities:
Prepaid in-orbit insurance 3,387 3,215
Trade accounts receivable (2,142) (5,257)
Other current assets 5,565 648
Inventory (7,426) (15,448)
Accounts payable and accrued expenses (8,558) 20,050
------- ------
Net cash used in operating activities (37,495) (44,344)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in AMRC (17,978) --
Additions to property and equipment (5,804) (7,090)
------- -------
Net cash used in investing activities (23,782) (7,090)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 141 904
Proceeds from issuance of Common Stock of AMRC 1,500 --
Principal payments under capital leases (1,882) (1,372)
Proceeds from short-term borrowings -- 70,000
Proceeds from debt -- 1,700
Debt issued by subsidiary 14,978 --
Payments on long-term debt (5,225) (12,269)
Debt issuance costs (611) (455)
Proceeds from long-term debt 53,000 --
------- --------
Net cash provided by financing activities 61,901 58,508
------- ------
Net (decrease) increase in cash and cash equivalents 624 7,074
CASH AND CASH EQUIVALENTS, beginning of period 2,182 8,865
------ -----
CASH AND CASH EQUIVALENTS, end of period $2,806 $15,939
====== =======
See notes to consolidated financial statements.
3
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1997
(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"). 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 expanding a developing 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.
On April 2, 1997, American Mobile Radio Corporation ("AMRC"), a subsidiary of
AMSC, was a winning bidder for an FCC license to provide satellite-based Digital
Audio Radio Service ("DARS") throughout the United States (see "Liquidity and
Financing"). As previously reported, AMSC entered into an agreement with
WorldSpace, Inc. ("WorldSpace"), by which WorldSpace acquired a 20%
participation in AMRC. In connection with the DARS auction, AMRC also arranged
for financing of the FCC license fees as well as for initial working capital
needs. The terms of the financing, which also included the issuance of options,
would, if the options were exercised, have a dilutive impact on AMSC's ownership
interest in AMRC. The operations and financing of AMRC are maintained separate
and apart from the operations and financing of AMSC.
American Mobile Satellite Corporation has five other subsidiaries, two of which
are inactive and three whose limited activities do not require material
resources at this time.
2. Basis of Presentation
The consolidated balance sheet as of June 30, 1997, and the consolidated
statements of loss and cash flows for the three months and six months ended June
30, 1997 and 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 June 30, 1997, and for all periods presented have
been made. The balance sheet at December 31, 1996 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 1996 Annual Report on Form 10-K ("1996 10-K").
4
The Company paid approximately $1.6 million and $3.0 million in the six-month
periods ended June 30, 1997 and 1996, respectively, to related parties for
capital assets, service-related obligations, and payments under financing
agreements. Payments from related parties for communication services totalled
$1.2 million in the six-month period ended June 30, 1997, as compared to none in
the six-month period ended June 30, 1996. Total net indebtedness to related
parties as of June 30, 1997 approximated $2.9 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.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement, applicable to reporting periods ending after December
15, 1997, governs the calculation of Earnings per Share ("EPS"), and requires
that EPS calculations be presented as Basic Earnings per Share and Diluted
Earnings per Share. The impact of adopting the Statement is not expected to be
material to the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
governing the reporting and display of comprehensive income and its components,
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requiring that public businesses report financial and descriptive
information about its reportable operating segments. Both Statements are
applicable to reporting periods beginning after December 15, 1997. The impact of
adopting the Statements is not expected to be material to the financial
statements.
3. Liquidity and Financing
Adequate liquidity and capital are critical to the ability of the Company to
continue as a going concern and to fund subscriber acquisition programs
necessary to reach cash positive and profitable operations. As previously
reported, the Company has established a debt facility with Morgan Guaranty Trust
Company and Toronto Dominion Bank (the "Bank Financing") consisting of a Term
Loan Facility and a Working Capital Facility. The Bank Financing is fully
guaranteed by certain AMSC shareholders. As previously reported, the Company, on
March 27, 1997, reached an agreement with the Guarantors to eliminate all
covenant tests in exchange for additional warrants and a re-pricing of warrants
previously issued (together, the "Guarantee Warrants"). Previously, the
Guarantee Warrants had been valued at $19.0 million. The Guarantee Warrants were
re-valued at $21.9 million, effective March 27, 1997. As of July 31, 1997, the
Company had drawn down $144.0 million of the Term Loan Facility at annual
interest rates ranging from 5.9375% to 6.25%, and $42.0 million of the Working
Capital Facility at annual interest rates ranging from 5.9375% to 6.25%.
As a result of slower than anticipated sales of inventory, the Company will need
additional financing ("Additional Financing") in 1997 beyond the Bank Financing.
The Company is currently pursuing such Additional Financing through various
financing arrangements and believes that such Additional Financing will likely
be available; however, there can be no assurance that Additional Financing will
be available or that the terms thereof will be favorable to the Company. If the
Bank Financing or Additional Financing is not sufficient, the Company may not
have adequate capital to fund its future operations. The Company expects that
operating revenues will be insufficient to cover operating expenses until
sometime in 1998 or beyond.
On March 12, 1997, the Company received waivers of certain financial covenants
contained in the ground segment obligations ("Ground Segment Obligations") for
the remaining anticipated period of the Ground Segment Obligations. The Ground
Segment Obligations were satisfied in full on May 15, 1997.
As previously mentioned (see "Organization and Business"), AMRC was a winning
bidder for an FCC license to provide DARS throughout the United States. AMRC has
arranged funding of the FCC license fees as well as the initial working capital
needs for this business through the issuance of debt, not guaranteed by the
Company, and equity in AMRC. Such debt is currently in the form of a note
outstanding at an annual interest rate of 10.9% (LIBOR plus 5%). It is not
expected that the development of this business will have a material impact on
the Company's financial position, results of operations, or cash flows.
5
4. Legal and Regulatory Matters
Like other mobile service providers in the telecommunications industry, the
Company is subject to substantial domestic, foreign and international regulation
including the need for regulatory approvals to operate the SKYCELL System,
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 the necessary regulatory approvals, some of which are pursuant
to special temporary authority, to continue full commercial revenue service. 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, while not necessary to achieve the Company's
current business plan, 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 December 1997. Management believes that the complaint is without
merit, and the ultimate outcome of this matter will not be material to the
Company's financial position, results of operations, or its cash flows.
5. Other Matters
The Company has received a current recommendation from a subcontractor to its
satellite manufacturer that, pending further results from an ongoing
investigation, the satellite should be operated at modified power management
levels. The Company and its satellite manufacturer are investigating the basis,
if any, for this recommendation. Based on the information available to date,
management believes that, even if maintained, the current power management
recommendation would not have a material negative effect on the Company's
near-term business plan based on anticipated traffic patterns and anticipated
subscriber levels. In the event that traffic patterns or subscriber levels vary
materially from those anticipated, the power management recommendation, if
maintained, could have a material impact on the Company's long-term business
plan.
At June 30, 1997, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory in the
maximum amount of $18.7 million.
6
PART I--FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Interim Financial Condition and Results of Operations
In addition to historical information, this Form 10-Q Quarterly Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 and Form 10-Q
Quarterly Report filed by the Company prior to this Form 10-Q, any Form 10-Q
filed subsequent to this Form 10-Q, and any Current Reports on Form 8-K filed by
the Company.
General
The following discussion and analysis provides information that 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. The SKYCELL
System includes the Company's satellite ("AMSC-1") launched successfully in
April 1995, and a fixed communications ground segment (the "CGS"). In December
1995, the Company initiated commercial voice service. During 1996, the Company
transitioned to an operating company, and currently operates North America's
first high-powered, satellite-based, digital mobile communication system (the
"SKYCELL System").
On April 2, 1997, American Mobile Radio Corporation ("AMRC"), a subsidiary of
American Mobile Satellite Corporation, was a winning bidder for an FCC license
to provide satellite-based Digital Audio Radio Service ("DARS") throughout the
United States (see "Liquidity and Financing").
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 future 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's acceptance
of the Company's services, (iii) the ability and the commitment of the Company's
Authorized Sales Agents and other distribution channels to market and distribute
the Company's services, (iv) the Company's ability to modify its organization,
strategy and product mix to maximize the market opportunities in light of
changes therein, (v) competition from existing companies that provide services
using existing communications technologies and the possibility of competition
from companies using new technology in the future, (vi) capacity constraints
arising from the reconfiguration of AMSC-1 previously reported, (vii) 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, (viii)
the ability of the Company to fully integrate certain components of the mobile
data service, (ix) Subscriber Equipment inventory responsibilities and
liabilities assumed by the Company and the ability of the Company to realize the
value of its inventory in a timely manner, and (x) the Company's ability to
secure additional financing as necessary.
The Company has received a current recommendation from a subcontractor to its
satellite manufacturer that, pending further results from an ongoing
investigation, the satellite should be operated at modified power management
levels. The Company and its satellite manufacturer are investigating the basis,
if any, for this recommendation. Based on the information available to date,
management believes that, even if maintained, the current power management
recommendation would not have a material negative effect on the Company's
near-term business plan based on anticipated traffic patterns and anticipated
subscriber levels. In the event that traffic patterns or subscriber levels vary
materially from those anticipated, the power management recommendation, if
maintained, could have a material impact on the Company's long-term business
plan.
7
As of June 30, 1997, there were in excess of 25,700 subscribers on the
SKYCELL System.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This
Statement, applicable to reporting periods ending after December 15, 1997,
governs the calculation of Earnings per Share ("EPS"), and requires that EPS
calculations be presented as Basic Earnings per Share and Diluted Earnings per
Share. The impact of adopting the Statement is not expected to be material to
the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
governing the reporting and display of comprehensive income and its components,
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requiring that public businesses report financial and descriptive
information about its reportable operating segments. Both Statements are
applicable to reporting periods beginning after December 15, 1997. The impact of
adopting the Statements is not expected to be material to the financial
statements.
Results of Operations
Operating Revenues
Service revenues, which include both the Company's voice and data services,
approximated $5.0 million and $9.1 million for the three-month and six-month
periods ended June 30, 1997, respectively. Service revenue from voice services
approximated $3.1 million for the three-month period ended June 30, 1997, as
compared to $849,000 for the comparable period in 1996, and $5.7 million for the
six-month period ended June 30, 1997, as compared to $1.8 million for the
comparable period in 1996. This increase was primarily a result of (i) a 243%
increase in voice customers as of June 30, 1997, as compared to voice customers
as of June 30, 1996, and (ii) a 68% increase in power and band width contracts
as of June 30, 1997, as compared to power and band width contracts as of June
30, 1996, offset by approximately $1.3 million received in the first five months
of 1996, attributable to satellite capacity leased to TMI, under a commitment
that was completed in May 1996. Service revenue from the Company's data services
approximated $1.9 million for the three-month period ended June 30, 1997, and
$3.5 million for the six-month period ended June 30, 1997, compared to $949,000
and $1.8 million for the same period in 1996, an increase of $1.0 million and
$1.7 million, respectively. The increase was primarily a result of (i) an 83%
increase in single mode mobile messaging subscribers, and (ii) additional
revenue from dual mode subscribers added as a result of the acquisition, in
November 1996, of Rockwell International Corporation's ("Rockwell") dual mode
mobile messaging and global positioning and monitoring service, as compared to
the revenue received in the first six months of 1996 for satellite capacity
leased by Rockwell. Revenue from the sale of mobile data terminals and mobile
telephones increased from $5.0 million for the three months ended June 30, 1996
to $5.7 million for the three months ended June 30, 1997, and from $7.5 million
for the six-months ended June 30, 1996 to $10.3 million for the six-months ended
June 30, 1997. This increase is attributable to (i) a 13% increase in voice
equipment sales as a result of the Company's introduction of additional
Subscriber Equipment configurations throughout 1996, and (ii) increased
equipment sales of the dual mode mobile messaging product, discussed above.
Costs and Expenses
The Company's costs and expenses have primarily decreased in the six-month
period ended June 30, 1997, as compared to the comparable period in 1996, as a
result of stringent cost controls and expense management. Cost of service and
operations for the three-month and six-month periods ended June 30, 1997, which
includes costs to support subscribers and to operate the SKYCELL System, was
$8.2 million and $17.1 million, respectively, $638,000 less than and $1.4
million greater than the comparable periods in 1996. Cost of service and
operations for the three-month and six-month periods ended June 30, 1997, as a
percentage of operating expenses, was 25% and 26%, respectively, compared to 19%
and 20% for the comparable periods in 1996. The dollar decrease in the
three-month period ended June 30, 1997, as compared to the comparable period in
1996, was the result of the reversal, in May 1996, of previously capitalized
costs. The dollar and percentage increase in cost of service and operations for
the six-month period ended June 30, 1997, was primarily attributable to (i)
increased interconnect charges associated with increased service usage by
customers, and (ii) the additional costs associated with supporting the dual
mode mobile messaging product, discussed above. The cost of equipment sold
decreased to $7.1 million from $14.4 million for the three months ended June 30,
1997 and 1996, respectively, and represented 22% and 32% of total operating
expenses for the three months ended June 30, 1997 and 1996, respectively. The
cost of equipment sold decreased to $12.6 million from $16.9 million for the six
months ended June 30, 1997 and 1996, respectively, and represented 19% and 22%
of total operating expenses for the same periods. The decrease in both dollars
and as a percentage of operating expenses of the cost of equipment sold was
8
primarily attributable to certain charges in the second quarter of 1996,
totalling $8.1 million, for the reconfiguration of inventory and the write down
of certain assets, including inventory, to net realizable value, offset by (i)
the Company's introduction of additional Subscriber Equipment configurations
throughout 1996 and the resulting sale of mobile telephones, and (ii) increased
equipment sales of the dual mode mobile messaging product, discussed above.
Sales and advertising expenses were $3.0 million and $6.2 million for the
three-month and six-month periods ended June 30, 1997, respectively, compared
with $6.3 million and $12.3 million for the same periods in 1996. Sales and
advertising expenses for both the three-month and six-month periods ended June
30, 1997, were 10% as a percentage of operating expenses, compared to 14% and
16% for the comparable periods in 1996. Both the dollar decrease and the
percentage decrease of sales and advertising expenses were primarily
attributable to (i) reduced personnel and advertising costs as the Company moved
from consumer markets to targeted business-to-business sales, and (ii) increased
costs in the first quarter of 1996 for the development of collateral material
needed to support the sales effort, and (iii) costs incurred in the first
quarter of 1996 associated with the formal launch of service. General and
administrative expenses for the three-month and six-month periods ended June 30,
1997, were $2.9 million and $7.8 million, respectively, $1.5 million less than
both of the comparable periods in 1996. General and administrative expenses for
the three-month and six-month periods ended June 30, 1997, were 9% and 12%,
respectively, as a percentage of operating expenses, compared to 38% and 36% for
the same periods in 1996. Both the dollar and percentage decrease in general and
administrative expenses for the first six months of 1997 compared to 1996 were
primarily attributable to reductions made in staffing as a result of a
management restructuring in the third quarter of 1996. Depreciation and
amortization expense was $11.1 million and $21.0 million for the three-month and
six-month periods ended June 30, 1997, respectively, compared with $11.7 million
and $22.9 million for the same periods in 1996. Depreciation and amortization
for the three-month and six-month periods ended June 30, 1997, was 34% and 33%
respectively, as a percentage of operating expenses, compared with 25% and 30%
for the comparable periods in 1996. The dollar decrease in depreciation and
amortization expense was attributable to the reduction of the carrying value of
the satellite as a result of the resolution, in August 1996, of claims under the
Company's satellite insurance contracts and policies and the receipt of
approximately $66.0 million, offset by a $1.0 million one-time charge associated
with increased amortization in accordance with SFAS No. 86, in the second
quarter of 1997, of certain costs associated with software development for the
mobile data product. The increase as a percentage of operating expenses in
depreciation and amortization expense was attributable to the reduction in all
other operating expenses.
Interest and Other Income
Interest income was $86,000 and $156,000 for the three and six-month periods
ended June 30, 1997, respectively, compared to $196,000 and $305,000 in the same
periods in 1996. The decrease was a result of lower average cash balances in the
first six months of 1997 as compared to the same period in 1996. The Company
incurred $5.3 million and $9.7 million of interest expense for the three and
six-month periods ended June 30, 1997, respectively, compared to $4.7 million
and $7.7 million of interest expense for the comparable periods of 1996
reflecting (i) increased debt balances during the six months of 1997 as compared
to 1996, and (ii) the amortization of debt discount and debt issuance costs in
the six months of 1997 of approximately $4.3 million compared to $2.3 million in
the first six months of 1996. Additionally, in the first six months of 1997, the
Company received other income in the amount of $875,000 representing proceeds
from the licensing of certain technology associated with the SKYCELL System.
Capital Expenditures
Net capital additions, including additions financed through vendor financing
arrangements, for the first six months of 1997 were $4.4 million compared to
$7.5 million for the same period in 1996. The decrease was largely attributable
to the reduction in the acquisition of assets necessary to complete the SKYCELL
System.
Liquidity and Capital Resources
Adequate liquidity and capital are critical to the ability of the Company to
continue as a going concern and to fund subscriber acquisition programs
necessary to reach cash positive and profitable operations. As previously
reported, the Company has established a debt facility with Morgan Guaranty Trust
Company and Toronto Dominion Bank (the "Bank Financing") consisting of a Term
Loan Facility and a Working Capital Facility. The Bank Financing is fully
guaranteed by certain AMSC shareholders (the "Guarantors"). As previously
reported, the Company, on March 27, 1997, reached an agreement with the
Guarantors to eliminate all covenant tests, in exchange for additional warrants
and a re-pricing of warrants previously issued (together, the "Guarantee
Warrants"). Previously, the Guarantee Warrants had been valued at $19.0 million.
The Guarantee Warrants were re-valued at $21.9 million, effective March 27,
1997. As of July 31, 1997, the Company had drawn down $144.0 million of the Term
Loan Facility at annual interest rates ranging from 5.9375% to 6.25%, and $44.0
million of the Working Capital Facility at annual interest rates ranging from
5.9375% to 6.25%.
9
As a result of slower than anticipated sales of inventory, the Company will need
additional financing ("Additional Financing") in 1997 beyond the Bank Financing.
The Company is currently pursuing such Additional Financing through various
financing arrangements and believes that such Additional Financing will likely
be available; however, there can be no assurance that Additional Financing will
be available or that the terms thereof will be favorable to the Company. If the
Bank Financing or Additional Financing is not sufficient, the Company may not
have adequate capital to fund its future operations. The Company expects that
operating revenues will be insufficient to cover operating expenses until
sometime in 1998 or beyond.
On March 12, 1997, the Company received waivers of certain financial covenants
contained in the ground segment obligations ("Ground Segment Obligations") for
the remaining anticipated period of the Ground Segment Obligations. The Ground
Segment Obligations were satisfied in full on May 15, 1997.
As previously mentioned (see "Organization and Business"), AMRC was a winning
bidder for an FCC license to provide DARS throughout the United States. AMRC has
arranged funding of the FCC license fees as well as the initial working capital
needs for this business through the issuance of debt, not guaranteed by the
Company, and equity in AMRC. Such debt is currently in the form of a note
outstanding at an annual interest rate of 10.9% (LIBOR plus 5%). It is not
expected that the development of this business will have a material impact on
the Company's financial position, results of operations, or cash flows.
At June 30, 1997, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory in the
maximum amount of $18.7 million.
For the first six months of 1997, the Company used $37.5 million of cash in
operating activities and $23.8 million of cash in investing activities and has
generated $61.9 million of cash from financing activities. Cash used in
operating activities was $37.5 million for the first six months of 1997 compared
to $44.3 million for the same period in 1996, a decrease of $6.8 million. The
decrease in cash used in operating activities was primarily attributable to (i)
decreased operating losses, and (ii) the reduction of payments for inventory
commitments, partially offset by increased payments for accounts payable and
accrued expenses. Cash used in investing activities was $23.8 million for the
first six months of 1997 compared to $7.1 million for the same period in 1996,
an increase of $16.7 million. The increase was primarily attributable to the
initial funding towards the acquisition of the DARS license, partially offset by
the reduction, in the first six months of 1997 as compared to the comparable
period in 1996, in the acquisition of capital assets required to complete the
SKYCELL System. Cash provided by financing activities was $61.9 million for the
first six months of 1997 compared to $58.5 million for the same period in 1996,
an increase of $3.4 million. The increase was largely attributable to financing
received to fund the required payments towards the acquisition of the DARS
license, offset by the reduction in the amount of proceeds received in the first
six months of 1997, as compared to the comparable period in 1996, from various
bank financing arrangements. As of June 30, 1997, the Company had $2.8 million
of cash and cash equivalents and working capital of $24.8 million.
10
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 May 21, 1997,
the matters described under (b) and (c) below were voted upon.
(b) The following nominees, constituting all of the Company's directors, were
elected to the Company's board of directors:
Votes For Votes Against Abstain
Steven D. Dorfman 22,715,454 0 612,476
Ho Siaw Hong 22,716,669 0 611,261
David A. Juliano 22,636,654 0 691,276
Billy J. Parrott 22,717,369 0 610,561
Gary M. Parsons 22,717,454 0 610,476
Andrew A. Quartner 22,717,454 0 610,476
Jack A. Shaw 22,633,824 0 694,106
Roderick M. Sherwood, III 22,716,654 0 611,276
Michael T. Smith 22,715,354 0 612,576
Yap Chee Keong 22,716,754 0 611,176
Albert L. Zesiger 22,716,069 0 611,861
(c)(1) The vote on the ratification of Arthur Andersen LLP as independent
accountants for the Company for 1997 was 23,176,753 for, 92,656
against, 58,521 abstaining.
(2) The vote on the approval of an amendment to the Company's 1989 Stock
Option Plan to increase the number of shares authorized for issuance
was 20,691,339 for, 1,303,632 against, 22,596 abstaining and 1,310,363
not voted.
11
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))
11.1 -- Computations of Earning Per Common Share (filed herewith)
27.0 -- Financial Data Schedule (filed herewith)
12
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: August 7, 1997 By:/s/STEPHEN D. PECK
-------------------------------------
Stephen D. Peck
Vice President and Chief Financial Officer
(principal financial officer)
By:/s/CHRISTOPHER COLAVITO
-------------------------------------
Christopher Colavito
Controller and Vice President
(principal accounting officer)
13