SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-23044
AMERICAN MOBILE SATELLITE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0976127
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
10802 Parkridge Boulevard
Reston, VA 20191-5416
(Address of principal (Zip Code)
executive offices)
(703) 758-6000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares of Common Stock outstanding at July 31, 1998: 32,129,163
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF LOSS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- --------- --------- ---------
REVENUES
Services $16,670 $4,979 $23,088 $9,132
Sales of equipment 5,740 5,774 9,344 10,306
---------- --------- --------- ---------
Total Revenue 22,410 10,753 32,432 19,438
COSTS AND EXPENSES
Cost of service and operations 16,918 8,201 24,646 17,074
Cost of equipment sold 5,415 7,140 9,296 12,582
Sales and advertising 4,711 3,059 7,733 6,280
General and administrative 5,773 2,937 9,404 7,805
Depreciation and amortization 14,457 11,083 24,620 21,020
------ ------ ------ ------
Operating Loss (24,864) (21,667) (43,267) (45,323)
INTEREST EXPENSE (15,706) (5,281) (22,344) (9,651)
INTEREST AND OTHER INCOME 1,607 106 1,748 1,051
EQUITY IN LOSS OF AMRC -- -- (342) --
------ ------ ------ ------
NET LOSS ($38,963) ($26,842) ($64,205) ($53,923)
========== ========= ========= =========
BASIC AND DILUTED NET LOSS PER SHARE OF
COMMON STOCK ($1.23) ($1.07) ($2.25) ($2.15)
========== ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING DURING THE PERIOD (000'S) 31,719 25,120 28,502 25,115
========== ========= ========= =========
See notes to consolidated financial statements.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, December 31,
1998 1997
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $8,944 $2,106
Inventory 37,887 40,321
Accounts receivable-trade, net 13,279 8,140
Restricted cash-current portion 41,038 --
Prepaid in-orbit insurance 1,993 4,564
Other current assets 20,602 9,608
------ -----
Total current assets 123,743 64,739
PROPERTY AND EQUIPMENT - NET 265,788 233,174
GOODWILL AND INTANGIBLES - NET 54,347 --
DEFERRED CHARGES AND OTHER ASSETS 34,554 13,534
RESTRICTED CASH - NON-CURRENT 83,970 --
------ --------
Total assets $562,402 $311,447
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $40,725 $35,861
Obligations under capital leases due within one year 3,687 798
Current portion of long-term debt 3,006 15,254
Other current liabilities 7,673 7,520
----- -----
Total current liabilities 55,091 59,433
LONG-TERM LIABILITIES:
Obligations under Bank Financing 122,000 198,000
Obligations under Senior Notes, net of discount 326,722 --
Capital lease obligations 10,163 3,147
Net assets acquired in excess of purchase price 2,376 2,725
Other long-term debt 1,003 1,364
Other long-term liabilities 563 647
------- -------
Total long-term liabilities 462,827 205,883
------- -------
Total liabilities 517,918 265,316
------- -------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $0.01; no shares issued -- --
Common Stock, voting, par value $0.01 318 252
Additional paid-in capital 502,228 451,892
Common Stock purchase warrants 62,547 36,338
Unamortized guarantee warrants (37,640) (23,586)
Retained loss (482,969) (418,765)
--------- ---------
Total stockholders' equity 44,484 46,131
------ ---------
Total liabilities and stockholders' equity $562,402 $311,447
======== ========
See notes to consolidated financial statements.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30
------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($64,205) ($53,923)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of guarantee warrants, debt discount and issuance costs 5,877 4,297
Depreciation and amortization 24,220 21,020
Equity in loss from AMRC 341 --
Amortization of interest rate swap 1,491 --
Changes in assets and liabilities:
Inventory 1,889 (7,426)
Prepaid in-orbit insurance 2,571 3,387
Trade accounts receivable 1,941 (2,142)
Other current assets 67 5,565
Accounts payable and accrued expenses 1,245 (8,558)
Deferred trade payables (7,680) --
Deferred items - net (124) 285
--------- ---------
Net cash used in operating activities (32,367) (37,495)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (5,558) (5,804)
Acquisition of ARDIS (51,440) --
Purchase of long-term, restricted cash securities (141,899) --
Investment in AMRC -- (1,500)
---------- ---------
Net cash used in investing activities (198,897) (7,304)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 236 141
Principal payments under capital leases (1,234) (1,882)
Proceeds from Bank Financing 24,000 --
Repayment of Bank Financing (100,000) --
Proceeds from bridge financing 10,000 --
Repayment of bridge financing (10,000) --
Proceeds from Senior Notes and Warrants 335,000 --
Payments on long-term debt (4,933) (5,225)
Proceeds from long-term debt -- 53,000
Debt issuance costs (14,967) (611)
-------- -------
Net cash provided by financing activities 238,102 45,423
Net increase (decrease) in cash and cash equivalents 6,838 624
CASH AND CASH EQUIVALENTS, beginning of period 2,106 2,182
------ ------
CASH AND CASH EQUIVALENTS, end of period $8,944 $2,806
====== ======
See notes to consolidated financial statements.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Organization and Business
-------------------------
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.
On March 31, 1998 the Company (through its newly-formed, wholly-owned
subsidiary, AMSC Acquisition Company, Inc. ("Acquisition Company")) acquired
ARDIS Company ("ARDIS"), a wholly-owned subsidiary of Motorola Inc. that owns
and operates a two-way wireless data communications network, for a purchase
price of approximately $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, becomes a nationwide provider of wireless communications
services, including data, dispatch, and voice services, primarily to business
customers in the United States.
On October 16, 1997, American Mobile Radio Corporation, an indirect subsidiary
of American Mobile through its subsidiary AMRC Holdings, Inc. (together with
American Mobile Radio Corporation, "AMRC"), was awarded a license by the FCC to
provide satellite-based Digital Audio Radio Service ("DARS") throughout the
United States, following its successful $89.9 million bid at auction on April 2,
1997. 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.
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.
2. Significant Accounting Policies
-------------------------------
Basis of Presentation
The unaudited consolidated condensed financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. While the Company believes
that the disclosures made are adequate to make the information not misleading,
these consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1997 Annual Report on Form 10-K
The consolidated balance sheet as of June 30, 1998, and the consolidated
statements of loss and cash flows for the three months and six months ended June
30, 1998 and 1997, have been prepared by the Company without audit. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, result of
operations and cash flows at June 30, 1998, and for all periods presented have
been made. The balance sheet at December 31, 1997 has been taken from the
audited financial statements.
Acquisition
- -----------
The Company acquired ARDIS for a purchase price of approximately $50 million in
cash and $50 million in the Company's Common Stock (the "Purchase Price").
Approximately 1.5 million of the shares that were issuable to Motorola
(representing approximately $11.5 million) were contingent upon stockholder
approval at the May 20, 1998 annual meeting of shareholders. Such approval was
duly received and the remaining shares issued. The purchase method of accounting
for business combinations was used for the recording of the acquisition. The
operating results of ARDIS have only been included in the Company's consolidated
statements of loss from the date of acquisition. The Company's preliminary
estimate of the excess of the purchase price over the fair market value of net
assets acquired is $54.3 million. The Company has not yet specifically
identified amounts to assign to certain intangibles and licenses; changes in the
amounts allocated to such assets could result in changes to the amount of
goodwill recorded. A preliminary amortization period of twenty years has been
selected, which is expected in all material respects to be representative of the
amortization expense that will result from the ultimate allocation to the
specific intangible assets.
The unaudited pro forma results give effect to (i) the Acquisition, (ii) the
Offering and (iii) the New Bank Financing as if such transactions had been
consummated on January 1 of each of the periods presented.
Six Months Ended
June 30,
(dollars in thousands, except per share data) 1998 1997
---- ----
Revenues $42,364 $41,239
Net loss ($77,812) ($81,770)
Loss per share ($2.45) ($2.58)
Weighted-average shares outstanding 31,708 31,636
Net Loss Per Share
- ------------------
Basic and diluted loss per common share is based on the weighted-average number
of shares of Common Stock outstanding during the period. Stock options and
common stock purchase warrants are not reflected since their effect would be
antidilutive.
Recently Adopted Accounting Pronouncements
- ------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted both of these standards during the six
month period ended June 30, 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income" to be reported in the financial statements and/or notes
thereto. Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "total comprehensive income" for the
three months and six months ended June 30, 1997 and 1998.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is not required for interim financial
reporting purposes during 1998. The Company is in the process of assessing the
additional disclosures, if any, required by SFAS No. 131. However, such adoption
will not impact the Company's results of operations or financial position, since
it relates only to disclosures.
Other
- -----
The Company paid approximately $9.4 million and $1.6 million in the six-month
periods ended June 30, 1998 and 1997, respectively, to related parties for
capital assets, service-related obligations, and payments under financing
agreements. Payments from related parties for communication services and
equipment purchases totaled $2.5 million in the six-month period ended June 30,
1998 and $1.2 million in the six-month period ended June 30, 1997. Total
indebtedness to related parties as of June 30, 1998 approximated $1.3 million.
3. Liquidity and Financing
-----------------------
$335 Million Unit Offering
- --------------------------
In connection with the acquisition of ARDIS, discussed above, 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 value of $8.5 million was assigned to the Warrants and is reflected in
the balance sheet as a debt discount. A portion of the net proceeds of the sale
of the Units were used to finance the Acquisition. In connection with the Notes,
the Company has purchased approximately $112.3 million of pledged securities
that are intended to provide for the payment of the first six interest payments
on the Notes. The Company incurred approximately $15 million in costs associated
with the placement of the Notes and the Acquisition.
Interest payments are due semi-annually, in arrears, beginning October 1, 1998.
Acquisition Company consummated its offer to exchange up to $335 million
aggregate principal amount of its registered 12 1/4 percent Senior Notes (due
2008, Series B) (the "New Notes") for outstanding unregistered 12 1/4 percent
Senior Notes (due 2008, Series A) (the "Old Notes"). The exchange expired at
5:00 p.m. (New York City time) on Friday, August 7, 1998. Holders tendered for
exchange $334.75 million aggregate principal amount of the Old Notes as of the
expiration of the offer. The Old Notes tendered for exchange constituted 99.93%
of the Old Notes outstanding.
The Notes contain covenants that, among other things, limit the ability of
Acquisition Company, Inc. and its Subsidiaries 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.
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 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. Borrowings under the Revolving Credit Facility are subject to certain
conditions beginning in the fourth quarter of 1998. In the event the Company is
unable to borrow amounts under the Revolving Credit Facility, the Company's cash
needs will significantly exceed its available resources, which would have a
material adverse effect on the Company. The revolving Credit Facility ranks 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"). In exchange for the
additional risks undertaken by the Bank Facility Guarantors in connection with
the New Bank Financing, the Company agreed to compensate the Bank Facility
Guarantors, principally in the form of 1 million additional warrants and
re-pricing of 5.5 million warrants previously issued (together, the "Guarantee
Warrants"). The Guarantee Warrants have an exercise price of $12.51 and have
been valued at approximately $17.7 million. As of July 31, 1998, the Company had
outstanding borrowings of $100 million of the Term Loan Facility at 6.1875%, and
$27 million under the Revolving Credit Facility at 6.1875%.
In connection with the New Bank Financing, the Company entered into an interest
rate swap agreement, with an implied annual rate of 6.51%. The swap agreement
reduces the impact of interest rate increases on the Term Loan Facility. The
Company paid a fee of approximately $17.9 million for the swap agreement. Under
the swap agreement, the Company will receive an amount equal to LIBOR plus 50
basis points, paid on a quarterly basis, on a notional amount of $100 million
until the termination date of March 31, 2001. The Company has reflected as an
asset the unamortized fee paid for the swap agreement in the accompanying
financial statements. The Company is exposed to a credit loss in the event of
non performance by the counter party under the swap agreement. The Company does
not believe there is a significant risk of non performance as the counter party
to the swap agreement is a major financial institution.
Motorola Vendor Financing
- -------------------------
Motorola has entered into an agreement with a subsidiary of Acquisition Company,
the ARDIS Company, to provide 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 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 the
facility require that amounts borrowed be secured by the equipment purchased
therewith. No amounts were outstanding under this facility as of July 31, 1998.
Financing Summary
- -----------------
The Company believes the proceeds from the issuance of the Notes, net of cash
used for the Acquisition, together with the borrowings under the New Bank
Financing and the Vendor Financing Commitment, will be sufficient to fund
operating losses, capital expenditures, working capital, and scheduled principal
and interest payments on debt through 1998 and beyond; 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.
AMRC
- ----
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.
Summarized unaudited financial information for AMRC as of June 30, 1998, and for
the six month periods ended June 30, 1998 and 1997, and for the period from
December 15, 1992 (date of inception) through June 30, 1998 is set forth below.
December 15, 1992
Six Months through
dollars in thousands Ended June 30, June 30,
-------------- --------
(unaudited) (unaudited)
1998 1997 1998
---- ---- ----
Gross sales $ -- $ -- $ --
Operating expenses 8,132 51 9,242
Loss from operations 8,132 51 9,242
Interest expense ---- 219 549
Net loss 8,132 270 9,791
As of
As of June 30, December 31,
1998 1997
---- ----
(unaudited) (unaudited)
Current assets $ 598 $ --
Noncurrent assets 114,929 91,933
Current liabilities 108,584 82,949
Noncurrent liabilities 6,091 --
Total stockholders' equity 852 8,983
Deferred Trade Payables
- -----------------------
In the last quarter of 1997 and the first quarter of 1998, the Company arranged
the financing of certain trade payables, and as of June 30, 1998, $4.0 million
of deferred trade payables were outstanding at rates ranging from 6.23% to 12%
and are generally payable by the end of 1998.
Purchase and Lease Agreement
- ----------------------------
As previously disclosed, the Company has entered into certain agreements to
acquire a one-half ownership interest in TMI Communications and Company, Limited
Partnership's ("TMI") satellite, MSAT-1, at a cost of $60 million payable over a
five-year period, as well as entered into a five-year lease of the Company's
satellite, MSAT-2, with African Continental Telecommunications Ltd. that
provides for aggregate lease payments to the Company of $182.5 million. Closing
under the agreements is subject to a number of conditions, including: a
successful financing by ACTEL of at least $120 million and completion of certain
satellite testing, inversion and relocation activities with respect to AMSC-1.
It is anticipated that the closing under both the purchase and lease agreements
will occur simultaneously in the third quarter of 1998.
Other
- -----
On July 2, 1998, American Mobile filed an application for authority to launch
and operate its second-generation mobile satellite system. This satellite is
intended to support the Company's existing satellite services and also allow the
provision of an expanded array of services, such as higher data rate services
and services to lower-power terminals. There can be no assurance that the FCC
will grant this application. If the Company proceeds with deployment of this
second-generation satellite system, the Company would be required to raise
substantial additional capital to finance this project.
4. Legal and Regulatory Matters
----------------------------
Like other mobile service providers in the telecommunications industry, the
Company is subject to substantial domestic, foreign and international regulation
including the need for regulatory approvals to operate and expand the Satellite
Network and operate and modify subscriber equipment.
The ownership and operation of American Mobile's MSS system and ARDIS'
ground-based two-way wireless data system are subject to the rules and
regulations of the FCC, which acts under authority granted by the Communications
Act and related federal laws. Among other things, the FCC allocates portions of
the radio frequency spectrum to certain services and grants licenses to and
regulates individual entities using the spectrum. American Mobile and ARDIS
operate pursuant to various licenses granted by the FCC.
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.
There are applications now pending before the FCC to use the Inmarsat system and
TMI's Canadian-licensed system, both of which operate in the MSS L-band and have
satellite footprints covering the United States, to provide service in the
United States. American Mobile has opposed these filings. In addition to
providing additional competition to American Mobile, a grant of domestic
authority by the FCC to use any of these foreign systems may increase the demand
by these systems for spectrum in the international coordination process and
could adversely affect American Mobile's ability to coordinate its spectrum
access.
On July 20, 1998, the International Bureau of the FCC granted an application for
Special Temporary Authority to use TMI's space segment to conduct market tests
in the U.S. for the next six months using up to 500 mobile terminals. American
Mobile has asked the full Commission to review this decision and stay the
effectiveness of the temporary authorization. There can be no assurance that the
FCC will stay the effectiveness of this decision or rescind the International
Bureau's grant of Special Temporary Authority.
American Mobile is authorized to build, launch, and operate three geosynchronous
satellites in accordance with a specific schedule. American Mobile is not in
compliance with the schedule for commencement and construction of its second and
third satellites and has petitioned the FCC for changes to the schedule. Certain
of these extension requests have been opposed by third parties. The FCC has not
acted on American Mobile's requests. The FCC has the authority to revoke the
authorizations for the second and third satellites and in connection with such
revocation could exercise its authority to rescind American Mobile's license.
American Mobile believes that the exercise of such authority to rescind the
license is unlikely. The term of the license for each of American Mobile's three
authorized satellites is ten years, beginning when American Mobile certifies
that the respective satellite is operating in compliance with American Mobile's
license. The ten-year term of MSAT-2 began August 21, 1995. Although American
Mobile anticipates that the authorization to MSAT-2 is likely to be extended in
due course to correspond to the useful life of the satellite and a new license
granted for any replacement satellites, there is no assurance of such extension
or grants.
On July 2, 1998, American Mobile filed an application for authority to launch
and operate its second-generation mobile satellite system. This satellite is
intended to support the Company's existing satellite services and, also, allow
the provision of an extended array of services, such as higher data rate
services and services to lower-power terminals. There is no guarantee that the
FCC will grant this application. The filing of the application does not commit
the Company to expend any resources toward this project; however, should the
Company decide to proceed with the construction of the follow-on satellite, the
Company would be required to raise substantial additional capital to fund this
project.
As a provider of interstate telecommunications services, the Company is required
to contribute to the FCC's universal service fund for certain of its services,
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 generally is not borne by the Company,
but passed on to its customers.
On June 5, 1996, the FCC waived its one-year construction requirement and
granted ARDIS extensions of time to complete buildouts of approximately 190
sites, as required to maintain previously granted licenses. The extended
construction deadlines vary by site until March 31, 1999. While management
believes that all buildouts will continue to be completed in a timely manner,
there can be no assurances that future delays will not occur. Failure to
complete the buildouts in a timely manner could result in a loss of licenses for
such sites from the FCC.
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 is
currently scheduled for late 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.
5. Other Matters
-------------
At June 30, 1998, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory in the
maximum amount of $3.6 million over the next year. Additionally, the Company had
remaining contractual commitments in the amount of $1.7 million for the
development of certain next generation data terminal inventory. Contingent upon
the successful research and development efforts, the Company would have
additional contractual commitments for mobile communications data terminal
inventory in the amount of $31.2 million over a three-year period. The Company
has the right to terminate the research and development and inventory commitment
by paying cancellation fees of between $1 million and $2.5 million, depending on
when the termination option is exercised during the term of the contract.
6. AMSC Acquisition Company Financial Statements
---------------------------------------------
In connection with the Acquisition and related financing discussed above, the
Company formed a new wholly-owned subsidiary, AMSC Acquisition Company, Inc. The
Company transferred all of its inter-company notes receivables and its rights,
title and interests in AMSC Subsidiary Corporation, American Mobile Satellite
Sales Corporation, and AMSC Sales Corp. Ltd. (together with ARDIS, the
"Subsidiaries") to AMSC Acquisition Company, Inc., and AMSC Acquisition Company,
Inc. was the acquirer of ARDIS and the issuer of the $335 million of Senior
Notes. American Mobile Satellite Corporation ("Parent") is a guarantor of the
Senior Notes. The Senior Notes contain covenants that, among other things, limit
the ability of Acquisition Company, Inc. and its Subsidiaries 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.
Acquisition Company is a holding company with no material operations. It holds
the Senior Notes and Revolving Credit Facility, both of which are fully and
unconditionally guaranteed on a joint and several basis by all of its
Subsidiaries.
Separate company financial statements for AMSC Acquisition Company, Inc. have
not been prepared, as management believes the differences between the two
statements to be immaterial, and therefore not material information to the
investors.
Major differences between the financial statements of Parent and Acquisition
Company include (i) the Term Loan Facility which, as of the Acquisition, is an
obligation of Parent and, as such, the related debt and interest costs are not
included in the Acquisition Company financial statements for the periods ended
and as of June 30, 1998, as discussed in Note 3, and (ii) certain immaterial
intercompany management fees and expenses between the Parent and Acquisition
Company are not eliminated at the Acquisition Company level.
The combined condensed financial statements of Acquisition Company are set forth
below.
AMSC Acquisition Company, Inc.
Consolidated Condensed Statements of Loss
(dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------- ------- --------
REVENUES
Services $16,670 $4,979 $23,088 $9,132
Sales of equipment 5,740 5,774 9,344 10,306
------ ------ ------ ------
Total Revenues 22,410 10,753 32,432 19,438
COSTS AND EXPENSES:
Cost of service and operations 16,918 8,201 24,646 17,074
Cost of equipment sold 5,415 7,123 9,296 12,565
Sales and advertising 4,693 3,042 7,686 6,263
General and administrative 5,807 2,858 9,466 7,635
Depreciation and amortization 14,457 11,609 25,146 22,072
------- ------- -------- --------
Operating Loss (24,880) (22,080) (43,808) (46,171)
INTEREST AND OTHER INCOME 1,491 86 1,632 1,031
INTEREST EXPENSE (12,793) (12,650) (26,619) (24,272)
-------- -------- -------- --------
NET LOSS $(36,182) $(34,644) $(68,795) $(69,412)
========= ========= ========= =========
AMSC Acquisition Company, Inc.
Consolidated Condensed Balance Sheets
(dollars in thousands)
(Unaudited)
June 30, December 31,
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $8,944 $2,106
Inventory 37,887 40,321
Accounts receivable-trade, net of allowance for doubtful accounts 13,279 8,140
Restricted cash-current portion 41,038 --
Prepaid in-orbit insurance 1,993 4,564
Other current assets 14,638 9,608
-------- -------
Total current assets 117,779 64,739
PROPERTY AND EQUIPMENT - NET 282,422 250,335
GOODWILL AND INTANGIBLE - NET 54,347 --
RESTRICTED CASH - Non-Current 63,157 --
DEFERRED CHARGES AND OTHER ASSETS - NET 49,371 36,722
-------- -------
Total assets $567,076 $351,796
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $40,644 $35,825
Obligations under capital leases due within one year 3,687 798
Current portion of long-term debt 3,006 15,254
Other current liabilities 7,673 7,520
-------- --------
Total current liabilities 55,010 59,397
DUE TO PARENT -- 441,836
LONG-TERM LIABILITIES:
Obligations under Bank Financing 22,000 198,000
Senior Notes, net of discount 326,722 --
Capital lease obligations 10,163 3,147
Other long-term debt 1,003 1,364
Net assets acquired in excess of purchase price 2,376 2,725
Other long-term liabilities 563 647
-------- --------
Total long-term liabilities 362,827 205,883
Total liabilities 417,837 707,116
-------- -------
STOCKHOLDERS' EQUITY 149,239 (355,320)
-------- ---------
Total liabilities and stockholders' equity $567,076 $351,796
========== ========
AMSC Acquisition Company, Inc.
Consolidated Condensed Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
------------------------------
1998 1997
-------- ---------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(68,795) ($69,412)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 5,318 4,297
Depreciation and amortization 24,747 22,072
Changes in assets and liabilities:
Inventory 1,889 (7,426)
Prepaid in-orbit insurance 2,571 3,387
Trade accounts receivable 1,941 (2,142)
Other current assets (48) 5,565
Accounts payable and accrued expenses 1,201 (8,536)
Deferred trade payables (7,680) --
Deferred items - net (124) 305
----- -------
Net cash used in operating activities (38,980) (51,890)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property and equipment (5,558) (5,804)
Acquisition of ARDIS (51,440) --
Purchase of long-term restricted cash securities (113,747) --
--------- -------
Net cash used in investing activities (170,745) (5,804)
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding (to) from Parent (21,303) 13,035
Principal payments under capital leases (1,234) (1,882)
Proceeds from Bank Financing 24,000 53,000
Repayment of Bank Financing (100,000) --
Proceeds from bridge financing 10,000 --
Repayment of bridge financing (10,000) --
Proceeds from Senior Notes 335,000 --
Payments on long-term debt (4,933) (5,225)
Debt issuance costs (14,967) (611)
-------- -------
Net cash provided by financing activities 216,563 58,317
Net increase (decrease) in cash and cash equivalents 6,838 623
CASH AND CASH EQUIVALENTS, beginning of period 2,106 2,182
------ ------
CASH AND CASH EQUIVALENTS, end of period $8,944 $2,805
======= ======
PART I-FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of
Interim Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q 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 Form 10-Q, including, without limitation, in conjunction with the
forward-looking statements included in this Form 10-Q. 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 Form 10-K Annual
Report and Form 10-Q Quarterly Reports filed by the Company prior to and
subsequent to this Form 10-Q Quarterly 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 March 31, 1998 the Company (through its newly-formed,
wholly-owned subsidiary, AMSC Acquisition Company, Inc.) acquired ARDIS Company
("ARDIS"), a wholly-owned subsidiary of Motorola Inc. that owns and operates a
two-way wireless data communications network, for a purchase price of
approximately $50 million in cash and $50 million in the Company's Common Stock
and warrants (the "Purchase Price"). 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 offers a broad range of end-to-end wireless
solutions utilizing a seamless network consisting of the nation's largest, most
fully-deployed terrestrial wireless data network (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." Additionally, in
connection with the Acquisition and related financing, the Company transferred
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 Acquisition Company.
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. The operations and financing of AMRC are maintained separate and apart
from the operations and financing of American Mobile (see "Liquidity and
Financing").
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 ARDIS.
Overview
- --------
Each of American Mobile and ARDIS 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 June 30, 1998, the
Company had indebtedness of approximately $466.6 million.
The Company's future operating results could be adversely affected by a number
of uncertainties and factors, including (i) the timely completion and deployment
of future products and related services, including among other things,
availability of mobile telephones, data terminals and other equipment to be used
with the Network ("Subscriber Equipment") being manufactured by third parties
over which the Company has limited control, (ii) the market's acceptance of the
Company's services, (iii) the ability and the commitment of the Company's
distribution channels to market and distribute the Company's services, (iv) the
Company's ability to modify its organization, strategy and product mix to
maximize the market opportunities in light of changes therein, (v) competition
from existing companies that provide services using existing communications
technologies and the possibility of competition from companies using new
technology in the future, (vi) capacity constraints arising from the
reconfiguration of MSAT-2, subsequent anomalies affecting MSAT-2 and MSAT-1, or
the power management recommendation affecting both MSAT-2 and MSAT-1 previously
reported, (vii) additional technical anomalies that may occur within the
Satellite Network, including those relating to MSAT-1 and MSAT-2, which could
impact, among other things, the operation of the Satellite Network and the cost,
scope or availability of in-orbit insurance, (viii) subscriber equipment
inventory responsibilities and liabilities assumed by the Company including the
ability of the Company to realize the value of its inventory in a timely manner,
(ix) the Company's ability to secure additional financing as may be necessary,
(x) the Company's ability to respond and react to changes in its business and
the industry as a result of being highly leveraged, (xi) the ability of the
Company to successfully integrate ARDIS and to achieve certain business
synergies, and (xii) the ability of the Company to manage growth effectively.
As of June 30, 1998, there were approximately 91,700 units on the Network.
Quarter Ended June 30, 1998 and 1997
- ------------------------------------
Service revenues, which include both the Company's voice and data services,
approximated $16.7 million and $23.1 million for the three-month and six-month
periods ended June 30, 1998, respectively, which constitutes an $11.7 million
and $14.0 million increase over the three-month and six-month periods ended June
30, 1997, respectively. The significant increase in service revenues year over
year is primarily attributable to the income of the ARDIS data service. Absent
the acquisition of ARDIS on March 31, 1998, service revenues for the three-month
and six-month period ended June 30, 1998, respectively, increased 36% and 44%
year to year, from $5.0 million and $9.1 million for the three and six-month
periods ended June 10, 1997, to $6.7 million and $13.2 million for the three and
six-month periods ended June 30, 1998, respectively. Service revenue from voice
services increased 39% and 54% from approximately $2.4 million and $4.3 million
in the second quarter and six-months of 1997, respectively, to approximately
$3.5 million and $6.7 million in the comparable periods of 1998. The increases
were primarily a result of a 54% increase in voice customers during the first
half of 1998 as compared to the same period in 1997. Service revenue from the
Company's data services approximated $12.3 million and $14.5 million for the
three-month and six-month periods ended June 30, 1998, respectively, as compared
to $1.9 million and $3.5 million for the comparable periods of 1997. The dollar
increases of $10.4 million and $11.0 million are primarily a result of a 33%
increase in mobile data units during the first half of 1998 and $9.9 million
from the ARDIS data service. Service revenue from capacity resellers, who handle
both voice and data services, approximated $852,000 in the second quarter of
1998 and $1.6 million for the six-months ended June 30, 1998, as compared to
$608,000 and $1.1 million for the same periods of 1997, an increase of $244,000
and $531,000, or 40% and 47%, respectively.
Revenue from the sale of mobile data terminals and mobile telephones decreased
10% from $10.3 million in the first half of 1997 to $9.3 million in the first
half of 1998 and, similarly, by 2% from $5.8 million to $5.7 million in the
second quarter of 1997 and 1998, respectively. The decrease was primarily
attributable to reduced sales of voice products, as well as certain price
reductions made in the first quarter of 1998. ARDIS equipment sales for the
second quarter were $384,000.
Cost of service and operations for the three-months and the six-months ended
June 30, 1998, which includes costs to support subscribers and to operate the
Network, was $16.9 million and $24.7 million compared to $8.2 million and $17.1
million for the same periods of 1997. Cost of service and operations, as a
percentage of revenues, was 76% for the second quarters of both 1998 and 1997
and 76% and 88% for the first six-months of 1998 and 1997, respectively. The
increase in cost of service and operations was primarily attributable to (i)
$9.1 million of ARDIS costs (ii) increased interconnect charges associated with
increased service usage offset by (iii) a reduction in information technology
costs affected by reducing the dependence on outside consultants. Absent the
acquisition of ARDIS on March 31, 1998, cost of service and operations for the
three-month and six-month period ended June 30, 1998, respectively, was $7.9
million and $15.6 million, and represented approximately 35% and 48% of revenue,
compared to $8.2 million and $17.1 million for the same periods in 1997.
The cost of equipment sold decreased 24% from $7.1 million for the three-months
ended June 30, 1997, to $5.4 million for the three-months ended June 30, 1998,
and 26% from $12.6 million for the six-month period ended June 30, 1997, to $9.3
million for the same period in 1998. The dollar decrease in the cost of
equipment sold was primarily attributable to (i) a corresponding decrease in
voice equipment sales and (ii) the impact of the inventory valuation allowance
recorded in the fourth quarter of 1997.
Sales and advertising expenses were $4.7 million and $7.7 million for the
three-months and the six-months ended June 30, 1998, respectively, compared to
$3.0 million and $6.3 million for the same periods in 1997. Sales and
advertising expenses as a percentage of revenue were 21% and 24% in the second
quarter and first half of 1998, respectively, as compared to 28% and 32% during
the same periods of 1997. The increase in sales and advertising expenses was
primarily attributable to ARDIS. Absent the acquisition of ARDIS on March 31,
1998, sales and advertising expenses for the three-month and six-month period
ended June 30, 1998 were $3.2 million and $6.3 million, respectively, and
represented 15% and 20% of revenue, respectively, compared to $3.0 million and
$6.3 million, or 28% and 32% of revenue, for the same periods in 1997.
General and administrative expenses for the three-months and the six-months
ended June 30, 1998, were $5.8 million and $9.4 million, respectively, compared
to $2.9 million and $7.8 million in the same periods of 1997. As a percentage of
revenue, general and administrative expenses represented 26% and 29% in the
second quarter and first half of 1998, respectively, compared to 27% and 40% in
the same periods of 1997. The increase in general and administrative expenses
for 1998 compared to 1997 was primarily attributable to $2.1 million of ARDIS
costs offset by a $741,000 reduction in personnel expenses as a result of
reduced headcount. Absent the acquisition of ARDIS on March 31, 1998, general
and administrative expenses for the three-month and six-month period ended June
30, 1998 were $3.6 million and $7.3 million, respectively, approximating 16% and
22% of revenue, compared to $2.9 million and $7.8 for the same periods in 1997.
Depreciation and amortization expense was $14.4 million and $24.6 million for
the three-months and the six-months ended June 30, 1998, respectively,
representing approximately 65% and 76% of revenue for the respective periods.
During the same periods of 1997 depreciation and amortization expense was $11.1
million and $21.0 million, approximating 103% and 108% of revenue. The increase
in depreciation and amortization expense was primarily attributable to the
addition of ARDIS assets and amortization of goodwill associated with the ARDIS
acquisition. Absent the acquisition of ARDIS on March 31, 1998, depreciation and
amortization expense for the three-month and six-month period ended June 30,
1998 was $10.4 million and $20.5 million, respectively, approximating 46% and
63% of revenue, compared to $11.1 million and $21.0 million for the same periods
in 1997.
Interest and other income was $1.6 million and $1.7 million for the second
quarter and first half of 1998, respectively, as compared to $86,000 and $1.0
million for the same periods in 1997. The increase was primarily a result of
interest earned on escrows required under the terms of the $335 million debt
offering at the end of the first quarter. The Company incurred $15.7 million and
$22.3 million of interest expense in the second quarter and first half of 1998
compared to $5.3 million and $9.7 million for the same periods in 1997,
reflecting (i) the amortization of debt discount and debt offering costs in the
amount of $5.9 million in 1998, compared to $4.3 million in 1997 and (ii) higher
outstanding loan balances as compared to 1997.
Interest expense in the first half of 1998 was significant as a result of
borrowings under the Bank Financing, the amortization of borrowing costs
incurred in conjunction with securing the facility, and interest accrual on the
Notes issued in the ARDIS acquisition . 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, for the first half of 1998 for property and equipment
were $5.6 million compared to $5.8 million for the same period in 1997.
Liquidity and Capital Resources
- -------------------------------
$335 Million Unit Offering
- --------------------------
In connection with the Acquisition, discussed above, 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. The
Warrants were valued at $8.5 million and are reflected in the balance sheet as a
debt discount. A portion of the net proceeds of the sale of the Units were used
to finance the Acquisition. In connection with the Notes, the Company has
purchased approximately $112.3 million of pledged securities that are intended
to provide for the payment of the first six interest payments on the Notes. The
Company incurred approximately $15 million in costs associated with the
placement of the Notes and the Acquisition. Interest payments are due
semi-annually, in arrears, beginning October 1, 1998.
Acquisition Company consummated its offer to exchange up to $335 million
aggregate principal amount of its registered 12 1/4 percent Senior Notes (due
2008, Series B) (the "New Notes") for outstanding unregistered 12 1/4 percent
Senior Notes (due 2008, Series A) (the "Old Notes"). The exchange expired at
5:00 p.m. (New York City time) on Friday, August 7, 1998. Holders tendered for
exchange $334.75 million aggregate principal amount of the Old Notes as of the
expiration of the offer. The Old Notes tendered for exchange constituted 99.93%
of the Old Notes outstanding.
The Notes contain covenants that, among other things, limit the ability of
Acquisition Company, Inc. and its Subsidiaries 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.
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 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. Borrowings under the Revolving Credit Facility are subject to certain
conditions beginning in the fourth quarter of 1998. In the event the Company is
unable to borrow amounts under the Revolving Credit Facility, the Company's cash
needs will significantly exceed its available resources, which would have a
material adverse effect on the Company. The revolving Credit Facility ranks 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"). In exchange for the
additional risks undertaken by the Bank Facility Guarantors in connection with
the New Bank Financing, the Company agreed to compensate the Bank Facility
Guarantors, principally in the form of 1 million additional warrants and
re-pricing of 5.5 million warrants previously issued (together, the "Guarantee
Warrants"). The Guarantee Warrants have an exercise price of $12.51 and have
been valued at approximately $17.7 million. As of July 31, 1998, the Company had
outstanding borrowings of $100 million of the Term Loan Facility at 6.1875%, and
$27 million under the Revolving Credit Facility at 6.1875%.
In connection with the New Bank Financing, the Company entered into an interest
rate swap agreement, with an implied annual rate of 6.51%. The swap agreement
reduces the impact of interest rate increases on the Term Loan Facility, and
fixes The Company paid a fee of approximately $17.9 million for the swap
agreement. Under the swap agreement, the Company will receive an amount equal to
LIBOR plus 50 basis points, paid on a quarterly basis, on a notional amount of
$100 million until the termination date of March 31, 2001. The Company has
reflected as an asset the unamortized fee paid for the swap agreement in the
accompanying financial statements. The Company is exposed to a credit loss in
the event of non performance by the counter party under the swap agreement. The
Company does not believe there is a significant risk of non performance as the
counter party to the swap agreement is a major financial institution.
Motorola Vendor Financing
- -------------------------
Motorola has entered into an agreement with a subsidiary of Acquisition Company,
the ARDIS Company, to provide 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 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 the
facility require that amounts borrowed be secured by the equipment purchased
therewith. No amounts were outstanding under this facility as of July 31, 1998.
Financing Summary
- -----------------
The Company believes the proceeds from the issuance of the Notes, net of cash
used for the Acquisition, together with the borrowings under the New Bank
Financing and the Vendor Financing Commitment, will be sufficient to fund
operating losses, capital expenditures, working capital, and scheduled principal
and interest payments on debt through 1998 and beyond; 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.
AMRC
- ----
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.
Deferred Trade Payables
- -----------------------
In the last quarter of 1997 and the first quarter of 1998, the Company arranged
the financing of certain trade payables, and as of June 30, 1998, $4.0 million
of deferred trade payables were outstanding at rates ranging from 6.23% to 12%
and are generally payable by the end of 1998.
Purchase and Lease of Satellite
- -------------------------------
As previously disclosed, the Company has entered into certain agreements to
acquire a one-half ownership interest in TMI Communications and Company, Limited
Partnership's ("TMI") satellite, MSAT-1, at a cost of $60 million payable over a
five-year period, as well as entered into five-year lease of the Company's
satellite, MSAT-2, with African Continental Telecommunications Ltd. that
provides for aggregate lease payments to the Company of $182.5 million. Closing
under the agreements is subject to a number of conditions, including: a
successful financing by ACTEL of at least $120 million and completion of certain
satellite testing, inversion and relocation activities with respect to AMSC-1.
It is anticipated that the closing under both the purchase and lease agreements
will occur simultaneously in the third quarter of 1998.
Other
- -----
At June 30, 1998, the Company had remaining contractual commitments to purchase
both mobile data terminal inventory and mobile telephone inventory in the
maximum amount of $3.6 million over the next year. Additionally, the Company had
remaining contractual commitments in the amount of $1.7 million for the
development of certain next generation data terminal inventory. Contingent upon
the successful research and development efforts, the Company would have
additional contractual commitments for mobile communications data terminal
inventory in the amount of $31.2 million over a three-year period. The Company
has the right to terminate this the research and development and inventory
commitment by paying cancellation fees of between $1 million and $2.5 million,
depending on when the termination option is exercised during the term of the
contract.
On July 2, 1998, the Company filed an application with the Federal
Communications Commission ("FCC") to construct and launch a follow-on
geostationary mobile satellite for its business. The filing of the application
does not commit the Company to expend any resources toward this project;
however, should the Company decide to proceed with the construction of the
follow-on satellite, the Company would be required to raise substantial
additional capital to fund this project.
Cash used in operating activities for the first six months of 1998 was $32.4
million as compared to $37.5 million for the same period of 1997. The decrease
in cash used in operating activities was primarily attributable to reduced
inventory spending. Cash used by investing activities was $198.9 million for the
first six months of 1998 compared to $7.3 million during the first six months of
1997. The increase was primarily attributable to the acquisition of ARDIS and
the funding of certain escrows required in connection with the Acquisition and
issuance of Notes. Cash provided by financing activities was $238.1 million
during the first six months of 1998 as compared to $45.4 million during the
first six months of 1997, reflecting (i) the proceeds from the Notes, offset by
(ii) the repayment of a portion of the Bank Financing and (iii) payment of
financing fees associated with the acquisition of the Notes. As of June 30,
1998, the Company had $8.9 million of cash and cash equivalents and working
capital of $68.7 million.
Other Matters
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In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted both of these standards during the six
month periods ended June 30, 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income" to be reported in the financial statements and/or notes
thereto. Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "total comprehensive income" for the
three months and six months ended June 30, 1997 and 1998.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is not required for interim financial
reporting purposes during 1998. The Company is in the process of assessing the
additional disclosures, if any, required by SFAS No. 131. However, such adoption
will not impact the Company's results of operations or financial position, since
it relates only to disclosures.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company believes the proceeds from the issuance of the Notes, net of cash
used for the Acquisition, together with the borrowings under the New Bank
Financing and the Vendor Financing Commitment, will be sufficient to fund
operating losses, capital expenditures, working capital, and scheduled principal
and interest payments on debt through 1998 and beyond; 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.
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) At the annual meeting of the stockholders of AMSC held on May 20, 1998, the
matters described under (b) and (c) below were voted upon.
(b) The following nominees, constituting all of the Company's directors, were
elected to the Company's board of directors:
Individual
Votes For Votes Withheld Withheld
Douglas I. Brandon 28,215,889 1,201 1,163,388
Ho Siaw Hong 28,216,389 701 1,162,888
Pradeep P. Kaul 28,216,389 701 1,162,888
Billy J. Parrott 28,216,469 621 1,162,808
Gary M. Parsons 28,216,314 776 1,162,963
Andrew A. Quartner 28,215,989 1,101 1,163,288
Jack A. Shaw 28,216,669 421 1,162,608
Roderick M. Sherwood, III 27,986,600 230,490 1,392,677
Michael T. Smith 28,216,689 401 1,162,588
Yap Chee Keong 27,986,265 230,825 1,393,012
On June 5, 1998 the Company reported on its Report on 8K dated June 1, 1998 that
Mr. Yap had resigned his position as director of the Company in connection with
his resignation of employment from Singapore Telecommunications, Ltd. As
indicated in that Report, the position vacated by Mr. Yap remains vacant until
such time as filled by a vote of the Board of Directors or the stockholders.
(c)(1) The vote on the ratification of Arthur Andersen LLP as independent
accountants for the Company for 1998 was 29,371,445 for, 7,732 against, 100
abstaining.
(2) The vote on the approval of an amendment to the Company's 1989 Stock
Option Plan to increase the number of shares authorized for issuance was
27,587,129 for, 1,787,564 against, 4,584 abstaining.
(3) The vote on the approval of the issuance of shares of the Company's
Common Stock to Motorola Inc. was 22,128,875 for, 28,195 against, 3,220
abstaining and 7,218,987 not voting (including the shares held by Motorola
Inc.).
PART II - OTHER INFORMATION
Item 5. Other Information
If the Company does not receive notice at its principal executive offices on or
before March 13, 1999 of a stockholder proposal for consideration at the 1999
annual meeting of stockholders, the proxies named by the Company's Board of
Directors with respect to the meeting shall have discretionary voting authority
with respect to such proposal.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 - Restated Certificate of Incorporation of AMSC (as restated
effective May 1, 1996) (Incorporated by reference to Exhibit 3.1
to the Company's Annual Report on Form 10-K for the period ending
December 31,1997 (File No. 0-23044))
3.2 - Amended and Restated Bylaws of AMSC (as amended and restated
effective May 20, 1998) (Incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1997 (File No. 0-23044))
10.13 - Amended and Restated Stock Option Plan (as amended effective May
20, 1998) (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-8 (Reg. No.
333-53253))
10.67 - Credit Agreement by and between Motorola Inc. and ARDIS Company
dated June 17, 1998 (filed herewith)
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K:
On June 5, 1998, the Company filed a Current Report on Form 8-K, describing in
response to Item 5-Other Events, the resignation of director Yap Chee Keong.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN MOBILE SATELLITE CORPORATION
(Registrant)
Date: August 14, 1998 By:/s/Stephen D. Peck
-------------------------------------
Stephen D. Peck
Vice President and Chief Financial Officer
(principal financial and accounting officer)
EXHIBIT INDEX
Number Description
3.1 - Restated Certificate of Incorporation of AMSC (as restated
effective May 1, 1996) (Incorporated by reference to Exhibit 3.1
to the Company's Annual Report on Form 10-K for the period ending
December 31,1997 (File No. 0-23044))
3.2 - Amended and Restated Bylaws of AMSC (as amended and restated
effective May 20, 1998) (Incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year
ending December 31, 1997 (File No. 0-23044))
10.13 - Amended and Restated Stock Option Plan (as amended effective May
20, 1998) (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-8 (Reg. No.
333-53253))
10.67 - Credit Agreement by and between Motorola Inc. and ARDIS Company
dated June 17, 1998 (filed herewith)
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 - Financial Data Schedule (filed herewith)