The following items were the subject of a
Form 12b-25 and are included herein:
Item 14, Financial Statements
of AMRC Holdings, Inc.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10802 Parkridge Boulevard
Reston, VA 20191-5416
(Address of principal executive (Zip Code)
offices)
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.
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
-------------------------------------
Form 10-K/A
-------------------------------
This amendment on Form 10-K/A is being filed solely to file audited supplemental
financial statements for the Company's unconsolidated subsidiary, AMRC Holdings,
Inc.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(1) 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-11
Consolidated Statements of Loss.............................................F-12
Consolidated Balance Sheets.................................................F-13
Consolidated Statements of Stockholders' Equity.............................F-14
Consolidated Statements of Cash Flows.......................................F-15
Notes to Consolidated Financial Statements..................................F-16
Quarterly Financial Data....................................................F-38
Selected Financial Data.....................................................F-39
AMRC Holdings, Inc. and Subsidiary Audited Financial Statements.............F-40
Notes to Consolidated Financial Statements of AMRC Holdings, Inc.
and subsidiary....................................................F-46
(2) Exhibits
23.3. Consent of KPMG Peat Marwick LLP.
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: April 15, 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 April 15, 1998
- ------------------ Chairman of the Board
Gary M. Parsons (principal executive officer)
/s/Stephen D. Peck Vice President and Chief April 15, 1998
- ------------------ Financial Officer
Stephen D. Peck (principal financial and
accounting officer)
/s/Douglas I. Brandon Director April 15, 1998
- ---------------------
Douglas I. Brandon
Director April 15, 1998
- ---------------------
Steven D. Dorfman
s/Ho Siaw Hong Director April 15, 1998
- --------------
Ho Siaw Hong
/s/Billy J. Parrott Director April 15, 1998
- -------------------
Billy J. Parrott
Director April 15, 1998
- ---------------------
Andrew A. Quartner
/s/Jack A. Shaw Director April 15, 1998
- ---------------
Jack A. Shaw
/s/Roderick M. Sherwood, III Director April 15, 1998
- ----------------------------
Roderick M. Sherwood, III
/s/Michael T. Smith Director April 15, 1998
- -------------------
Michael T. Smith
/s/Yap Chee Keong Director April 15, 1998
- -----------------
Yap Chee Keong
/s/Albert L. Zesiger Director April 15, 1998
- --------------------
Albert L. Zesiger
INDEX
Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................F-1
Report of Independent Public Accountants....................................F-11
Consolidated Statements of Loss.............................................F-12
Consolidated Balance Sheets.................................................F-13
Consolidated Statements of Stockholders' Equity.............................F-14
Consolidated Statements of Cash Flows.......................................F-15
Notes to Consolidated Financial Statements..................................F-16
Quarterly Financial Data....................................................F-38
Selected Financial Data.....................................................F-39
AMRC Holdings, Inc. and Subsidiary Audited Financial Statements.............F-40
Notes to Consolidated Financial Statements of AMRC Holdings, Inc.
and subsidiary....................................................F-46
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
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."
F-1
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
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
F-2
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.
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.
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
F-3
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
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
F-4
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
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 re-acquisition 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
F-5
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.
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.
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
F-6
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
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
F-7
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.
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
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.
F-8
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
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
F-9
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".
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-10
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-11
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 25,131 25,041 24,900
OUTSTANDING DURING THE PERIOD (000's)
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
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, less allowance for doubtful
accounts of $1,930 in 1997 and $1,548 in 1996 8,140 6,603
Other current assets 9,608 14,247
----- ------
Total current assets 64,739 66,146
PROPERTY AND EQUIPMENT - 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-13
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-14
American Mobile Satellite Corporation and Subsidiaries
- ------------------------------------------------------
Consolidated Statements of Cash Flows (dollars in thousands) for the years ended
December 31, 1997, 1996, and 1995
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-15
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,
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.
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
F-16
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 (as defined herein), 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 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
F-17
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
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 $ --
Noncurrent assets 91,901 Gross sales $ --
Current liabilities -- Operating Expenses 1,110
Noncurrent liabilities 84,387 Interest expense 518
Total stockholders' equity 7,514 Net loss 1,628
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
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.
F-18
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.
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.
F-19
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. 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.
F-20
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. 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-21
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
========== ==========
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
F-22
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 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.
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.
F-23
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, the Company 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 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 Note15.
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
F-24
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%.
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
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
F-25
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
====== ====== =======
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.
F-26
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.
At December 31, 1997, minimum future lease payments under noncancellable
operating and capital leases are as follows:
Operating Leases Capital
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
F-27
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
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.
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
F-28
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)
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
F-29
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.
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.
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 --
F-30
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
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
F-31
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
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
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.
F-32
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-33
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-34
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-35
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-36
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 11,658 -- --
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-37
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 $12.0 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-38
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-39
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Financial Statements
December 31, 1997 and for the period December 15, 1992 (date of
inception) to December 31, 1997
(With Independent Auditors' Report Thereon)
F-40
Independent Auditors' Report
To the Board of Directors and Stockholders
AMRC Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of AMRC Holdings,
Inc. and subsidiary (a development stage company) as of December 31, 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1997 and the period December 15, 1992
(date of inception) to December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 the audits 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 disclosures 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AMRC Holdings, Inc.
and subsidiary (a development stage company) as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended and the
period December 15, 1992 (date of inception) to December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 5 to the
consolidated financial statements, the Company has not commenced operations, has
negative working capital of $82,948,890, and is dependent upon additional
capital contributions, which raises substantial doubt about its ability to
continue as a going concern. Management's plan in regard to these matters is
also described in note 5. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/KPMG Peat Marwick LLP
April 10, 1998
F-41
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
December 31, 1997
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Current assets - Cash $ 544
- --------------------------------------------------------------------------------
Other assets - system under construction 91,932,362
- --------------------------------------------------------------------------------
$91,932,906
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Current liabilities:
Accrued expenses due to related party $ 390,659
Due to related party 55,435
Accrued interest on loans payable 1,885,653
Loans payable due to related parties (note 3) 80,617,687
- --------------------------------------------------------------------------------
Total current liabilities 82,949,434
- --------------------------------------------------------------------------------
Stockholders' equity:
Common stock -- $0.10 par value; authorized 3,000 shares;
issued and outstanding 125 shares at December 31, 1997 13
Additional paid-in capital 10,642,531
Deficit accumulated during development stage (1,659,072)
- --------------------------------------------------------------------------------
Total stockholders' equity 8,983,472
- --------------------------------------------------------------------------------
Commitments and contingencies (notes 2, 3, 8, and 9)
$91,932,906
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-42
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
Year ended December 31, 1997 and for the period
from December 15, 1992 (date of inception) to
December 31, 1997
December 15, 1992
(date of inception)
to December 31,
1997 1997
- --------------------------------------------------------------------------------
Revenue $ - $ -
- --------------------------------------------------------------------------------
Operating expenses:
Legal and consulting expenses (1,109,625) (1,109,625)
- --------------------------------------------------------------------------------
Total operating expenses (1,109,625) (1,109,625)
- --------------------------------------------------------------------------------
Operating loss (1,109,625) (1,109,625)
- --------------------------------------------------------------------------------
Other expense:
Interest expense (549,447) (549,447)
- --------------------------------------------------------------------------------
Total other expense (549,447) (549,447)
- --------------------------------------------------------------------------------
Net loss $(1,659,072) $(1,659,072)
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-43
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Stockholders' Deficit
Year ended December 31, 1997 and for the period
from December 15, 1992 (date of inception) to
December 31, 1997
Deficit
accumulated
Additional during Stockholders'
Common stock paid-in development equity
Shares Amount capital stage total
- -------------------------------------------------------------------------------------------------------------------
Issuance of common stock (December 15, 1992) 100 $ 10 $ - $ - $10
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 100 10 - - 10
Liabilities and Stockholders' Equity - - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 100 10 - - 10
Net loss - - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 100 10 - - 10
Net loss - - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 100 10 - - 10
Net loss - - - - -
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 100 10 - - 10
Contribution to paid-in capital 142,534 142,534
Issuance of common stock and capital contributions 25 3 8,999,997 - 9,000,000
Issuance of options - - 1,500,000 - 1,500,000
Net loss - - - (1,659,072) (1,659,072)
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 125 $13 $10,642,531 $(1,659,072) $8,983,472
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-44
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
Year ended December 31, 1997 and for the period
from December 15, 1992 (date of inception) to
December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
December 15, 1992
(date of inception)
to December 31,
1997 1997
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,659,072) $(1,659,072)
Adjustments to reconcile net loss to net cash used in
operating activities:
Note discount amortization 32,595 32,595
Changes in operating liabilities:
Increase in accrued expenses due to related party 390,659 390,659
Increase in amounts due to related party 55,435 55,435
Increase in accrued interest 516,852 516,852
- -------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (663,531) (663,531)
- -------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities - capital expenditures (90,030,889) (90,030,889)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock and capital contribution 9,142,534 9,142,544
Proceeds from issuance of loans payable 80,052,420 80,052,420
Proceeds from issuance of options 1,500,000 1,500,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 90,694,954 90,694,964
- -------------------------------------------------------------------------------------------------------------------
Net cash increase in cash and cash equivalents 534 544
Cash and cash equivalents - beginning 10 -
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending $ 544 544
- -------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosure:
Interest capitalized $1,901,473 $1,901,473
- -------------------------------------------------------------------------------------------------------------------
Interest converted into principal note balance $ 500,626 $ 500,626
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-45
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(1) Summary of Significant Accounting Policies and Practices
Nature of Business
------------------
American Mobile Radio Corporation (AMRC) was incorporated on December
15, 1992 in the State of Delaware as a wholly owned subsidiary of
American Mobile Satellite Corporation (AMSC) for the purpose of
procuring a digital audio radio service license (DARS). Business
activity for the period December 15, 1992 through December 31, 1996 was
insignificant.
AMRC Holdings, Inc. (the Company) was incorporated in the State of
Delaware on May 16, 1997 for the purpose of constructing, launching and
operating a domestic communications satellite system for the provision
of DARS. Pursuant to various financing agreements entered into in 1997
between AMSC, AMRC and WorldSpace, Inc. (WSI), WSI acquired a 20%
interest in AMRC. In May 1997, AMSC and WSI exchanged their respective
interests in AMRC for all of the Company's common stock.
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The consolidated financial statements include the accounts of AMRC
Holdings, Inc. and its subsidiary, AMRC. All significant intercompany
transactions and accounts have been eliminated. The Company's board of
directors have devoted substantially all of their time to the planning
and organization of the Company and to the process of addressing
regulatory matters, initiating research and development programs,
conducting market research and securing adequate debt and equity
capital for anticipated operations and growth. Accordingly, the
Company's financial statements are presented as those of a development
stage enterprise, as prescribed by Statement of Financial Accounting
Standards No. 7, Accounting and Reporting by Development Stage
Enterprises.
Cash and Cash Equivalents
-------------------------
The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. At
December 31, 1997, the Company maintained one bank account and held no
short-term investments.
F-46
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(1) Continued
System Under Construction
-------------------------
The Company is currently developing its satellite system. Costs related
to the project are being capitalized to the extent that they have
future benefits. As of December 31, 1997, all amounts recorded as
system under construction relate to costs incurred in obtaining FCC
licenses and approvals.
On October 16, 1997, the Federal Communications Commission ("FCC")
granted AMRC a license to launch and operate two geostationary
satellites for the purpose of providing digital audio radio in the
United States in the 2332.5 - 2345 MHz (space-to-earth) frequency band,
subject to achieving certain technical milestones and international
regulatory requirements. The license is valid for eight years upon
successful launch and orbital insertion of the satellites. The
Company's license requires that it comply with a construction and
launch schedule specified by the FCC for each of the two authorized
satellites. The FCC has the authority to revoke the authorizations 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.
The license asset value consists of the total payments made to the FCC
for the license of $90,030,889. Associated with this license is
capitalized interest of $1,901,473.
During 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of (SFAS No. 121).
SFAS No. 121 requires that long-lived assets to be held and used be
reviewed by the Company for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized when the undiscounted
net cash flows associated with the asset are less than the asset's
carrying amount. Impairment losses, if any, are measured as the excess
of the carrying amount of the asset over its estimated fair market
value. The adoption of SFAS No. 121 did not have a material impact on
the Company's financial position or results of operations.
F-47
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(1) Continued
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities
and the financial reporting amounts at each year-end, based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the sum of tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of expenses during the reported period. The estimates
involve judgments with respect to, among other things, various future
factors which are difficult to predict and are beyond the control of
the Company. Significant estimates include valuation of the Company's
investment in the DARS license and benefit for income taxes and related
valuation allowances. Accordingly, actual amounts could differ from
these estimates.
(2) Related Party Transactions
--------------------------
The Company had related party transactions with the following
shareholders:
AMSC
----
In 1997, AMSC contributed $142,534 for the Company to establish the
original application for the FCC license. On March 28, 1997, the
Company received $1,500,000 as a capital contribution from AMSC.
During the fiscal year, AMSC incurred costs for operating expenses of
the Company and established an intercompany balance of $55,435.
F-48
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(2) Continued
WSI
---
On March 28, 1997, the Company received $1,500,000 as a capital
contribution from WSI. The Company issued WSI 25 shares of common stock
for this consideration.
On April 16, 1997, the Company received $14,977,777 from WSI, which
represented $6,000,000 as an additional capital contribution and
$8,977,777 as a six-month bridge loan (see note 3).
On May 16, 1997, the Company obtained a $1,000,000 working capital loan
facility from WSI. During fiscal year 1997, the Company drew down
$663,531 against the facility (see note 3).
On October 16, 1997, the Company received $71,911,111 from WSI, which
represented an additional $13,522,223 under the bridge loan and
$58,388,889 under the additional amounts loan (see note 3).
In addition to financing, the Company has relied upon certain related
parties for legal and technical services. Total expenses incurred in
transactions with related parties are as follows:
Year ended December 31, 1997
----------------------------
WSI AMSC Total
--- ---- -----
Technical and other
Professional services $ 921,756 $ - $ 921,756
Legal services 37,803 130,451 168,254
Other - 19,615 19,615
---------- -------- ----------
Total $ 959,559 $ 150,066 $1,109,625
========== ========== ==========
F-49
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(3) Loans Payable
In March 1997, AMRC entered into a series of agreements (Participation
Agreement) with AMSC and WSI in which both companies provide various
equity and debt funding commitments to AMRC for the purpose of
financing the activities of AMRC in connection with the establishment
of a DARS satellite system in the United States. On May 16, 1997,
certain portions of the Participation Agreement were subsequently
ratified with substantially the same terms and conditions under the
Bridge Loan, Additional Amounts Loan and Working Capital Credit
Facility (Loan Agreement).
The Company has loans payable with a face amount of $82,053,046 with a
carrying amount of $80,617,687 at December 31, 1997 outstanding with
WSI as follows:
Bridge loan $23,000,626
Additional amounts loan 58,388,889
Working capital loan 663,531
- --------------------------------------------------------------------------------
82,053,046
Discount arising from concurrent issuance of options (note 4) (1,435,359)
- --------------------------------------------------------------------------------
$80,617,687
- --------------------------------------------------------------------------------
Bridge Loan
-----------
The Company executed the bridge loan with WSI in two traunches.On April
16, 1997, the Company received proceeds of $8,479,012 for a loan with a
face amount of $8,977,777. On October 16, 1997, the Company received
proceeds of $12,770,988 for a loan with a face amount of $13,522,223.
The first traunche was a six-month loan at LIBOR plus five percent per
annum, equaling 11.03 percent. The first traunche was rolled over with
the establishment of the second tranche, which is a six-month loan at
LIBOR plus five percent per annum, equaling 10.88 percent.
F-50
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(3) Continued
Additional Amounts Loan
-----------------------
On October 16, 1997, the Company executed the additional amounts loan
with WSI and received proceeds of $58,218,889 for a loan with a face
amount of $58,388,889. This loan is a six-month loan at LIBOR plus five
percent per annum, equaling 10.88 percent.
Working Capital Loan
--------------------
On May 16, 1997, the Company executed the working capital loan with WSI
whereby the company would receive proceeds of $920,000 for a loan with
a face amount of $1,000,000. The Company drew down $663,531 against the
line of credit through December 31, 1997. This loan is a six-month loan
at LIBOR plus five percent per annum, with interest rates ranging from
10.91 percent to 11 percent as the components of the loan were rolled
over in November 1997.
(4) Options
The Company issued WSI three options. Under the first option, WSI may
purchase 97.2222 shares of common stock at $241,714 per share. The
option may be exercised in whole or in incremental amounts between
April 16, 1998 and October 16, 2002, subject to prior approval of the
FCC to the extent that such exercise would constitute transfer of
control. Under certain circumstances, AMSC may require WSI to exercise
the option in whole. The Company allocated $ 1,250,000 to the option,
based upon an independent valuation. Under the second option, WSI may
purchase 128.8876 shares at $477,005 per share. The option may be
exercised between October 16, 1997 and October 16, 2003, subject to
prior approval of the FCC to the extent that such exercise would
constitute transfer of control. The Company allocated $ 170,000 to the
option, based upon an independent valuation. Under the third option,
WSI may purchase 3.5111 shares of common stock at $284,811 per share.
The option may be exercised between October 16, 1997 and October 16,
2002, subject to prior approval of the FCC to the extent that such
exercise would constitute transfer of control. The Company allocated $
80,000 to the option, based upon an independent valuation.
F-51
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(5) Accumulated Deficit
-------------------
The Company is devoting its efforts to develop, construct and expand a
digital audio radio network. This effort involves substantial risk and
future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. These factors individually or in the aggregate could
have an adverse effect on the Company's financial condition and future
operating results and create an uncertainty as to the Company's ability
to continue as a going concern. The financial statements do not include
any adjustments that might be necessary should the Company be unable to
continue as a going concern.
In order to commence satellite-based radio broadcasting services, the
Company will require substantial funds to develop and construct the
DARS system, develop and launch radio communications satellites, retire
debt incurred in connection with the acquisition of the DARS license
and to sustain operations until it generates positive cash flow. At the
Company's current stage of development, economic uncertainties exist
regarding successful acquisition of additional debt and equity
financing and ultimate profitability of the Company's proposed service.
The Company has not commenced construction of its satellites and will
require substantial additional financing before it is able to do so.
Failure to obtain the required long-term financing will prevent the
Company from realizing its objective of providing satellite-delivered
radio programming. Management's plan to fund operations and capital
expansion includes the additional sale of debt and equity securities
through public and private sources. There are no assurances, however,
that such financing will be obtained.
(6) Interest Cost
-------------
The Company capitalizes a portion of its interest cost as a component
of the system under construction. The following is a summary of
interest cost incurred during 1997:
Interest cost capitalized $1,901,473
Interest cost charged to expense 549,447
- --------------------------------------------------------------------------------
Total interest cost incurred $2,450,920
- --------------------------------------------------------------------------------
Interest costs incurred prior to the award of the license were expenses.
F-51
AMRC HOLDINGS, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
for the period from December 15, 1992 (date of inception) to
December 31, 1997
(7) Income Taxes
------------
For the period from December 15, 1992 (date of inception) to December
31, 1997, the Company filed a consolidated return with its majority
stockholder, AMSC. The Company generated net operating losses and other
tax benefits which were not utilized by AMSC. As no formal tax sharing
agreement has been finalized, the Company was not compensated for the
net operating losses. Had the Company filed on a stand alone basis, it
would have had no tax provision as the deferred tax benefit of
approximately $650,000 would have been fully offset by a valuation
allowance.
(8) Commitments and Contingencies
-----------------------------
The FCC has established certain system development milestones that must
be met for the company to maintain its license to operate the systems.
The Company believes that it is proceeding into the system development
as planned and in accordance with the FCC milestones.
(9) Subsequent Events
-----------------
On March 20, 1998, the Company entered into an agreement for the
construction of two satellites, two launch vehicles, and related
equipment, services and spare parts, including launch services. The
total commitment, excluding financing fees, is $376 million. These
amounts are due upon completion of certain milestones. In March 1998,
the Company made the first milestone payment of $5 million which was
funded through additional borrowings from WSI.
F-53