SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 758-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per value per share
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
The aggregate market value of shares of Common Stock held by non-affiliates at
March 27, 1998 was approximately $142,757,227.
Number of shares of Common Stock outstanding at March 27, 1998: 25,176,726.
This Annual Report on Form 10-K omits certain supplemental financial information
required by Rule 3-09 of Regulation S-X.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Company's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders is incorporated by reference in Part III of this
Form 10-K.
AMERICAN MOBILE SATELLITE CORPORATION
1997 Annual Report on Form 10-K
PART I
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "believes,"
"intended," "will be positioned," "expects," "expected," "estimates,"
"anticipates" and "anticipated." These forward-looking statements are based on
the Company's current expectations. All statements other than statements of
historical facts included in this Annual Report, including those regarding the
Company's financial position, business strategy, projected costs and financing
needs, and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Annual Report, including, without limitation, in conjunction with the
forward-looking statements included in this Annual Report. These forward-looking
statements represent the Company's judgment as of the date hereof and readers
are cautioned not to place undue reliance on these forward-looking statements.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including the Current Report on
Form 8-K filed on March 9, 1998, and Form 10-Q Quarterly Reports to be filed by
the Company subsequent to this Form 10-K Annual Report and any Current Reports
on Form 8-K and registration statements filed by the Company.
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Item 1. Business.
Overview
American Mobile Satellite Corporation (the "Company" or "American Mobile"),
through its subsidiaries, is a leading provider of nationwide wireless
communications services, including data, dispatch, and voice services, primarily
to business customers in the United States. On March 31, 1998, American Mobile
acquired ARDIS Company ("ARDIS") from Motorola, Inc. ("Motorola"), and combined
the ARDIS terrestrial-based business with the satellite-based business operated
through its subsidiary AMSC Subsidiary Corporation. The Company's combined
network offers a broad range of end-to-end wireless solutions utilizing a
seamless network consisting of the nation's largest, most fully-deployed
terrestrial wireless data network and a satellite in geosynchronous orbit.
American Mobile
American Mobile, a leading provider of nationwide mobile data and voice dispatch
service, operates North America's first high-powered, satellite-based digital
mobile communications system. American Mobile provides a broad range of
integrated end-to-end wireless solutions to land, sea and air-based customers in
a service area (the "Service Area") consisting of the continental United States,
Alaska, Hawaii, Puerto Rico, the U.S. Virgin Islands and U.S. coastal waters and
airspace.
American Mobile provides data service through two network configurations, either
a "satellite-only" service network or a "multi-mode" terrestrial and satellite
service network. American Mobile's satellite-only data communications system
provides data services primarily to long-haul trucking customers. The Company's
multi-mode communications system uses the Company's terrestrial and satellite
networks to provide "least-cost routing" for customers' two-way data
communications by actively seeking connections to the lower cost terrestrial
network before automatically using the Company's satellite network, thereby
providing cost-effective nationwide coverage.
In addition to providing data service, American Mobile offers two forms of
mobile voice communications service: nationwide dispatch service and satellite
telephone service. American Mobile is the only company that offers a nationwide
dispatch service which allows multiple users located anywhere in American
Mobile's extensive service area to share a single connection for
point-to-multipoint communication using push-to-talk handsets. American Mobile
markets its nationwide dispatch service primarily to field services users with
wide-area fleet communications needs. American Mobile's satellite telephone
service provides traditional voice, fax and data service through satellite
terminals that are similar to cellular phones. American Mobile markets its
satellite telephone service primarily to maritime users, including both
commercial and recreational vessels, as well as other market segments such as
government and public safety organizations.
As of December 31, 1997, American Mobile had approximately 32,400 units
operating on its network.
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ARDIS
ARDIS, a leading provider of nationwide wireless data service, markets its
service primarily to business customers with a need for reliable, two-way
wireless data communications in the field services and transportation markets.
The ARDIS wireless data network provides the widest breadth of coverage of any
single provider of terrestrial wireless service in the United States. The
network incorporates approximately 1,700 radio towers (base stations) that
provide service to 425 of the largest cities and towns in the United States,
including virtually all metropolitan areas. The network was designed and built
using Motorola technology to provide reliable two-way data communications, deep
in-building penetration and efficient frequency usage. The extensive coverage
and deep in-building penetration provided by the ARDIS network is attractive to
customers who desire a single service provider whose nationwide scope extends
from large metropolitan areas to smaller cities and towns. Customers use
applications such as service call dispatch, asset tracking, and peer-to-peer
communications to achieve critical business objectives resulting in increased
productivity, profitability and customer satisfaction.
As of December 31, 1997, ARDIS had approximately 55,400 units (including
approximately 6,500 units, common to both American Mobile and ARDIS) operating
on its network.
AMRC
American Mobile Radio Corporation, a subsidiary of AMRC Holdings, Inc. (together
with American Mobile Radio Corporation, "AMRC") has been granted a license from
the Federal Communications Commission (the "FCC") to construct, launch and
operate a domestic satellite system for the provision of satellite-based digital
audio radio service ("DARS"). AMRC made a payment of $90 million to fully pay
for its DARS license in October 1997. The Company currently owns 80% of the
capital stock of AMRC. The remainder of AMRC is owned by WorldSpace, Inc.
("WorldSpace"), a leading international DARS company that is planning to provide
DARS service to Latin America, Africa and Asia. Through its investment in AMRC,
WorldSpace has an option to increase its ownership in AMRC to 72%, subject to
FCC approval. It is anticipated that the proceeds resulting from the exercise of
the option will not be available to the Company. As previously reported, on
March 20, 1998, AMRC entered into an agreement with Hughes Space and
Communications International, Inc. to build two new generation, high-powered
HS-702 geostationary orbit satellites for its digital radio service, with
service anticipated to begin in the year 2000.
History
The Company, a Delaware corporation, was incorporated in May 1988 by eight of
the initial applicants for the first mobile satellite services license,
following a determination by the FCC that the public interest would best be
served by granting the license to a consortium composed of all willing and
qualified
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applicants. In March 1991, the Company transferred the mobile satellite services
license to its wholly owned subsidiary, AMSC Subsidiary Corporation.
In August 1989, the FCC authorized the Company to construct, launch and operate
a mobile satellite communications system. For the system's mobile links, the FCC
assigned to the Company the exclusive license to 30 MHz of L-band spectrum,
subject to international frequency coordination. L-band spectrum is considered
advantageous for mobile communications services because it is less affected by
radio propagation difficulties than are higher frequencies. The FCC licensed the
Company to provide a full range of mobile voice, data and dispatch
communications services via satellite to land, air and sea-based customers in
the Service Area.
The Acquisition
On March 31, 1998, the Company acquired ARDIS (the "Acquisition") in accordance
with a purchase agreement (the "Purchase Agreement") entered into with Motorola
on December 31, 1997. Subject to certain purchase price adjustment provisions,
the Company acquired ARDIS for a purchase price of $100 million (the "Purchase
Price") paid as follows: (i) $50 million in cash, paid at the closing of the
Acquisition; (ii) approximately $38 million in shares of the Company's Common
Stock, paid at the closing of the Acquisition; and (iii) approximately $12
million in shares of the Company's Common Stock and warrants for shares of
Company's Common Stock only if, at the annual meeting of Company's stockholders,
the stockholders approve the issuance of the additional shares and warrants to
Motorola. The holders of approximately 76% of Company's Common Stock outstanding
and entitled to vote thereon have agreed with Motorola that they will vote for
approval of such issuance.
In connection with the Acquisition, the Company and its subsidiaries entered
into agreements with respect to three financings and refinancings: (1) $335
million of Units consisting of 12 1/4% Senior Notes due 2008 and Warrants to
purchase shares of Common Stock of the Company; (2) a $100 million Revolving
Credit Facility and a $100 million Term Loan Facility (collectively, the "New
Bank Financing"); and (3) a $10 million commitment with respect to Motorola
vendor financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Upon completion of the Acquisition, ARDIS became a wholly-owned subsidiary of
AMSC Acquisition Company, Inc. ("Acquisition Company"). In connection with the
Acquisition, the Company also transferred all of its rights, title and interest
in three additional subsidiaries -- American Mobile Satellite Sales Corporation,
AMSC Subsidiary Corporation and AMSC Sales Corporation, Ltd. -- to Acquisition
Company. As a result, each of these entities is a wholly-owned subsidiary of
Acquisition Company that, in turn, operates as a wholly-owned subsidiary of the
Company. The Company continues to retain its direct ownership interest in AMRC.
The full benefits of a combination of American Mobile and ARDIS as a result of
the Acquisition will require the integration of each company's administrative,
finance, sales and marketing organizations, the coordination of each company's
sales efforts and the implementation of appropriate operational, financial and
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management systems and controls. There can be no assurance that the Company will
be able to integrate the operations of American Mobile and the ARDIS network
successfully or, if successful, that such integration will yield the expected
benefits to the Company.
The Network
Following the Acquisition, the Company's integrated network consists of (i) a
satellite in geosychronous orbit with coverage of the continental United States,
Alaska, Hawaii, Puerto Rico, the U.S. Virgin Islands and U.S. coastal waters and
airspace, and (ii) the largest two-way terrestrial data network in the United
States with coverage of over 425 of the largest cities and towns in the United
States, including virtually all metropolitan areas. The network provides a wide
range of mobile data and voice services in multi-mode and single-mode
configurations.
Users of the Company's terrestrial and satellite communications network access
the network through subscriber units that may be portable, mobile or stationary
devices. Generally, subscriber units enable either data or voice communications
and are designed to operate over either the terrestrial data-only network or the
satellite network, which provide both voice and data communications. In
addition, the Company's multi-mode subscriber equipment is designed to provide
least-cost routing of data messages over both the terrestrial and satellite
networks.
Subscriber units receive and transmit wireless data or voice messages from
either terrestrial base stations or the Company's satellite, MSAT-2. Terrestrial
messages are routed to their destination via Company-owned data switches, which
connect to the public data network. Satellite messages are routed to their
destination via satellite data and voice switches, located at the Company's
headquarters, which connect to the public data and switched voice networks. A
data switch located in Cedar Rapids links the terrestrial and satellite networks
for the delivery of the Company's multi-mode data service.
The Company's terrestrial network delivers superior in-building penetration,
completion rates and response times compared to other wireless data networks
through the use of a patented single frequency reuse ("SFR") technology
developed by Motorola. SFR technology enables multiple base stations in a given
area to use the same frequency. As a result, a message sent by a subscriber can
be received by a number of base stations. This technology contrasts with more
commonly used multiple frequency reuse ("MFR") systems which provide for only
one transmission path for a given message at a particular frequency. In
comparison with MFR systems, the Company's technology provides superior
in-building penetration and response times and enables the Company to
incrementally deploy additional capacity as required, instead of in larger
increments as required by most wireless networks.
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Business Strategy
The Company's objective is to maximize its revenues by delivering value-added
services to end users in specific market segments. To meet this objective and to
capitalize upon the competitive advantages resulting from the combination of
American Mobile and ARDIS, the Company intends to: (i) offer business customers
a broad range of nationwide wireless service and end-to-end data solutions; (ii)
integrate and leverage the advantages of its nationwide terrestrial and
satellite data networks; (iii) enhance market penetration by lowering customers'
"total cost of ownership;" and (iv) expand the use of alternate distribution
channels to accelerate network loading.
Offer Business Customers a Broad Range of Nationwide Wireless Solutions. The
Company believes its corporate customers prefer a single-source service provider
capable of delivering a broad range of efficient and cost effective solutions to
meet their need for mobile wireless communications. The Company believes that it
has and will continue to have a unique strategic advantage in being able to
provide one-stop shopping across a broad range of products, including two-way
paging and advanced messaging, packaged e-mail and LAN solutions, custom data
applications, dual mode terrestrial/satellite data, and satellite voice and
dispatch functions.
Integrate and Leverage Network Advantages. The Company has spent over a decade
developing and deploying its nationwide terrestrial and satellite networks and
now seeks to accelerate growth by leveraging its integrated network. Unlike many
competitors with plans to build out limited city-wide or regional terrestrial
networks or to launch satellites, the Company's technology infrastructure is in
place and operational today, with future network expansion requirements arising
primarily from increased customer demand. The Company believes that this
integrated terrestrial/satellite network provides key competitive advantages
currently unmatched by any competitor: virtually 100% nationwide geographic
coverage, guaranteed message delivery, and, in the areas covered by the ARDIS
network, deep in-building penetration. By integrating the operations of its
terrestrial and satellite networks, the Company expects to achieve operating
efficiencies and economies of scale that it believes will lead to improved
operating margins.
Enhance Market Penetration By Reducing Customers' "Total Cost of Ownership."
Historically, the most significant obstacle to the implementation of
enterprise-wide wireless data applications has been the relatively high total
cost of ownership. The total cost of ownership is comprised of three primary
elements: the cost of the subscriber unit, the required investment in software
development, and the monthly cost of network access and usage. In most of the
Company's applications, the monthly cost of network access and usage has been
the least prohibitive of these elements. Until recently, subscriber unit costs
in excess of $3,000 and custom software investments of up to several million
dollars were common. By working with business partners and vendors, and making
strategic software investments, the Company has succeeded in significantly
lowering customers' total cost of ownership. New subscriber units, including
low-cost two-way messaging units and laptop modem cards, are now available for
$500 or less and substantial development work is underway with several of the
Company's vendors to accelerate reductions of equipment cost, unit weight and
size. In the future, the Company expects that the increased subscriber unit
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volumes associated with recent large contract awards will lead to additional
unit price reductions. In addition, customers can now use off-the-shelf software
applications that are relatively inexpensive, or in the case of the Company's
two-way messaging service, free. The Company believes that these lower price
points will accelerate the adoption of the Company's services in its historical
markets, and will enable the Company to develop new markets, such as wireless
point-of-sale and telemetry.
Expand Alternate Distribution Channels. The Company sells it service primarily
through a direct sales force and resellers. In order to accelerate network
loading, the Company expects to expand its use of indirect distribution
channels. To date, the Company has entered into agreements with resellers to
penetrate markets where such resellers have a market presence and significantly
greater resources than the Company, including dedicated sales personnel. In
addition, the Company is in the process of establishing relationships with
existing paging companies, paging resellers, and other targeted distribution
partners to market two-way guaranteed messaging services. The Company believes
that the resale of its network is an alternative that paging companies will
consider when assessing a move from one-way to two-way messaging because it may
reduce or eliminate the need for additional investment in network
infrastructure. The Company intends to utilize paging companies and other
similar partners with well established distribution capabilities to develop
markets outside of the Company's historical market segments.
Marketing and Distribution
The Company markets its services through four primary distribution channels:
direct sales, vertical resellers, horizontal resellers and dealers.
Direct Sales
The Company has a direct sales force who focus on the requirements of business
customers. This sales organization is comprised of a national accounts group
that profiles and targets specific Fortune 500 accounts, and a network of
regionally based representatives who specialize in specific industry segments.
Sales to national account targets generally require a sustained marketing effort
lasting several months. Prior to making a buying decision, a majority of the
accounts exercise a due diligence process where competitive alternatives are
evaluated. The Company's employees often assist in developing justification
studies, application design support, hardware testing, planning and training.
Vertical Resellers
In order to penetrate quickly certain market segments characterized by
specialized technical requirements and/or unique business applications, the
Company leverages the capabilities of specialized distribution partners. These
relationships enable the Company to penetrate new market segments without
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investing in the product, training and development requirements typically
associated with entry into a new market segment.
The Company's resale arrangements are specifically designed to accelerate entry
into the wireless telemetry (utility and alarm monitoring), point-of-sale,
maritime and government market segments. These business partners are responsible
for development of the end-user solutions, and purchase capacity on the
Company's data network.
Value added service providers ("VASPs") represent one of the Company's primary
distribution channels for maritime satellite telephony. VASPs purchase bulk
minutes, resell at a margin, set the price, take risk of collection and perform
all service and billing functions.
The Company currently utilizes three specialized government resellers, one of
which has included the Company's products on the general services administration
schedule. The Company intends to expand the distribution opportunities for its
terrestrial data products by also including them in these programs.
The Company also has various private network customers ("PNCs") that purchase
bulk satellite capacity from the Company in the form of dedicated capacity
increments or channels. PNCs use this capacity to support their own proprietary
networks and products, and maintain all associated business risks and
responsibilities.
Horizontal Resellers
The Company utilizes a series of resale relationships designed to reach a large
segment of the mobile workforce that does not require integration with
centralized systems, but still has a broad need for two-way messaging and
wireless e-mail access. Because these applications are generic across numerous
industries, the segment is horizontally addressable, and requires some level of
retail presence. To achieve this presence, the Company is in the process of
establishing relationships with existing paging companies, paging resellers and
other targeted distribution partners to market two-way guaranteed messaging
services. The Company also maintains relationships with manufacturers of
personal handheld computing devices, who include the Company's marketing
material with the device packaging to provide the purchaser the option of
wirelessly enabling a handheld computing device.
Dealer Channels
The Company also uses land mobile and maritime dealers who distribute the
Company's nationwide dispatch and satellite telephony products. These dealers
typically have strong business relationships with regional public safety
entities, as well as with smaller field service fleets and maritime users. The
Company believes that opportunities exist to capitalize on the strengths of this
channel by introducing a low cost terrestrial data device with minimum
integration requirements. Typically these dealers serve as agents for sales and
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service and do not set pricing or provide billing and collection services. These
dealers are generally compensated with a modest percentage of the service
revenue for which they are responsible.
Customer Concentration
After giving pro forma effect to the Acquisition, three existing customers, IBM,
NCR and Pitney Bowes, accounted for 26%, 7% and 5%, respectively, of the
Company's recurring service revenue for the twelve months ended December 31,
1997. The loss of one or more of such customers, or any event, occurrence or
development which adversely affects the relationship between the Company and
such customer could have a material adverse effect upon the Company.
Equipment; Supplier Relationships
The Company has contracts with multiple vendors to supply equipment
configurations designed to operate on each of its operating platforms. These
devices are designed to meet the requirements of specific end-user applications.
The Company continues to pursue enhancements to these devices that will result
in additional desirable features and reduced cost of ownership. Although many of
the components of the Company's products are available from a number of
different suppliers, the Company does rely upon a few key suppliers.
In connection with its mobile data communications service, the Company presently
has an agreement with Trimble Navigation, Limited to supply its satellite data
unit. In addition, multi-mode data terminals are sourced from Rockwell Collins,
Inc. The Company also has contracted with Vistar, Inc., a Canadian company, for
the development of a new multi-mode terminal. The new terminal will incorporate
design changes that will simplify the installation process and allow for the
addition of enhancements in a modular fashion. The Company believes that the
price of multi-mode terminals will continue to decline in the coming years.
There are currently over 30 different types of subscriber units available from
15 manufacturers that can operate on the terrestrial network. Examples of
portable subscriber units include ruggedized laptop computers, small external
modems, handheld or palmtop "assistants," pen based "tablets," and two-way
messaging devices, such as the RIM Interactive PagerTM. Significant developers
of devices that are compatible with the network include Motorola, RIM and
Itronix. Motorola and RIM manufacture modems designed to be integrated into
handheld field service terminals, telemetry devices, utility monitoring and
security systems as well as other computing systems. RIM recently has developed
the Interactive PagerTM that supports the Company's two-way messaging service.
Itronix manufactures the XC-6000, a fully ruggedized laptop computer with a
standard keyboard and an integrated wireless modem.
Mobile satellite voice telephones are offered in a number of different
configurations that deliver a variety of features and options to meet specific
market needs. Mobile satellite telephones are currently available in land mobile
vehicle installed, fixed site, maritime, aeronautical, dual mode voice/direct to
home satellite television and fully transportable (i.e., battery powered and
packaged in a briefcase) configurations. Subscriber equipment for satellite
telephone service and nationwide dispatch service includes data interface ports
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to allow connection to communications accessories such as personal computers,
and global positioning satellite ("GPS") tracking devices. Recent enhancements
allow users to utilize the dispatch product remotely from the vehicle, via a
wireless tether. American Mobile continues to add enhancements based upon
customer requirements, and has several initiatives that could result in the
reduced cost of end-user devices. The primary suppliers for the voice equipment
are Westinghouse Electric, Inc. ("Westinghouse") and Mitsubishi Electric
Corporation.
Tandem computer provides the ARDIS network switching computers under a
multi-year lease that extends through the year 2000, while AT&T provides network
services including a nationwide wireline data network, and leased sites which
house regional ARDIS switching equipment. The Company also has a relationship
with AT&T as its vendor for switched inbound and outbound public switched
telephone network services. The satellite system terminates calls from its
telephone product via both the AT&T and Sprint networks.
ARDIS has executed multiple agreements with Motorola that provide for certain
continued support from Motorola with respect to: supply and support for the
ARDIS DataTAC network infrastructure; ongoing maintenance and service of the
ARDIS base stations; and lease administration services for approximately 37% of
ARDIS' base station site leases. Additionally, Motorola is expected to continue
to manufacture modems compatible with the ARDIS network infrastructure for use
in end-user devices.
Hughes Network Systems Ltd, of the United Kingdom, manufactures and supports the
key component to the Company's multi-mode and satellite messaging products,
which is the Land Earth Station ("LES"). There are currently four LES's
operational. The platform for the Company's voice products, the communications
ground segment ("CGS"), depends upon products from multiple vendors, most of
which are generally commercially available. Northern Telecom manufactures and
supports the core voice switch. Digital Equipment Corporation supplies the
computing platform that runs the CGS.
American Mobile jointly owns certain patents, technical data and other
intellectual property, including the final mobile terminal performance
specification ("FMPS"), developed by Westinghouse, with the Canadian mobile
satellite service provider, TMI Communications and Company, Limited Partnership
("TMI"). The Company separately owns other patents, technical data and other
intellectual property developed by Westinghouse at the Company's sole expense.
Certain of the intellectual property used in the development of the CGS is owned
by Westinghouse or licensed from others. The Company believes its ownership of
and rights to intellectual property relating to the CGS is sufficient for its
business purposes.
The ARDIS network, and certain of its competitive strengths such as deep
in-building penetration, is based upon SFR technology. Motorola holds the patent
for SFR technology. ARDIS has entered into support agreements with Motorola to
provide for certain support of the operations of the ARDIS network.
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However, there can be no assurance that Motorola will not enter into
arrangements with the Company's competitors, or that if it does, such
arrangements would not have a material adverse effect on the Company.
Satellite Lease and Purchase Agreement
As previously reported, on December 4, 1997, the Company entered into an
agreement with African Continental Telecommunications Ltd. ("ACTEL") to lease
the Company's satellite, "MSAT-2," (the "Satellite Lease agreement") for
deployment over sub-Saharan Africa. The five-year lease provides for aggregate
payments to the Company of $182.5 million. Simultaneously, the Company agreed
with TMI to acquire a one-half ownership interest in TMI's satellite, "MSAT-1,"
(the "Satellite Purchase Agreement") at an aggregate cost to the Company of $60
million, payable in equal installments over a five-year period; certain
additional payments to TMI of up to one-half of additional net payments received
are contemplated in the event that additional benefits are realized by the
Company with respect to MSAT-2 after the initial five-year lease term. Under the
Satellite Purchase Agreement, TMI and the Company will each own a 50% undivided
ownership interest in MSAT-1, will be jointly responsible for the operation of
MSAT-1, and will share certain satellite operating expenses, but will otherwise
maintain their separate business operations.
The Satellite Purchase Agreement and Satellite Lease Agreement are separate
transactions and reflect separate sets of obligations for the Company. While the
Company believes that if ACTEL defaults under the Satellite Lease Agreement, the
Company would be able to achieve the return of MSAT-2 from ACTEL to its
operation in the United States and terminate its payment obligations to TMI
under the Satellite Purchase Agreement, there can be no assurances that such
actions can be achieved. In addition, there can be no assurances that the
agreements will operate in parallel, or that the Company will not be met with
certain completion or transactional risks under the Satellite Lease Agreement.
If it is necessary for the Company to make payments under the Satellite Purchase
Agreement at a time when it is not receiving payments under the Satellite Lease
Agreement, the Company could be materially and adversely affected.
Closing under the Satellite Purchase Agreement and Satellite Lease Agreement is
subject to a number of conditions, including: United States and Canadian
regulatory approvals; a successful financing by ACTEL of at least $120 million;
completion of certain satellite testing, inversion and relocation activities
with respect to American Mobile's satellite, to support the contemplated
services over Africa; receipt of various government authorizations from
Gibraltar, South Africa and other jurisdictions to support satellite relocation,
including authorizations with respect to orbital slot and spectrum coordination;
and completion of certain system development activities sufficient to support
satellite redeployment. On March 13, 1998, the FCC provided approval of the
transactions; Canadian government coordination and approvals remain outstanding.
It is anticipated that the closing under both agreements will occur
simultaneously in the spring of 1998. It is anticipated that the net proceeds of
the Satellite Lease Agreement and Satellite Purchase Agreement will be used
primarily to repay the Company's Revolving Credit Facility, as well as to
provide the Company with additional liquidity. In addition, any amounts repaid
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from the net proceeds of the Satellite Lease Agreement and Satellite Purchase
Agreement would reduce the commitment available to the Company under the
Revolving Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." While it is anticipated that these transactions would improve the
leverage of and provide additional liquidity to the Company, there can be no
assurance that such transactions will be consummated simultaneously, or at all.
Satellite Back-up and Technology
The Company presently has an agreement with TMI, the Canadian mobile satellite
licensee, for reciprocal backup, restoral and excess capacity usage ("Backup
Capacity") on the other party's satellite in the event of a satellite failure or
a need for excess capacity. In the event that the lease and redeployment of
MSAT-2 is consummated, the Company will no longer have available Backup Capacity
from MSAT-1. Each of MSAT-2 and MSAT-1 has in the past experienced certain
technological anomalies, most recently with respect to MSAT-2 in January 1998
and MSAT-1 in February 1998. While recent anomalies have involved either spare
components or ones which have not had a material impact on the Company, there
can be no assurance that either of the satellites will not experience subsequent
anomalies that could adversely affect the Company's financial condition, results
of operations and cash flows. In the event that MSAT-1 experiences anomalies of
this type or other types at a time when the Company has no back-up capacity,
there would be a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
The Company, as well as TMI, 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.
MSAT-2 has an expected remaining service life of approximately eight years and
the expected remaining life of MSAT-1 is approximately ten years. This expected
remaining service life of each satellite may be affected by a number of factors.
For example, random failure of satellite components could result in damage to or
loss of MSAT-2 or MSAT-1. It is also possible that either satellite could be
damaged by electromagnetic storms or collisions with other objects, although
such occurrences are rare. Although the Company believes that the actual service
lives of both satellites may exceed their expected service lives, there can be
no assurance that MSAT-2's or MSAT-1's expected service life will be exceeded or
achieved. Although the Company has obtained in-orbit insurance against a failure
of MSAT-2 in the amount of $184 million, such insurance includes a variety of
deductibles, performance margins and exclusions and it is unlikely that any
recovery under such insurance would fully compensate the Company for losses it
would sustain in such event. Further, the proceeds from the in-orbit insurance
- 12 -
must be used to repay the outstanding balance of the New Bank Financing and the
remaining proceeds, if any, would be insufficient to construct, launch and
insure the launch of a replacement satellite. There can be no assurance that
additional financing will be available to construct, launch and insure a
replacement satellite or, if available, will be available on terms favorable to
the Company. At present, there is no insurance policy in effect for MSAT-1.
Although there can be no assurance, the Company believes that it will be able to
obtain insurance with respect to its interest in MSAT-1 in connection with the
Satellite Purchase Agreement on terms substantially similar to those presently
in effect for MSAT-2. In addition, the in-orbit insurance policy is subject to
annual renewal, and there is no assurance that insurance on favorable terms and
at commercially reasonable rates will remain available for coverage of MSAT-2,
or be available for coverage of MSAT-1.
In the event that, following the satellite lease, MSAT-1 ceases to operate, the
Company would have several options to replace the lost capacity, through the
lease or purchase of capacity on certain Inmarsat satellites, or the launch of a
new satellite. However, each of these options would require substantial
lead-time and significant financing. As a result, any such delay or need for
significant funds would result in a material adverse effect on the Company.
Competition
The wireless communications industry is highly competitive and is characterized
by frequent technological innovation. The Company competes on the basis of
providing comprehensive, end-to-end solutions and a premium level of service in
the markets it serves. End-to-end solutions have been assembled working with a
select group of business partners who develop and manufacture software,
middleware and hardware components. The Company differentiates itself and
provides a premium level of service due to its unmatched geographic coverage,
in-building penetration, guaranteed message delivery, and guaranteed
reliability.
The Company competes with a full array of companies, from small startups to
Fortune 500 companies. Many of these competitors have financial, technical and
marketing resources in excess of the Company's. Because the Company competes in
several market segments with a broad range of services, competing technologies
may address one or more of the market segments. The Company has identified six
major classes of technologies or services that offer capabilities competitive
with the Company's services: Terrestrial Packetized Data; Cellular/PCS;
Specialized Mobile Radio ("SMR")/Enhanced Specialized Mobile Radio ("ESMR");
Private Systems; Paging/Narrowband PCS; and Mobile Satellite Services.
- 13 -
Terrestrial Packetized Data. Companies using packetized data technologies
provide wireless data services that compete directly with a number of the
Company's data products. Packetized data technology relies on radio frequencies
to transmit short-burst data messages. Primary competitors using this technology
include RAM Mobile Data ("RAM"), Metricom, Teletrac and Cellnet. RAM, a
wholly-owned subsidiary of BellSouth enterprises, operates a terrestrial-only
network that provides data services to customers primarily in the field service,
transportation and utility industries. The Company believes that its network
provides broader coverage, and superior in-building penetration compared to
RAM's network. In addition, the Company is upgrading its network in major cities
so that it will operate at faster speeds than the RAM network. Metricom's
Ricochet service provides wireless, mobile access to the Internet, private
intranets, local area networks and e-mail. Metricom currently offers its service
in limited regions comprised of San Francisco, Seattle, Houston and Washington,
D.C. Teletrac provides primarily location and vehicle monitoring and two-way
data transfer services in major metropolitan areas and Cellnet provides wireless
meter reading services.
Cellular and PCS. Cellular and PCS services compete with the Company's satellite
and terrestrial voice and data services, and presently serve the majority of
mobile communications users in the United States, with approximately 55,000,000
units. Cellular and PCS systems operated by approximately 1,500 companies
collectively provide service throughout most of the United States, with no
single competitor providing the breadth of coverage that is available through
the Company's network. Cellular Digital Packet Data ("CDPD"), the cellular
industry's standard packet data service, is available principally in
metropolitan areas containing approximately 44% of the nation's population at
the end of 1997. PCS carriers, many of which offer short message capabilities
and expect to offer larger capacity packet data services in the near future,
presently offer service which in the aggregate covers approximately 60% of the
U.S. population.
Most cellular and PCS providers have structured their services and distribution
principally to meet switched voice service requirements of broad-market users.
However, HighwayMaster Communications, Inc. offers data and voice communications
to the long-haul trucking industry through the application of its proprietary
messaging and billing technologies to circuit-switched cellular capacity which
it purchases in bulk from a number of large cellular carriers. Differences in
equipment and service pricing and product characteristics result in minimal
direct competition between the Company's voice products and most other cellular
carriers.
Specialized Mobile Radio (SMR) and Enhanced Specialized Mobile Radio (ESMR)
Services. Within the limitations of available spectrum and technology, SMR
operators compete with the Company's voice dispatch services by providing mobile
communications services, including mobile telephone, dispatch, paging and
limited data services. For certain applications, such as mobile telephone
interconnect, SMR systems presently are less expensive than the Company's
services, although the shared channel configuration and the economics of these
systems have traditionally caused SMR systems to be less frequently utilized for
voice telephone services.
SMR radio services have been expanding rapidly over the past ten years and
converting from analog to digital technology. ESMR systems compete with the
Company's voice and data dispatch services in metropolitan areas. NEXTEL
- 14 -
Communications, Inc. ("Nextel") provides ESMR services in numerous large
metropolitan service areas in the United States and is the leading provider of
SMR using digital technology, frequency reuse and lower power transmitters to
transform its current SMR service into cellular-like services, including voice
telephone services. Geotek Communications, Inc. ("Geotek") offers voice and data
communication networks for the trunked mobile radio market. Targeted primarily
to small and medium-sized businesses managing fleets of vehicles and mobile
workforces, Geotek is focused on providing metropolitan area voice and data
services. Currently, Geotek's service is available in 11 markets. Neither Nextel
nor Geotek provide nationwide voice dispatch or data services comparable to
those offered by the Company.
Private Land Mobile Frequencies. Individual companies that have chosen to
develop their own private wireless data network constitute a large percentage of
the wireless marketplace for corporate fleets. An example of such a customer is
Federal Express. While these companies already have made significant investments
in their systems, in some cases recurring maintenance, upgrade and expansion
costs, coupled with recent steps by the FCC to charge private system owners for
the use of the radio frequencies, have caused these organizations to turn to
commercial providers such as the Company.
Narrowband PCS/Enhanced Paging. There are a large number of paging companies
that offer messaging services on a regional or nationwide basis. Despite the low
cost of one-way paging, most traditional paging services do not provide
full-function two-way communications. Although some paging companies, such as
MTel, have begun to offer limited time-delayed two-way messaging services,
initial challenges in coverage, responsiveness and throughput currently limit
their adoption by the Company's targeted business customers.
Mobile Satellite Services. The Company's voice and data services face
competition from a number of companies that are selling or are developing
services using a variety of satellite technologies. The principal alternative
satellite-based communications system available to the trucking market is
Qualcomm Incorporated's ("Qualcomm") OmniTracs nationwide data service. Qualcomm
currently provides low-speed mobile data services using terminals which are
priced competitively with the Company's satellite-only terminals. Qualcomm's
OmniTracs service does not provide a terrestrial communications path or
least-cost routing capabilities similar to the Company's multi-mode product. As
a result, transmissions to and from a vehicle must be routed exclusively over a
satellite network and are subject to line of sight blocking and higher
transmission costs, limiting the product's functionality and cost-effectiveness
in segments that require urban coverage or large volumes of data transmission.
NORCOM Networks Inc. ("NORCOM") is in the process of commercially deploying a
satellite-based packet data service that competes with the Company's data
services in the transportation and field service segments. NORCOM currently
purchases channel capacity on the Company's satellite over which it operates its
network, and combines its satellite data service product with terrestrial
services provided by RAM and by the Company.
The Company's satellite services also compete for mobile maritime subscribers
with TMI, a Canadian company operating a satellite comparable to MSAT-2, and
with Inmarsat, a consortium of 70 countries
- 15 -
that is authorized to provide maritime voice and data services along the North
American coasts. Because Inmarsat's current system operates at a much lower
power level than does the Company's satellite, its mobile terminals must be
equipped with antenna systems that are larger and more expensive than those
required for the Company's network. The Inmarsat system also has per minute
charges significantly higher than those charged by the Company. Comsat, the U.S.
signatory for Inmarsat, applied to the FCC for authority to provide mobile
satellite services ("MSS") in the United States through Inmarsat facilities.
TMI, which is technically capable of providing service within the United States,
has also announced its intention to provide MSS to domestic customers over
MSAT-1. Although the FCC has consistently denied Comsat's application, most
recently on January 9, 1998, there can be no assurances that Comsat, TMI, or any
other satellite provider, will not become authorized to provide MSS in the
United States (See "Regulation").
Recently, several Low Earth Orbit ("LEO") and Medium Earth Orbit ("MEO")
satellite systems have been announced or have commenced deployment. Examples of
these systems, which are more complex and costly than the Company's
geosynchronous network, include Iridium LLC; Globalstar Telecommunications, LTD,
and ICO Global. When deployed, these systems will offer certain advantages over
the Company's voice telephony service, including the ability to support small
handheld telephones and, in certain instances, reduced transmission delay.
However, the Company does not expect that these systems will provide a
nationwide dispatch service or support data service in excess of 2,400 bps.
Moreover, these companies are focused primarily on consumer-oriented and global
traveler applications and not the business markets which are the focus of the
Company. Further, because these companies will deploy satellite systems, they
are not expected to compete against urban in-building data services provided by
the Company.
In addition to relatively complex LEO systems designed to provide mobile voice
services, there are a number of proposals for relatively simple "little" LEO
systems that would provide only low-speed packet data services. These systems,
including ORBCOMM Global, L.P., Final Analysis and LEO One USA, have access to
comparatively limited spectrum and are expected to compete for customers who
require specialty applications such as asset tracking services for unpowered
trailers.
Regulation
American Mobile's satellite system and ARDIS' ground-based two-way wireless data
system are regulated to varying degrees at the federal, state, and local levels.
Various legislative and regulatory proposals under consideration from time to
time by Congress and the FCC have in the past materially affected and may in the
future materially affect the telecommunications industry in general, and
American Mobile and ARDIS in particular. In addition, many aspects of regulation
at the federal, state and local level currently are subject to judicial review
or are the subject of administrative or legislative proposals to modify, repeal,
or adopt new laws and administrative regulations and policies. The following is
a summary of significant laws, regulations and policies affecting the operation
of American Mobile's and ARDIS' businesses.
- 16 -
General
The ownership and operation of American Mobile's system and ARDIS' ground-based
two-way wireless data system are subject to the rules and regulations of the
FCC, which acts under authority granted by the Communications Act and related
federal laws. Among other things, the FCC allocates portions of the radio
frequency spectrum to certain services and grants licenses to and regulates
individual entities using that spectrum. American Mobile and ARDIS operate
pursuant to various licenses granted by the FCC.
Both American Mobile and ARDIS are Commercial Mobile Radio Service ("CMRS")
providers and therefore are regulated as common carriers. The companies must
offer service at just and reasonable rates on a first-come, first-serve basis,
without any unjust or unreasonable discrimination, and they are subject to the
FCC's complaint processes. The FCC has forborne from applying numerous common
carrier provisions of the Communications Act to CMRS providers. In particular,
American Mobile and ARDIS are not subject to traditional public utility
rate-of-return regulation, and the companies are not required to file tariffs
with the FCC for their domestic services.
As providers of interstate telecommunications services, American Mobile and
ARDIS are required to contribute to the FCC's universal service fund, which
supports the provision of telecommunications services to high-cost areas, and
establishes funding mechanisms to support the provision of service to schools,
libraries, and rural health care providers. Under the FCC's current rules,
American Mobile and ARDIS are required to contribute a percentage of their
end-user telecommunications revenues resulting from the sale of
telecommunications services. The extent of this obligation is subject to change.
A number of parties have filed petitions for review of the FCC's universal
service policy and these appeals have been consolidated in the U.S. Court of
Appeals for the Fifth Circuit. Both companies may also be required to contribute
to state universal service programs. The requirement to make these payments, the
amount of which in some cases may be subject to change and is not yet
determined, may have a material adverse impact on the conduct of their
businesses.
American Mobile and ARDIS are subject to the Communications Assistance for Law
Enforcement Act ("CALEA"). Under CALEA, American Mobile and ARDIS must ensure
that law enforcement agencies can intercept certain communications transmitted
over their networks. American Mobile and ARDIS must also ensure that law
enforcement agencies are able to access certain call-identifying information
relating to communications over their networks. The companies must comply with
the CALEA requirements and any rules subsequently promulgated by October 25,
1998 or face possible sanctions, including substantial fines and possible
imprisonment of company officials. The FCC currently has a proceeding underway
to establish rules for the implementation of these requirements. This proceeding
primarily addresses record-keeping and security-related issues. The
telecommunications industry, which has been charged with establishing detailed
technical standards for compliance with CALEA's requirements, has not yet been
able to adopt final standards that are acceptable to law enforcement. While both
Congress and the FCC have the authority to extend the compliance deadline, both
have thus far declined to do so. It is not clear whether the companies will be
able to comply with CALEA's requirements or will be able to do so in a timely
manner. CALEA establishes a federal fund to compensate telecommunications
- 17 -
carriers for all reasonable costs directly associated with modifications
performed by carriers in connection with equipment, facilities, and services
installed or deployed on or before January 1, 1995. For equipment, facilities,
and services deployed after January 1, 1995, the CALEA fund is supposed to
compensate carriers for any reasonable costs associated with modifications
required to make compliance "reasonably achievable." It is possible that all
necessary modifications will not qualify for this compensation and that the
available funds will not be sufficient to reimburse the companies. The
requirement to comply with CALEA could have a material adverse effect on the
conduct of their businesses.
As a matter of general regulation by the FCC, both of the companies are subject
to, among other things, payment of regulatory fees, restrictions on the level of
radio frequency emissions of their systems' mobile terminals and base stations,
and "rate integration" regulations requiring that providers of interstate
interexchange telecommunications services charge the same rates for these
services in every state, including Puerto Rico and the U.S. Virgin Islands. Any
of these regulations may have an adverse impact on the conduct of their
businesses.
The FCC licenses of American Mobile and ARDIS are subject to restrictions in the
Communications Act that (i) certain FCC licenses may not be held by a
corporation of which more than 20% of its capital stock is directly owned of
record or voted by non-U.S. citizens or entities or their representatives and
(ii) that no such FCC license may be held by a corporation controlled by another
corporation ("indirect ownership") if more than 25% of the controlling
corporation's capital stock is owned of record or voted by non-U.S. citizens or
entities or their representatives, if the FCC finds that the public interest is
served by the refusal or revocation of such license. However, with the
implementation of the Basic Telecommunications Agreement ("BTA"), negotiated
under the auspices of the World Trade Organization ("WTO") and to which the
United States is a party, the FCC will presume that indirect ownership interests
in excess of 25% by non-U.S. citizens or entities will be permissible to the
extent that the ownership interests are from WTO-member countries. The BTA took
effect on February 5, 1998, and the FCC's implementing regulations took effect
on February 9, 1998.
American Mobile
American Mobile is licensed by the FCC to provide a broad range of mobile voice,
data and dispatch 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 and U.S. coastal waters and airspace.
American Mobile is also authorized to provide fixed site voice and data services
via satellite to locations within this service area, so long as such services
remain incidental to American Mobile's mobile communications services. American
Mobile is authorized to build, launch and operate three geosynchronous
satellites in accordance with a specified schedule. American Mobile is not in
compliance with the schedule for commencement and construction of its second and
third satellites and has petitioned the FCC for changes to the schedule. Certain
of these extension requests have been opposed by third parties. The FCC has not
acted on American Mobile's requests. The FCC has the authority to revoke the
authorizations for the second and third satellites and, in connection with such
- 18 -
a revocation, could exercise its authority to rescind American Mobile's license.
American Mobile believes that the exercise of such authority to rescind the
license is unlikely. The term of the license for each of American Mobile's three
authorized satellites is ten years, beginning when American Mobile certifies
that the respective satellite is operating in compliance with American Mobile's
license. The ten-year term of MSAT-2 began August 21, 1995. Although American
Mobile anticipates that the authorizations are likely to be extended in due
course to correspond to the useful lives of the satellites and that new licenses
will be granted for replacement satellites, there is no assurance of such
extension or grant.
American Mobile's current foreign ownership level, for which the indirect
ownership limits are applicable, is approximately 21%. Singapore, which is the
domicile of Singapore Telecom, one of American Mobile's largest shareholders, is
a WTO-member country.
On March 12, 1998, the FCC granted American Mobile's application requesting the
modification of its license to permit American Mobile to implement the Satellite
Purchase Agreement and Satellite Lease Agreement. This proceeding was contested,
and the opponents to this application may seek review of this grant. In
addition, this grant is conditioned upon and subject to modification as
necessary to comply with any subsequent agreement between representatives of the
governments of Canada and the United States concerning shared use of MSAT-1.
MSAT-2, like MSAT-1, is designed to be able to operate over the
1530-1559/1631.5-1660.5 MHz bands (the "L-band"). American Mobile is currently
licensed to operate in the 1544-1559/1645-1660.5 MHz bands (the "upper L-band").
The FCC has designated American Mobile as the licensee for both MSS and
Aeronautical Mobile Satellite (Route) Service ("AMS(R)S"). AMS(R)S includes
satellite communications related to air traffic control, as well as aeronautical
safety-related operational and administrative functions. As a condition to its
authorization, American Mobile is required by the FCC to be capable of providing
priority and preemptive access for AMS(R)S traffic in the upper L-band and to be
interoperable with and capable of transferring AMS(R)S traffic to international
and foreign systems providing such service. American Mobile currently
anticipates it will be able to meet these requirements without any material
adverse effect on its business. If American Mobile is unable to meet these
requirements, the FCC may authorize and give priority spectrum access to one or
more additional satellite systems that meet the specified requirements.
American Mobile has applied for authorization to operate in the additional
1530-1544/1631.5-1645.5 MHz bands (the "lower L-band"). If American Mobile is
assigned spectrum in the lower L-band, it will be required by the FCC to provide
similar priority and preemptive access in that spectrum to maritime distress and
safety communications. With respect to its mobile voice terminals, American
Mobile currently anticipates it will be able to meet this requirement without
any material adverse effect on its business. The Federal Aviation Administration
("FAA") filed comments, however, in connection with American Mobile's
application to operate up to 30,000 mobile data terminals that were transitioned
from leased space segment to MSAT-2 in late 1995, stating its concern that the
mobile data terminals cannot be operated in compliance with American Mobile's
obligation to provide priority and preemptive access in the upper L-band. The
FAA has proposed that American Mobile operate the mobile data terminals in the
lower L-band. American Mobile has received successive six-month grants of
special temporary authority ("STA"), under a two-year waiver of the FCC's rules
on priority and preemptive access, to operate up to 15,100 mobile data terminals
in the lower L-band. This number was increased to 33,100 terminals pursuant to
American Mobile's acquisition of the mobile data equipment and services
previously licensed to Rockwell. The two-year waiver expired on August 1, 1997,
but remains in effect while American Mobile's request for a two-year extension
of that waiver is pending at the FCC. American Mobile will need additional
authority to increase the number of mobile data terminals that it is authorized
to operate if it is to fulfill contracts with GE Logisticom and others. American
Mobile will also need permission from the FCC to operate mobile data terminals
with a different transmission design than those operated under its current lower
L-band authorization. Transmissions from these terminals require a wider band
width than do transmissions from American Mobile's existing terminals. There can
be no assurance that American Mobile will continue to receive authority to
operate these new mobile data terminals or any other additional mobile data
terminals in the lower L-band.
American Mobile's mobile terminal authorizations are subject to compliance with
certain requirements regarding interference protection to the Global Positioning
System ("GPS"). With the consent of the FAA, the FCC granted American Mobile's
application subject to certain conditions, including that the grant may be
modified after the interference issue is studied. The FCC is now considering a
proposal from the National Telecommunications and Information Administration to
impose more stringent limits on the out-of-band emissions from certain mobile
terminals, including those used in connection with American Mobile's system, in
order to protect GPS and the Russian Global Navigation Satellite System
("Glonass"). This proposal would require that mobile terminals used on American
Mobile's system be manufactured according to a new design by 2002, and that
existing terminals and any terminals not meeting the new specifications be
retired or retrofitted by 2005. American Mobile has opposed this proposal. If
adopted by the FCC, this policy could have a material adverse effect on American
Mobile's business.
American Mobile's license authorizes MSAT-2 to operate using certain telemetry,
transfer and control frequencies in the Ku-band, and, under the Satellite
Purchase Agreement, American Mobile would operate MSAT-1 using similar
frequencies. American Mobile operates MSAT-2 at the 101 degrees W.L. orbital
location, and, under the Satellite Purchase Agreement, would also operate MSAT-1
at 101 degrees W.L. GE American Communications, Inc. ("GE American"), also
operates a satellite at the 101 degrees W.L. orbital location. American Mobile
and GE American have an agreement covering both MSAT-1 and MSAT-2 that may
require American Mobile to modify its operations or make certain payments to GE
American if American Mobile's operations cause interference to those of GE
American. While there can be no assurances, the Company does not anticipate any
interference in the operations of either MSAT-1 or MSAT-2 and those of GE
American.
American Mobile's subscriber equipment will operate in L-band frequencies that
are limited in available bandwidth. The feeder-link earth stations and the
network communications controller of the CGS operate in the more plentiful fixed
satellite service Ku-band frequencies. Of the 30 MHz in the upper L-band
frequencies, American Mobile is currently licensed to operate in the
1544-1559/1645.5-1660.5 MHz bands. Of the 30 MHz assigned to American Mobile by
- 19 -
the FCC, one MHz is limited to AMS(R)S and one-way paging and two MHz are
limited to distress and safety communications. American Mobile does not plan to
operate on these three MHz of bandwidth.
In June 1996, the FCC issued a notice of proposed rulemaking proposing to assign
to American Mobile the first 28 MHz of internationally coordinated L-band
spectrum from either the upper or lower portion of the MSS L-band. Under the
FCC's proposal, American Mobile would have first priority access to use the
lower L-band spectrum as necessary to compensate for spectrum unavailable for
coordination in the upper L-band. In the event the United States is able to
coordinate more than 28 MHz of L-band spectrum, the FCC has proposed allowing
other applicants to apply for assignment of those frequencies. Certain entities
have filed with the FCC petitions to deny American Mobile's application and
comments opposing the assignment of additional frequencies to American Mobile.
While there can be no assurances, American Mobile believes the FCC is likely to
grant American Mobile's application.
In the Ku-band frequencies, American Mobile is currently licensed to operate
MSAT-2 using 200 MHz within the bands 10.75-10.95 GHz for downlink transmissions
and 13.0-13.15 GHz and 13.2-13.25 GHz for uplink transmissions. American Mobile
has applied for authority to operate using an additional 200 MHz of spectrum
within the same bands.
Spectrum availability, particularly in the L-band, is a function not only of how
much spectrum is assigned to American Mobile by the FCC, but also the extent to
which the same frequencies are used by other systems in the North American
region, and the manner of such use. All spectrum use must be coordinated with
other parties that are providing or plan to provide mobile satellite-based
communications in the same geographical region using the same spectrum. At this
time, the other parties with which spectrum use must be coordinated include
Canada, Mexico, the Russian Federation and Inmarsat.
Use of the spectrum is determined through a series of negotiations between the
United States government and the other user agencies, pursuant to the rules and
regulations of the International Telecommunication Union ("ITU"). For the past
several years, each of the countries and international organizations that have
used or will use L-band frequencies within the North American region have been
meeting regularly to negotiate and coordinate their current and future use of
that spectrum. American Mobile estimates that international coordination will
make approximately 20 MHz of L-band spectrum available to the United States for
MSAT-2. Since the coordination process involves many parties and there is
uncertainty about the total outcome, the actual amount of spectrum available may
be more or less than that estimated. In addition, the proposed Satellite Sharing
Agreement may make the coordination of spectrum for American Mobile's system
more difficult. Some of the spectrum that may be available to American Mobile
may include a portion of the 28 MHz lower L-band spectrum adjacent to the
frequencies already assigned to American Mobile by the FCC.
The ITU's Radio Regulations include a table of frequency allocations that
prescribe the permitted uses of the radio spectrum. As a result of the ITU
satellite plan for parts of the Ku-band, there also may be restrictions on
American Mobile's ability to deploy feederlink earth stations in Alaska, Hawaii,
Puerto Rico, and the U.S. Virgin Islands.
- 20 -
During the course of the licensing process for American Mobile and several times
since, the FCC has stated that there is only enough spectrum in the MSS L-band
for the FCC to authorize a single MSS system to provide service in the United
States. In 1995, however, Comsat applied for authority to provide MSS in the
United States in the L-band over the Inmarsat satellite system. Comsat
subsequently filed an application seeking a blanket authorization for the
operation of 5,000 mobile terminals in the United States, as well as a request
for an STA to operate 50 mobile terminals in the United States. On January 9,
1998, the FCC denied Comsat's request for an STA and required that Comsat amend
its underlying applications to conform with the requirements established in the
FCC's November 1997 order on market access by foreign-licensed satellite
systems. This order conforms the FCC's regulations with the BTA and makes it
easier for foreign satellite systems from WTO-member countries to access the
United States market, while at the same time making clear that the FCC may deny
access to such satellite applicants on the basis of spectrum availability,
applicants' technical, legal, or financial qualifications, or foreign or
domestic policy factors. The order also requires Comsat to make an appropriate
waiver of immunity from any suit as part of any application to provide domestic
services over Inmarsat's system. On January 12, 1998, Comsat filed an appeal of
this order with the U.S. Court of Appeals for the D.C. Circuit, and American
Mobile is opposing this appeal as an intervenor. On February 6, 1998, Comsat
filed an application for review of the FCC's denial of its request for an STA,
and a petition for waiver of the FCC's new market access rules to permit it to
offer MSS on a temporary basis in the United States. American Mobile has opposed
these filings.
In its January 9, 1998 denial of Comsat's STA request, the FCC stated that it
would be willing to authorize Comsat to provide international service if Comsat
amended its blanket license application to show that service through its
terminals and Inmarsat's MSS system could be limited to international traffic.
Comsat has amended its application in order to make this showing. American
Mobile has opposed this application. In addition, Comsat has applied for
authority under Section 214 of the Communications Act to provide satellite
paging and tracking services in the United States. American Mobile has also
opposed this application.
TMI, which is technically capable of providing service within the United States,
has also announced its intentions to provide MSS to domestic customers over
MSAT-1. On February 10, 1998, the FCC granted a thirty-day STA to SatCom
Systems, Inc. for the testing of up to 30 mobile terminals in the United States
using TMI's system. On March 10, 1998, SatCom filed a request for an additional
STA of 90 days for further testing, and also requested that the scope of this
STA be expanded to permit it to operate up to 500 mobile terminals for 180 days
on a private carrier so that it may conduct U.S. marketing trials. SatCom
simultaneously filed an application for a blanket license to operate up to
25,000 mobile terminals in the United States over MSAT-1 on a permanent basis.
American Mobile will oppose SatCom's request for an expanded STA to operate up
to 500 mobile terminals for 180 days and SatCom's application for permanent
authority to operate mobile terminals in the United States.
On January 30, 1998, Kitcomm Satellite Communications Ltd. ("Kitcomm") filed a
letter of intent with the FCC to provide MSS to U.S. customers over its proposed
foreign-licensed satellite system. Kitcomm proposes to provide two-way remote
data collection, tracing, and messaging services over a global system in the
- 21 -
lower L-band at 1525-1530/1626.5-1631 MHz. In order to provide domestic service,
Kitcomm will also have to request authority to operate mobile terminals in the
United States. American Mobile will oppose any FCC application by Kitcomm that
would reduce the spectrum available to American Mobile either directly or as a
result of international frequency coordination.
In addition to providing additional competition to American Mobile, a grant of
domestic authority by the FCC to one of these foreign systems would
significantly increase the demand for spectrum in the international coordination
process and could adversely affect American Mobile's business.
American Mobile is operating under waivers of certain FCC rules. In 1996, the
FCC issued an order requiring all CMRS providers to offer what are known as
"enhanced 9-1-1 services" including the ability to automatically locate the
position of all transmitting mobile terminals. American Mobile would not have
been able to offer this automatic location information without adding
substantially to the cost of its mobile equipment and reconfiguring its CGS
software. The FCC decided not to impose specific new requirements on MSS
providers, including American Mobile, at that time. The FCC did state its
expectation that such providers eventually would be required to provide
"appropriate access to emergency services." A decision to impose this
requirement on MSS providers could have a material adverse effect on American
Mobile.
The FCC enacted "rate integration" regulations requiring that providers of
interstate interexchange telecommunications services charge the same rates for
these services in every state, including Puerto Rico and the U.S. Virgin
Islands. American Mobile has opposed the imposition of this rate integration
requirement on its MSS system, so that it may preserve the flexibility to charge
more for service in areas covered by satellite beams that require more satellite
power. The FCC has denied American Mobile's request for a permanent exemption
from its rate integration requirement, but has not yet ruled on American
Mobile's request for a temporary waiver of a year or more. The FCC has granted
American Mobile an interim waiver from its rate integration requirement until
its decision on American Mobile's temporary waiver request.
ARDIS
ARDIS' wireless data network consists of base stations licensed in the Business
Radio and Specialized Mobile Radio Service, all operating in the 800 MHz
frequency band. The ARDIS system is interconnected with the public switched
network.
The FCC's licensing regime in effect when it issued ARDIS' licenses provided for
the issuance of individual licenses for specific channels at specific sites.
With respect to the part of the band in which all of ARDIS' base stations
operate, however, the FCC has implemented a new licensing regime. The new
licensing regime involves the auctioning of licenses for specific channels for
wide geographic areas, within which the licensee will have substantial
flexibility to operate any number of base stations, including base stations that
may operate on the same channels as incumbent licensees such as ARDIS. The FCC
has proposed to conduct the auctions for additional channel capacity of the kind
- 22 -
used by ARDIS beginning in the third quarter of 1998. The FCC proposes to
prohibit the new geographic licensees from causing interference to incumbents,
but there is concern that such interference may occur and that practical
application of these rules is uncertain.
ARDIS believes that it has licenses for sufficient channels to meet its current
needs for capacity. To the extent that it needs additional capacity, it may be
required to either participate in the upcoming auctions or acquire channels from
other licensees. As part of its new licensing regime, the FCC permits a
wide-area geographic licensee, with prior FCC approval, to sell a portion of its
geographic area to another entity. This partitioning authority may increase
ARDIS' flexibility to operate additional base stations, but the practical
utility of this option is uncertain at this time.
ARDIS operates its system under a number of waivers of the FCC's technical
rules, including rules on station identification, for-profit use of excess
capacity, system loading, and multiple station ownership. Several of these
waivers were first obtained individually by IBM and Motorola, which operated
separate wireless data systems until forming the ARDIS joint venture in 1990.
The FCC incorporated a number of these waivers into its regulations when it
implemented Congress' statutory provision creating the CMRS classification, and
ARDIS no longer requires those waivers. On June 5, 1996, the FCC waived its
one-year construction requirement and granted ARDIS extensions of time to
complete the buildouts of approximately 190 sites, as required to maintain
previously granted licenses. As of March 25, 1998, ARDIS intends but has yet to
construct 104 of these sites. The extended construction deadlines vary by site
between June 27, 1998 and March 31, 1999. Failure to complete the buildouts in a
timely manner could result in a loss of licenses for such sites from the FCC. In
addition, at 11 of 104 uncompleted sites ARDIS is required to erect a new tower,
and there is no assurance that local zoning regulations will not affect the
timetable for the completion of these sites.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulation and legislation relating to the industries in which
American Mobile and ARDIS operate. Other existing federal, state, and local
regulations currently are the subject of a variety of judicial proceedings,
legislative hearings, and administrative and legislative proposal which could
change, in varying degrees, the manner in which American Mobile and ARDIS
operate. Neither the outcome of these proceedings nor their impact on American
Mobile's and ARDIS' operations can be predicted at this time.
ARDIS Acquisition
On March 3, 1998, the FCC granted authority for the transfer of control of all
authorizations held by ARDIS to the Company, thereby permitting ARDIS and
American Mobile to consummate the Acquisition. Interested parties have until
April 2, 1998 to appeal or ask for reconsideration of this grant, and the FCC
has until April 13, 1998 to reconsider this grant on its own motion. If these
dates are reached without any challenge or FCC reconsideration of this grant,
this grant will become final and not subject to appeal. In the event that the
FCC takes action that prevents American Mobile from operating ARDIS as
contemplated, American Mobile has the right to rescind the Acquisition (an
- 23 -
"Unwind") by providing notice to Motorola within 30 days of the receipt of such
adverse order. In the event of an Unwind, the Purchase Price would be returned
to American Mobile and American Mobile's ownership interests in ARDIS would be
returned to Motorola. While the Company does not believe that such an Unwind
will occur, were it to occur, such an Unwind would have a material adverse
effect on the Company.
Year 2000 Compliance
The Company has implemented a Year 2000 program to ensure that the Company's
computer systems, applications, subscriber units, communications processors and
back office support systems will function properly beyond 1998. The Company has
assessed how it may be impacted by Year 2000 and has formulated and commenced
implementation of a comprehensive plan to address known issues as they relate to
its information systems. Vendors that provide critical products and services to
the Company are included in this assessment plan. The plan, as it relates to
information systems, includes a combination of modification, upgrade and
replacement.
If necessary modifications and conversions by the Company and those with which
it conducts business are not completed in a timely manner, Year 2000
non-compliance may have a material adverse effect on the Company's operations.
While there can be no assurances, the Company estimates that the cost of Year
2000 compliance for its information system will not have a material adverse
effect on the future consolidated results of the operations of the Company. The
Company is not yet able to estimate the cost of Year 2000 compliance with
respect to third party suppliers; however, based on a preliminary review,
management does not expect that such costs will have a material adverse effect
on the Company's financial condition, results of operations and cash flow.
Employees
At March 31, 1998, the Company had approximately 477 employees. None of the
Company's employees is represented by a labor union. The Company considers its
relations with its employees to be good.
- 24 -
Item 2. Properties.
The Company leases approximately 94,000 square feet at its headquarters office
space and network operations center in Reston, Virginia. The lease has a term
which runs through August 3, 2003 (which may be extended at the Company's
election for an additional five years). In addition, the Company leases a
back-up Ku-band radio frequency facility in Alexandria, Virginia. The Company
also leases approximately 86,000 square feet of space for an operations center
in Lincolnshire, Illinois, the lease for which expires December 31, 2000, and
approximately 7,800 square feet for a remote data center in Lexington, Kentucky,
the lease for which expires April 30, 2001. The Company also leases site space
for approximately 1,700 base stations across the country under one- to five-year
lease contracts with renewal provisions. The Company anticipates that it will be
able to gain access to additional base station sites when necessary on
acceptable terms.
Item 3. Legal Proceedings.
In 1992, a former director of American Mobile filed an Amended Complaint against
American Mobile alleging violations of the Communications Act 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, American Mobile filed its response
denying all allegations. American Mobile's motion for summary judgment, 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 flow.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's Stockholders during the
fourth quarter of fiscal 1997.
- 25 -
PART II
Items 5, 6, 7 and 8.
The information called for by Items 5 through 8 of Part II is presented in a
separate section of this Annual Report on Form 10-K commencing on the page
numbers specified below:
Form 10-K Item Page
Item 5 - Market for the Registrant's
Common Equity and Related Matters F-49
Item 6 - Selected Financial Data F-50
Item 7- Management's Discussion and Analysis
of Financial Condition and Results of Operations F-1
Item 8 - Financial Statements and Supplementary Data F-15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
- 26 -
PART III
Items 10, 11, 12 and 13.
The information called for by Part III (Items 10, 11, 12 and 13) is incorporated
herein by reference from the material included under the captions "Nominees,"
"Executive Officers," "Executive Compensation," "Security Ownership of Certain
Beneficial Owners and Management," "Agreements Among Stockholders,"
"Compensation and Stock Option Committee Interlocks and Insider Participation"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement (to be filed) for its Annual Meeting of Stockholders
to be held May 20, 1998 (the "Proxy Statement"). The Proxy Statement is being
prepared and will be filed with the Securities and Exchange Commission pursuant
to Regulation 14A on or about April 10, 1998, and furnished to the Company's
Stockholders, on or about April 25, 1998.
- 27 -
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements of the Company and its
subsidiaries are included in a separate section of this Annual Report on Form
10-K commencing on the page numbers specified below:
INDEX
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................F - 1
Report of Independent Public Accountants..................................F - 15
Consolidated Statements of Loss...........................................F - 16
Consolidated Balance Sheets...............................................F - 17
Consolidated Statements of Stockholders' Equity...........................F - 18
Consolidated Statements of Cash Flows.....................................F - 19
Notes to Consolidated Financial Statements................................F - 20
Quarterly Financial Data..................................................F - 49
Selected Financial Data...................................................F - 50
- 28 -
2. Financial Statement Schedules.
Financial Statement Schedules not included with the one listed below have been
omitted because they are not required or not applicable, or because the required
information is shown in the financial statements or notes thereto.
I. Condensed Financial
Information of Registrant.................................Page S-1
2. Exhibits
3.1 - Restated Certificate of Incorporation of AMSC (as restated
effective May 1, 1996) (Incorporated by reference to Exhibit
3.1a to the Company's Quarterly Report on Form 10-Q filed
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 Quarterly Report on Form 10-Q
filed for the period ending June, 1996 (File No. 0- 23044))
9.1 - Amended and Restated Stockholders' Agreement dated as of
December 1, 1993, between AMSC and certain holders of its
capital stock (Incorporated by reference to Exhibit 9.1 to
the Company's Registration Statement on Form S-1 (Reg. No.
33- 70468)) 10.3 - Contract for an MSAT Spacecraft, dated
December 7, 1990 between AMSC and Hughes Aircraft Company,
amended June 15, 1993 (Amendment Nos. 1 through 4) and
further amended November 11, 1993 (Amendment No. 5), between
AMSC Subsidiary Corporation, as assignee of AMSC, and Hughes
Aircraft Company (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1 (Reg.
No. 33-70468))
10.3a - Amendment No. 6 to the AMSC Hughes MSAT Spacecraft Contract,
dated October 11, 1994, between AMSC Subsidiary Corporation,
as assignee to AMSC, and Hughes Aircraft Company
(Incorporated by reference to Exhibit 10.3a to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-23044))
- 29 -
10.3b - Mutual Final Release, dated October 11, 1994, between AMSC
Subsidiary Corporation, Hughes Aircraft, Spar Aerospace
Limited and Lockheed Missiles & Space Company, Inc.
(Incorporated by reference to Exhibit 10.3b to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-23044))
10.3c - Amendment No. 7 to the AMSC Hughes MSAT Spacecraft Contract,
dated October 11, 1994, between AMSC Subsidiary Corporation,
as assignee to AMSC, and Hughes Aircraft Company (filed
herewith)
10.7 - Memorandum of Agreement for Satellite Capacity, dated
February 17, 1992, between AMSC Subsidiary Corporation and
Telesat Mobile Inc., as amended by Amending Agreement dated
October 18, 1993 among AMSC, AMSC Subsidiary Corporation and
TMI Communications and Company, Limited Partnership, as
successor in interest to Telesat Mobile Inc., and as further
amended by letter agreement dated October 18, 1993
(Incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.11 - Right of First Offer Agreement dated as of November 30, 1993
among AMSC, Hughes Communications Satellite Services, Inc.,
Singapore Telecommunications Ltd., Satellite Communications
Investments Corporation, Space Technologies Investments,
Inc., Satellite Mobile Telephone Company L.P., Transit
Communications, Inc., MTel Space Technologies, L.P. and MTel
Space Technologies Corporation (Incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
10.13* - Amended and Restated Stock Option Plan (as amended effective
May 21, 1997) (Incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement on Form S-8 (Reg.
No.333-30099))
10.13b* - Amended Form of Employee Stock Option Agreement
(Incorporated by reference to Exhibit 10.3b to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-23044))
10.13c* - Form of Restricted Stock Agreement (filed herewith)
10.1 - [Reserved.]
10.15 - [Reserved.]
10.16 - [Reserved.]
- 30 -
10.17 - Mobile Terminal Production Agreement, dated October 6, 1992,
between AMSC Subsidiary Corporation and Westinghouse
Electric Corporation acting through Westinghouse Electronic
Systems Company (Incorporated by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (Reg.
No. 33-70468))
10.17a - Amendment No. 1 to Mobile Terminal Production Agreement,
dated November 21, 1994, between AMSC Subsidiary Corporation
and Westinghouse Electric Corporation acting through
Westinghouse Electronic Systems Company (Incorporated by
reference to Exhibit 10.17a to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-23044))
10.17b - Amendment No. 2 to Mobile Terminal Production Agreement,
dated January 23, 1995, between AMSC Subsidiary Corporation
and Westinghouse Electric Corporation acting through
Westinghouse Electronic Systems Company (Incorporated by
reference to Exhibit 10.17b to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994
(File No. 0-23044))
10.17c - Amendment No. 3 to Mobile Terminal Production Agreement,
dated March 21, 1995, between AMSC Subsidiary Corporation
and Westinghouse Electric Corporation acting through
Westinghouse Electronic Systems Company (Incorporated by
reference to Exhibit 10.17c the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (File
No. 0-23044))
10.18 - Mobile Terminal Production Contract, dated November 30,
1992, between AMSC Subsidiary Corporation and Mitsubishi
Electric Corporation (Incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1
(Reg. No. 33-70468))
10.18a - Addendum Number One dated June 29, 1994, to Mobile Terminal
Production Contract between AMSC Subsidiary Corporation and
Mitsubishi Electric Corporation (Incorporated by reference
to Exhibit 10.18a to the Company's Quarterly Report on Form
10-Q filed for the period ending June 30, 1994 (File
No.0-23044))
10.18b - Memorandum of Agreement, dated November 30, 1994, between
AMSC Subsidiary Corporation and Mitsubishi Electric
Corporation (Incorporated by reference to Exhibit 10.18b to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
10.19 - Codec License Agreement, dated February 2, 1993 and amended
March 26, 1993, between AMSC Subsidiary Corporation and
Digital Voice Systems, Inc. (Incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
- 31 -
10.20 - Deed of Lease at Reston, Virginia, dated February 4, 1993
and amended June 21, 1993, between AMSC Subsidiary
Corporation and Trust Company of the West as Trustee
(Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.20a - Amendment No. 4 to Deed of Lease, dated October 7, 1994,
between AMSC Subsidiary Corporation and Trust Company of the
West as Trustee (Incorporated by reference to Exhibit 10.20a
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-23044))
10.21 - Authorized Service Provider Agreement, dated March 1, 1993,
between AMSC Subsidiary Corporation and McCaw Cellular
Communications, Inc. (Incorporated by reference to Exhibit
10.21 to the Company's Registration Statement on Form S-1
(Reg. No. 33-70468))
10.23 - Term Loan Agreement dated May 28, 1993, between AMSC
Subsidiary Corporation and Northern Telecom Finance
Corporation, amended by letter agreement dated October 14,
1993 between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation. (Incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
10.23a - First Amendment to Term Loan Agreement dated as of April 8,
1994, between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation (Incorporated by reference to
Exhibit 10.23a to the Company's Quarterly Report on Form
10-Q filed for the period ending June 30, 1994 (File No.
0-23044))
10.23b - Second Amendment to Term Loan Agreement, dated August 1,
1995, between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation. (Incorporated by reference to
Exhibit 10.23b to the Company's Quarterly Report on Form
10-Q filed for the period ending September 30, 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 (Incorporated by reference to
Exhibit 10.23c to the Company's Quarterly Report on Form
10-Q filed for the period ending September 30, 1996 (File
No. 0-23044))
- 32 -
10.23d - Fourth Amendment to Term Loan Agreement, dated October 1,
1996, between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation (Incorporated by reference to
Exhibit 10.23d to the Company's Quarterly Report on Form
10-Q filed for the period ending September 30, 1996 (File
No. 0-23044))
10.23e - Fifth Amendment to Term Loan Agreement, dated December 19,
1997, between AMSC Subsidiary Corporation and NTFC Capital
Corporation (formerly known as Northern Telecom Finance
Corporation) (filed herewith)
10.24a - Volume Purchasing Agreement, dated March 10, 1995, between
AMSC Subsidiary Corporation and TNL Navigation Limited
(Incorporated by reference to Exhibit 10.24a to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
10.24b - First Amendment to Volume Purchasing Agreement, dated March
10, 1995, between Trimble Navigation Limited and AMSC
(Incorporated by reference to Exhibit 10.24b to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-23044))
10.24c - Second Amendment to Volume Purchasing Agreement, dated
January 28, 1997, between Trimble Navigation Limited and
AMSC (Incorporated by reference to Exhibit 10.24c to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (File No. 0-23044))
10.24d - Third Amendment to Volume Purchasing Agreement, dated August
29, 1997, between Trimble Navigation Limited and AMSC (filed
herewith)
10.25 - Master Lease Agreement, dated June 23, 1993, between AMSC
Subsidiary Corporation and Digital Equipment Corporation and
Amendment to Master Lease Agreement between AMSC Subsidiary
Corporation and Digital Equipment Corporation dated August
2, 1993 (Incorporated by reference to Exhibit 10.25 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-70468))
10.26 - [Reserved]
10.27 - Telemetry, Tracking and Control Satellite Service Agreement,
dated as of August 5, 1993, between AMSC Subsidiary
Corporation and Hughes Communications Satellite Services,
Inc. (Incorporated by reference to Exhibit 10.27 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-70468))
10.28 - [Reserved]
- 33 -
10.29 - [Reserved]
10.30 - Agreement dated October 11, 1993, among AMSC, Hughes
Communications Satellite Services, Inc., Singapore
Telecommunications Ltd., Space Technologies Investments,
Inc., MTel Space Technologies Corporation and MTel Space
Technologies, L.P. (Incorporated by reference to Exhibit
10.30 to the Company's Registration Statement on Form S-1
(Reg. No. 33-70468))
10.31 - [Reserved]
10.32 - Agreement for Cooperation in Joint Procurement of MSS
Systems, dated September 19, 1988, between American Mobile
Satellite Consortium Inc. and Telesat Mobile Inc.
(Incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.33 - Joint Operating Agreement, dated April 25, 1990, between
AMSC and Telesat Mobile Inc. as amended by Amending
Agreement dated October 18, 1993 among AMSC, AMSC Subsidiary
Corporation and TMI Communications and Company, Limited
Partnership, as successor in interest to Telesat Mobile Inc.
(Incorporated by reference to Exhibit 10.33 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.34* - Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.34 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
10.35 - Agreement dated as of December 14, 1992 between AMSC
Subsidiary Corporation and GTE Spacenet Corporation
(Incorporated by reference to Exhibit 10.35 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.35a - Amendment No. 1 dated as of November 7, 1997 to the
Agreement dated as of December 14, 1992, by GTE Spacenet
Corporation and AMSC Subsidiary Corporation (filed herewith)
10.36a - Master Agreement dated March 30, 1994, between Washington
International Teleport, Inc., and AMSC (Incorporated by
reference to Exhibit 10.36a to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(File No. 0-23044))
10.36b - Contract Amendment No. A001, dated July 1, 1994, between
Washington International Teleport, Inc., and AMSC
(Incorporated by reference to Exhibit 10.36b to the
Company's Quarterly Report on Form 10-Q filed for the period
ending September 30, 1994 (File No. 0-23044))
- 34 -
10.36c - Contract Amendment No. A002, dated July 1, 1994, between
Washington International Teleport, Inc., and AMSC
(Incorporated by reference to Exhibit 10.36c to the
Company's Quarterly Report on Form 10-Q filed for the period
ending September 30, 1994 (File No. 0-23044))
10.37 - [Reserved.]
10.3 - [Reserved.]
10.39 - [Reserved.]
10.40 - [Reserved.]
10.41* - Form of Directors and Officers Indemnification Agreement
(Incorporated by reference to Exhibit 10.41 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 (File No. 0-23044))
10.42 - DTE Design, Development, and Manufacturing Agreement, dated
September 28, 1994, between AMSC Subsidiary Corporation and
Omnidata International, Inc. (Incorporated by reference to
Exhibit 10.42 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (File No.
0-23044))
10.43 - [Reserved.]
10.44 - CAL Corporation Agreement for the development of the
aeronautical MSAT terminal, dated December 22, 1994, between
AMSC Subsidiary Corporation and CAL Corporation
(Incorporated by reference to Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0- 23044))
10.45 - Contract for System Enhancement, dated February 1, 1994,
between AMSC Subsidiary Corporation and Westinghouse
Electric Corporation acting through Westinghouse Electronic
Systems Company (Incorporated by reference to Exhibit 10.45
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-23044))
10.46 - Agreement for the Manufacture, Delivery and Installation of
Satellite Communications Equipment Supporting 6 TDMs per LES
and working to AMSC Satellite, dated November 21, 1994,
between Hughes Network Systems Limited and AMSC Subsidiary
Corporation (Incorporated by reference to Exhibit 10.46 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
- 35 -
10.46a - Amendment One to Agreement Number 742-94, dated December 15,
1994, between Hughes Network Systems Limited and AMSC
Subsidiary Corporation (Incorporated by reference to Exhibit
10.46a to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No. 0-23044))
10.47 - [Reserved.]
10.48 - [Reserved.]
10.49 - General Services Agreement between AMSC Subsidiary
Corporation and AT&T Corp., acting though its Network
Systems Group, dated April 4, 1995 (certain attachments have
not been provided and will be furnished to the Commission
upon request) (Incorporated by reference to Exhibit 10.49 to
the Company's Quarterly Report on Form 10-Q filed for the
period ending June 30, 1995 (File No. 0-23044))
10.51 - Agreement for Development of High-Gain Maritime Mobile
Terminals between AMSC and KVH Industries, Inc. dated
September 19, 1995. (Incorporated by reference to Exhibit
10.51 to the Company's Annual Report on Form 10-K filed for
the period ended December 31, 1996 (File No. 0-23044))
10.52 - Private Voice Network Service, Satellite Telephone Service,
Facsimile, and Circuit Switched Data Service Agreement
between AMSC and AT&T Corporation dated October 17, 1995.
(Incorporated by reference to Exhibit 10.52 to the Company's
Annual Report on Form 10-K filed for the period ended
December 31, 1996 (File No. 0-23044))
10.53* - 1994 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 10.53 to the Company's
Annual Report on Form 10-K filed for the period ended
December 31, 1996 (File No. 0-23044))
10.54* - Form of Executive Agreements (Incorporated by reference to
Exhibit 10.54 to the Company's Annual Report on Form 10-K
filed for the period ending December 31, 1996 (File No.
0-23044))
10.55 - $150,000,000 Credit Agreement dated as of June 28, 1996,
among AMSC Subsidiary Corporation, American Mobile Satellite
Corporation, the Banks Listed Therein, Morgan Guaranty Trust
Company of New York, as Documentation Agent, and Toronto
Dominion (Texas), Inc., as Administrative Agent.
(Incorporated by reference to Exhibit 10.55 to the Company's
Quarterly Report on Form 10-Q filed for the period ended
June 30, 1996 (File No. 0-23044))
- 36 -
10.56 - $75,000,000 Credit Agreement dated as of June 28, 1996,
among AMSC Subsidiary Corporation, American Mobile Satellite
Corporation, the Banks Listed Therein, Morgan Guaranty Trust
Company of New York, as Documentation Agent, and Toronto
Dominion (Texas), Inc., as Administrative Agent.
(Incorporated by reference to Exhibit 10.56 to the Company's
Quarterly Report on Form 10-Q filed for the period ended
June 30, 1996 (File No. 0-23044))
10.57 - Guaranty Issuance Agreement dated as of June 28, 1996, by
and among Hughes Electronics Corporation, Singapore
Telecommunications Ltd., Baron Capital Partners, L.P., AMSC
Subsidiary Corporation and American Mobile Satellite
Corporation (Incorporated by reference to Exhibit XII to the
Amended and Restated Schedule 13D dated July 1, 1996, filed
by Hughes Communications Satellite Services, Inc., Hughes
Communications, Inc., Hughes Aircraft Company, Hughes
Electronics Corporation and General Motors Corporation with
respect to shares of Common Stock, $.01 par value, of
American Mobile Satellite Corporation). (Incorporated by
reference to Exhibit 10.57 to the Company's Quarterly Report
on Form 10-Q filed for the period ended June 30, 1996 (File
No. 0-23044))
10.57a - Amendment No. 1 to Guaranty Issuance Agreement, dated as of
March 27, 1997 (Incorporated by reference to Exhibit 10.57a
to the Company's Annual Report on Form 10-K filed for the
period ending December 31, 1996 (File No. 0- 23044))
10.58 - Guaranty dated as of June 28, 1996, made by Hughes
Electronics Corporation to Toronto Dominion (Texas), Inc.,
as Administrative Agent. (Incorporated by reference to
Exhibit 10.58 to the Company's Quarterly Report on Form 10-Q
filed for the period ended June 30, 1996 (File No. 0-23044))
10.59 - Warrant No. 1 for the Purchase of 3,750,000 Shares (subject
to adjustment) of Common Stock of American Mobile Satellite
Corporation issued to Hughes Electronics Corporation, dated
June 28, 1996 (Incorporated by reference to Exhibit XIII to
the Amended and Restated Schedule 13D dated July 1, 1996,
filed by Hughes Communications Satellite Services, Inc.,
Hughes Communications, Inc., Hughes Aircraft Company, Hughes
Electronics Corporation and General Motors Corporation with
respect to shares of Common Stock, $.01 par value, of
American Mobile Satellite Corporation). (Incorporated by
reference to Exhibit 10.57 to the Company's Quarterly Report
on Form 10-Q filed for the period ended June 30, 1996 (File
No. 0-23044))
- 37 -
10.60 - Registration Rights Agreement dated as of June 28, 1996,
among American Mobile Satellite Corporation, Hughes
Electronics Corporation, Singapore Telecommunications Ltd.,
and Baron Capital Partners, L.P. (Incorporated by reference
to Exhibit XIV to the Amended and Restated Schedule 13D
dated July 1, 1996, filed by Hughes Communications Satellite
Services, Inc., Hughes Communications, Inc., Hughes Aircraft
Company, Hughes Electronics Corporation and General Motors
Corporation with respect to shares of Common Stock, $.01 par
value, of American Mobile Satellite Corporation).
(Incorporated by reference to Exhibit 10.57 to the Company's
Quarterly Report on Form 10-Q filed for the period ended
June 30, 1996 (File No. 0-23044))
10.61 - Asset Sale Agreement dated as of November 22, 1996, by and
among Rockwell Collins, Inc. American Mobile Satellite
Corporation and AMSC Subsidiary Corporation (Incorporated by
reference to Exhibit 10.61 to the Company's Current Report
on Form 8-K dated November 22, 1996, and filed on December
9, 1996 (File No. 0-23044))
10.62 - Satellite Lease Agreement for the AMSC-1 Satellite, dated as
of December 2, 1997, By and Among AMSC Subsidiary
Corporation, American Mobile Satellite Corporation and
African Continental Telecommunications Ltd. (Incorporated by
reference to Exhibit 10.61 to the Company's Current Report
on Form 8-K dated December 4, 1997 (File No. 0-23044))
10.63 - Satellite Purchase Agreement, dated as of December 2, 1997,
by and Among TMI Communications and Company, Limited
Partnership and AMSC Subsidiary Corporation and American
Mobile Satellite Corporation. (Incorporated by reference to
Exhibit 10.61 to the Company's Current Report on Form 8-K
dated December 4, 1997 (File No. 0-23044))
10.64 - Bridge Loan Agreement, dated as of December 30, 1997, made
by and among AMSC Subsidiary Corporation, American Mobile
Satellite Corporation and Hughes Communications Satellite
Services, Inc. (filed herewith)
10.64a - Pledge Agreement dated as of December 30, 1997, made by
American Mobile Satellite Corporation to Hughes
Communications Satellite Services, Inc. (filed herewith)
10.64b - Term Note for $10,000,000 dated December 30, 1997 (filed
herewith)
- 38 -
10.65 - Stock Purchase Agreement for the Acquisition of Motorola
ARDIS Acquisition, Inc. and Motorola ARDIS, Inc. by AMSC
Acquisition Company, Inc., a Wholly- Owned Subsidiary of
American Mobile Satellite Corporation, Dated as of December
31, 1997 (filed herewith)
10.66 - Participation Rights Agreement by and among Motorola, Inc.,
American Mobile Satellite Corporation, and the parties
listed on Schedule A, dated as of December 31, 1997 (filed
herewith)
11.1 - Computation of Net Loss Per Share (filed herewith)
21.1 - Subsidiaries of American Mobile (filed herewith)
23.1 - Consent of Arthur Andersen LLP (filed herewith)
27.1 - Financial Data Schedule (filed herewith)
- ------------------------------------
*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this report pursuant to Item 14(c) of this report.
- 39 -
(b) Reports on Form 8-K:
On December 8, 1997, the Company filed a Current Report on Form 8-K,
describing in response to Item 5-Other Events, regarding the Company
entering into two simultaneous transactions: (i) Satellite Lease
Agreement for the AMSC-1 Satellite, By and Among AMSC Subsidiary
Corporation, American Mobile Satellite Corporation and African
Continental Telecommunications and (ii) Satellite Purchase Agreement,
By and Among TMI Communications and Company, Limited Partnership and
AMSC Subsidiary Corporation and American Mobile Satellite Corporation.
On January 5, 1998, the Company filed a Current Report on Form 8-K,
describing in response to Item 5-Other Events, in the form of a press
release, regarding the Company entering into two agreements: (i)
Bridge Loan Agreement with Hughes Communications Satellite Services,
Inc. and (ii) Stock Purchase Agreement with Motorola, Inc. for the
acquisition of ARDIS Company.
On January 13, 1998, the Company filed an Amendment to its Current
Report on Form 8-K/A amending and restating under Item 7 - Financial
Statements, Pro Forma Financial Information and Exhibits the financial
statements to American Mobile's acquisition previously filed on
February 6, 1997. On January 22, 1998, the Company filed a Current
Report on Form 8-K, describing in response to Item 5-Other Events, the
resignation of director David A. Juliano and the election of Douglas
I. Brandon to fill the vacancy created by Mr. Juliano's resignation.
On March 9, 1998, the Company filed a Current Report on Form 8-K,
describing in response to Item 5-Other Events, an excerpt of a
financing document of American Mobile Satellite Corporation and its
subsidiary, AMSC Acquisition Company, Inc.
- 40 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Gary M. Parsons
Gary M. Parsons
Chief Executive Officer and
Chairman of the Board
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Gary M. Parsons Chief Executive Officer March 31, 1998
Gary M. Parsons Chairman of the Board
(principal executive officer)
/s/Stephen D. Peck Vice President and Chief March 31, 1998
Stephen D. Peck Financial Officer
(principal financial and
accounting officer)
/s/Douglas I. Brandon Director March 31, 1998
Douglas I. Brandon
/s/Steven D. Dorfman Director March 31, 1998
Steven D. Dorfman
/s/Ho Siaw Hong Director March 31, 1998
Ho Siaw Hong
______________________ Director March 31, 1998
Billy J. Parrott
- 41 -
/s/Andrew A. Quartner Director March 31, 1998
Andrew A. Quartner
/s/Jack A. Shaw Director March 31, 1998
Jack A. Shaw
/s/Roderick M. Sherwood, III Director March 31, 1998
Roderick M. Sherwood, III
_______________________ Director March 31, 1998
Michael T. Smith
/s/Yap Chee Keong Director March 31, 1998
Yap Chee Keong
/s/Albert L. Zesiger Director March 31, 1998
Albert L. Zesiger
-42-
INDEX
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................F - 1
Report of Independent Public Accountants..................................F - 15
Consolidated Statements of Loss...........................................F - 16
Consolidated Balance Sheets...............................................F - 17
Consolidated Statements of Stockholders' Equity...........................F - 18
Consolidated Statements of Cash Flows.....................................F - 19
Notes to Consolidated Financial Statements................................F - 20
Quarterly Financial Data..................................................F - 49
Selected Financial Data...................................................F - 50
F-i
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "believes,"
"intended," "will be positioned," "expects," "expected," "estimates,"
"anticipates" and "anticipated." These forward-looking statements are based on
the Company's current expectations. All statements other than statements of
historical facts included in this Annual Report, including those regarding the
Company's financial position, business strategy, projected costs and financing
needs, and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Annual Report, including, without limitation, in conjunction with the
forward-looking statements included in this Annual Report. These forward-looking
statements represent the Company's judgment as of the date hereof and readers
are cautioned not to place undue reliance on these forward-looking statements.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including the Current Report on
Form 8-K filed on March 9, 1998, and Form 10-Q Quarterly Reports to be filed by
the Company subsequent to this Form 10-K Annual Report and any Current Reports
on Form 8-K and registration statements filed by the Company.
General
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the financial
condition and consolidated results of operations of American Mobile Satellite
Corporation (with its subsidiaries, "American Mobile" or the "Company"). The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
American Mobile Satellite Corporation was incorporated in May 1988 and, until
1996, was a development stage company, engaged primarily in the design,
development, construction, deployment and financing of a mobile satellite
communication system. On December 31, 1997, the Company entered into a Stock
Purchase Agreement (the "Purchase Agreement") with Motorola, Inc. ("Motorola"),
for the acquisition (the "Acquisition") of ARDIS Company ("ARDIS"), a
wholly-owned subsidiary of Motorola that owns and operates a two-way wireless
data communications network. On March 3, 1998, the FCC granted consent to
consummate the Acquisition. On March 31, 1998, the Acquisition and related
F-1
financing were completed. See "Liquidity and Capital Resources." With the
acquisition of ARDIS, the Company becomes a leading provider of nationwide
wireless communications services, including data, dispatch and voice services,
primarily to business customers in the United States. The Company will offer a
broad range of end-to-end wireless solutions utilizing a seamless network
consisting of the nation's largest, most fully-deployed terrestrial wireless
data network (the "ARDIS Network") and a satellite in geosynchronous orbit (the
"Satellite Network")(together, the "Network").
In connection with the Acquisition, the Company and its subsidiaries entered
into agreements with respect to the following financings and refinancings: (1)
$335 million of Units; (2) the restructuring of its existing $200 million
Revolving Credit Facility and Term Loan Facility (collectively, the "New Bank
Financings"); and (3) $10 million commitment with respect to Motorola vendor
financing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
On October 16, 1997, American Mobile Radio Corporation, an indirect subsidiary
of American Mobile through its subsidiary AMRC Holdings, Inc. (together with
American Mobile Radio Corporation, "AMRC"), 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. American Mobile 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 American Mobile's ownership interest in AMRC to 28%.
Additionally, the agreement gives WorldSpace certain participation rights which
provide for their participation in significant business decisions in the
ordinary course of business. As a result, AMRC is carried on the equity method.
The operations and financing of AMRC are maintained separate and apart from the
operations and financing of American Mobile (see "Liquidity and Financing").
On December 4, 1997, the Company entered into an agreement with African
Continental Telecommunications Ltd. ("ACTEL") to lease the Company's satellite,
"MSAT-2" (the "Satellite Lease Agreement") for deployment over sub-Saharan
Africa. Simultaneously, the Company agreed with TMI Communications and Company
Limited Partnership ("TMI") to acquire a one-half ownership interest in TMI's
satellite, "MSAT-1" (the "Satellite Purchase Agreement"). See Item I. "Business
- -- Satellite Lease and Purchase Agreement", "-Satellite Back-up and Technology,"
and Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
In late 1996 the Company expanded its mobile data business through the
acquisition of Rockwell International Corporation's ("Rockwell") dual mode
mobile messaging and global positioning and monitoring service for commercial
trucking fleets ("MCSS"). In the transaction, the Company assumed Rockwell's
existing customer contracts, and acquired Rockwell's system infrastructure for
F-2
delivering their mobile data product, as well as Rockwell's rights to the
multi-mode, satellite-terrestrial product. The assets of the business were
acquired through the assumption of the various contracts and obligations of
Rockwell relating to the business; no additional payments were made to Rockwell
under the terms of the Asset Sale Agreement dated as of November 22, 1996. See
"Liquidity and Capital Resources."
Management believes the period to period comparison of the Company's financial
results are not necessarily meaningful and should not be relied upon as an
indication of future operating performance due to the Company's historically
high growth rate and the acquisition of MCSS and ARDIS.
Overview
Each of American Mobile and ARDIS has incurred significant operating losses and
negative cash flows in each year since it commenced operations, due primarily to
start-up costs, the costs of developing and building each network and the cost
of developing, selling and providing its respective products and services. The
Company is, and will continue to be, highly leveraged. As of December 31, 1997,
on a pro forma basis, the Company would have had indebtedness of approximately
$454.9 million, assuming the Acquisition, the issuance of the $335 million of
Units, and restructuring of the bank financing (see "Recent Financing Activity")
occurred on December 31, 1997.
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 Network ("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
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 MSAT-2, subsequent anomalies affecting MSAT-2 and MSAT-1, or
the power management recommendation affecting both MSAT-2 and MSAT-1 previously
reported, (vii) additional technical anomalies that may occur within the
Satellite Network, including those relating to MSAT-1 and MSAT-2, which could
impact, among other things, the operation of the Satellite Network and the cost,
scope or availability of in-orbit insurance, (viii) 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,
(ix) the Company's ability to secure additional financing as may be necessary,
(x) the Company's ability to respond and react to changes in its business and
the industry as a result of being highly leveraged, (xi) the ability of the
Company to successfully integrate ARDIS and to achieve certain business
synergies, and (xii) the ability of the Company to manage growth effectively.
F-3
The Company's operating results and capital and liquidity needs have been
materially affected by delays experienced in the acquisition of subscribers and
the related equipment sales. As a result, the Company shifted from a consumer
focus to a business to business focus in late 1996. Such shift has caused the
Company to refocus certain business resources and to re-organize the sales and
marketing organization. The impact of this delay has substantially decreased the
Company's anticipated revenues and increased the Company's capital and liquidity
needs. No assurance can be given that additional delays relating to the
acquisition of subscribers and delayed equipment sales will not be encountered
in the future and not have an adverse impact on the Company.
As of December 31, 1997, there were approximately 32,400 units on the Satellite
Network.
Years Ended December 31, 1997 and 1996
Service revenues, which include both the Company's voice and data services,
approximated $20.7 million for 1997 as compared to $9.2 million for 1996 and
represents a 125% increase year over year. Service revenue from voice services
increased 100% from approximately $5.0 million in 1996 to approximately $10.0
million in 1997. The $5.0 million increase was primarily a result of a 101%
increase in voice customers during 1997. Service revenue from the Company's data
services approximated $7.6 million in 1997, as compared to $2.3 million for
1996, an increase of $5.4 million or 245%. The increase was primarily a result
of additional revenue from dual mode subscribers added as a result of the
acquisition, on November 1996, of Rockwell's dual mode mobile messaging and
global positioning and monitoring service, as compared to the revenue received
in 1996 for satellite capacity leased by Rockwell. Service revenue from capacity
resellers, who handle both voice and data services, approximated $2.8 million in
1997, as compared to $1.8 million in 1996, an increase of $1.0 million or 56%.
As of December 31, 1997 and 1996, receivables relating to service revenues were
$3.6 million and $1.8 million, respectively.
Revenue from the sale of mobile data terminals and mobile telephones increased
27% from $18.5 million in 1996 to $23.5 million in 1997. The increase was
primarily attributable to increased equipment sales of the dual-mode mobile
messaging product, discussed above. As of December 31, 1997 and 1996,
receivables relating to equipment revenue were $5.9 million and $5.8 million
respectively.
Cost of service and operations for 1997, which includes costs to support
subscribers and to operate the Satellite Network, were $32.0 million for 1997
and $30.5 million for 1996. Cost of service and operations for 1997 and 1996, as
a percentage of revenues, were 72% and 110%, respectively. The 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, offset by a reduction in information
technology costs affected by dramatically reducing the dependence on outside
consultants.
F-4
The cost of equipment sold increased 26% from $31.9 million in 1996 to $40.3
million in 1997. The dollar increase in the cost of equipment sold is primarily
attributable to (i) increased sales as a result of the acquisition of the dual
mode messaging product, (ii) an increase of $600,000 in inventory carrying costs
as certain subscriber equipment contracts were fulfilled, and (iii) a $12.0
million write down of inventory to net realizable value in 1997 as compared to
$11.1 million write down and reconfiguration charges in 1996.
Sales and advertising expenses were $12.1 million in 1997, compared to $24.5
million in 1996. Sales and advertising expenses as a percentage of revenue were
27% in 1997 and 88% in 1996. The decrease of sales and advertising expenses was
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 1997 were $14.8 million, compared to
$17.5 million in 1996. As a percentage of revenue, general and administrative
expenses represented 34% in 1997 and 63% in 1996. The decrease in general and
administrative expenses for 1997 compared to 1996 was primarily attributable to
reductions made in staffing as a result of a management restructuring in the
third quarter of 1996 and the associated severance costs.
Depreciation and amortization expense was $42.4 million and $43.4 million in
1997 and 1996, respectively, representing approximately 96% and 156% of revenue
for 1997 and 1996, respectively. The overall dollar and percentage 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, in the second quarter of 1997, associated with increased amortization in
accordance with SFAS No.86 of certain cost associated with software development
for the mobile data product.
Interest income was $247,000 in 1997 compared to $552,000 in 1996. The decrease
was a result of lower average cash balances. The Company incurred $21.6 million
of interest expense in 1997 compared to $15.2 million of interest expense in
1996 reflecting (i) the amortization of debt discount and debt offering costs in
the amount of $9.4 million in 1997, compared to $5.7 million in 1996, and (ii)
higher outstanding loan balances as compared to 1996. During 1997, the Company
received other income in the amount of $875,000 representing proceeds from the
licensing of certain technology associated with the Satellite Network.
Interest expense in 1997 was significant as a result of borrowings under the
Bank Financing, as well as the amortization of borrowing costs incurred in
F-5
conjunction with securing the facility. It is anticipated that interest costs
will continue to be significant as a result of the Bank Financing, Bridge
Financing, and Acquisition, (see "Liquidity and Capital Resources").
Net capital expenditures, including additions financed through vendor financing
arrangements, for 1997 for property and equipment were $8.8 million compared to
capital reductions of $51.0 million in 1996. The $59.4 million increase was
largely attributable to (i) the net proceeds in 1996 of $66.0 million from the
resolution of the claims under the Company's satellite insurance contracts and
policies (see "Liquidity and Capital Resources") and (ii) the decrease in asset
acquisitions associated with the final build-out of the communications ground
segment (the "CGS").
Years Ended December 31, 1996 and 1995
Service revenues, which include both the Company's voice and data services,
approximated $9.2 million for 1996 as compared to $6.9 million for 1995 which
represents a 33% increase year over year. Service revenue from voice services
approximated $5.0 million in 1996, including approximately $1.3 million
attributable to satellite capacity leased to TMI, under a commitment which was
completed in May 1996. Service revenue from the Company's data and position
location services ("Mobile Data Communication Service") approximated $2.2
million in 1996, as compared to $1.7 for 1995, an increase of $500,000 or 29%.
Service revenue from capacity resellers who handle both voice and data services,
approximated $1.8 million in 1996, as compared to $5.2 million in 1995, a
decrease of $3.4 million or 65%. Prior to 1996, the Company provided its Mobile
Data Communication Service using satellite capacity leased from the
Communications Satellite Corporation ("COMSAT"), the cost of which was passed
through to one customer (Rockwell). The decrease in revenue from capacity
resellers reflects the reduced revenue from Rockwell resulting from lower
billings for the use of the lower cost MSAT-2 versus billings attributable to
the leased COMSAT satellite applied on a pass-through basis. As previously
discussed, the Company acquired the dual mode mobile messaging and global
positioning and monitoring service of Rockwell in November 1996. At December 31,
1996 and 1995, receivables relating to service revenues were $1.8 and $405,000,
respectively.
Revenue from the sale of mobile data terminals and mobile telephones increased
from $1.9 million in 1995 to $18.5 million in 1996, 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, and (ii) the increased
availability of mobile data terminals in 1996 compared to 1995 following a
contract signed with a mobile data terminal manufacturer in February 1995.
The Company's costs and expenses have primarily increased in connection with the
start of full commercial service in December 1995. Cost of service and
operations for 1996, which includes costs to support subscribers and to operate
the Satellite Network, were $30.5 million for 1996, an increase of $6.5 million
from 1995. Cost of service and operations for 1996 and 1995, as a percentage of
revenue were 110% and 272%, respectively. The dollar increase in cost of service
F-6
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) $6.5 million of insurance expense for
in-orbit insurance coverage for MSAT-2, offset by the elimination of COMSAT
lease expense reflecting the transition of the Company's customers from the
leased satellite to MSAT-2.
The cost of equipment sold increased to $31.9 million in 1996 from $4.7 million
in 1995. The increase in 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 1995, (iii) a $4.2 million charge in
1996 for the reconfiguration of certain components to better meet customer
requirements, and (iv) a $6.9 million write down of inventory to net realizable
value in 1996.
Sales and advertising expenses were $24.5 million in 1996, compared to $22.8
million in 1995. Sales and advertising expenses as a percentage of revenue were
88% in 1996 and 259% in 1995. The increase of sales and advertising expenses was
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 increase in subscriber acquisition programs, offset by a
$1.4 million charge, in 1995, associated with the reacquisition of defective
equipment located at a customer site and settlement of related disputes.
General and administrative expenses for 1996 were $17.5 million, an increase of
$0.8 million as compared to 1995. As a percentage of revenue, general and
administrative expenses represented 63% in 1996 and 190% in 1995. The dollar
increase in general and administrative expenses for 1996 compared to 1995 was
primarily attributable to (i) approximately $675,000 of severance costs
associated with a management restructuring and (ii) an increase in facilities
rents and utilities of $236,000. The decrease of general and administrative
expenses as a percentage of operating expenses was attributable to the overall
increase in operating expenses.
Depreciation and amortization expense was $43.4 million and $11.2 million in
1996 and 1995, respectively, representing approximately 156% and 128% of revenue
for 1996 and 1995, respectively. The increase in depreciation and amortization
expense was attributable to the commencement of depreciation of both MSAT-2 and
related assets and the CGS in the fourth quarter of 1995.
Interest and other income was $552,000 in 1996 compared to $4.5 million in 1995.
The decrease was a result of lower average cash balances. The Company incurred
$15.2 million of interest expense in 1996 compared to $916,000 of interest
expense in 1995 reflecting (i) the discontinuation of interest cost
capitalization as a result of substantially completing the Satellite Network in
the fourth quarter of 1995, (ii) the amortization of debt discount and debt
offering costs (including Guarantee Warrants (see "Liquidity and Capital
Resources")) relating to the Bridge Financing and Bank Financing (see "Liquidity
and Capital Resources"), and (iii) higher outstanding loan balances as compared
to 1995.
F-7
Net capital reductions, including additions financed through vendor financing
arrangements, for 1996 for property and equipment were $51.0 million compared to
capital expenditures of $86.7 million in 1995. The decrease was largely
attributable to (i) the net proceeds of $66.0 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 CGS were completed.
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. To satisfy its
ongoing financing needs, the Company, on June 28, 1996, established a $219
million debt facility (the "Bank Financing"), of which $200 million is available
and fully guaranteed by certain American Mobile shareholders (the "Guarantors").
As of December 31, 1997, the Bank Financing consisted of: (i) a $144 million
five-year, multi-draw term loan facility (the "Term Loan Facility") with
quarterly payments commencing March 31, 1999 through and including June 30,
2001, and (ii) a $56 million five-year revolving credit facility with a bullet
maturity on June 30, 2001 (the "Working Capital Facility"). Proceeds from the
Bank Financing were used to repay the Company's interim financing and to
refinance short-term vendor financing, and for general working capital purposes.
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"). As a result of the repricing, the Guarantee Warrants were revalued
at $21.9 million. As of March 20, 1998, the Company had drawn down $144.0
million of the Term Loan Facility at annual interest rates ranging from 6.025%
to 6.0875% and $56.0 million of the Working Capital Facility at annual interest
rates ranging from 6.025% to 6.2125%.
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.
In the last quarter of 1997, the Company arranged the financing of certain trade
payables, and as of December 31, 1997, $11.7 million of deferred trade payables
were outstanding at rates ranging from 6.23% to 14% and are generally payable by
the end of 1998.
F-8
On December 4, 1997, the Company entered into two simultaneous transactions. The
Company agreed with TMI to acquire a one-half ownership interest in TMI's
satellite, MSAT-1, at a cost of $60 million payable in equal installments over a
five-year period (the "Satellite Purchase Agreement"); certain additional
payments to TMI are contemplated in the event that additional benefits are
realized by the Company. Under the Satellite Purchase Agreement, TMI and
American Mobile will each own a 50% undivided ownership interest in the Shared
Satellite, will jointly be responsible for the operation of the Shared
Satellite, and will share certain satellite operating expenses, but will
otherwise maintain their separate business operations.
Simultaneously, the Company entered into an agreement (the "Satellite Lease
Agreement") with African Continental Telecommunications Ltd. ("ACTEL"), for the
lease of MSAT-2, for deployment over sub-Saharan Africa. The five-year lease
provides for aggregate lease payments to the Company of $182.5 million. The
lease includes a renewal option through the end of the life of MSAT-2, on the
same lease terms, at ACTEL's election exercisable 2 1/2 years prior to the end
of the initial lease term.
Closing under the Satellite Purchase Agreement and Satellite Lease Agreement is
subject to a number of conditions, including: United States and Canadian
regulatory approvals, a successful financing by ACTEL of at least $120 million,
completion of certain satellite testing, inversion and relocation activities
with respect to MSAT-2, to support the contemplated services over Africa;
receipt of various government authorizations from Gibraltar, South Africa and
other jurisdictions to support satellite relocation, including authorizations
with respect to orbital slot and spectrum coordination; and completion of
certain system development activities sufficient to support satellite
redeployment. On March 13, 1998, the FCC provided approval of the transactions;
Canadian government coordination and approvals remain outstanding. It is
anticipated that the closing under both the purchase and lease agreements will
occur simultaneously in the spring of 1998.
On December 31, 1997, the Company entered into a Bridge Loan Agreement (the
"Bridge Loan") with Hughes Communications Satellite Services, Inc. ("Hughes") in
the principal amount of up to $10 million, secured by a pledge of the Company's
interest in its 80%-owned subsidiary, AMRC Holdings, Inc. The Bridge Loan bore
an annual interest rate of 12%, had a maturity date of March 31, 1999, and
required mandatory repayment in the event net proceeds are received from any
asset disposition, lease agreement, financing or equity transaction of the
Company. The Bridge Loan was drawn down in full, and repaid on March 31, 1998,
with a portion of the proceeds of the Notes (described below).
Recent Financing Activity
$335 Million Unit Offering
In connection with the Acquisition, the Company issued $335 million of Units
(the "Units") consisting of 12 1/4% Senior Notes due 2008 (the "Notes"), and
F-9
Warrants to purchase shares of Common Stock of the Company. Each Unit consists
of $1,000 principal amount of Notes and one Warrant to purchase 3.75749 shares
of Common Stock at an exercise price of $12.51 per share. A portion of the net
proceeds of the sale of the Units were used to finance the Acquisition. The
Notes are fully guaranteed by American Mobile Satellite Corporation.
New Bank Financing
In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries restructured the existing $200 million Bank Financing (the "Bank
Financing") to provide for two facilities: (i) the Revolving Credit Facility, a
$100 million unsecured five-year reducing revolving credit facility, and (ii)
the Term Loan Facility, a $100 million five-year, term loan facility with up to
three additional one-year extensions subject to the lenders' approval. The
Revolving Credit Facility will rank pari passu with the Notes. The Term Loan
Facility is secured by the assets of the Company, principally its stockholdings
in AMRC and the Acquisition Company, and will be effectively subordinated to the
Revolving Credit Facility and the Notes. The New Bank Financing is severally
guaranteed by Hughes Electronics Corporation ("Hughes"), Singapore
Telecommunications Ltd. ("Singapore Telecom") and Baron Capital Partners, L.P.
(the "Bank Facility Guarantors"). The lenders' placement fee for the New Bank
Financing is approximately $500,000.
The Revolving Credit Facility
The Revolving Credit Facility bears an interest rate, generally, of 50 basis
points above London Interbank Offered Rate ("LIBOR") and is unsecured, with a
negative pledge on the assets of the Acquisition Company and its subsidiaries
ranking pari passu with the Notes. The Revolving Credit Facility will be reduced
$10 million each quarter, beginning with the quarter ending June 30, 2002, with
the balance due on maturity of March 31, 2003. Certain proceeds received by the
Acquisition Company would be required to repay and reduce the Revolving Credit
Facility, unless otherwise waived by the lenders and the Bank Facility
Guarantors: (1) 100% of excess cash flow obtained by the Acquisition Company;
(2) the first $25.0 million net proceeds of the lease or sale of MSAT-2 received
by the Acquisition Company, and thereafter 75% of the remaining proceeds
received from such lease or sale (the remaining 25% may be retained by the
Acquisition Company for business operations); (3) 100% of the proceeds of any
other asset sales by the Acquisition Company; (4) 50% of the net proceeds of any
offerings of the Acquisition Company's equity (the remaining 50% to be retained
by the Acquisition Company for business operations); and (5) 100% of any major
casualty proceeds. At such time as the Revolving Credit Facility is repaid in
full, and subject to satisfaction of the restrictive payments provisions of the
Notes, any prepayment amounts that would otherwise have been used to prepay the
Revolving Credit Facility will be dividended to the Company.
F-10
The Term Loan Facility
The Term Loan Facility bears an interest rate, generally, of 50 basis points
above LIBOR and is secured by the assets of the Company, principally its
stockholdings in AMRC and the Acquisition Company. The Term Loan Agreement does
not include any scheduled amortization until maturity, but does contain certain
provisions for prepayment based on certain proceeds received by the Company,
unless otherwise waived by the Banks and the Bank Facility Guarantors: (1) 100%
of excess cash flow obtained by the Company; (2) the first $25.0 million net
proceeds of the lease or sale of MSAT-2 received by the Company, and thereafter
75% of the remaining proceeds received from such lease or sale (the remaining
25% to be retained by the Acquisition Company for business operations); (3) 100%
of the proceeds of any other asset sales by the Company; (4) 50% of the net
proceeds of any equity offerings of the Company (the remaining 50% to be
retained by the Company for business operations); and (5) 100% of any major
casualty proceeds of the Company. To the extent that the Term Loan Facility is
repaid, the aforementioned proceeds that would otherwise have been used to repay
the Term Loan Facility will be used to repay and reduce the commitment under the
Revolving Credit Facility.
The Guarantees
In connection with the New Bank Financing, the Bank Facility Guarantors have
agreed to extend separate guarantees of the obligations of each of the
Acquisition Company and the Company to the Banks, which on a several basis
aggregate to $200 million. In their agreement with each of the Acquisition
Company and the Company (the "Guarantee Issuance Agreement"), the Bank Facility
Guarantors have agreed to make their guarantees available for the New Bank
Financing. The Guarantee Issuance Agreement will include certain additional
agreements of the Acquisition Company and of the Company including with respect
to financial performance of the Acquisition Company relating to the ratio of
debt to EBITDA and service revenue, which, if not met, could, if not waived,
limit the Acquisition Company's ability to draw down on additional amounts under
the Revolving Credit Facility and result in a default under the New Bank
Financing beginning in 1999. In exchange for the additional risks undertaken by
the Bank Facility Guarantors in connection with the New Bank Financing, the
Company has agreed to compensate the Bank Facility Guarantors, principally in
the form of 1 million additional warrants and repricing and extending the
expiration date of 5.5 million warrants previously issued (together, the "New
Guarantee Warrants"). The New Guarantee Warrants will be on the same pricing
terms as those issued as part of the Units. The Bank Facility Guarantors will
have certain demand and piggy-back registration rights with regard to the
unregistered shares of the Company's Common Stock held by them or issuable upon
exercise of the Guarantee Warrants.
Further, in connection with the Guarantee Issuance Agreement, the Company has
agreed to reimburse the Bank Facility Guarantors in the event that the
Guarantors are required to make payment under the Revolving Credit Facility
F-11
guarantees, and, in connection with this Reimbursement Commitment has provided
the Bank Facility Guarantors a junior security interest with respect to the
assets of the Company, principally its stockholdings in AMRC and the Acquisition
Company.
Motorola Vendor Financing
Motorola has agreed to provide the Acquisition Company with up to $10.0 million
of vendor financing (the "Vendor Financing Commitment"), which will be available
to finance up to 75% of the purchase price of additional network base stations.
Loans under this facility will bear interest at a rate equal to LIBOR plus 7.0%
and will be guaranteed by the Company and each subsidiary of the Acquisition
Company. The terms of such facility will require that amounts borrowed be
secured by the equipment purchased therewith. This commitment is subject to
customary conditions, including due diligence, and there can be no assurance
that the facility will be obtained by the Acquisition Company on these terms or
at all.
Summary of Recent Financing
The Company believes the proceeds from the issuance of the Notes, together with
the borrowings under the New Bank Financing and the Vendor Financing Commitment,
will be sufficient to pay the cash portion of the Acquisition and fund operating
losses, capital expenditures, working capital, and scheduled principal and
interest payments on debt through the time when the Company expects to generate
positive free cash flow (operating cash flow less capital expenditures);
however, there can be no assurance that the Company's current projections
regarding the timing of its ability to achieve positive operating cash flow will
be accurate, and that the Company will not need additional financing in the
future. See "Overview."
At December 31, 1997, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory
approximating $6.3 million. (See Note 10 to the consolidated financial
statements).
All wholly owned subsidiaries of the Company are subject to financing agreements
that limit the amount of cash dividends and loans that can be advanced to the
Company. At December 31, 1997, all of these subsidiaries' net assets were
restricted under these agreements. These restrictions will have an impact on
American Mobile's ability to pay dividends.
Cash used in operating activities was $50.9 million for 1997 compared to $113.6
million for 1996. The decrease in cash used in operating activities was
primarily attributable to (i) decreased operating losses, and (ii) decreased
inventory and accounts receivable balances. Cash used by investing activities
was $10.2 million for 1997 compared to cash provided by investing activities of
$50.9 million in 1996. The $61.1 decrease was primarily attributable to the
proceeds in the amount of $66.0 million from the settlement of the Company's
claims under its satellite insurance contracts and policies, offset by a general
F-12
reduction in capital expenditures. Cash provided by financing activities was
$61.1 million in 1997 compared to cash used of $56.0 million in 1996, reflecting
the proceeds from the Bank Financing, offset by the repayment of certain vendor
financing and other long-term debt. Proceeds from the sale of debt securities
and Common Stock were $284,000 and $2.9 million for 1997 and 1996, respectively.
Payments on long-term debt and capital leases were $8.8 million and $63.2
million for 1997 and 1996, respectively. In addition, the Company incurred $10.8
million of debt issuance costs associated with the placement of the Bank
Financing in 1996, as compared to $1.5 million in 1997. As of December 31, 1997,
the Company had $2.1 million of cash and cash equivalents and working capital of
$5.3 million.
Regulation
The ownership and operations of the Company's communication systems are subject
to significant regulation by the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the "Communications Act"), and related
federal laws. A number of the Company's licenses are subject to renewal by the
FCC and, with respect to the Company's satellite operations, are subject to
international frequency coordination. In addition, current FCC regulations
generally limit the ownership and control of American Mobile by non-U.S.
citizens or entities to 25%. There can be no assurances that the rules and
regulations of the FCC will continue to support the Company's operations as
presently conducted and contemplated to be conducted in the future, or that all
existing licenses will be renewed and requisite frequencies coordinated. See
"Part I, Item 1. Business - Regulation".
On June 5, 1996, the FCC granted ARDIS extensions of time to complete the
buildouts of 190 antenna sites, as required to maintain previously granted
licenses. As of March 25, 1998, approximately 104 of the sites remain to be
constructed by expiration dates that range between June 27, 1998 to March 31,
1999. Management estimates that $5.2 million will be necessary to achieve timely
buildouts of the network, including $5.0 million in 1998. Failure to obtain such
capital or to complete the buildouts in a timely manner could result in loss of
licenses for such sites from the FCC, loss of customers, as well as the
incurrence of penalties under a customer contract, which would have a material
adverse effect on the Company.
Other Matters
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. See "Part I, Item 1. Business-Satellite Back-up and Technology".
F-13
Regarding the year 2000 compliance issue for information systems, the Company
has recognized the need to ensure that its computer operations and operating
systems will not be adversely affected by the upcoming calender year 2000 and is
cognizant of the time sensitive nature of the problem. The Company has assessed
how it may be impacted by year 2000 and has formulated and commenced
implementation of a comprehensive plan to address known issues as they relate to
its information systems. The plan, as it relates to information systems,
includes a combination of modification, upgrade and replacement. The Company
estimates that the cost of year 2000 compliance for its information systems will
not have a material adverse affect on the future consolidated results of the
operations of the Company. The Company is not yet able to estimate the cost of
year 2000 compliance with respect to third party suppliers; however, based on a
preliminary review, management does not expect that such costs will have a
material adverse effect on the Company's financial condition, results of
operations and cash flow.
Accounting Standards
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement 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 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.
F-14
Report of Independent Public Accountants
To American Mobile Satellite Corporation:
We have audited the accompanying consolidated balance sheets of American Mobile
Satellite Corporation (a Delaware corporation) and Subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of loss,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Mobile Satellite
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Washington, D.C.
March 31, 1998
F-15
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Loss (dollars in thousands, except per share data)
for the years ended December 31, 1997, 1996, and 1995
Years Ended December 31
----------------------------------------------
1997 1996 1995
REVENUES
Services $20,684 $9,201 $6,873
Sales of equipment 23,530 18,529 1,924
------ ------ ------
Total Revenues 44,214 27,730 8,797
COSTS AND EXPENSES:
Cost of service and operations 31,959 30,471 23,948
Cost of equipment sold 40,335 31,903 4,676
Sales and advertising 12,066 24,541 22,775
General and administrative 14,819 17,464 16,681
Depreciation and amortization 42,430 43,390 11,218
------ ------ ------
Operating Loss (97,395) (120,039) (70,501)
INTEREST EXPENSE (21,633) (15,151) (916)
INTEREST AND OTHER INCOME 1,122 552 4,500
EQUITY IN LOSS OF AMRC (1,301) -- --
-------- -------- -----
NET LOSS ($119,207) ($134,638) ($66,917)
========== ========== =========
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK ($4.74) ($5.38) ($2.69)
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING DURING THE PERIOD (000's) 25,131 25,041 24,900
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
American Mobile Satellite Corporation and Subsidiaries
Consolidated Balance Sheets (dollars in thousands, except per share data) as of
December 31, 1997 and 1996
ASSETS 1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $2,106 $2,182
Inventory 40,321 38,034
Prepaid in-orbit insurance 4,564 5,080
Accounts receivable-trade, net of allowance for doubtful accounts 8,140 6,603
of $1,930 in 1997 and $1,548 in 1996
Other current assets 9,608 14,247
------ ------
Total current assets 64,739 66,146
PROPERTY AND EQUIPMENT IN SERVICE - NET
(gross balances include $135,586 and $134,737 purchased from
related parties through 1997 and 1996 respectively) 233,174 267,863
DEFERRED CHARGES AND OTHER ASSETS:
(net of accumulated amortization of $14,096 in 1997 and
$10,597 in 1996)
(gross balances include $3,000 paid to related parties in 1996) 13,534 16,164
------- ------
Total assets $311,447 $350,173
------------ ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $35,861 $42,625
Obligations under capital leases due within one year 798 3,931
Current portion of long-term debt 15,254 11,113
Other current liabilities 7,520 --
------- -------
Total current liabilities 59,433 57,669
LONG-TERM LIABILITIES:
Obligations under Bank Financing 198,000 127,000
Capital lease obligations 3,147 2,557
Net assets acquired in excess of purchase price (Note 12) 2,725 3,395
Other long-term debt 1,364 --
Other long-term liabilities 647 852
----- ---
Total long-term liabilities 205,883 133,804
------- -------
Total liabilities 265,316 191,473
COMMITMENTS (Note 9 and 10)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01: authorized 200,000 shares;
no shares issued -- --
Common Stock, voting, par value $0.01: authorized 75,000,000 shares;
25,159,311 shares issued and outstanding in 1997; 25,097,577 shares
issued and outstanding in 1996 252 251
Additional paid-in capital 451,892 451,259
Common Stock purchase warrants 36,338 23,848
Unamortized guarantee warrants (23,586) (17,100)
Retained loss (418,765) (299,558)
--------- ---------
Total stockholders' equity 46,131 158,700
------ -------
Total liabilities and stockholders' equity $311,447 $350,173
------------------------------------------ ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (dollars in thousands, except
per share data) for the period from January 1, 1995 through December 31, 1997
Common Stock Additional Common Stock Unamortized
Shares Par Paid-in Purchase Guarantee Retained
Value Capital Warrants Warrants Loss Total
- ------
BALANCE, December 31, 1994 24,798,755 $248 $445,859 $3,440 -- ($98,003) $351,544
Common Stock issued in January under
Stock Purchase Plan 8,707 -- 94 -- -- -- 94
Common Stock issued in April pursuant
to Launch Services Contract 81,909 1 1,719 -- -- -- 1,720
Common Stock issued throughout the year
for exercise of stock options and award 32,026 1 518 -- -- -- 519
of bonus stock
Common Stock issued in July under Stock 22,170 -- 238 -- -- -- 238
Purchase Plan
Common Stock issued in March, June,
September and December under the 401(k)
Savings Plan 17,563 -- 329 -- -- -- 329
Net Loss -- -- -- -- -- (66,917) (66,917)
---------- --- ------- ----- ----- --------- --------
BALANCE, December 31, 1995 24,961,130 250 448,757 3,440 -- (164,920) 287,527
Common Stock issued in January under
Stock Purchase Plan 13,432 -- 294 -- -- -- 294
Common Stock purchase warrants issued
in January for Bridge Financing -- -- -- 2,253 -- -- 2,253
Common Stock issued for exercise of
stock options and award of bonus stock 37,320 -- 612 -- -- -- 612
Common Stock issued upon exercise of Warrants 37,500 1 844 (845) -- -- --
Common Stock purchase warrants issued in -- -- -- 19,000 (19,000) -- --
July for Bank Financing
Amortization of guarantee warrants -- -- -- -- 1,900 -- 1,900
Common Stock issued in July under Stock 25,934 -- 341 -- -- -- 341
Purchase Plan
Common Stock issued in March, June,
September and December under the 401(k)
Savings Plan 22,261 -- 411 -- -- -- 411
Net Loss -- -- -- -- -- (134,638) (134,638)
---------- --- ------- ----- ----- --------- ---------
BALANCE, December 31, 1996 25,097,577 251 451,259 23,848 (17,100) (299,558) 158,700
Common stock issued in March, June,
September, October, and December under
the 401K Saving Plan 31,684 1 349 -- -- -- 350
Common stock issued in January and
July under the Stock Purchase Plan 29,930 -- 283 -- -- -- 283
Common Stock issued throughout award
of bonus stock 120 -- 1 -- -- -- 1
Stock Purchase Warrants Revaluation -- -- -- 12,490 (12,490) -- --
Amortization of Stock Purchase
Warrants -- -- -- -- 6,004 -- 6,004
Net Loss -- -- -- -- -- (119,207) (119,207)
---------- --- ------- ----- ----- --------- ---------
BALANCE, December 31, 1997 25,159,311 $252 $451,892 $36,338 ($23,586) ($418,765) $46,131
========== ==== ======== ======= ========= ========== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Cash Flows (dollars in thousands) for the years ended
December 31, 1997, 1996, and 1995
Years Ended December 31
----------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($119,207) ($134,638) ($66,917)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of guarantee warrants, debt discount, and debt issuance costs 9,350 5,721 --
Depreciation and amortization 42,430 43,307 11,218
Equity in loss from AMRC 1,301 -- --
Changes in assets and liabilities:
Inventory (2,287) (27,482) (10,438)
Prepaid in-orbit insurance 516 (257) (4,823)
Trade accounts receivable (1,537) (5,229) 218
Other current assets 4,639 1,970 (4,230)
Accounts payable and accrued expenses (5,820) 1,672 23,414
Deferred trade payables 11,685 -- --
Deferred items - net 8,038 1,347 (1,730)
-------- --------- --------
Net cash used in operating activities (50,892) (113,589) (53,288)
CASH FLOWS FROM INVESTING ACTIVITIES:
Insurance proceeds applied to equipment -- 66,000 --
Additions to property and equipment (8,598) (14,054) (83,776)
Proceeds from sales of short-term investments -- -- 28,717
Deferred charges and other assets -- (1,000) (169)
Investment in AMRC (1,643) -- --
------- ------ --------
Net cash provided by (used in) investing activities (10,241) 50,946 (55,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 284 1,247 2,569
Principal payments under capital leases (2,576) (3,994) (538)
Proceeds from short-term borrowings -- 70,000 --
Payments on short-term borrowings -- (70,000) --
Proceeds from Bank Financing 71,000 127,000 --
Proceeds from debt issuance -- 1,700 7,630
Payments on long-term debt (6,180) (59,190) (28,486)
Debt issuance costs (1,471) (10,803) (1,081)
------- ------- --------
Net cash provided by (used in) financing activities 61,057 55,960 (19,906)
Net decrease in cash and cash equivalents (76) (6,683) (128,422)
CASH AND CASH EQUIVALENTS, beginning of period 2,182 8,865 137,287
------ ------- ---------
CASH AND CASH EQUIVALENTS, end of period $2,106 $2,182 $8,865
====== ====== ======
Supplemental Cash Flow Information
Interest Payments $11,785 $8,293 $5,574
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
as of December 31, 1997, 1996 and 1995
1. ORGANIZATION, BUSINESS AND LIQUIDITY
American Mobile Satellite Corporation (with its subsidiaries, "American Mobile"
or the "Company") was incorporated on May 3, 1988, by eight of the initial
applicants for the mobile satellite services license, following a determination
by the Federal Communications Commission ("FCC") that the public interest would
be best served by granting the license to a consortium of all willing, qualified
applicants. The FCC has authorized American Mobile to construct, launch, and
operate a mobile satellite services system (the "Satellite Network ") 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, American Mobile Subsidiary
Corporation ("AMSC Subsidiary"). On April 7, 1995, the Company successfully
launched its first satellite ("MSAT-2"), from Cape Canaveral, Florida.
In late 1996, the Company expanded its mobile data business through the
acquisition of Rockwell International Corporation's ("Rockwell") dual mode
mobile messaging and global positioning and monitoring service for commercial
trucking fleets. Rockwell was a private network customer of the Company which
had purchased capacity from the Company on MSAT-2. See Note 12.
On December 31, 1997, the Company entered into a Stock Purchase Agreement (the
"Purchase Agreement") with Motorola, Inc. ("Motorola"), for the acquisition (the
"Acquisition") of ARDIS Company ("ARDIS"), a wholly-owned subsidiary of Motorola
that owns and operates a two-way wireless data communications network. Subject
to certain purchase price adjustment provisions, the Company will acquire ARDIS
for a purchase price of $50 million in cash and $50 million in the Company's
Common Stock and warrants (the "Purchase Price"). The Company, through the
acquisition of ARDIS, intends to create a nationwide provider of wireless
communications services, including data, dispatch, and voice services, primarily
to business customers in the United States. See Note 15.
On October 16, 1997, American Mobile Radio Corporation, an indirect subsidiary
of American Mobile through its subsidiary AMRC Holdings, Inc. (together with
American Mobile Radio Corporation, "AMRC"), 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,
F-20
1997. American Mobile has entered into an agreement with WorldSpace, Inc.
("WorldSpace"), by which WorldSpace has acquired a 20% participation in AMRC,
which can dilute the Company's interest in AMRC to 28%. 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. 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. See Note 2.
F-21
American Mobile is devoting its efforts to expanding a developing business. This
effort involves substantial risk, including successfully integrating ARDIS.
Specifically, future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. Depending on their extent and timing, these factors, individually
or in the aggregate, could have an adverse effect on the Company's financial
condition and future results of operations.
Liquidity and Financing Requirements
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. The Company expects
to continue to make significant capital outlays for the foreseeable future to
fund interest expense, capital expenditures and working capital prior to the
time that it begins to generate positive cash flow from operations and for the
foreseeable future thereafter. To fund its operations through the first quarter
of 1998, the Company (i) borrowed all remaining amounts available under the Bank
Financing, (ii) entered into a $10 million Bridge Loan Agreement (the "Bridge
Loan") with Hughes Communications Satellite Services, Inc. ("Hughes"), and (iii)
arranged the financing of $11.7 million of deferred trade payables. See Note 7.
The Company currently believes that the net proceeds from the sale of the $335
million in Notes and warrants, together with the borrowings under the $200
million New Bank Financing, the Motorola financing, and the proceeds from the
Satellite Lease Agreement (all discussed below) will be sufficient to meet the
Company's currently anticipated capital expenditures, operating losses, working
capital and debt service requirements through 1998 and beyond. However, if the
Company's cash flows from operations are less than projected, the Company may
not meet its financial performance agreements under the Guaranty Issuance
Agreement and, if such conditions are not met or waived, the Company would not
have access to additional funds under the Revolving Credit Facility. See Note
15. In addition, even in the event that the Company has access to such funds, it
may require additional debt or equity financing in amounts that could be
substantial. The type, timing and terms of financing selected by the Company
will be dependent upon the Company's cash needs, the availability of other
financing sources and the prevailing conditions in the financial markets. There
can be no assurance that any such sources will be available to the Company at
any given time or as to the favorableness of the terms on which such sources may
be available.
In connection with the ARDIS Acquisition, the Company raised $335 million in
cash proceeds from the private issuance of units ("Units") consisting of 12 1/4%
Senior Notes ("Notes") due 2008 and one warrant to purchase 3.75749 shares of
Common Stock of the Company for each $1,000 principal amount of Notes, and
restructured its existing Bank Financing the "New Bank Financing"). The New Bank
Financing of $200 million will consist of a $100 million unsecured five-year
reducing Revolving Credit Facility maturing March 31, 2003 and a $100 million
F-22
five-year Term Loan Facility with up to three additional one-year extensions
subject to lender approval. Additionally, Motorola has agreed to provide the
Company with up to $10 million of vendor financing ("the Vendor Financing
Commitment"), which will be available to finance up to 75% of the purchase price
of additional base stations needed to meet ARDIS' buildout requirements under
certain customer contracts. See Note 15.
On December 4, 1997, the Company entered into two simultaneous transactions. The
Company agreed with TMI to acquire a one-half ownership interest in TMI's
satellite, MSAT-1, at a cost of $60 million payable in equal installments over a
five-year period (the "Satellite Purchase Agreement"); certain additional
payments to TMI are contemplated in the event that additional benefits are
realized by the Company. Simultaneously, the Company entered into an agreement
(the "Satellite Lease Agreement") with African Continental Telecommunications
Ltd. ("ACTEL"), for the lease of MSAT-2, for deployment over sub-Saharan Africa.
The five-year lease provides for aggregate lease payments to the Company of
$182.5 million. The lease includes a renewal option through the end of the life
of MSAT-2. Closing under the Satellite Purchase Agreement and Satellite Lease
Agreement is subject to a number of conditions. It is anticipated that the
closing under both leasing agreements will occur simultaneously in the spring of
1998. See Note 10.
2. SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company
Consistent with Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises," the Company ceased
to be considered a development stage company in the fourth quarter of 1996 with
the generation of significant revenue from its voice products and services.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most significant estimates relate to the valuation of
inventory and committed inventory purchases and the allowance for doubtful
accounts receivable.
Consolidation
The consolidated financial statements include the accounts of American Mobile
and seven of its wholly owned subsidiaries, one of which is inactive. All
significant inter-company transactions and accounts have been eliminated. As
discussed in Note 1, AMRC, was awarded a license to provide digital audio radio
service ("DARS") and entered into an agreement with World Space, Inc. ("World
F-23
Space"), whereby World Space has acquired a 20% participation in AMRC, and the
exercise of outstanding issued options could reduce American Mobile's ownership
interest in AMRC to 28%. Additionally, the agreement gives WorldSpace certain
participative rights which provide for their participation in significant
business decisions that would be made in the ordinary course of business;
therefore, in accordance with Emerging Issues Task Force ("EITF") No. 96-16, the
Company's investment in AMRC is carried on the equity method.
The following represents the unaudited summary financial information of AMRC as
of December 31,1997. AMRC had no material activity prior to 1997.
(In thousands)
Current assets $ -- Gross sales $ --
Noncurrent assets 91,901 Operating expense 1,110
Current liabilities -- Interest expense 518
Noncurrent liabilities 84,387 Net loss 1,628
Total stockholders' equity 7,514
Cash and Cash Equivalents
The Company considers highly liquid investments with remaining maturities of 90
days or less at the time of acquisition to be cash equivalents.
Inventories
Inventories, which consist primarily of finished goods, are stated at the lower
of cost or market. Cost is determined using the weighted average cost method.
The Company periodically assesses the market value of its inventory, based on
sales trends and forecasts and technological changes and records a charge to
current period income when such factors indicate that a reduction to net
realizable value is appropriate. For purposes of evaluating the net realizable
value of inventory, management considers both inventory on hand and inventory
which it has committed to purchase. During 1997 and 1996, the Company recorded
charges to Cost of Equipment Sold in the amount of $12.0 million and $11.1
million, respectively, related to the realizability of the Company's inventory
investment.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of the fair value of certain financial instruments. For purposes of
F-24
this disclosure, the fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between willing
parties. Cash and cash equivalents, trade accounts receivable and accounts
payable approximate fair value because of the relatively short maturity of these
instruments. As a result of the Guarantees (see Note 7) associated with the Bank
Financing, it is not practicable to estimate the fair value of this facility.
The fair value of other debt approximates carrying value because the related
debt has variable interest costs based on current market rates or are short-term
in nature.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments, short-term
investments and accounts receivable. The Company places its temporary cash
investments and short-term investments in debt securities such as commercial
paper, time deposits, certificates of deposit, bankers acceptances, and
marketable direct obligations of the United States Treasury. The Company's
intent is to hold its investments in debt securities to maturity. To date, the
majority of the Company's business has been transacted with telecommunications,
natural resources and transportation companies, including maritime and trucking
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. Exposure to losses on trade accounts
receivable, for both service and for inventory sales, is principally dependent
on each customer's financial condition. The Company anticipates that its credit
risk with respect to trade accounts receivable in the future will continue to be
diversified due to the large number of customers expected to comprise the
Company's base and their expected dispersion across many different industries
and geographies.
Software Development Costs
The Company capitalizes costs related to the development of certain software to
be used with its mobile messaging and position location service (the "Mobile
Data Communications Service") product. The Company commenced amortization of
these costs in the first quarter of 1996. These costs will be amortized over
three years. As of December 31, 1997 and 1996, net capitalized software
development costs were $1.8 million and $3.6 million, respectively, and are
included in property and equipment in the accompanying balance sheets.
Deferred Charges and Other Assets
Other assets primarily consist of unamortized financing costs and debt issue
costs associated with the existing vendor financing arrangements and the Bank
Financing. The Company had $11.8 million and $14.9 million of unamortized
financing costs recorded at December 31, 1997 and 1996, respectively. Financing
costs are amortized over the term of the related facility using the straight
line method, which approximates the effective interest method.
F-25
Revenue Recognition
The Company recognizes service revenue when communications services have been
rendered. Equipment sales are recognized upon shipment of products and customer
acceptance, if required.
Research and Development Costs
Research and development costs are expensed as incurred. Such costs include
internal research and development activities and expenses associated with
external product development agreements. The Company did not incur any research
and development cost for 1997, and incurred approximately $57,000 and $1.8
million for 1996 and 1995, respectively.
Advertising Costs
Advertising costs are charged to operations in the year incurred and totaled
$3.4 million, $6.0 million, and $6.5 million for 1997, 1996, and 1995
respectively.
Stock Based Compensation
The Company accounts for employee stock options using the method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Generally, no expense is recognized related to the Company's stock options
because the option's exercise price is set at the stock's fair market value on
the date the option is granted. Effective January 1, 1996, the Company adopted
SFAS No. 123 by making the required footnote disclosures (see Note 5).
Assessment of Asset Impairment
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" requires that impairment losses for such
assets be based upon the fair value of the assets, and was adopted by the
Company as the primary basis by which the Company measures impairment of the
Satellite Network and its related components. Adoption of this Statement has not
resulted in the recording of a provision for impairment of long-lived assets,
but there can be no assurance that a material provision for impairment will not
be required in the future.
Loss Per Share
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128
requires dual presentation of basic and diluted earnings per share on the face
of the income statement for all periods presented. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period.
F-26
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issued common stock were exercised or converted
into common stock. Options and warrants to purchase shares of common stock were
not included in the computation of loss per share as the effect would be
antidilutive. As a result, the basic and diluted earnings per share amounts are
identical.
3. STOCKHOLDERS' EQUITY
The Company has authorized 200,000 shares of Preferred Stock and 75,000,000
shares of Common Stock. The par value per share is $0.01 for each class of
stock. For each share held, Common stockholders are entitled to one vote on
matters submitted to the stockholders. Cumulative voting applies for all
elections of directors of the Company.
The Preferred Stock may be issued in one or more series at the discretion of the
Board of Directors (the "Board"), without stockholder approval. The Board is
authorized to determine the number of shares in each series and all
designations, rights, preferences, and limitations on the shares in each series,
including, but not limited to, determining whether dividends will be cumulative
or non-cumulative.
Certain controlling stockholders of the Company have entered into a
Stockholders' Agreement (the "Agreement") which contains provisions relating to
the election of directors, procedures for maintaining compliance with the FCC's
alien ownership restrictions, certain restrictions on the transfer, sale and
exchange of Common Stock, and procedures for appointing directors to the
Executive Committee of the Board, among others. The Agreement continues in
effect until terminated by an affirmative vote of holders of three-fourths of
the Company's Common Stock held by parties to the Agreement. Other matters
relating to the Company's governance of the Company are set forth in the
Certificate of Incorporation and Bylaws.
As of December 31, 1997, the Company had reserved Common Stock for future
issuance as detailed below.
Shares issuable upon exercise of warrants 6,474,596
Amended and Restated Stock Option Plan for Employees 3,429,326
Stock Option Plan for Non-Employee Directors 50,000
Employee Stock Purchase Plan 190,137
Defined Contribution Plan 103,492
-------
Total 10,247,551
==========
4. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated over its useful life
using the straight line method. Assets recorded as capital leases are amortized
over the shorter of their useful lives or the term of the lease.
F-27
The estimated useful lives of office furniture and equipment vary from 2-10
years, and the Communications Ground Segment ("CGS") is depreciated over 8
years.
The Company is depreciating the Space Segment over its estimated useful life of
10 years, which was based on several factors, including current conditions and
the estimated remaining fuel of MSAT-2. The original estimated useful live is
periodically reviewed using current Telemetry Tracking and Control ("TT&C")
data. To date, no significant change in the original estimated useful life has
resulted. The telecommunications industry is subject to rapid technological
change which may require the Company to revise the estimated useful lives of
MSAT-2 and the CGS or to adjust their carrying amounts. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over 8 years. Certain amounts from 1996 have been restated in the summary below.
The costs of constructing and putting satellites into service are capitalized in
the financial statements and depreciated over the estimated useful life of the
satellite. A total failure of the satellite from unsuccessful launches and/or in
orbit anomalies would result in a current write-down of the satellite value.
Partial satellite failures are recognized currently to the extent such losses
are deemed abnormal to the operation of the satellite. A partial failure which
is deemed normal would not result in a loss of satellite capacity beyond what is
considered normal satellite wear and tear and thus, a write down would not be
required. Additionally, all future incentive arrangements relating to the
construction of satellites will be capitalized at launch.
Property and equipment consists of the following:
December 31
(in thousands) 1997 1996
Space Segment $187,976 $187,386
Ground Segment 109,691 104,559
Office equipment and furniture 19,305 16,684
Mobile Data Communications Service 21,118 21,014
------ ------
338,090 329,643
Less accumulated depreciation and amortization 104,916 61,780
------- ------
Property and equipment, net $233,174 $267,863
======== ========
5. STOCK OPTIONS
The Company has two active stock option plans. The American Mobile Satellite
Corporation 1989 Amended and Restated Stock Option Plan for Employees (the
"Plan") permits the grant of non-statutory options and the award of bonus stock
F-28
up to a total of 3.5 million shares of Common Stock. Under the Plan, the
exercise price and vesting schedule for options is determined by the
Compensation Committee of the Board, which was established to administer the
Plan. Generally, options vest over a three year period and will have an exercise
price not less than the fair market value of a share on the date the option is
granted or have a term greater than ten years. In March 1997, the Company
repriced certain employee stock options to $13.00 per share. No other terms of
the options were modified.
The Company also has a Stock Option Plan for Non-Employee Directors (the
"Director Plan") which provides for the grant of options up to a total of 50,000
shares of Common Stock. Directors receive an initial option to purchase 1,000
shares of Common Stock, with annual option grants to purchase 500 shares of
Common Stock. Options under the Director Plan can be exercised at a price equal
to the fair market value of the stock on the date of the grant and are fully
vested and immediately exercisable on the date of grant. Each Director Plan
option expires on the earlier of (i) ten years from the date of grant or (ii)
seven months after the Director's termination.
In January 1998, the Board of Directors granted 356,111 shares of restricted
stock to senior management for the first time. These grants include both a
three-year vesting schedule as well as specific corporate performance targets.
Unless waived by the Board of Directors, failure to meet a required performance
target would prevent the vesting of the restricted shares.
Information regarding the Company's stock option plans is summarized below:
Weighted Average
Available Granted and Option Price Per
for Grant Outstanding Share
Balance, December 31, 1994 349,878 407,776 $18.60
Additional shares authorized for grant 50,000 --- --
Granted (275,480) 275,480 16.88
Exercised and awarded -- (32,026) 16.10
Forfeited 60,380 (60,380) 18.50
------ --------
Balance, December 31, 1995 184,778 590,850 17.94
Additional shares authorized for grant 1,241,138 -- --
Granted (1,565,272) 1,565,272 18.37
Exercised and awarded -- (37,320) 16.41
Forfeited and canceled 623,356 (623,356) 23.23
------- ---------
Balance, December 31, 1996 484,000 1,495,446 16.22
Additional shares authorized for grant 1,500,000 -- --
Granted (1,292,443) 1,292,443 12.67
Exercised and awarded -- (120) 10.28
Forfeited 1,104,828 (1,104,828) 17.15
--------- -----------
Balance, December 31, 1997 1,796,385 1,682,941 $13.08
========= ===========
F-29
Options Exercisable at December 31:
Options Average
Exercise Price
1997 595,432 $14.39
1996 276,804 $17.97
1995 219,272 $18.31
1994 175,471 $17.73
The Company accounts for stock compensation costs in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Had compensation cost been determined based on the fair
value at the grant dates for awards under the Company's stock plans in
accordance with SFAS No. 123, the net loss would have been increased by $5.3
million ($.21 per share) and $2.3 million ($.09 per share) in 1997 and 1996,
respectively. As required by SFAS No. 123, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions for 1997 and 1996: no historical dividend yield;
an expected life of 10 years; historical volatility of 65% in 1997 and 45% in
1996, 45% and a risk-free rate of return ranging from 5.71% to 6.44%. Exercise
prices for options outstanding as of December 31, 1997, are as follows:
Options Outstanding Options Exercisable
Number Weighted Number
Outstanding as Average Weighted Exercisable as of Weighted
Range of of December 31, Remaining Average December 31, Average
Exercise Prices 1997 Contractual Life Exercise Price 1997 Exercise Price
9.06 - 12.00 471,500 8.82 $11.45 132,160 $11.84
12.50 - 12.81 476,585 9.07 12.74 -- 0.00
13.00 - 13.00 549,808 7.64 13.00 278,224 13.00
14.62 - 26.25 185,048 5.47 18.29 185,048 18.29
------- -------
$9.06 - $26.25 1,682,941 8.14 $13.08 595,432 $14.39
========= =======
6. INCOME TAXES
The Company accounts for income taxes under the liability method as required in
the Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
laws and rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Under this method, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Potential
tax benefits, related to net operating losses and temporary differences, have
been recorded as an asset, and a valuation allowance for the same amount has
been established. The Company has paid no income taxes since inception.
F-30
The following is a summary of the Company's net deferred tax assets.
December 31
(in thousands) 1997 1996
Net Operating Loss for Income Tax Purposes $217,918 $170,710
Deferred Taxes Related to Temporary Differences:
Tangible asset bases, lives and depreciation methods (65,898) (64,889)
Other 8,700 6,229
----- -----
Total deferred tax asset 160,720 112,050
Less valuation allowance (160,720) (112,050)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
Significant timing differences affecting deferred taxes in 1997 were the
treatment of costs associated with the Space Segment for financial reporting
purposes compared to tax purposes. As of December 31, 1997, the Company had net
operating loss carryforwards ("NOLs") of $542 million. The NOLs expire in years
2004 through 2012. These NOL carryforwards are subject to certain limitations if
there is determined to be a substantial change in ownership as defined in the
Internal Revenue Code.
7. LONG-TERM DEBT
December 31
(in thousands) 1997 1996
Bank Financing $198,000 $127,000
Deferred Payment Agreement -- 5,180
Deferred Trade Payables 11,685 --
Term Loan Agreement 4,933 5,933
----- -----
214,618 138,113
Less current maturities 15,254 11,113
------ ------
Long-term debt $199,364 $127,000
======== ========
Bank Financing - Term Loan and Working Capital Facility
On June 28, 1996, established a $219 million debt facility (the "Bank
Financing"), of which $200 million is available and fully guaranteed by certain
American Mobile shareholders. As of December 31, 1997, the Bank Financing
consisted of: (i) a $144 million five-year, multi-draw term loan facility (the
"Term Loan Facility") with quarterly payments commencing March 31, 1999 through
and including June 30, 2001, and (ii) a $56 million five-year revolving credit
facility with a bullet maturity on June 30, 2001 (the "Working Capital
Facility"). Proceeds from the Bank Financing were used to repay the Company's
interim financing and to refinance short-term Vendor Financing, and will be used
F-31
for general working capital purposes. As of March 20, 1998, the Company had
drawn down $144.0 million of the Term Loan Facility at annual interest rates
ranging from 6.025% to 6.0875% and $56.0 million of the Working Capital Facility
at annual interest rates ranging from 6.025% to 6.2125%. 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"). As a result of the repricing, the
Guarantee Warrants were revalued at $21.9 million, effective March 27,1997 and
are being amortized over the remaining life of the guarantee. On March 31, 1998,
in connection with the Acquisition, the Bank Financing was restructured. See
Note 15.
Deferred Trade Payables
In the last quarter of 1997, the Company arranged the financing of certain trade
payables. As of December 31, 1997, $11.7 million of deferred trade payables were
outstanding at rates ranging from 6.23% to 14% and are generally payable by the
end of 1998.
Bridge Loan
On December 31, 1997, the Company entered into a Bridge Loan with Hughes
Communications Satellite Services, Inc. ("Hughes") in the principal amount of up
to $10 million, secured by a pledge of the Company's interest in its 80%-owned
subsidiary, AMRC. The Bridge Loan bears an annual interest rate of 12% and has a
maturity date of March 31, 1999, and requires mandatory repayment in the event
net proceeds are received from any asset disposition, lease agreement, financing
or equity transaction of the Company. The Bridge Loan was drawn in full and
subsequently repaid in full on March 31, 1998, with a portion of the proceeds
from the Notes. No further borrowing is available under the Bridge Loan. See
Note 15.
Term Loan Agreement
The Company entered into a Term Loan Agreement (the "Loan Agreement") with
Northern Telecom to finance the purchase of certain equipment to be used in the
ground segment. The Loan Agreement provided for principal borrowings up to $7.5
million plus $1.1 million for accrued interest. In September 1996, the Company
arranged to reduce the interest rate from LIBOR plus 4.5% to a floating rate of
LIBOR plus 2.5% through maturity and to defer amounts due under the Loan
Agreement to1997. In December 1997, the Loan Agreement was amended to increase
the interest rate to LIBOR plus 4.5%, effective January 1, 1998, and to defer a
portion of principal payments until April 1, 1998. As of December 31, 1997, $4.9
million was outstanding at an annual interest rate of 8.156%.
F-32
Deferred Payment Agreement
In 1992, the Company entered into a contract ("CGS Contract") with Westinghouse
Electric Corporation ("Westinghouse") pursuant to which Westinghouse was
responsible for designing and constructing the Ground Segment and developing the
final specification for mobile telephones. In connection with the CGS Contract,
Westinghouse agreed to defer payment, including interest thereon, under certain
terms and conditions, for the basic purchase price and for change orders and
options elected by the Company (the "Deferred Payment Agreement"). During 1997,
the remaining $5.2 million obligation under the Deferred Payment Agreement was
fully repaid.
Interest Costs
The Company incurred interest costs of approximately $21.6 million, $15.1
million, and $5.6 million in 1997, 1996, and 1995, respectively. All interest
costs incurred through September 30, 1995 were capitalized as part of the
Company's construction activities. The capitalization of interest was
discontinued in the fourth quarter of 1995 when the Satellite Network was deemed
substantially complete and ready for its intended use. Interest cost paid, net
of amounts capitalized, was $ 327,000 in 1995.
Assets Pledged and Secured
All wholly owned subsidiaries of the Company are subject to financing agreements
that limit the amount of cash dividends and loans that can be advanced to the
Company. At December 31, 1997, all of the subsidiaries' net assets were
restricted under these agreements. These restrictions will have an impact on
American Mobile Satellite Corporation's ability to pay dividends.
Covenants
The debt agreements and related Guarantee Agreements entered into by the Company
contain various restrictions, covenants, defaults, and requirements customarily
found in such financing agreements. Among other restrictions, these provisions
include limitations on cash dividends, restrictions on transactions between
American Mobile and its subsidiaries, restrictions on capital acquisitions,
material adverse change clauses, and maintenance of specified insurance
policies.
8. RELATED PARTIES
In 1990, following a competitive bid process, American Mobile signed contracts
with Hughes Aircraft, the parent company of Hughes Communications Satellite
Services ("Hughes Communications"), an American Mobile stockholder, to construct
MSAT-2 (the "Satellite Construction Contract"). The contract contains flight
performance incentives payable by the Company to Hughes Aircraft if MSAT-2
performs according to the contract. The total incentives owed, if earned, will
F-33
be $7.1 million, plus interest, with payment amounts otherwise due deferred
until second quarter 1998. The costs of the incentives are capitalized in the
period earned. The Company also in 1990 selected HNS Ltd., an affiliate of
Hughes Aircraft, to design, manufacture, and implement the Company's Mobile Data
Communications Service. In 1991, the Company entered into an agreement with
Hughes Communications to provide assistance in the launch services procurement
process and certain other management services through the launch date.
Additionally, in 1996, Hughes loaned the Company $10.0 million as part of its
participation in the Interim Financing. On December 31, 1997, the Company
entered into a Bridge Loan Agreement (the "Bridge Loan") with Hughes
Communications in the principal amount of up to $10 million (see Note 7).
The Company has entered into various transactions and agreements with affiliates
of AT&T Wireless Services, Inc. ("AT&T Wireless"), an American Mobile
stockholder. The arrangements include the purchase of satellite capacity and
equipment by AT&T, the purchase by American Mobile of certain equipment for use
in the Satellite Network, the leasing of certain office equipment, and the
engagement of AT&T to be one of the Company's long-distance providers.
Additionally, the Company sublet certain office space to AT&T Wireless through
September 1996. The following table presents a summary of related party
transactions.
Years Ended December 31
(in thousands) 1997 1996 1995
Payments made to (from) related parties:
Additions to property under construction $ -- $ -- $3,029
Additions to property and equipment in service 200 2,847 265
Proceeds from debt issuance -- (10,000) --
Payments on debt obligations 292 20,926 251
Payment for Guarantees -- 3,000 --
Operating expenses 2,706 3,817 1,453
Satellite capacity/airtime revenue (2,836) (1,276) --
Sublease income -- (205) (239)
Other -- -- (506)
-------- -------- -------
Net payments to related parties $ 362 $19,109 $4,253
======== ======== =======
Due to (from) related parties:
Mobile Data Communications Service Financing $ -- $ -- $7,180
Capital leases 249 446 631
Operating expenses 1,209 185 708
Satellite capacity/airtime revenue (495) (416) --
Capital acquisitions 2,120 1,584 1,924
----- ----- -----
Net amounts due to related parties $ 3,083 $1,799 $10,443
======== ======== ========
F-34
9. LEASES
Capital Leases
The Company leases certain office equipment and Ground Segment equipment under
agreements accounted for as capital leases. Assets recorded as capital leases in
the accompanying balance sheets include the following:
December 31
(in thousands) 1997 1996
Ground Segment equipment $7,263 $7,263
Office equipment 4,033 4,088
Less accumulated amortization 4,750 2,826
----- -----
Total $6,546 $8,525
====== ======
Amortization of the Ground Segment equipment began with the commencement of full
commercial service in December 1995.
In January 1996, the Company refinanced certain computer hardware components
under a sale/leaseback arrangement. The Company received proceeds in the amount
of $1.7 million. The transaction was accounted for as a financing, wherein the
property remains on the books and continues to be depreciated. A financing
obligation representing the proceeds was recorded, and is reduced based on
payments under the lease. The sale/leaseback has a three-year term and had a
balance of approximately $93,000 at December 31, 1997.
Operating Leases
The Company leases certain facilities and equipment under arrangements accounted
for as operating leases. Certain of these arrangements have renewal terms. The
office lease has an original lease term of ten years expiring in 2003, with a
renewal option, and escalation clauses. Total rent expense, under all operating
leases, approximated $2.9 million, $2.5 million, and $10.6 million in 1997,
1996, and 1995, respectively.
F-35
At December 31, 1997, minimum future lease payments under noncancellable
operating and capital leases are as follows:
Operating Capital
Leases Leases
(in thousands)
1998 $2,188 $1,200
1999 2,114 2,124
2000 2,044 1,351
2001 2,085 --
2002 2,131 --
thereafter 2,155 --
- ---------- ----- -----
Total $12,717 $4,675
=======
Less: Interest 730
-----
$3,945
======
10. OPERATING AGREEMENTS AND COMMITMENTS
Joint Operating and Satellite Capacity Agreements
On December 4, 1997, the Company entered into two simultaneous transactions. The
Company agreed with TMI to acquire a one-half ownership interest in TMI's
satellite, MSAT-1, at a cost of $60 million payable in equal installments over a
five-year period (the "Satellite Purchase Agreement"); certain additional
payments to TMI are contemplated in the event that additional benefits are
realized by the Company. Under the Satellite Purchase Agreement, TMI and
American Mobile will each own a 50% undivided ownership interest in the Shared
Satellite, will jointly be responsible for the operation of the Shared
Satellite, and will share certain satellite operating expenses, but will
otherwise maintain their separate business operations. Simultaneously, the
Company entered into an agreement (the "Satellite Lease Agreement") with African
Continental Telecommunications Ltd. ("ACTEL"), for the lease of MSAT-2, for
deployment over sub-Saharan Africa. The five-year lease provides for aggregate
lease payments to the Company of $182.5 million. The lease includes a renewal
option through the end of the life of MSAT-2, on the same lease terms, at
ACTEL's election exercisable 2 1/2 years prior to the end of the initial lease
term.
Should the Satellite Purchase Agreement and Satellite Lease Agreement not be
consummated, the Company and TMI will remain parties to a Joint Operating
Agreement and a Satellite Capacity Agreement under which the parties agree to
provide, among other things, emergency backup and restoral services to each
party during any period in which the other's satellite is not functioning
properly. Additionally, each party will be entitled to lease excess capacity
from the other party's satellite under specified terms and conditions. The
implementation of these agreements requires regulatory approvals by the FCC and
F-36
Industry Canada (formerly Canada's Department of Industry and Science). The
Company has received, and expects to continue to seek approvals contemplated
under these agreements on a timely basis.
Commitments
At December 31, 1997, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory
approximating $6.3 million.
The aggregate fixed and determinable portion of all inventory commitments and
obligations for other fixed contracts for the next five years is as follows.
(in thousands)
1998 $7,011
1999 1,802
2000 426
---
Total $9,239
======
Additionally, the Company may enter into additional commitments that may require
the purchase of mobile telephone and mobile terminal inventory in amounts that
could be material to the Company's financial condition.
The Company entered an agreement with a vendor, whereby the Company would incur
extra licensing fees, up to a total maximum potential of $4.1 million, upon the
voice subscriber base reaching certain levels. Management does not believe that
the subscriber levels outlined in the license will be met.
11. EMPLOYEE BENEFITS
Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan ("401(k) Savings Plan")
in which all employees can participate. Effective January 1, 1995, the 401(k)
Savings Plan provides for a Company match of employee contributions, in the form
of Common Stock, limited to the fair market value of up to one-half of the
employee's contribution not to exceed 6% of an employee's salary. The Company's
matching expense was $350,000 for 1997, $411,000 for 1996 and $329,000 for 1995.
F-37
Employee Stock Purchase Plan
In December 1993, the Company adopted the Employee Stock Purchase Plan ("Stock
Purchase Plan") to allow eligible employees to purchase shares of the Company's
Common Stock at 85% of the lower of market value on the first and last business
day of the six-month option period. An aggregate of 29,930, 39,366 and 30,877
shares of Common Stock were issued under the Stock Purchase Plan in 1997, 1996,
and 1995, respectively.
12. BUSINESS ACQUISITION
On November 22, 1996, the Company acquired the assets of Rockwell Collins, Inc.
("Rockwell") relating to its Land Transportation Electronics Mobile
Communications Satellite Service business (the "Business") through which
Rockwell had sold mobile messaging hardware and services to commercial trucking
fleets. The assets of the Business were acquired from Rockwell through the
assumption by the Company of the various contracts and obligations of Rockwell
relating to the Business; no additional direct payments were made or are to be
made under the terms of the Asset Sale Agreement, dated as of November 22, 1996.
The assets of the business acquired from Rockwell include tangible equipment,
completed inventory and future inventory deliveries to be used in connection
with fulfilling the contracts transferred with the Business. The Company intends
to continue such use in operating the Business.
The purchase method of accounting for business combinations was used. The
operating results of the Business have been included in the Company's
consolidated statements of loss from the date of acquisition and were
insignificant in 1996. The fair value of the assets acquired was $9.5 million
and liabilities assumed totaled $6.1 million. The fair value of assets acquired
in excess of purchase price arising from the acquisition in the amount of $3.4
million is being amortized over five years on a straight line basis. Assets
acquired included inventory deliveries, fixed assets, and other miscellaneous
items.
The pro forma results below (unaudited) assume the acquisition occurred at the
beginning of the year ended December 31, 1996 (dollars in thousands, except per
share data).
1996
Revenue $33,333
Net Loss (148,434)
Loss per share (5.93)
F-38
13. LEGAL AND REGULATORY AND OTHER MATTERS
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 and expand the Satellite
Network and operate and modify subscriber equipment.
The successful operation of the Satellite Network is dependent on a number of
factors, including the amount of L-band spectrum made available to the Company
pursuant to an international coordination process. The United States is
currently engaged in an international process of coordinating the Company's
access to the spectrum that the FCC has assigned to the Company. While the
Company believes that substantial progress has been made in the coordination
process and expects that the United States government will be successful in
securing the necessary spectrum, the process is not yet complete. The inability
of the United States government to secure sufficient spectrum could have an
adverse effect on the Company's financial position, results of operations and
cash flows.
The Company has the necessary regulatory approvals, some of which are pursuant
to special temporary authority, to continue its operations as currently
contemplated. The Company has filed applications with the FCC and expects to
file applications in the future with respect to the continued operations, change
in operation and expansion of the Network and certain types of subscriber
equipment. Certain of its applications pertaining to future service have been
opposed. While the Company, for various reasons, believes that it will receive
the necessary approvals on a timely basis, there can be no assurance that the
requests will be granted, will be granted on a timely basis or will be granted
on conditions favorable to the Company. Any significant changes to the
applications resulting from the FCC's review process or any significant delay in
their approval could adversely affect the Company's financial position, results
of operations and cash flows.
The Company's license requires that it comply with a construction and launch
schedule specified by the FCC for each of the three authorized satellites. The
second and third satellites are not in compliance with the schedule for
commencement of construction. The Company has asked the FCC to grant extensions
of the deadlines for the second and third satellites. Certain of these extension
requests have been opposed by third parties. The FCC has not acted on the
Company's requests. The FCC has the authority to revoke the authorizations for
the second and third satellites and in connection with such revocation could
exercise its authority to rescind the Company's license. The Company believes
that the exercise of such authority to rescind the license is unlikely.
As a provider of interstate telecommunications services, the Company is required
to contribute to the FCC's universal service fund, which supports the provision
of telecommunication services to high-cost areas, and establishes funding
mechanisms to support the provision of service to schools, libraries and rural
health care providers. The regulation became effective on January 1, 1998. This
cost is not born by the Company, but is passed on to its customers as is
universally practiced in the industry.
F-39
In 1992, a former director of American Mobile 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 judgment, filed on
March 31, 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 ultimate outcome of this matter will not
be material to the Company's financial position, results of operations or cash
flows.
Other Matters
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. Based on certain
engineering studies and the design of the satellite, the Company believes that
the insurance proceeds reflected the actual cost of damage sustained to the
satellite, and, as a result, the carrying value of the satellite was reduced by
the net insurance proceeds, which resulted 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.
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.
F-40
14. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31
(in thousands) 1997 1996 1995
Noncash investing and financing activities:
Leased asset and related obligations $182 $284 $1,351
Issuance of Common Stock purchase warrants 12,490 21,253 --
Issuance of Common Stock upon exercise of Common
Stock purchase warrants -- 845 --
Vendor financing for property under construction -- -- 7,561
Vendor financing for property in service -- 2,440 4,560
Issuance of Common Stock under the Defined Contribution Plan 349 411 329
Net assets acquired as a result of Business Acquisition (Note 12) -- 3,488 --
NOTE 15 - SUBSEQUENT EVENTS
During the first quarter of 1998, the Company entered into a series of
transactions. These transactions, some of which contain certain contingencies to
closing, include the acquisition of ARDIS and related $335 million financing;
the restructuring of the Bank Financing; and a commitment by Motorola to provide
the Company with up to $10 million of vendor financing related to the build out
of the ARDIS network.
Stock Purchase Agreement and Related Financing
As discussed in Note 1, on December 31, 1997, the Company entered into a Stock
Purchase Agreement with Motorola for the acquisition of ARDIS, a Motorola
subsidiary that owns and operates a two-way wireless data communications
network. Subject to certain post-acquisition purchase price reduction
provisions, the Company would acquire ARDIS for a purchase price of $50 million
in cash and $50 million in the Company's stock and warrants. The transaction was
subject to certain governmental approvals, including FCC approvals to transfer
the ARDIS licenses to the Company, and was subject to the completion of a
financing by the Company in an amount sufficient to fund the transactions
contemplated under the Stock Purchase Agreement. On March 3, 1998, the FCC
granted consent to consummate the Acquisition, and on March 31, 1998, the
Acquisition was consummated.
$335 Million Unit Offering
In connection with the Acquisition, the Company formed a new wholly-owned
subsidiary ("Acquisition Company") to hold the stock of all current wholly-owned
operating subsidiaries, acquire ARDIS, and issue $335 million of Units
consisting of 12 1/4% Senior Notes due 2008 of Acquisition Company, and Warrants
to purchase shares of Common Stock of the Company. Each Unit consists of $1,000
F-41
principal amount of Notes and one Warrant to purchase 3.75749 shares of Common
Stock at an exercise price of $12.51 per share. A portion of the net proceeds of
the sale of the Units were used to finance the Acquisition. The Notes are fully
guaranteed by American Mobile Satellite Corporation. The terms of the Notes
require that the Company purchase a portfolio of U.S. government securities
(approximately $113 million), which will provide funds sufficient to pay in full
when due the first six scheduled semi-annual interest payments on the Notes. The
Company intends to use the remaining proceeds from the Notes to fund certain
required escrows, repay the Bridge Loan, repay certain deferred obligations, pay
expenses associated with the Acquisition and the $335 Million Unit Offering, to
repay the Revolving Credit Facility under the Bank Financing, and for working
capital requirements.
New Bank Financing
In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries restructured the existing $200 million Bank Financing to provide
for the New Bank Financing: (i) the Revolving Credit Facility, a $100 million
unsecured five-year reducing revolving credit facility, and (ii) the Term Loan
Facility, a $100 million five-year, term loan facility with up to three
additional one-year extensions subject to the lenders' approval. The Revolving
Credit Facility will be the obligation of Acquisition Company and will rank pari
passu with the Notes. The Term Loan Facility will be the obligation of American
Mobile Satellite Corporation and is secured by the stockholdings of the Company,
principally its stockholdings in AMRC and the Acquisition Company, and will be
effectively subordinated to the Revolving Credit Facility and the Notes. The New
Bank Financing is severally guaranteed by Hughes, Singapore Telecom and Baron
Capital Partners, L.P. (the "Bank Facility Guarantors"). The Banks' placement
fee for the New Bank Financing is approximately $500,000.
The Revolving Credit Facility bears an interest rate, generally, of 50 basis
points above LIBOR and is unsecured, with a negative pledge on the assets of the
Acquisition Company and its subsidiaries ranking pari passu with the Notes. The
Revolving Credit Facility will be reduced $10 million each quarter, beginning
with the quarter ending June 30, 2002, with the balance due on maturity of March
31, 2003. Certain proceeds received by the Acquisition Company would be required
to repay and reduce the Revolving Credit Facility, unless otherwise waived by
the Banks and the Bank Facility Guarantors: (1) 100% of excess cash flow
obtained by the Acquisition Company; (2) the first $25.0 million net proceeds of
the lease or sale of MSAT-2 received by the Acquisition Company, and thereafter
75% of the remaining proceeds received from such lease or sale (the remaining
25% may be retained by the Acquisition Company for business operations); (3)
100% of the proceeds of any other asset sales by the Acquisition Company; (4)
50% of the net proceeds of any offerings of the Acquisition Company's equity
(the remaining 50% to be retained by the Acquisition Company for business
operations); and (5) 100% of any major casualty proceeds. At such time as the
Revolving Credit Facility is repaid in full, and subject to satisfaction of the
restrictive payments provisions of the Notes, any prepayment amounts that would
otherwise have been used to prepay the Revolving Credit Facility will be
dividended to the Company.
The Term Loan Facility bears an interest rate, generally, of 50 basis points
above LIBOR and is secured by the assets of the Company, principally its
F-42
stockholdings in AMRC and the Acquisition Company. The Term Loan Agreement does
not include any scheduled amortization until maturity, but does contain certain
provisions for prepayment based on certain proceeds received by the Company,
unless otherwise waived by the Banks and the Bank Facility Guarantors: (1) 100%
of excess cash flow obtained by the Company; (2) the first $25.0 million net
proceeds of the lease or sale of MSAT-2 received by the Company, and thereafter
75% of the remaining proceeds received from such lease or sale (the remaining
25% to be retained by the Acquisition Company for business operations); (3) 100%
of the proceeds of any other asset sales by the Company; (4) 50% of the net
proceeds of any equity offerings of the Company (the remaining 50% to be
retained by the Company for business operations); and (5) 100% of any major
casualty proceeds of the Company. To the extent that the Term Loan Facility is
repaid, the aforementioned proceeds that would otherwise have been used to repay
the Term Loan Facility will be used to repay and reduce the commitment under the
Revolving Credit Facility.
The Guarantees
In connection with the New Bank Financing, the Bank Facility Guarantors have
agreed to extend separate guarantees of the obligations of each of the
Acquisition Company and the Company to the Banks, which on a several basis
aggregate to $200 million. In their agreement with each of the Acquisition
Company and the Company (the "Guarantee Issuance Agreement"), the Bank Facility
Guarantors have agreed to make their guarantees available for the New Bank
Financing. The Guarantee Issuance Agreement will include certain additional
agreements of the Acquisition Company and of the Company including with respect
to financial performance of the Acquisition Company relating to the ratio of
debt to EBITDA and service revenue, which, if not met, could, if not waived,
limit the Acquisition Company's ability to draw down on additional amounts under
the Revolving Credit Facility and result in a default under the New Bank
Financing beginning in 1999. In exchange for the additional risks undertaken by
the Bank Facility Guarantors in connection with the New Bank Financing, the
Company has agreed to compensate the Bank Facility Guarantors, principally in
the form of 1 million additional warrants and repricing and extending the
expiration date of 5.5 million warrants previously issued (together, the "New
Guarantee Warrants"). The New Guarantee Warrants will be on terms substantially
similar, including with regard to pricing, as those issued as part of the Units.
Further, in connection with the Guarantee Issuance Agreement, the Company has
agreed to reimburse the Bank Facility Guarantors in the event that the
Guarantors are required to make payment under the Revolving Credit Facility
guarantees, and, in connection with this Reimbursement Commitment has provided
the Bank Facility Guarantors a junior security interest with respect to the
assets of the Company, principally its stockholdings in AMRC and the Acquisition
Company.
Motorola Vendor Financing
Motorola has agreed to provide the Acquisition Company with up to $10.0 million
of vendor financing (the "Vendor Financing Commitment"), which will be available
to finance up to 75% of the purchase price of additional network base stations.
Loans under this facility will bear interest at a rate equal to LIBOR plus 7.0%
and will be guaranteed by the Company and each subsidiary of the Acquisition
F-43
Company. The terms of such facility will require that amounts borrowed be
secured by the equipment purchased therewith. This commitment is subject to
customary conditions, including due diligence, and there can be no assurance
that the facility will be obtained by the Acquisition Company on these terms or
at all.
NOTE 16 - FINANCIAL STATEMENTS OF SUBSIDIARIES
In connection with the Acquisition and related financing discussed in Note 15,
the Company formed a new wholly-owned subsidiary, AMSC Acquisition Company, Inc.
The Company intends to transfer all of its rights, title and interests in AMSC
Subsidiary Corporation, American Mobile Satellite Sales Corporation, and AMSC
Sales Corp. Ltd. (together, "American Mobile Subsidiaries") to AMSC Acquisition
Company, Inc.
AMSC Acquisition Company, Inc. will be the acquirer of ARDIS and the issuer of
the $335 million of Senior Notes. American Mobile Satellite Corporation
("Parent") will guarantee the Senior Notes. The Senior Notes will contain
covenants that, among other things, limit the ability of AMSC Acquisition
Company, Inc. to incur additional indebtedness, pay dividends or make other
distributions, repurchase any capital stock or subordinated indebtedness, make
certain investments, create certain liens, enter into certain transactions with
affiliates, sell assets, enter into certain mergers and consolidations, and
enter into sale and leaseback transactions.
The combined condensed financial statements of American Mobile Subsidiaries are
set forth below.
F-44
American Mobile Subsidiaries
Combined Statements of Loss
(dollars in thousands)
for the years ended December 31, 1997, 1996, and 1995
Years Ended December 31
1997 1996 1995
REVENUES
Services $20,684 $9,201 $6,873
Sales of equipment 23,530 18,529 1,924
------ ------- ------
Total Revenues 44,214 27,730 8,797
COSTS AND EXPENSES:
Cost of service and operations 31,959 30 471 23,863
Cost of equipment sold 40,335 31,903 4,676
Sales and advertising 12,030 24,541 22,683
General and administrative 14,890 16,212 17,285
Depreciation and amortization 44,535 45,496 11,568
------ ------ ------
Operating Loss (99,535) (120,893) (71,278)
INTEREST AND OTHER INCOME 1,122 552 1,242
INTEREST EXPENSE (51,153) (44,636) (3,305)
-------- -------- -------
NET LOSS $(149,566) $(164,977) $(73,341)
========= ======== =======
F-45
American Mobile Subsidiaries
Combined Balance Sheets
(dollars in thousands)
as of December 31, 1997 and 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $2,106 $2,182
Inventory 40,321 38,034
Prepaid in-orbit insurance 4,564 5,080
Accounts receivable-trade, net
of allowance for doubtful accounts 8,140 6,603
Other current assets 9,608 14,247
----- ------
Total current assets 64,739 66,146
PROPERTY AND EQUIPMENT - NET 250,335 287,127
DEFERRED CHARGES AND OTHER ASSETS: 36,722 33,264
------ ------
Total assets $351,796 $386,537
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $35,825 $42,612
Obligations under capital leases due
within one year 798 3,931
Current portion of long-term debt 15,254 11,113
Other current liabilities 7,520 --
----- ------
Total current liabilities 59,397 57,656
DUE TO PARENT 441,836 400,831
LONG-TERM LIABILITIES:
Obligations under Bank Financing 198,000 127,000
Capital lease obligations 3,147 2,557
Net assets acquired in excess
of purchase price (Note 12) 2,725 3,395
Other long-term liabilities 2,011 852
------- -------
Total long-term liabilities 205,883 133,804
------- -------
Total liabilities 707,116 592,291
------- -------
STOCKHOLDERS' EQUITY: (355,320) (205,754)
------- -------
Total liabilities and
stockholders' equity $351,796 $386,537
======== ========
F-46
American Mobile Subsidiaries
Combined Statements of Stockholders' Equity
(dollars in thousands)
for the period from January 1, 1995 through December 31, 1997
Total
BALANCE, December 31, 1994 $ 32,564
Net Loss (73,341)
--------
BALANCE, December 31, 1995 (40,777)
Net Loss (164,977)
--------
BALANCE, December 31, 1996 (205,754)
Net Loss (149,566)
--------
BALANCE, December 31, 1997 $ (355,320)
=========
F-47
American Mobile Subsidiaries
Combined Statements of Cash Flows
(dollars in thousands)
for the years ended December 31, 1997, 1996, and 1995
Years Ended December 31
------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(149,566) $(164,977) $(73,341)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 9,350 5,721 --
Depreciation and amortization 44,535 45,413 11,568
Changes in assets and liabilities:
Inventory (2,287) (27,482) (10,438)
Prepaid in-orbit insurance 516 (257) (4,823)
Trade accounts receivable (1,537) (5,229) 218
Other current assets 4,639 1,970 (5,280)
Accounts payable and accrued expenses (5,844) 1,668 23,414
Deferred trade payables 11,685 -- --
Deferred items - net 8,038 1,347 (1,730)
----- ----- -------
Net cash used in operating activities (80,471) (141,826) (60,412)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Insurance proceeds applied to equipment in service -- 66,000 --
Additions to property and equipment (8,598) (14,054) (83,776)
Purchases of short-term investments -- (1,000) --
Deferred charges and other assets -- -- (169)
------ ------ --------
Net cash provided by (used in) investing activities (8,598) 50,946 (83,945)
------- ------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding from Parent 28,220 29,485 164,835
Principal payments under capital leases (2,576) (3,994) (538)
Proceeds from short-term borrowings -- 70,000 --
Payments on short-term borrowings -- (70,000) --
Proceeds from Bank Financing 71,000 127,000 --
Proceeds from debt issuance -- 1,700 7,630
Payments on long-term debt (6,180) (59,190) (28,486)
Debt issuance costs (1,471) (10,803) (1,081)
------- -------- -------
Net cash provided by (used in) financing activities 88,993 84,198 142,360
Net decrease in cash and cash equivalents (76) (6,682) (1,997)
CASH AND CASH EQUIVALENTS, beginning of period 2,182 8,864 10,861
----- ----- ------
CASH AND CASH EQUIVALENTS, end of period $2,106 $2,182 $8,864
====== ====== ======
F-48
QUARTERLY FINANCIAL DATA (unaudited)
(dollars in thousands, except for per share data)
1997-quarters 1996-quarters
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
Revenues $8,685 $10,753 $10,795 $13,981 $4,369 $6,749 $7,405 $9,207
Operating expenses(1) 32,341 32,420 30,617 46,231 31,371 45,747 33,914 36,737
Loss from operations (23,656) (21,667) (19,822) (32,250) (27,002) (38,998) (26,509) (27,530)
Interest and other
income (expense) (3,425) (5,175) (6,442) (6,770) (2,875) (4,511) (3,493) (3,720)
Net Loss (27,081) (26,842) (26,264) (39,020) (29,877) (43,509) (30,002) (31,250)
Net loss per common share (2) $(1.08) $(1.07) $(1.04) $(1.55) $(1.20) $(1.74) $(1.20) $(1.24)
Weighted-average common shares
outstanding during the
period (000s) 25,109 25,120 25,145 25,151 24,995 25,012 25,065 25,092
Market price per share (3)
High $14.75 $12.13 $10.88 $10.75 $33.25 $20.00 $17.50 $14.62
Low $9.37 $8.50 $6.23 $6.28 $16.00 $15.00 $10.75 $9.25
(1) Operating expenses include charges of approximately $12 million in the
fourth quarter of 1997 and $11.1 million in the second quarter of 1996
related to the realizability of the Company's inventory investment.
(2) Loss per share calculations for each of the quarters are based on the
weighted average number of shares outstanding for each of the periods, and
the sum of the quarters may not necessarily be equal to the full year loss
per share amount.
(3) The Company's Common Stock is listed under the symbol SKYC on the Nasdaq
National Market System. The Company's Common Stock was not publicly traded
prior to December 14, 1993. The quarterly high and low sales price
represents the closing price in the Nasdaq National Market System. The
quotations represent inter-dealer quotations, without retail markups,
markdowns or commissions, and may not necessarily represent actual
transactions. As of February 28, 1998, there were 251 stockholders of
record of the Company's Common Stock.
F-49
Selected Financial Data
Set forth below is the selected financial data for the Company for the five
fiscal years ended December 31, 1997:
(dollars in thousands, except for per share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $44,214 $27,730 $8,797 $5,240 $852
Net Loss $(119,207) $(134,638) $(66,917) $(21,103) $(25,180)
Net Loss per Common Share $(4.74) $(5.38) $(2.69) $(0.86) $(2.49)
Dividends on Common Stock (1) None None None None None
Consolidated Balance Sheet Data:
Cash and Cash Equivalents $2,106 $2,182 $8,865 $137,287 $243,060
Property Under Construction -- -- -- 263,505 204,740
Total Assets 311,447 350,173 398,351 448,674 460,382
Current Liabilities 59,433 57,669 104,772 37,251 36,309
Long-Term Obligations 205,883 133,804 6,052 59,879 56,703
Stockholders' Equity 46,131 158,700 287,527 351,544 367,370
(1) The Company has paid no dividends on its Common Stock since inception
and does not plan to pay dividends on its Common Stock in the
foreseeable future. In addition, the payment of dividends is subject to
restrictions described in Note 7 to the financial statements and
discussed in Management's Discussion and Analysis.
F-50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Mobile Satellite Corporation
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of American Mobile Satellite Corporation and
Subsidiaries (a Delaware corporation) included in this Form 10-K and have issued
our report thereon dated March 31, 1998. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the index is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Washington, D.C.
March 31, 1998
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Condensed Balance Sheets
December 31,
1997 1996
(in thousands of dollars)
ASSETS
Investment in and amounts due from subsidiaries $ 46,168 $158,713
--------- --------
Total assets $ 46,168 $158,713
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $37 $13
--- ---
Stockholders' Equity
Preferred Stock -- --
Common Stock 252 251
Additional paid-in capital 451,892 451,259
Common stock purchase warrants 36,338 23,848
Unamortized stock purchase warrants (23,586) (17,100)
Accumulated loss (418,765) (299,558)
--------- ---------
Total Stockholders' Equity 46,131 158,700
------ -------
Total Liabilities and Stockholders' Equity $ 46,168 $158,713
========= ========
The accompanying notes are an integral part of this condensed financial
information.
S-1
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Condensed Statements of Loss
For the Years Ended December 31,
1997 1996 1995
---- ---- ----
Management fees from wholly-owned subsidiary $1,200 $1,200 $1,200
------ ------ ------
Operating Expenses
Engineering operations -- -- 87
Sales and marketing 36 -- 91
General and administrative 1,129 2,452 595
----- ----- ----
Total operating expenses 1,165 2,452 773
----- ----- ----
Income (loss) from operations 35 (1,252) 427
Interest income -- -- 3,258
Interest expenses (6,005) (1,900) --
Equity loss in AMRC (1,301) -- --
--------- --------- ---------
(Loss) income before net loss of Acquisition Company (7,271) (3,152) 3,685
Net loss of Acquisition Company - Note A (111,936) (131,486) (70,602)
--------- --------- --------
Net Loss $(119,207) $(134,638) $(66,917)
========== ========== ==========
The accompanying notes are an integral part of this condensed financial
information.
S-2
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Condensed Statements of Cash Flows
For the Years Ended December 31,
1997 1996 1995
---- ---- ----
Cash Provided from Operating Activities $ 59 $1,424 $5,067
Investing Activities
Advances to and investment in subsidiaries (343) (2,672) (162,778)
Sales of short-term investments, net -- -- 28,717
------ ------- --------
Cash (used in) investing activities (343) (2,672) (134,061)
Financing Activities
Proceeds from sale of Common Stock 284 1,248 2,569
----- ----- -----
Cash Provided by Financing Activities 284 1,248 2,569
----- ----- -----
(Decrease) increase for the period -- -- (126,425)
Beginning of period -- -- 126,425
----- ----- -----
End of period $ -- $ -- $ --
====== ======= ========
The accompanying notes are an integral part of this condensed financial
information.
S-3
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Notes to Condensed Financial Statements
The condensed financial information should be read in conjunction with the
consolidated financial statements.
Note A -- Background and Basis of Presentation
American Mobile Satellite Corporation (with its subsidiaries, "American Mobile"
or the "Company") was incorporated on May 3, 1988, by eight of the initial
applicants for the mobile satellite services license, following a determination
by the Federal Communications Commission ("FCC") that the public interest would
be best served by granting the license to a consortium of all willing, qualified
applicants. The FCC has authorized American Mobile to construct, launch, and
operate a mobile satellite services system (the "Satellite Network ") 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, American Mobile Subsidiary
Corporation ("AMSC Subsidiary"). On April 7, 1995, the Company successfully
launched its first satellite ("MSAT-2"), from Cape Canaveral, Florida.
In late 1996, the Company expanded its mobile data business through the
acquisition of Rockwell International Corporation's ("Rockwell") dual mode
mobile messaging and global positioning and monitoring service for commercial
trucking fleets. Rockwell was a private network customer of the Company which
had purchased capacity from the Company on MSAT-2.
On December 31, 1997, the Company entered into a Stock Purchase Agreement (the
"Purchase Agreement") with Motorola, Inc. ("Motorola"), for the acquisition (the
"Acquisition") of ARDIS Company ("ARDIS"), a wholly-owned subsidiary of Motorola
that owns and operates a two-way wireless data communications network. Subject
to certain purchase price adjustment provisions, the Company will acquire ARDIS
for a purchase price of $50 million in cash and $50 million in the Company's
Common Stock and warrants (the "Purchase Price"). The Company, through the
acquisition of ARDIS, intends to create a nationwide provider of wireless
communications services, including data, dispatch, and voice services, primarily
to business customers in the United States.
On October 16, 1997, American Mobile Radio Corporation, an indirect subsidiary
of American Mobile through its subsidiary AMRC Holdings, Inc. (together with
American Mobile Radio Corporation, "AMRC"), 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,
S-4
1997. American Mobile 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. 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.
In the parent Company-only financial statements, the Company's investment in
subsidiaries is stated at cost less losses of subsidiaries. The net loss of
subsidiaries is included in these financial statements using the equity method.
The parent Company-only statements exclude inter-company interest. The Company
has entered into various transactions with its subsidiaries which are eliminated
in the December 31, 1997 audited consolidated financial statements and are
summarized as follows:
1997 1996 1995
Investment in and amounts
due from subsidiaries $46,167 $158,713 $287,527
Management fees 1,200 1,200 1,200
Interest income 29,520 29,485 23,445
Note B -- Investment in Subsidiaries
As stated in Note A, the Company records its investment in subsidiaries on the
equity method. In connection with the Acquisition, the Company formed a new
wholly-owned subsidiary ("Acquisition Company") to hold the stock of all current
wholly-owned operating subsidiaries. The Acquisition Company has six
wholly-owned subsidiaries. Additionally, the Company has an equity investment in
AMRC. The recoverability of such investment is subject to the risks associated
with expanding a developing business, including successfully integrating ARDIS.
Specifically, future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. Depending on their extent and timing, these factors, individually
or in the aggregate, could have an adverse effect on the Subsidiaries' financial
condition and future results of operations.
Adequate liquidity and capital are critical to the ability of the Acquisition
Company to continue as a going concern and to fund subscriber acquisition
programs necessary to reach cash positive and profitable operations. The
Acquisition Company expects to continue to make significant capital outlays for
the foreseeable future to fund interest expense, capital expenditures and
working capital prior to the time that it begins to generate positive cash flow
from operations and for the foreseeable future thereafter. The Acquisition
Company currently believes that the net proceeds from the sale of the $335
million in Notes and warrants, together with the borrowings under the $200
million New Bank Financing, the Motorola financing, and the proceeds from the
Satellite Lease Agreement (all discussed below) will be sufficient to meet the
Acquisition Company's currently anticipated capital expenditures, operating
losses, working capital and debt service requirements through 1998 and beyond.
S-5
However, if the Acquisition Company's cash flows from operations are less than
projected, the Acquisition Company may not meet its financial performance
agreements under the Guaranty Issuance Agreement and, if such conditions are not
met or waived, the Acquisition Company would not have access to additional funds
under the Revolving Credit Facility. In addition, even in the event that the
Acquisition Company has access to such funds, it may require additional debt or
equity financing in amounts that could be substantial. The type, timing and
terms of financing selected by the Acquisition Company will be dependent upon
the Acquisition Company's cash needs, the availability of other financing
sources and the prevailing conditions in the financial markets. There can be no
assurance that any such sources will be available to the Acquisition Company at
any given time or as to the favorableness of the terms on which such sources may
be available.
In connection with the ARDIS Acquisition, the Company raised $335 million in
cash proceeds from the private issuance of units ("Units") consisting of 12 1/4
% Senior Notes ("Notes") due 2008 and one warrant to purchase 3.75749 shares of
Common Stock of the Company for each $1,000 principal amount of Notes. The Notes
are fully guaranteed by American Mobile Satellite Corporation. Additionally, the
existing Bank Financing was restructured. The New Bank Financing of $200 million
will consist of a $100 million unsecured five-year reducing Revolving Credit
Facility maturing March 31, 2003 and a $100 million five-year Term Loan Facility
with up to three additional one-year extensions subject to lender approval. The
Revolving Credit Facility will be the obligation of Acquisition Company and will
rank pari passu with the Notes. The Term Loan Facility will be the obligation of
American Mobile Satellite Corporation and is secured by the stockholdings of the
Company, principally its stockholdings in AMRC and the Acquisition Company, and
will be effectively subordinated to the Revolving Credit Facility and the Notes.
The New Bank Financing is severally guaranteed by Hughes Electronics Corporation
("Hughes"), Singapore Telecommunications Ltd. ("Singapore Telecom") and Baron
Capital Partners, L.P. (the "Bank Facility Guarantors"). Additionally, Motorola
has agreed to provide the Company with up to $10 million of vendor financing
(the "Vendor Financing Commitment"), which will be available to finance up to
75% of the purchase price of additional base stations needed to meet ARDIS'
buildout requirements under certain customer contracts. Loans under this
facility will bear interest at a rate equal to LIBOR plus 7.0%. This commitment
is subject to customary conditions, including due diligence, and there can be no
assurance that the facility will be obtained by Acquisition Company on these
terms or at all.
On December 4, 1997, the Company and one of its wholly-owned subsidiaries (AMSC
Subsidiary) entered into two simultaneous transactions. The Company agreed with
TMI to acquire a one-half ownership interest in TMI's satellite, MSAT-1, at a
cost of $60 million payable in equal installments over a five-year period (the
"Satellite Purchase Agreement"); certain additional payments to TMI are
contemplated in the event that additional benefits are realized by the Company.
Simultaneously, the Company entered into an agreement (the "Satellite Lease
Agreement") with African Continental Telecommunications Ltd. ("ACTEL"), for the
lease of MSAT-2, for deployment over sub-Saharan Africa. The five-year lease
provides for aggregate lease payments to the Company of $182.5 million. The
lease includes a renewal option through the end of the life of MSAT-2, on the
same lease terms, at ACTEL's election exercisable 2 1/2 years prior to the end
of the initial lease term. Closing under the Satellite Purchase Agreement and
Satellite Lease Agreement is subject to a number of conditions. It is
anticipated that the closing under both leasing agreements will occur
simultaneously in the spring of 1998.
S-6
Note C -- Guarantee
The Company has guaranteed various obligations of Acquisition Company. These
guaranteed obligations include amounts borrowed under the New Bank Financing,
ground segment financing agreements and obligations of Acquisition Company and
its subsidiaries under an office lease agreement and various capital equipment
leases.
Note D -- Legal Matters
In 1992, a former director of American Mobile 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 judgment, filed on
March 31, 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 ultimate outcome of this matter will not
be material to the Company's financial position, results of operations or cash
flows.
S-7