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, 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 October 31, 1997: 25,151,255 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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- REVENUES Services $5,626 $2,480 $14,758 $6,071 Sales of equipment 5,169 4,925 15,475 12,452 ------ ------ ------- ------- Total Revenue 10,795 7,405 30,233 18,523 COSTS AND EXPENSES Cost of service and operations 7,910 7,615 24,984 23,258 Cost of equipment sold 6,348 6,227 18,930 23,116 Sales and advertising 2,860 5,729 9,140 18,048 General and administrative 3,058 4,242 10,863 13,635 Depreciation and amortization 10,441 10,101 31,461 32,975 ------- ------- ------- ------ Operating Loss (19,822) (26,509) (65,145) (92,509) INTEREST AND OTHER INCOME 55 180 1,086 485 INTEREST EXPENSE (6,654) (3,673) (16,305) (11,364) MINORITY INTEREST 157 -- 177 -- --------- ----------- --------- ---------- NET LOSS ($26,264) ($30,002) ($80,187) ($103,388) ========= ========= ========= ========== NET LOSS PER COMMON SHARE ($1.04) ($1.20) ($3.19) ($4.13) ======= ======= ======= ======= WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING DURING THE PERIOD (000'S) 25,145 25,065 25,125 25,024 ======= ======= ======= ====== See notes to consolidated financial statements. -2- PART I--FINANCIAL INFORMATION Item 1. Financial Statements (continued) AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (in thousands) (Unaudited) September 30, December 31, 1997 1996 ASSETS Current Assets: Cash and cash equivalents $2,592 $2,182 Inventory 49,023 38,034 Prepaid in-orbit insurance -- 5,080 Accounts receivable-trade 7,632 6,603 Other current assets 2,799 14,247 ------ ------ Total current assets 62,046 66,146 PROPERTY AND EQUIPMENT - NET 240,638 267,863 DEFERRED CHARGES AND OTHER ASSETS - NET 32,127 16,164 -------- -------- Total assets $334,811 $350,173 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $32,562 $42,625 Obligations under capital leases due within one year 773 3,931 Current portion of long-term debt 8,095 11,113 -------- ------ Total current liabilities 41,430 57,669 Long-term Liabilities: Obligations under Bank Facility 186,000 127,000 Debt of subsidiary 15,072 --- Capital lease obligations 3,187 2,557 Fair value of assets acquired in excess of purchase price 2,898 3,395 Other long-term debt 772 --- Other long-term liabilities 746 852 -------- ------- Total long-term liabilities 208,675 133,804 -------- ------- Total liabilities 250,105 191,473 Minority Interest 1,323 -- Stockholders' Equity: Preferred stock, par value $0.01; no shares issued -- -- Common stock, voting, par value $0.01 252 251 Additional paid-in capital 451,809 451,259 Common stock purchase warrants 36,337 23,848 Unamortized guarantee warrants (25,270) (17,100) Retained loss (379,745) (299,558) --------- --------- Total stockholders' equity 83,383 158,700 --------- ------- Total liabilities and stockholders' equity $334,811 $350,173 ========= ======== See notes to consolidated financial statements. -3- PART I--FINANCIAL INFORMATION Item 1. Financial Statements (continued) AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine Months Ended September 30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss ($80,187) ($103,388) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of debt discount and issuance costs 6,825 4,015 Depreciation and amortization 31,461 32,975 Deferred and other items, net 202 1,621 Changes in assets and liabilities: Prepaid in-orbit insurance 5,080 4,823 Trade accounts receivable (1,029) (5,668) Other current assets 11,448 944 Inventory (10,989) (24,856) Accounts payable and accrued expenses (8,671) 14,891 --------- -------- Net cash used in operating activities (45,860) (74,643) CASH FLOWS FROM INVESTING ACTIVITIES: Investment in AMRC (17,978) -- Insurance proceeds applied to equipment in service -- 66,000 Additions to property and equipment (6,370) (10,418) Deferred charges and other assets -- (1,000) --------- -------- Net cash (used in) provided by investing activities (24,348) 54,582 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common Stock 284 1,248 Proceeds from issuance of Common Stock of AMRC 1,500 -- Principal payments under capital leases (2,335) (2,671) Proceeds from short-term borrowings -- 70,000 Payments on short-term borrowings -- (70,000) Proceeds from Bank Financing 59,000 77,000 Proceeds from debt -- 1,700 Debt issued by subsidiary 15,072 -- Payments on long-term debt (5,225) (53,098) Debt issuance costs (612) (10,595) Acquisition of vendor financing 2,934 -- ------- ------- Net cash provided by financing activities 70,618 13,584 ------ ------ Net increase (decrease) in cash and cash equivalents 410 (6,477) CASH AND CASH EQUIVALENTS, beginning of period 2,182 8,865 ------- ------ CASH AND CASH EQUIVALENTS, end of period $2,592 $2,388 ======= ====== See notes to consolidated financial statements. -4- PART I--FINANCIAL INFORMATION Item 1. Financial Statements (continued) AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ September 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 October 16, 1997, American Mobile Radio Corporation ("AMRC"), a subsidiary of AMSC, was awarded a license by the FCC to provide satellite-based Digital Audio Radio Service ("DARS") throughout the United States, following its successful $89.9 million bid at auction on April 2, 1997. As previously reported, AMSC has entered into an agreement with WorldSpace, Inc. ("WorldSpace"), by which WorldSpace has acquired a 20% participation in AMRC. In connection with the DARS auction, AMRC has also arranged for financing of the FCC license fees as well as for initial working capital needs, which financing has included the issuance of options. Under the terms of AMRC's financing and contingent on FCC approval, exercise of the outstanding issued options could result in the dilution of AMSC's ownership interest in AMRC to 28%. The operations and financing of AMRC are maintained separate and apart from the operations and financing of AMSC (see "Liquidity and Financing"), and, accordingly, it is anticipated that AMRC would be deconsolidated from the financial results of the Company in the near future. -5- 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 September 30, 1997, and the consolidated statements of loss and cash flows for the nine months ended September 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 September 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"). The Company paid approximately $2.0 million and $6.6 million in the nine-month periods ended September 30, 1997 and 1996, respectively, to related parties for capital assets, service-related obligations, and payments under financing agreements. Payments from related parties for communications services totaled $1.8 million in the nine-month period ended September 30, 1997 as compared to $640,000 in the nine-month period ended September 30, 1996. Total indebtedness to related parties as of September 30, 1997 approximated $2.84 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 -6- Company and Toronto Dominion Bank (the "Bank Financing") consisting of a Term Loan Facility and a Working Capital Facility totalling $200.0 million. 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 repricing of warrants previously issued (together, the "Guarantee Warrants"). Previously, the Guarantee Warrants had been valued at $19.0 million. The Guarantee Warrants were revalued at $21.9 million, effective March 27,1997. As of October 31,1997, the Company had drawn down $144.0 million of the Term Loan Facility at annual interest rates ranging from 6.00% to 6.25%, and $46.0 million of the Working Capital Facility at annual interest rates ranging from 6.00% to 6.25%. As previously reported, as a result of slower than anticipated sales of inventory, the Company has sought additional financing and strategic arrangements ("Additional Transactions") to fund its operations through 1997 and into 1998 or beyond. The Company has received a commitment from one of its principal stockholders for an additional credit facility of up to $10.0 million ("Additional Borrowing") to be made available to the Company on commercial terms. The commitment is subject to the negotiation and execution of definitive documentation and the satisfaction of various conditions to be specified therein. The Company is determining whether other principal stockholders wish to participate in the proposed credit facility. While there can be no assurances, the Company believes that it will be able to conclude the Additional Borrowing. The Company is currently pursuing Additional Transactions, beyond the Additional Borrowing, to provide adequate capital to fund its future operations. While the Company believes that at least one of these Additional Transactions should be consummated, there can be no assurance that any of the Additional Transactions will be consummated or that the terms thereof will be favorable to the Company and non-dilutive to its stockholders. If the Bank Financing, Additional Borrowing or Additional Transactions are not consummated or sufficient, the Company may not have adequate capital to fund its future operations and debt obligations. The Company expects that operating revenues will be insufficient to cover operating expenses until sometime in late 1998 or beyond. During September, the Company arranged financing of certain current vendor obligations ("Vendor Financing"). As of October 31, 1997, $2.9 million was outstanding at an annual interest rate of 12%. As previously mentioned (see "Organization and Business"), AMRC was a winning bidder for, and on October 16, 1997, was awarded an FCC license to provide DARS throughout the United States. AMRC has and will continue to receive funding for this business from an independent source in exchange for debt and an equity interest in AMRC. Accordingly, it is not expected that the development of this business will have a material impact on the Company's financial position, results of operations, or cash flows. The Company's equity interest in AMRC may, however, even on a fully diluted basis, become a material asset of the Company. 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 -7- 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 trial in this matter, previously set for December 1997, has been postponed to a date to be determined in 1998. 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 business plan within the next three to five years, based on anticipated traffic patterns and anticipated subscriber levels. In the event that traffic patterns or subscriber levels materially exceed those anticipated, the power management recommendation, if maintained, could have a material impact on the Company's long-term business plan. At September 30, 1997, the Company had remaining contractual commitments to purchase both mobile data terminal inventory and mobile telephone inventory in the maximum amount of $14.1 million. -8- 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 Reports 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 October 16, 1997, American Mobile Radio Corporation ("AMRC"), a subsidiary of AMSC, was awarded a license by the FCC to provide satellite-based Digital Audio Radio Service ("DARS") throughout the United States, following its successful $89.9 million bid at auction on April 2, 1997. As previously reported, AMSC has entered into an agreement with WorldSpace, Inc. ("WorldSpace"), by which WorldSpace has acquired a 20% participation in AMRC. In connection with the DARS auction, AMRC has also arranged for financing of the FCC license fees as well as for initial working capital needs, which financing has included the issuance of options. Under the terms of AMRC's financing and contingent on FCC approval, exercise of the outstanding issued options could result in the dilution of AMSC's ownership interest in AMRC to 28%. The operations and financing of AMRC are maintained separate and apart from the operations and financing of AMSC (see "Liquidity and Financing"), and, accordingly, it is anticipated that AMRC would be deconsolidated from the financial results of the Company in the near future. -9- 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 or the power management recommendation 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 service, (ix) Subscriber Equipment inventory responsibilities and liabilities assumed by the Company including the ability of the Company to realize the value of its inventory in a timely manner, and (x) the Company's ability to secure additional financing as may be 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 business plan within the next three to five years, based on anticipated traffic patterns and anticipated subscriber levels. In the event that traffic patterns or subscriber levels materially exceed those anticipated, the power management recommendation, if maintained, could have a material impact on the Company's long-term business plan. As of September 30, 1997, there were approximately 29,300 subscribers on the SKYCELL System. 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. -10- Results of Operations Operating Revenues Service revenues, which include both the Company's voice and data services, approximated $5.6 million and $14.7 million for the three-month and nine-month period ended September 30, 1997. Service revenue from voice services approximated $3.6 million for the three-month period ended September 30, 1997 as compared to $1.1 million for the comparable period in 1996, and $9.2 million for the nine-month period ended September 30,1997, as compared to $2.9 million for the comparable period in 1996. This increase was primarily a result of (i) a 144% increase in voice customers as of September 30,1997, as compared to September 30, 1996 and (ii) a 9% increase in power and band width contracts, 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 $2.0 million and $5.5 million for the three-month and nine-month period ended September 30, 1997, compared to $1.4 million and $3.2 million for the same period in 1996, an increase of $601,000 and $2.3 million, respectively. The increase was primarily a result of 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 nine months of 1996 for satellite capacity leased by Rockwell. Revenue from the sale of mobile data terminals and mobile telephones increased from $4.9 million for the three months ended September 30, 1996 to $5.2 million for the three months ended September 30, 1997, and from $12.5 million for the nine-month period ended September 30,1996 to $15.5 million for the nine-month period ended September 30,1997. This increase is attributable to increased equipment sales of the dual mode mobile messaging product, discussed above. Costs and Expenses The Company's overall costs and expenses have primarily decreased in the nine-month period ended September 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 nine-month periods ended September 30, 1997, which includes costs to support subscribers and to operate the SKYCELL System, was $7.9 million and $25.0 million, respectively, $295,000 and $1.7 million greater than the comparable periods in 1996. Cost of service and operations for both the three-month and nine-month periods ended September 30, 1997, as a percentage of operating expenses, was 26%, compared to 22% and 21% for the comparable periods in 1996. The dollar and percentage increase in cost of service and operations was primarily attributable to (i) increased interconnect charges associated with increased service usage by customers, and (ii) the additional cost associated with supporting the dual mode mobile messaging product, discussed above. The cost of equipment sold increased to $6.3 million from $6.2 million for the three months ended September 30, 1997 and 1996, respectively, and represented 21% and 18% of total operating expenses for the three months ended September 30, 1997 and 1996, respectively. The cost of equipment sold decreased to $18.9 million from $23.1 million for the nine-month periods ended September 30,1997 and 1996, respectively, and represented 20% and 21% for total operation expense for the same periods. The overall decrease in both dollars and as a percentage of operating expense of the cost of equipment sold was primarily attributable to certain charges in the second and third quarters of 1996, totaling $8.8 million, for the reconfiguration of inventory and the write down of certain assets, including inventory, to net realizable value, offset by increased equipment sales of the dual mode mobile message product, discussed above. Sales and advertising expenses were $2.9 million and -11- $9.1 million for the three-month and nine-month periods ended September 30, 1997, compared with $5.7 million and $18.0 million for the same periods in 1996. Sales and advertising expenses for the three-month and nine-month periods ended September 30, 1997, were 9% and 10% as a percentage of operating expenses, compared to 17% 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) a more focused approach to advertising as the Company has moved from consumer markets to targeted business-to-business sales, and the resulting reduction in print advertising, (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 nine-month periods ended September 30, 1997, were $3.1 million and $10.9 million, respectively, $1.2 and $2.8 million less than the comparable periods in 1996. General and administrative expenses for the three-month and nine-month periods ended September 30, 1997, were 10% and 11%, respectively, as a percentage of operating expenses, compared to 13% and 12% for the same periods in 1996. Both the dollar and percentage decrease in general and administrative expenses for the first nine 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 $10.4 million and $31.5 million for the three-month and nine-month periods ended September 30, 1997, compared with $10.1 million and $33.0 million for the same periods in 1996. Depreciation and amortization for the three-month and nine-month periods ended September 30, 1997, was 34% and 33%, respectively, as a percentage of operating expenses, compared with 30% for both of the comparable periods in 1996. The overall 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 cost associated with software development for the mobile data product. Interest and Other Income Interest income was $55,000 and $211,000 for the three-month and nine-month periods ended September 30, 1997, compared to $180,000 and $485,000 in the same periods in 1996. The decrease was a result of lower average cash balances in the first nine months of 1997 as compared to the same period in 1996. The Company incurred $6.7 million and $16.3 million of interest expense for the three-month and nine-month periods ended September 30, 1997, compared to $3.7 million and $11.4 million of interest expense for the comparable periods of 1996, reflecting (i) increased debt balances during the first nine-months of 1997 as compared to 1996, and (ii) the amortization of debt discount and debt issuance costs in the first nine-months of 1997 of approximately $6.8 million compared to $4.0 million in the same period of 1996. Additionally, in the first nine 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 nine months of 1997 were $4.7 million, compared to $10.5 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. -12- 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 totalling $200.0 million. 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 repricing of warrants previously issued (together, the "Guarantee Warrants"). Previously, the Guarantee Warrants had been valued at $19.0 million. The Guarantee Warrants were revalued at $21.9 million, effective March 27,1997. As of October 31,1997, the Company had drawn down $144.0 million of the Term Loan Facility at annual interest rates ranging from 6.00% to 6.25%, and $46.0 million of the Working Capital Facility at annual interest rates ranging from 6.00% to 6.25%. As previously reported, as a result of slower than anticipated sales of inventory, the Company has sought additional financing and strategic arrangements ("Additional Transactions") to fund its operations through 1997 and into 1998 or beyond. The Company has received a commitment from one of its principal stockholders for an additional credit facility of up to $10.0 million ("Additional Borrowing") to be made available to the Company on commercial terms. The commitment is subject to the negotiation and execution of definitive documentation and the satisfaction of various conditions to be specified therein. The Company is determining whether other principal stockholders wish to participate in the proposed credit facility. While there can be no assurances, the Company believes that it will be able to conclude the Additional Borrowing. The Company is currently pursuing Additional Transactions, beyond the Additional Borrowing, to provide adequate capital to fund its future operations. While the Company believes that at least one of these Additional Transactions should be consummated, there can be no assurance that any of the Additional Transactions will be consummated or that the terms thereof will be favorable to the Company and non-dilutive to its stockholders. If the Bank Financing, Additional Borrowing or Additional Transactions are not consummated or sufficient, the Company may not have adequate capital to fund its future operations and debt obligations. The Company expects that operating revenues will be insufficient to cover operating expenses until sometime in late 1998 or beyond. During September, the Company arranged financing of certain current vendor obligations ("Vendor Financing"). As of October 31, 1997, $2.9 million was outstanding at an annual interest rate of 12%. -13- As previously mentioned (see "General"), AMRC was a winning bidder for, and on October 16, 1997, was awarded an FCC license to provide DARS throughout the United States. AMRC has and will continue to receive funding for this business from an independent source in exchange for debt and an equity interest in AMRC. Accordingly, it is not expected that the development of this business will have a material impact on the Company's financial position, results of operations, or cash flows. The Company's equity interest in AMRC may, however, even on a fully diluted basis, become a material asset of the Company. As of September 30,1997, the company had remaining contractual commitments to purchase both mobile data terminal inventory and mobile telephone inventory in the maximum amount of $14.1 million. For the first nine months of 1997, the Company has used $45.9 million of cash in operating activities and $24.3 million of cash in investing activities and has generated $70.6 million of cash from financing activities. Cash used in operating activities was $45.9 million for the first nine months of 1997 compared to $74.6 million for the same period in 1996, a decrease of $28.7 million. The decrease in cash used in operating activities was primarily attributable to (i) decreased operating losses, and (ii) reduced payments of inventory commitments. Cash used in investing activities was $24.3 million for the first nine months of 1997 compared to $54.6 million cash provided by investment activities for the same period in 1996, a decrease of $78.9 million. The decrease was primarily attributable to the insurance settlement in the amount of $66.0 million received in the third quarter of 1996, offset by funding of the DARS license, discussed above. Cash provided by financing activities was $70.6 million for the first nine months of 1997 compared to $13.6 million for the same period in 1996, an increase of $57 million. The increase was largely attributable to the reduction in payments made for repayment of long-term debt and debt acquisition costs incurred in 1996 associated with the establishment of the Bank Financing, discussed above. As of September 30, 1997, the Company had $2.6 million of cash and cash equivalents and working capital of $20.6 million. -14- 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) (b) Reports on Form 8-K: On October 6, 1997, the Company filed a Current Report on Form 8-K describing in response to Item 5 - Other Events that the Federal Communications Commission ("FCC") had announced that it was prepared to grant a license to American Mobile Radio Corproation, a subsidiary of the Company. -15- 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, 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) -16-