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, 1999
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, 1999: 39,307,615
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
American Mobile Satellite Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except per share data)
REVENUES
Services $ 16,622 $ 16,670 $32,786 $23,088
Sales of equipment 6,251 5,740 10,317 9,344
----- ----- ------ -----
Total Revenues 22,873 22,410 43,103 32,432
COSTS AND EXPENSES
Cost of service and operations 16,516 16,225 34,386 23,953
Cost of equipment sold 6,594 5,415 11,122 9,296
Sales and advertising 5,721 5,404 10,470 8,426
General and administrative 4,708 5,773 9,477 9,404
Depreciation and amortization 13,632 14,457 27,404 24,620
------- ------- ------ ------
Operating Loss (24,298) (24,864) (49,756) (43,267)
INTEREST EXPENSE (16,891) (15,706) (32,821) (22,344)
INTEREST AND OTHER INCOME 1,893 1,607 3,632 1,748
UNREALIZED LOSS ON NOTE RECEIVABLE FROM XM RADIO (9,919) -- (9,919) --
UNREALIZED GAIN ON NOTE PAYABLE TO RELATED PARTY 10,036 -- 10,036 --
EQUITY IN LOSS OF XM RADIO (3,198) (4,026) (6,692) (6,532)
-------- --------- ------- -------
NET LOSS $(42,377) $(42,989) $(85,520) $(70,395)
========= ========= ========= ========
Basic and Diluted Loss Per Share of common stock $ (1.31) $ ( 1.36) $ (2.65) $ (2.47)
Weighted-average common shares outstanding during the
period 32,416 31,719 32,321 28,502
See notes to consolidated condensed financial statements.
American Mobile Satellite Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Unaudited)
June 30, December 31,
1999 1998
---- ----
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,314 $ 2,285
Inventory 18,426 18,593
Prepaid in-orbit insurance 483 3,381
Accounts receivable-- net 20,010 15,325
Restricted short-term investments 41,038 41,038
Note receivable from XM Radio, fair value 12,477 --
Other current assets 15,180 13,231
------ ------
Total current assets 108,928 93,853
PROPERTY & EQUIPMENT-- net 229,050 246,553
GOODWILL & INTANGIBLES-- net 52,156 53,235
RESTRICTED INVESTMENTS 50,477 67,199
DEFERRED CHARGES & OTHER ASSETS-- net 24,241 28,954
------ ------
Total assets $464,852 $489,794
======== ========
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable & accrued expenses $ 30,745 $ 33,797
Obligations under capital leases due within one year 3,992 5,971
Vendor financing due to related party within one year 1,674 543
Deferred trade payables due within one year 1,262 4,498
Other current liabilities -- 162
------ --------
Total current liabilities 37,673 44,971
LONG-TERM LIABILITIES
Obligations under Bank Financing 172,000 132,000
Obligations under Senior Notes, net of discount 327,571 327,147
Capital lease obligations 5,120 5,824
Net assets acquired in excess of purchase price 1,681 2,028
Vendor financing due to related party 3,108 1,069
Convertible note payable to related party, fair value 12,055 --
Deferred trade payables 213 620
Investment in XM Radio 19,310 12,618
Other long-term liabilities 1,359 540
----- ---
Total long-term liabilities 542,417 481,846
------- -------
Total liabilities 580,090 526,817
STOCKHOLDERS' DEFICIT
Preferred Stock -- --
Common Stock 327 322
Additional paid-in capital 514,732 508,084
Deferred compensation (4,931) (1,528)
Common Stock purchase warrants 60,588 59,108
Unamortized guarantee warrants (31,103) (33,678)
Cumulative loss (654,851) (569,331)
-------- --------
Total stockholders' deficit (115,238) (37,023)
--------- -------
Total liabilities and stockholders' deficit $464,852 $489,794
======== ========
See notes to consolidated financial statements.
American Mobile Satellite Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1999 1998
---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(85,520) ($70,395)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of guarantee warrants, debt discount and
issuance costs 9,196 7,368
Depreciation and amortization 27,404 24,220
Equity in loss in XM Radio 6,692 6,532
Interest payable on Senior Notes 10,259 10,259
Unrealized loss on note receivable from XM Radio 9,919 --
Unrealized gain on note payable to related party (10,036) --
Changes in assets and liabilities:
Inventory 168 1,889
Prepaid in-orbit insurance 2,898 2,571
Trade accounts receivable (4,685) 1,941
Other current assets (2,477) 67
Accounts payable and accrued expenses 8,937 (9,015)
Deferred trade payables (3,644) (7,680)
Deferred items-- net (466) (124)
----- ------
Net cash used in operating activities (31,355) (32,367)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (5,631) (5,558)
Purchase of XM Radio note receivable (21,419) --
Acquisition of ARDIS -- (51,440)
Purchase of long-term, restricted investments (3,781) (141,899)
------- ---------
Net cash used in investing activities (30,831) (198,897)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 2,913 236
Principal payments under capital leases (2,781) (1,234)
Principal payments under Vendor Financing (197) --
Proceeds from New Bank Financing 40,000 24,000
Proceeds from note payable to related party 21,500 --
Repayment of Bank Financing -- (100,000)
Proceeds from bridge financing -- 10,000
Repayment of bridge financing -- (10,000)
Payments on long-term debt -- (4,933)
Proceeds from Senior Notes and Stock Purchase -- 335,000
Warrants
Debt issuance costs & deferred charges (220) (14,967)
----- --------
Net cash provided by financing activities 61,215 238,102
Net (decrease) increase in cash and cash equivalents (971) 6,838
CASH AND CASH EQUIVALENTS, beginning of period 2,285 2,106
----- -----
CASH AND CASH EQUIVALENTS, end of period $1,314 $8,944
====== ======
See notes to consolidated financial statements.
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (continued)
----------------------------------------
American Mobile Satellite Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
June 30, 1999
(Unaudited)
1. Organization and Business
- ----------------------------
American Mobile Satellite Corporation (with its subsidiaries, "American
Mobile" or the "Company") is a nationwide provider of wireless communications
services, including data, dispatch, and voice services, primarily to business
customers in the United States.
American Mobile is devoting its efforts to expanding its business. This
effort involves substantial risk. 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.
On July 7, 1999, XM Satellite Radio Holdings Inc. became a wholly-owned
subsidiary of the Company as a result of the Company's acquisition of certain of
WorldSpace, Inc.'s debt and equity interests in XM Satellite Radio Holdings Inc.
This acquisition will be accounted for as a purchase in the third quarter of
1999. The Company's proportionate share of losses of XM Radio have been recorded
in the accompanying statements of operations pursuant to the equity method of
accounting. XM Satellite Radio Holdings Inc., through its subsidiary XM
Satellite Radio Inc. (together with XM Satellite Radio Holdings Inc., "XM
Radio"), is one of two entities awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States. XM Radio is currently engaged in efforts to construct its satellite
system. The Company is not required to provide any additional funding to XM
Radio. See footnote 8-Subsequent Events.
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 not make the information misleading,
these consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
filings with the Securities and Exchange Commission.
The consolidated balance sheet as of June 30, 1999, and the consolidated
statements of operations for the three and six months ended June 30, 1999 and
1998, and the cash flows for the six months ended June 30, 1999 and 1998, have
been prepared by the Company and are unaudited. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
June 30, 1999, and for all periods presented have been made. The balance sheet
at December 31, 1998, the statement of operations for the three and six months
ended June 30, 1998, and the statement of cash flow for the six months ended
June 30, 1998, have been restated to record our portion of the losses from XM
Radio which had been previously suspended under the equity method of accounting,
as described in footnote 8-Subsequent Events.
Certain amounts from prior years have been reclassified to conform to
current year presentation.
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. As of June 30, 1999, there were approximately 5.2 million options
and warrants that would have been included in this calculation had the effect
not been antidilutive.
Comprehensive Income
- --------------------
SFAS No. 130, "Reporting of Comprehensive Income," 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
"comprehensive income" for the three and six months ended June 30, 1999 and
1998.
Segment Disclosures
- -------------------
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information," the Company has only one operating segment which is
engaged in the provision of nationwide wireless communication. The Company
provides services within North America and parts of Central America and the
Caribbean, and all revenues are derived from customers within the United States.
The following summarizes service revenue by major product lines:
Revenue for the Revenue for the
Three Months Six Months Ended
Ended June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(in millions)
Voice Service $ 5.0 $ 5.7 $ 9.0 $ 10.2
Data Service 16.8 15.9 31.9 20.4
Capacity Resellers and Other 1.1 0.8 2.2 1.8
Recently Adopted Accounting Pronouncements
- ------------------------------------------
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the recognition of all
derivatives as either assets or liabilities measured at fair value. This
statement is effective for the year ending December 31, 2000. In June 1999, FASB
issued Statement N. 147, which defers the effective date of Statement No. 133
until fiscal quarters beginning after June 15, 2000. The Company does not
believe that the adoption of this statement will have a material impact on its
financial position, results of operations and cash flows.
In March 1999, FASB issued an Exposure Draft on an Interpretation of
Accounting Principles Board Opinion No. 25 Accounting for Certain Transactions
involving Stock Compensation. This proposed Interpretation would make it more
likely that expense would be required to be recognized in the case of, among
other things, stock (including stock options) issued to non-employee members of
an entity's board of directors. The Company has assessed the impact of this
proposed Interpretation and does not believe that adoption of this
Interpretation would have a material impact on its financial position, results
of operations and cash flows.
Other
- -----
The Company paid approximately $3.7 million and $9.4 million in the
six-month periods ended June 30, 1999 and 1998, respectively, to related parties
for capital assets, service- related obligations, and payments under
pre-existing financing agreements. There were no payments from related parties
in the six-month period ended June 30, 1999, as compared to $2.5 million for
communication services and equipment purchases in the six-month period ended
June 30, 1998. Total indebtedness to related parties as of June 30, 1999
approximated $17.7 million, with amounts due from related parties as of June 30,
1999 totaling $12.5 million.
3. Liquidity and Financing
- --------------------------
Liquidity and Financing Requirements
- ------------------------------------
Adequate liquidity and capital are critical for the Company to continue as a
going concern and to fund subscriber acquisition programs necessary to achieve
positive cash flow and profitable operations. The Company expects to continue to
make significant capital outlays 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.
On March 31, 1998, AMSC Acquisition Company, Inc. ("Acquisition Company"), a
wholly-owned subsidiary of the Company, issued $335 million of units consisting
of 12 1/4% Senior Notes due 2008 (the "Senior Notes"), and one warrant to
purchase 3.75749 shares of Common Stock of the Company for each $1,000 principal
amount of Senior Notes (the "Warrants"), and also restructured its existing bank
financing (the "New Bank Financing"). The New Bank Financing consists 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, a portion of which
has been permanently reduced, as discussed below. Additionally, on March 29,
1999, the Bank Facility Guarantors (as defined in Item 2 under the caption
"Liquidity and Capital Resources") agreed to eliminate certain covenants
relating to the Company's future earnings before interest, taxes, depreciation,
and amortization ("EBITDA") and service revenue. In exchange for this
elimination of covenants, the Company agreed to reprice the Guarantee Warrants
(as defined in Item 2 under the caption "Liquidity and Capital Resources"),
effective April 1, 1999, from $12.51 to $7.50. The value of the repricing was
approximately $1.5 million. As of June 30, 1999, the Company had $28.0 million
available for borrowing under the Revolving Credit Facility. Additionally,
Motorola has agreed to provide the Company with up to $10 million of vendor
financing (the "Vendor Financing Commitment"), which is available to finance up
to 75% of the purchase price of additional base stations needed to meet ARDIS'
buildout requirements under certain customer contracts. As of June 30, 1999,
$4.8 million was outstanding under this facility.
On August 3, 1999, the Company raised $116 million, net of underwriting
discounts and expenses, through the issuance of 7.0 million shares of its common
stock in a public offering. Of these proceeds, approximately $58 million was
used to pay down a portion of the Term Loan Facility, and is not available for
re-borrowing. The remainder of the proceeds were used to pay down a portion of
the Revolving Credit Facility, which will be available for re-borrowing as
needed for general working capital purposes. As a result of the partial pay down
of the Term Loan Facility, the Company will record an extraordinary loss on
extinguishment of debt of approximately $12.1 million in the third quarter of
1999, which reflects the write-off, on a pro-rata basis, of Guarantee Warrants
and deferred financing fees associated with the placement of the New Bank
Financing.
As a result of the automatic application of certain adjustment provisions
following the issuance of the 7.0 million shares, the exercise price of the
Guarantee Warrants was reduced to $7.3571 per share and the Guarantee Warrants
became exercisable for an additional 126,246 shares. Additionally, the exercise
price of the warrants associated with the Senior Notes was reduced to $12.28 per
share and the aggregate number of shares issuable upon the exercise of such
warrants was increased by 24,291 shares. The additional Guarantee Warrants and
repricing were valued at $2.4 million, and the additional Senior Notes warrants
and repricing were valued at $440,000.
The Company's current operating assumptions and projections, which reflect
management's best estimate of subscriber and revenue growth and operating
expenses, indicate that anticipated capital expenditures, operating losses,
working capital and debt service requirements through 1999 and beyond, can be
met by cash flows from operations, the net proceeds from the issuance of common
stock in August 1999, the net proceeds from the sale of the Senior Notes and
Warrants, together with the borrowings under the New Bank Financing and the
Vendor Financing Commitment; however, the Company's ability to meet its
projections is subject to numerous uncertainties and 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 if the Company's cash
requirements are more than projected, the Company may require additional
financing in amounts which may be material. 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 available on favorable terms.
4. Investment in XM Radio
- --------------------------
As previously mentioned (see "Organization and Business"), the Company has
an investment in XM Radio, which is one of two entities awarded a license by the
FCC to provide satellite-based Digital Audio Radio Service ("DARS") throughout
the United States. XM Radio is currently engaged in efforts to construct its
satellite system. The Company is not required to provide any additional funding
to XM Radio. See Note 8 - Subsequent Events.
On January 15, 1999, the Company issued to Baron Asset Fund ("Baron"), a
related party, a $21.5 million note convertible into shares of common stock of
XM Satellite Radio Holdings Inc. (the "Baron XM Radio Convertible Note"). The
Company subsequently loaned approximately $21.4 million to XM Radio in exchange
for XM Radio common stock and a note convertible into XM Radio shares (the "XM
Radio Note Receivable"). The Baron XM Radio Convertible Note ranks subordinate
to all other debt securities of the Company and is fully collateralized by
approximately one-half of the shares received by the Company as a result of this
transaction. The XM Radio Note Receivable is a non-recourse note and is
exchangeable into approximately half of the additional XM Radio common stock to
be received by the Company as a result of the January 15 transaction. The XM
Radio Note Receivable earns interest at LIBOR plus 5% and is due on December 31,
2004, unless extended, in certain circumstances if XM Radio issues high yield
debt securities, and the Baron XM Radio Convertible Note accrues interest at the
rate of 6% annually, with all payments deferred until maturity, December 31,
2004, or extinguished upon conversion. The Company has the option to satisfy the
Baron XM Radio Convertible Note by tendering the shares into which it would have
been convertible in lieu of any cash payments. The Company's June 30, 1999
consolidated condensed balance sheet reflects management's estimate of the fair
value of the XM Radio Note Receivable and Baron XM Radio Convertible Note.
Changes in the fair value of the XM Radio Note Receivable and Baron XM Radio
Convertible Note are reflected in the accompanying statement of operations as
unrealized losses on note receivable from XM Radio ($9.9 million for the
six-months ended June 30, 1999) and unrealized gain on note payable to related
party ($10.0 million for the six-months ended June 30, 1999), respectively.
Summarized financial information for XM Radio as of June 30, 1999, and for
the three months and six months ended June 30, 1999 and 1998, and for the period
from December 15, 1992 (date of inception) through June 30, 1999 is set forth
below.
Three Months Six Months December 15,
Ended Ended 1992 through
June 30, June 30, June 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
(dollars in thousands)
Gross sales $ -- $ -- $ -- $ -- $ --
Operating expenses 4,020 5,032 8,441 8,132 25,744
Loss from operations 4,020 5,032 8,441 8,132 25,744
Interest expense (22) -- (76) -- 447
(income)
Net loss (3,998) (5,032) (8,365) (8,132) (26,191)
As of As of
June 30, December 31,
1999 1998
---- ----
Current assets $255 $482
Non-current assets 263,646 170,003
Current liabilities 198,353 130,823
Non-current liabilities 81,096 46,845
Total stockholders' deficit (15,548) (7,183)
5. Legal and Regulatory Matters
- -------------------------------
The ownership and operation of the mobile satellite services system and
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 operates
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 its 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 Mobile
Satellite Services ("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 SatCom
Systems, Inc. a Special Temporary Authority ("STA") to use TMI's space segment
to conduct market tests in the U.S. for six months using up to 500 mobile
terminals for 180 days on a private carrier basis so that it may conduct
marketing trials; this special temporary authority is likely to be extended
until the FCC acts on SatCom's underlying application for a blanket license to
operate up to 25,000 mobile terminals in the United States on a permanent basis.
On July 30, 1998, American Mobile filed an Application for Review and a Motion
for Stay of this STA grant with the FCC, and these filings remain pending.
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 for
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.
6. Commitments and Contingencies
- --------------------------------
At June 30, 1999, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory in
the maximum amount of $1.6 million during the remainder of 1999. Additionally,
the Company had remaining contractual commitments for the development and
production of certain next generation data terminals of approximately $26.3
million, subject to final pricing negotiations, over a three-year period, with
delivery starting in the second half of 1999. The Company has the right to
terminate the research and development and inventory commitment by paying
cancellation fees of between $1 million and $2.3 million, depending on when the
termination option is exercised during the term of the contract. The Company
also has the right to terminate the inventory commitment by incurring a
cancellation penalty representing a percentage of the unfulfilled portion of the
contract. The Company has also contracted for the purchase of $26.2 million of
next generation wireless data terminals to be delivered beginning in the third
quarter of 1999. The contract contains a 50% cancellation penalty.
As described in footnotes 12 and 13 of XM Satellite Radio Holdings Inc. and
Subsidiary's December 31, 1998 financial statements, included in the Company's
filings with the Securities and Exchange Commission, certain commitments and
contingencies, including legal proceedings, exist with respect to XM Radio. As
of June 30, 1999, there have been no significant changes with respect to these
matters.
7. Condensed Consolidating Financial Statements
- -----------------------------------------------
In connection with the Company's acquisition of ARDIS Company on March 31,
1998 (the "Acquisition") and related financing discussed above, the Company
formed a new wholly-owned subsidiary, AMSC Acquisition Company, Inc.
("Acquisition Company"). The Company contributed all of its inter-company notes
receivables and transferred its rights, title and interests in AMSC Subsidiary
Corporation, American Mobile Satellite Sales Corporation, and AMSC Sales Corp.
Ltd. (together with ARDIS, the "Subsidiary Guarantors") to Acquisition Company,
and Acquisition Company was the acquirer of ARDIS and the issuer of the Senior
Notes. American Mobile Satellite Corporation ("American Mobile Parent") is a
guarantor of the Senior Notes. The Senior Notes contain covenants that, among
other things, limit the ability of Acquisition Company 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.
The $335 million of Senior Notes are jointly and severally guaranteed on a
full and unconditional basis by the Subsidiary Guarantors, Acquisition Company
and American Mobile Parent. The following unaudited condensed consolidating
information for these entities presents:
o Condensed consolidating balance sheets as of June 30, 1999 and
December 31, 1998 and condensed consolidating statements of operations
and cash flows for the six month periods ended June 30, 1999 and 1998.
o Elimination entries necessary to combine the entities comprising
American Mobile.
Condensed Consolidating Balance Sheet
As of June 30, 1999
(Unaudited)
(In Thousands)
Consolidated American Consolidated
Subsidiary Acquisition Acquisition Mobile American Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ----------- ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,314 $-- $-- $1,314 $-- $-- $1,314
Inventory 18,426 -- -- 18,426 -- -- 18,426
Prepaid in-orbit insurance 483 -- -- 483 -- -- 483
Accounts receivable-- net 20,010 -- -- 20,010 -- -- 20,010
Restricted short-term investments -- 41,038 -- 41,038 -- -- 41,038
Note receivable from XM Radio -- -- -- -- 12,477 -- 12,477
Other current assets 9,230 -- -- 9,230 5,950 -- 15,180
----- ------ ------ ----- ----- ------ ------
Total current assets 49,463 41,038 -- 90,501 18,427 -- 108,928
PROPERTY AND EQUIPMENT-- NET 243,052 -- (14,002) 229,050 -- -- 229,050
GOODWILL & INTANGIBLES-- NET 52,156 -- -- 52,156 -- -- 52,156
INVESTMENT IN/DUE FROM
SUBSIDIARY -- 294,501 (294,501) -- (16,762) 16,762 --
DEFERRED CHARGES AND OTHER
ASSETS-- NET 350 30,443 -- 30,793 (6,552) -- 24,241
RESTRICTED INVESTMENTS 1,536 36,624 -- 38,160 12,317 -- 50,477
----- ------ --------- ------ ------ ------- ------
Total assets $346,557 $402,606 ($308,503) $440,660 $7,430 $16,762 $464,852
======== ======== ========== ======== ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued $19,338 $10,982 $-- $30,320 $425 $-- $30,745
expenses
Obligations under capital leases due
within one year 3,992 -- -- 3,992 -- -- 3,992
Current portion long-term debt 2,936 -- -- 2,936 -- -- 2,936
----- -------- ----- ----- ----- ----- -----
Total current liabilities 26,266 10,982 -- 37,248 425 -- 37,673
DUE TO PARENT/AFFILIATE 729,198 -- (728,890) 308 (9,123) 8,815 --
LONG-TERM LIABILITIES:
Obligations under Bank Financing -- 72,000 -- 72,000 100,000 -- 172,000
Senior Notes, net of discount -- 327,571 -- 327,571 -- -- 327,571
Other long-term debt 3,320 -- -- 3,320 12,056 -- 15,376
Capital lease obligations 5,120 -- -- 5,120 -- -- 5,120
Net assets acquired in excess
of purchase price 1,681 -- -- 1,681 -- -- 1,681
Investment in XM Radio -- -- -- -- 19,310 -- 19,310
Other long-term liabilities 1,359 -- -- 1,359 -- -- 1,359
----- ------ ------- ----- -------- ------- --------
Total long-term liabilities 11,480 399,571 -- 411,051 131,366 -- 542,417
Total liabilities 766,944 410,553 (728,890) 448,607 122,668 8,815 580,090
------- ------- --------- ------- ------- ----- -------
STOCKHOLDERS' EQUITY (DEFICIT) (420,387) (7,947) 420,387 (7,947) (115,238) 7,947 (115,238)
--------- ------- ------- ------- -------- ----- ---------
Total liabilities and stockholders'
equity (deficit) $346,557 $402,606 ($308,503) $440,660 $7,430 $16,762 $464,852
======== ======== ========== ======== ====== ======= ========
Condensed Consolidating Balance Sheet
As of December 31, 1998
(Unaudited)
(In Thousands)
Consolidated American Consolidated
Subsidiary Acquisition Acquisition Mobile American Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ------------ ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,285 $-- $-- $2,285 $-- $-- $2,285
Inventory 18,593 -- -- 18,593 -- -- 18,593
Prepaid in-orbit insurance 3,381 -- -- 3,381 -- -- 3,381
Accounts receivable-- net 15,325 -- -- 15,325 -- -- 15,325
Restricted short-term investments -- 41,038 -- 41,038 -- -- 41,038
Other current assets 7,192 20 -- 7,212 6,019 -- 13,231
----- ------ ------- ----- ----- ------ ------
Total current assets 46,776 41,058 -- 87,834 6,019 -- 93,853
PROPERTY AND EQUIPMENT-- NET 261,607 -- (15,054) 246,553 -- -- 246,553
GOODWILL & INTANGIBLES-- NET 53,235 -- -- 53,235 -- -- 53,235
INVESTMENT IN/DUE FROM SUBSIDIARY -- 304,192 (304,192) -- 63,787 (63,787) --
DEFERRED CHARGES AND OTHER
ASSETS-- NET 386 33,460 -- 33,846 (4,892) -- 28,954
RESTRICTED INVESTMENTS 1,500 54,939 -- 56,439 10,760 -- 67,199
----- ------ ------ ------ ------ -------- ------
Total assets $363,504 $433,649 ($319,246) $477,907 $75,674 ($63,787) $489,794
======== ======== ========== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued $23,003 $10,715 $-- $33,718 $79 $-- $33,797
expenses
Obligations under capital leases due
within one year 5,971 -- -- 5,971 -- -- 5,971
Current portion long-term debt 5,041 -- -- 5,041 -- -- 5,041
Other current liabilities 162 -- -- 162 -- -- 162
----- ----- ----- ----- ----- ----- -----
Total current liabilities 34,177 10,715 -- 44,892 79 -- 44,971
DUE TO PARENT/AFFILIATE 681,029 -- (681,029) -- -- -- --
LONG-TERM LIABILITIES:
Obligations under New Bank Financing -- 32,000 -- 32,000 100,000 -- 132,000
Senior Notes, net of discount -- 327,147 -- 327,147 -- -- 327,147
Other long-term debt 1,689 -- -- 1,689 -- -- 1,689
Capital lease obligations 5,824 -- -- 5,824 -- -- 5,824
Net assets acquired in excess
of purchase price 2,028 -- -- 2,028 -- -- 2,028
Investment in XM Radio -- -- -- -- 12,618 -- 12,618
Other long-term liabilities 540 -- -- 540 -- -- 540
----- ----- ----- ----- ----- ----- -----
Total long-term liabilities 10,081 359,147 -- 369,228 112,618 -- 481,846
Total liabilities 725,287 369,862 (681,029) 414,120 112,697 -- 526,817
------- ------- --------- ------- ------- ----- -------
STOCKHOLDERS' EQUITY (DEFICIT) (361,783) 63,787 361,783 63,787 (37,023) (63,787) (37,023)
--------- ------ ------- ------ -------- -------- --------
Total liabilities and stockholders'
equity (deficit) $363,504 $433,649 ($319,246) $477,907 $75,674 ($63,787) $489,794
======== ========= ========== ======== ======= ========= ========
Condensed Consolidating Statement of Operations
Three Months Ended June 30, 1999
(Unaudited)
(In Thousands)
Consolidated American Consolidated
Subsidiary Acquisition Acquisition Mobile American Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ------------ ------
REVENUES
Services $16,622 $-- $-- $16,622 $300 $(300) $16,622
Sales of equipment 6,251 -- -- 6,251 -- -- 6,251
----- ----- ----- ----- ----- ----- -----
Total Revenues 22,873 -- -- 22,873 300 (300) 22,873
COSTS AND EXPENSES
Cost of service and operations 16,516 -- -- 16,516 -- -- 16,516
Cost of equipment sold 6,594 -- -- 6,594 -- -- 6,594
Sales and advertising 5,620 -- -- 5,620 101 -- 5,721
General and administrative 4,496 355 -- 4,851 157 (300) 4,708
Depreciation and amortization 14,159 -- (527) 13,632 -- -- 13,632
------ ------ ----- ------ ------ ------- ------
Operating Loss (24,512) (355) 527 (24,340) 42 -- (24,298)
INTEREST AND OTHER INCOME 103 4,814 (3,759) 1,158 735 -- 1,893
EQUITY IN LOSS OF
SUBSIDIARIES -- (28,786) 28,786 -- (40,110) 36,912 (3,198)
UNREALIZED LOSS ON NOTE
RECEIVABLE FROM XM RADIO -- -- -- -- (9,919) -- (9,919)
UNREALIZED GAIN ON NOTE PAYABLE
TO RELATED PARTY -- -- -- -- 10,036 -- 10,036
INTEREST EXPENSE (4,377) (13,112) 3,759 (13,730) (3,161) -- (16,891)
------- -------- ----- -------- ------- ------- --------
NET LOSS $(28,786) $(37,439) $29,313 $(36,912) $(42,377) $36,912 $(42,377)
========= ========= ======= ========= ========= ======= =========
Condensed Consolidating Statement of Operations
Three Months Ended June 30, 1998
(Unaudited)
(In Thousands)
Consolidated American Consolidated
Subsidiary Acquisition Acquisition Mobile American Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ------------ ------
REVENUES
Services $18,623 $-- ($1,953) $16,670 $300 ($300) $16,670
Sales of equipment 5,740 -- -- 5,740 -- -- 5,740
----- ----- ------ ----- ---- ---- -----
Total Revenues 24,363 -- (1,953) 22,410 300 (300) 22,410
COSTS AND EXPENSES
Cost of service and operations 16,378 -- (153) 16,225 -- -- 16,225
Cost of equipment sold 5,415 -- -- 5,415 -- -- 5,415
Sales and advertising 5,386 -- -- 5,386 18 -- 5,404
General and administrative 7,578 29 (1,800) 5,807 266 (300) 5,773
Depreciation and amortization 14,984 -- (527) 14,457 -- -- 14,457
------ ------ ----- ------ ------ ----- ------
Operating Loss (25,378) (29) 527 (24,880) 16 -- (24,864)
INTEREST AND OTHER INCOME 65 5,269 (3,843) 1,491 116 -- 1,607
EQUITY IN LOSS OF
SUBSIDIARIES -- (30,407) 30,407 -- (4,026) -- (4,026)
INTEREST EXPENSE (5,094) (10,983) 3,285 (12,792) (2,914) -- (15,706)
------- -------- -------- -------- ------- ------- --------
NET LOSS ($30,407) ($36,150) $30,376 ($36,181) ($6,808) $-- ($42,989)
========= ========= ======== ========= ======== ====== =========
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 1999
(Unaudited)
(In Thousands)
Consolidated American Consolidated
Subsidiary Acquisition Acquisition Mobile American Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ------------ ------
REVENUES
Services $32,786 $-- $-- $32,786 $600 $(600) $32,786
Sales of equipment 10,317 -- -- 10,317 -- -- 10,317
------ ----- ----- ------ ----- ----- ------
Total Revenues 43,103 -- -- 43,103 600 (600) 43,103
COSTS AND EXPENSES
Cost of service and operations 34,386 -- -- 34,386 -- -- 34,386
Cost of equipment sold 11,122 -- -- 11,122 -- -- 11,122
Sales and advertising 10,369 -- -- 10,369 101 -- 10,470
General and administrative 9,039 691 -- 9,730 347 (600) 9,477
Depreciation and amortization 28,457 -- (1,053) 27,404 -- --- 27,404
------ ------ ------- ------ ------ ------ ------
Operating Loss (50,270) (691) 1,053 (49,908) 152 -- (49,756)
INTEREST AND OTHER INCOME 172 9,812 (7,645) 2,339 1,293 --- 3,632
UNREALIZED LOSS ON NOTE
RECEIVABLE FROM XM RADIO -- -- -- -- (9,919) -- (9,919)
UNREALIZED GAIN ON NOTE PAYABLE
TO RELATED PARTY -- -- -- -- 10,036 -- 10,036
EQUITY IN LOSS OF
SUBSIDIARIES -- (58,604) 58,604 -- (80,801) 74,109 (6,692)
INTEREST EXPENSE (8,506) (25,679) 7,645 (26,540) (6,281) -- (32,821)
------- -------- ----- -------- ------- ----- --------
NET LOSS $(58,604) $(75,162) $ 59,657 $(74,109) $(85,520) $74,109 $(85,520)
======== ======== ======== ======== ======== ======= ========
Condensed Consolidating Statement of Operations
For the Six Months ended June 30, 1998
(Unaudited)
(In Thousands)
Consolidated American Consolidated
Subsidiary Acquisition Acquisition Mobile American Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ------------ ------
REVENUES
Services $25,041 $-- $(1,953) $23,088 $600 $(600) $23,088
Sales of equipment 9,344 -- -- 9,344 -- -- 9,344
----- ----- ------- ----- ----- ----- -----
Total Revenues 34,385 -- (1,953) 32,432 600 (600) 32,432
COSTS AND EXPENSES
Cost of service and operations 24,106 -- (153) 23,953 -- -- 23,953
Cost of equipment sold 9,296 -- -- 9,296 -- -- 9,296
Sales and advertising 8,379 -- -- 8,379 51 (4) 8,426
General and administrative 11,237 29 (1,800) 9,466 533 (595) 9,404
Depreciation and amortization 25,673 -- (527) 25,146 (525) (1) 24,620
------ ------ ----- ------ ----- ------ ------
Operating Loss (44,306) (29) 527 (43,808) 541 -- (43,267)
INTEREST AND OTHER INCOME 206 5,269 (3,843) 1,632 7,304 (7,188) 1,748
EQUITY IN LOSS OF
SUBSIDIARIES -- (63,020) 63,020 -- (75,326) 68,794 (6,532)
INTEREST EXPENSE (18,920) (10,983) 3,285 (26,618) (2,914) 7,188 (22,344)
-------- -------- ----- -------- ------- ----- --------
NET LOSS $(63,020) ($68,763) $62,989 $(68,794) ($70,395) $68,794 ($70,395)
========= ========= ======= ========= ========= ======= ========
Condensed Consolidating Statements of Cash Flow
Six Months Ended June 30, 1999
(Unaudited)
(In thousands)
Consolidated
Consolidated American American
Subsidiary Acquisition Acquisition Mobile Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ------------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($58,604) ($75,162) $59,657 ($74,109) ($85,520) $74,109 ($85,520)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Amortization of Guarantee Warrants
and debt related costs -- 3,616 -- 3,616 5,580 -- 9,196
Depreciation and amortization 27,404 -- 27,404 -- -- 27,404
Accrued interest on Senior Notes -- 10,259 -- 10,259 -- -- 10,259
Equity in loss in XM Radio -- -- -- -- 6,692 -- 6,692
Unrealized gain on note payable to
related party -- -- -- -- (10,036) -- (10,036)
Unrealized loss on note receivable
from XM Radio -- -- -- -- 9,919 -- 9,919
Changes in assets & liabilities
Inventory 168 -- -- 168 -- -- 168
Prepaid in-orbit insurance 2,898 -- -- 2,898 -- -- 2,898
Trade accounts receivable (4,685) -- -- (4,685) -- -- (4,685)
Other current assets (1,859) 20 -- (1,839) (638) -- (2,477)
Accounts payable and 7,802 --- -- 7,802 1,135 -- 8,937
accrued expenses
Deferred trade payables (3,644) -- -- (3,644) -- -- (3,644)
Deferred Items-- net 20 -- -- 20 (486) -- (466)
----- ------- -- ----- ----- -- -----
Net cash (used in) provided by (30,500) (61,267) 59,657 (32,110) (73,354) 74,109 (31,355)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property & equipment (5,631) -- -- (5,631) -- -- (5,631)
Purchase of XM Radio note receivable -- -- -- -- (21,419) -- (21,419)
Purchase of long-term, restricted (1,008) (1,217) -- (2,225) (1,556) -- (3,781)
investments
------- ------- -- ------- ------- -- -------
Net cash used in investing activities (6,639) (1,217) -- (7,856) (22,975) -- (30,831)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common Stock -- -- -- -- 2,913 -- 2,913
Funding from parent/subsidiary 39,146 22,484 (59,657) 1,973 72,136 (74,109) --
Principal payments under
capital leases (2,781) -- -- (2,781) -- -- (2,781)
Principal payments under
Vendor Financing (197) -- -- (197) -- -- (197)
Proceeds from bank financing -- 40,000 -- 40,000 -- -- 40,000
Proceeds from note payable to
related party -- -- -- -- 21,500 -- 21,500
Debt issuance costs -- -- -- -- (220) -- (220)
------ ------ ------ ------ -------- ------- -----
Net cash provided by (used in)
financing activities 36,168 62,484 (59,657) 38,995 96,329 (74,109) 61,215
Net increase in cash and cash equivalents (971) -- -- (971) -- -- (971)
CASH & CASH EQUIVALENTS, beginning of
period 2,285 -- -- 2,285 -- -- 2,285
----- ----- ------- ----- ------ ------- -----
CASH & CASH EQUIVALENTS, end of
period $1,314 $-- $-- $1,314 $-- $ -- $1,314
====== === === ====== ======= ======= ======
Condensed Consolidating Statements of Cash Flow
Six Months Ended June 30, 1998
(Unaudited)
(In Thousands)
Consolidated
Consolidated American American
Subsidiary Acquisition Acquisition Mobile Mobile
Guarantors Company Eliminations Company Parent Eliminations Parent
---------- ------- ------------ ------- ------ ------------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($63,020) ($68,763) $62,989 ($68,794) ($70,395) $68,794 ($70,395)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Amortization of guarantee warrants,
debt discount and issuance costs 2,524 2,794 -- 5,318 2,050 -- 7,368
Depreciation and amortization 25,274 -- (527) 24,747 (525) (2) 24,220
Equity in loss in XM Radio -- -- -- -- 6,532 -- 6,532
Accrued interest on Senior Notes --- 10,259 --- 10,259 --- --- 10,259
Changes in assets & liabilities
Inventory 1,889 -- -- 1,889 -- -- 1,889
Prepaid in-orbit insurance 2,571 -- -- 2,571 -- -- 2,571
Accounts receivable-- trade 1,941 -- -- 1,941 -- -- 1,941
Other current assets (3,422) 3,374 -- (48) 115 -- 67
Accounts payable and accrued expenses (9,172) 113 -- (9,059) 44 -- (9,015)
Deferred trade payables (7,680) -- -- (7,680) -- -- (7,680)
Deferred Items-- net (124) -- -- (124) -- -- (124)
----- ------ ------ ------- ------- ------- ------
Net cash used in operations (49,219) (52,223) 62,462 (38,980) (62,179) 68,792 (32,367)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property & equipment (5,558) -- -- (5,558) -- -- (5,558)
Cash paid for acquisition of ARDIS -- (51,440) -- (51,440) -- -- (51,440)
Purchase of long-term, restricted
investments -- (113,747) -- (113,747) (28,152) -- (141,899)
--------- --------- ------ --------- -------- ------- ---------
Net cash used in investing activities (5,558) (165,187) -- (170,745) (28,152) -- (198,897)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock -- -- -- -- 236 -- 236
Funding from parent 165,782 (124,623) (62,462) (21,303) 90,095 (68,792) --
Principal payments under capital leases (1,234) -- -- (1,234) -- -- (1,234)
Proceeds from bank financing 2,000 22,000 -- 24,000 -- -- 24,000
Repayment of bank financing (100,000) -- -- (100,000) -- -- (100,000)
Payments on long-term debt (4,933) --- --- (4,933) --- --- (4,933)
Debt issuance costs -- (14,967) -- (14,967) -- -- (14,967)
Proceeds from Notes and stock purchase -- 335,000 -- 335,000 --- -- 335,000
warrants ------- ------- ------ ------- ------ ------ -------
Net cash provided by financing
activities 61,615 217,410 (62,462) 216,563 90,331 (68,792) 238,102
Net increase in cash and cash
equivalents 6,838 -- -- 6,838 -- -- 6,838
CASH & CASH EQUIVALENTS, beginning of
period 2,106 -- -- 2,106 -- -- 2,106
----- ------ ------ ----- ------ ------ -----
CASH & CASH EQUIVALENTS, end of
period $8,944 $-- $-- $8,944 $-- $-- $8,944
====== === === ====== === === ======
8. Subsequent Events
- --------------------
XM Acquisition
- --------------
On July 7, 1999, the Company acquired WorldSpace's debt and equity
interests in XM Radio, other than a $75 million loan from WorldSpace to XM
Radio, in exchange for approximately 8.6 million shares of the Company's common
stock, of which the issuance of approximately 2.1 million is subject to Company
stockholder approval, for which a special shareholder meeting has been scheduled
for September 7, 1999. Additionally, XM Radio issued an aggregate $250 million
of Series A subordinated convertible notes to several new investors and used $75
million of the proceeds it received from the issuance of these notes to repay
the outstanding loan owed to WorldSpace. As a result of these transactions, the
Company owns all of the issued and outstanding stock of XM Radio. Assuming
subsequent conversion of all outstanding convertible notes of XM Radio, the
Company would own approximately 37% of the equity of XM Radio, and would have
approximately 62% of the voting power in XM Radio.
On a pro forma basis, assuming this transaction had been consummated on
January 1, 1999, the following results would have been reflected:
Six Months
Ended
June 30, 1999
-------------
Revenues $43,103
Net Loss 95,998
Loss per (2.35)
share
As a result of these transactions, the Company controls XM Radio and will
consolidate XM Radio on a prospective basis. Additionally, pursuant to generally
accepted accounting principles, the Company's 1998 and June 30, 1998 financial
statements have been restated to record American Mobile's share of losses which
had previously been suspended pursuant to the equity method of accounting. The
effect of this restatement was to increase the Company's previously reported net
loss for the three months and six months ended June 30, 1998 from $38,963 to
$42,989, and from $64,205 to $70,395, respectively. The loss per share increases
from $1.23 to $1.36 for the three months ended June 30, 1998 and from $2.25 to
$2.47 for the six months ended June 30, 1998.
On July 23, 1999, XM Radio filed a registration statement with the
Securities and Exchange Commission for an initial public offering of its shares.
If consummated, the issuance of these shares would reduce the Company's
ownership interests in XM Radio below the 37% noted above.
Financing
- ---------
On August 3, 1999, the Company raised approximately $116 million, net of
underwriting discount and offering expenses, through the issuance of 7,000,000
shares of its Common Stock. Half of the net proceeds were used to pay down a
portion of the Term Loan Facility, with the remaining balance used to repay a
portion of the outstanding balance under the Revolving Credit Facility, until
such time as the funds are needed for general working capital purposes.
PART I-FINANCIAL INFORMATION
----------------------------
Item 2. Management's Discussion and Analysis of 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,
"believe," "intend" "will be positioned," "will," "may," "project," "expect,"
"expected," "estimate," "anticipate" 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 Quarterly 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. 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.
Important factors that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed under "Overview
and Factors Affecting the Company's Results," and elsewhere in this Quarterly
Report, including, without limitation, in conjunction with the forward-looking
statements included in this Quarterly Report. 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 also should carefully review the risk factors
described in other reports and documents the Company files from time to time
with the Securities and Exchange Commission, including its Form 10-K Annual
Report filed on March 30, 1999 and Form 10-Q Quarterly Reports to be filed by
the Company 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 was formed in 1988 to develop, construct, and operate a
mobile satellite services system. With the launch of its satellite in 1995, the
Company began to offer a full range of mobile voice and data communications
services via satellite to customers in North America. In March 1998, the Company
acquired ARDIS Company ("ARDIS") from Motorola, Inc. for $100 million. With the
acquisition of ARDIS, the Company acquired the nation's largest, most fully
deployed terrestrial wireless data network, and now offers a broad range of
wireless communications services using an integrated network consisting of the
ARDIS terrestrial network (the "ARDIS Network") and a satellite in
geosynchronous orbit (the "Satellite Network," and, together with the ARDIS
Network, the "Network").
The Company and its consolidated subsidiaries are parties to the following
financings and refinancings: (1) $335 million of Senior Notes due 2008 (the
"Senior Notes"); (2) the $200 million Revolving Credit Facility and Term Loan
Facility, of which a portion has been permanently reduced (collectively, the
"New Bank Financings"); and (3) a $10 million vendor financing facility with
Motorola. See "Liquidity and Capital Resources."
XM Radio is one of two entities awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States. XM Radio is currently engaged in efforts to construct its satellite
system and negotiate contracts with third party vendors and other partners. On
July 7, 1999, the Company acquired WorldSpace, Inc.'s debt and equity interests
in XM Radio, other than a $75 million loan from to XM Radio, in exchange for
approximately 8.6 million shares of the Company's common stock. Concurrently
with this transaction, XM Radio issued $250 million of subordinated convertible
notes to several new strategic and financial investors, including General Motors
Corporation, Clear Channel Investments, DIRECTV, Telcom Ventures, Columbia
Capital and Madison Dearborn Partners. XM Radio used $75 million of the proceeds
from these notes to repay the outstanding loan payable to WorldSpace. As a
result of these transactions, the Company owns all of the issued and outstanding
stock of XM Radio, subject to the possibility of its interest being diluted
through the conversion of the subordinated convertible notes discussed above.
Assuming conversion of these notes, the Company's interest would be reduced to
approximately 37% of the economic interest and approximately 62% of the voting
interest. Upon the occurrence of certain other events, including an initial
public offering of XM Radio stock yielding gross proceeds in excess of $100
million and above a prescribed per share value and upon receipt of FCC approval
for a change of control, the Company's voting interest would be reduced to the
level of its economic interest at that time. On July 23, 1999, XM Radio filed a
registration statement with the SEC for an initial public offering of its
shares. Such an issuance, if consummated, would further reduce the Company's
economic and voting interest in XM Radio, and all proceeds from such issuance
would be used solely to fund XM Radio and would not be available for use by the
Company.
As a result of the July 7, 1999 transactions, the Company was required, in
accordance with generally accepted accounting principles, to restate its
financial statements for the year ended December 31, 1998, and the quarter
ending March 31, 1999, to reflect its share of XM Radio's losses based on the
Company's voting equity interest in XM Radio during those periods. This resulted
in the Company recording additional net losses of approximately $12.6 million
for the year ended December 31, 1998, and $3.5 million for the quarter ended
March 31, 1999. As of July 7, 1999, the Company will be required to consolidate
XM Radio's accounts and operating results until such time, if ever, as the
Company no longer controls XM Radio.
In light of the significance of the acquisition of ARDIS in 1998, 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.
Overview and Factors Affecting the Company's Results
----------------------------------------------------
The Company 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 its network and the cost of
developing, selling and providing its products and services. The Company has,
and will continue to have, substantial indebtedness.
The Company's future operating results could be adversely affected by a
number of uncertainties and factors, including:
o the launch of new products or the entry into new market segments,
which may require the Company to continue to incur significant
operating losses,
o the Company's ability to gain market acceptance of new products and
services, including its new eLink(sm) wireless email service,
o the Company's ability to respond and react to changes in its business
and the industry as a result of having substantial indebtedness,
o the Company's ability to fund its anticipated capital expenditures,
operating losses and debt service requirements and its ability to
secure additional financing as may be necessary,
o the Company's ability to modify its organization, strategy and product
mix to maximize the market opportunities in light of changes therein,
o the ability of the Company to manage growth effectively,
o competition from existing companies that provide services using
existing communications technologies and the possibility of
competition from companies using new technology in the future,
o the ability of the Company to maintain, on commercially reasonable
terms or at all, certain technologies licensed from third parties,
o the loss of one or more of the Company's key customers,
o the timely roll-out of certain key customer initiatives and products,
including the Company's UPS contract,
o the timely availability of an adequate supply of subscriber equipment
at competitive price points,
o regulation by the FCC,
o technical anomalies that may occur within the Network, which could
impact, among other things, customer performance and satisfaction, or
the operation of the Satellite Network and the cost, scope or
availability of in-orbit insurance, and
o the Company's ability to attract and retain key personnel.
Also, XM Radio's business involves significant risks, and these risks may
impair the value of the Company's investment in XM Radio.
As of June 30, 1999, there were approximately 123,000 units on the Network.
Results of Operations
---------------------
Quarter ended and six month period ended June 30, 1999 and 1998
Service revenues, which includes both the Company's voice and data services,
approximated $16.6 million and $32.8 million for the three months and six months
ended June 30, 1999, respectively, compared to $16.7 million and $23.1 million
during the same periods in 1998.
Summary of Revenue Three Months Ended June 30,
(in millions) 1999 1998 Change % Change
---- ---- ------ --------
Voice Service $3.2 $3.5 ($0.3) (9%)
Data Service 12.3 12.3 -- --
Capacity Resellers & Other 1.1 0.9 0.2 22
Equipment Sales 6.3 5.7 0.6 11
Summary of Revenue Six Months Ended June 30,
(in millions) 1999 1998 Change % Change
---- ---- ------ --------
Voice Service $6.2 $6.7 ($0.5) (7)%
Data Service 24.4 14.5 9.9 68
Capacity Resellers & Other 2.2 1.6 0.6 38
Equipment Sales 10.3 9.3 1.0 11
The decrease in service revenue from voice services was primarily a result
of reduced per-minute rates following the sale of the assets of the Company's
maritime division, in October 1998, to a reseller, partially offset by a 25%
increase in voice customers in the first six months of 1999 over the comparable
period in 1998. While the Company's service revenue increased $9.9 million from
the first six months of 1998 to the first six months of 1999, this increase was
due principally to six months of revenue from ARDIS in 1999 totalling $19.0
million, versus three months of revenue from ARDIS in 1998 totalling $9.9
million. Overall average revenue per user ("ARPU") declined year over year, and
is expected to continue to do so, due to changes in products and the subscriber
mix. Service revenue from capacity resellers, who handle both voice and data
services, increased primarily as a result of increased contract commitments from
current customers.
Revenue from the sale of subscriber equipment increased as a result of
increased sales of certain data products, offset by decreased revenue from the
sale of voice equipment as a result of lowered equipment prices in 1999 as
compared to 1998.
Three Months
Summary of Expenses Ended June 30,
(in millions) 1999 1998 Change % Change
---- ---- ------ --------
Cost of Service & Operations $16.5 $16.2 $0.3 2%
Cost of Equipment Sales 6.6 5.4 1.2 22
Sales & Advertising 5.7 5.4 0.3 6
General & Administrative 4.7 5.8 (1.1) (19)
Depreciation & Amortization 13.6 14.5 (0.9) (6)
Six Months
Summary of Expenses Ended June 30,
(in millions) 1999 1998 Change % Change
---- ---- ------ --------
Cost of Service & Operations $34.4 $24.0 $10.4 43%
Cost of Equipment Sales 11.1 9.3 1.8 19
Sales & Advertising 10.5 8.4 2.1 25
General & Administrative 9.5 9.4 0.1 1
Depreciation & Amortization 27.4 24.6 2.8 11
As of January 1999, as a result of the completion of the integration of
the ARDIS acquisition and the achievement of certain related cost synergies, the
Company ceased to report separate company information for ARDIS. Consequently,
ARDIS costs are no longer distinguished from those of the remaining business,
and, therefore the discussion of the three and six months ended June 30, 1999
reflects the costs of the consolidated entity.
Cost of service and operations for the three and six months ended June
30, 1999, which includes costs to support subscribers and to operate the
network, was $16.5 million and $34.4 million, respectively, compared to $16.2
and $24.0 million during the same periods in 1998. As a percentage of total
revenues, cost of service and operations was 72% for both the second quarter of
1999 and 1998, and 80% and 74% for the six month period ended June 30, 1999 and
1998, respectively. The increase in cost of service and operations was primarily
attributable to (i) additional headcount, primarily as a result of the ARDIS
acquisition, (ii) increased communication charges associated with increased
service usage and costs to support the ARDIS terrestrial network, (iii) system
and base station maintenance to support the ARDIS terrestrial network, (iv) site
rental costs associated with the terrestrial network, and (v) incremental Year
2000 costs. As a percentage of revenue, cost of service and operations has
increased as a result of the variable costs incurred within the ARDIS
terrestrial network, such as site rent and telecommunications costs.
The cost of equipment sold increased $1.2 million or 22% from $5.4
million for the second quarter of 1999, and $1.8 million or 20% from $9.3
million for the six month period ended June 30, 1999. This increase was
primarily attributable to the increase in the volume of sales of the various
data products and warranty costs thereon.
Sales and advertising expenses were $5.7 million and $10.5 million for
the three and six months ended June 30, 1999, respectively, compared to $5.4
million and $8.4 million during the same periods in 1998. Sales and advertising
expenses as a percentage of revenue were 25% and 24% in the second quarter and
first half of 1999, respectively, as compared to 24% and 26% during the same
periods in 1998. The 25% increase in sales and advertising expenses from the
first six months of 1998 to the first six months of 1999 was primarily
attributable to (i) increased headcount costs resulting from the ARDIS
acquisition and (ii) costs associated with the launch of a new service offering
("eLink(sm)").
General and administrative expenses were $4.7 million and $9.5 million
for the three and six months ended June 30, 1999, respectively, compared to $5.8
million and $9.4 million during the same periods in 1998. General and
administrative expenses as a percentage of revenue were 21% and 22% in the
second quarter and first half of 1999, respectively, as compared to 26% and 29%
during the same periods in 1998. The $1.1 million decrease in general and
administrative expenses quarter over quarter for 1999 compared to 1998 was
primarily attributable to (i) reduced headcount costs related to integrating the
ARDIS organization into the Company and the resulting elimination of certain
positions, (ii) one-time costs incurred in the second quarter of 1998 associated
with the ARDIS integration, and (iii) a decrease in expenses associated with
outside legal and regulatory counsel.
Depreciation and amortization expenses were $13.6 million and $27.4
million for the three and six months ended June 30, 1999, respectively, compared
to $14.5 million and $24.6 million during the same periods in 1998. Depreciation
and amortization expenses as a percentage of revenue were 60% and 64% in the
second quarter and first half of 1999, respectively, as compared to 65% and 76%
during the same periods in 1998. The $2.8 million increase in depreciation and
amortization expense for the six months ended June 30, 1999, was primarily
attributable to the ARDIS assets acquired and the amortization of intangibles
acquired in the ARDIS acquisition.
Interest and other income was $2.0 million and $3.7 million for the
second quarter and first half of 1999, respectively, compared to $1.6 million
and $1.7 million during the same periods in 1998. The increase was primarily a
result of (i) interest earned on certain required escrows established with the
proceeds from the Senior Notes in March 1998 and (ii) interest earned on the XM
Note Receivable (as defined below) issued in January 1999. The Company incurred
$32.8 million of interest expense in the first six months of 1999 compared to
$22.3 million in the same period of 1998, reflecting (i) interest expense on the
Senior Notes at 12.25%, offset by lower debt balances on the Company's bank
loans (comprising the Term Loan Facility and the Revolving Credit Facility) and
(ii) the amortization of debt discount, prepaid interest and debt offering costs
in the amount of $9.2 million in the first six months of 1999, compared to $7.4
million in the first six months of 1998. It is anticipated that interest costs
will continue to be significant as a result of the Senior Notes and as a result
of the borrowings under the New Bank Financings. See "Liquidity and Capital
Resources".
Net capital expenditures for the first half of 1999 and 1998 for
property and equipment were $5.6 million. Expenditures consisted primarily of
assets necessary to continue the build outs of the Company's Network.
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 achieve positive cash flow and profitable operations. The
Company expects to continue to make significant capital outlays to fund interest
expense, capital expenditures and working capital prior to the time that it
begins to generate positive cash flow from operations. These outlays are
expected to continue for the foreseeable future thereafter.
On March 31, 1998, AMSC Acquisition Company, Inc. ("Acquisition
Company"), a wholly-owned subsidiary of the Company, issued $335 million of
units consisting of 12 1/4% Senior Notes due 2008 (the "Senior Notes"), and one
warrant to purchase 3.75749 shares of Common Stock of the Company for each
$1,000 principal amount of Notes (the "Warrants"), and also restructured its
existing bank financing (the "New Bank Financing"). The New Bank Financing of
$200 million consists 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. As of June 30, 1999, the Company had $28.0 million available for
borrowing under the Revolving Credit Facility. Additionally, Motorola has agreed
to provide the Company with up to $10 million of vendor financing (the "Vendor
Financing Commitment"), which is available to finance up to 75% of the purchase
price of additional base stations needed to meet buildout requirements under
certain customer contracts. As of June 30, 1999, $4.8 million was outstanding
under this facility.
In connection with the New Bank Financing, each of Hughes Electronics
Corporation, Singapore Telecommunications Ltd. and Baron Capital Partners, L.P.
(collectively, the "Bank Facility Guarantors") extended separate guarantees of
the obligations of each of the Acquisition Company and the Company to the Banks,
which on a several basis aggregated to $200 million. In their agreement with
each of the Acquisition Company and the Company (the "Guarantee Issuance
Agreement"), the Bank Facility Guarantors agreed to make their guarantees
available for the New Bank Financing. 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 were issued with an exercise price of $12.51 and were valued
at approximately $17.7 million. On March 29, 1999, the Bank Facility Guarantors
agreed to eliminate certain covenants contained in the Guarantee Issuance
Agreement relating to earnings before interest, depreciation, amortization and
taxes ("EBITDA") and service revenue. In exchange for this elimination of
covenants, the Company agreed to re-price their Guarantee Warrants, effective
April 1, 1999, from $12.51 to $7.50. The value of the repricing was
approximately $1.5 million. As of June 30, 1999, the Company had outstanding
borrowings of $100 million of the Term Loan Facility at 5.5%, and $72 million
under the Revolving Credit Facility at rates ranging from 5.6875% to 5.8125%.
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 New Bank Financing
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 XM Radio and the
Acquisition Company.
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 directly to the banks 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.
On August 3, 1999, the Company raised $116 million, net of underwriting
discounts and expenses, through the issuance of 7.0 million shares of its common
stock in a public offering. Of the net proceeds, $58 million was used to pay
down a portion of the Term Loan Facility, and is not available for re-borrowing.
The remainder of the net proceeds were used to pay down a portion of the
Revolving Credit Facility, which will be available for re-borrowing as needed
for general working capital purposes. As a result of the partial pay down of the
Term Facility, the Company will record an extraordinary loss on extinguishment
of debt of approximately $12.1 million in the third quarter of 1999, which
reflects the write-off, on a pro-rata basis, of Guarantee Warrants and fees
associated with the placement of the New Bank Financing. Additionally, it is
anticipated that a portion of the interest rate swap agreement, discussed above,
will be released to the Company, resulting in additional cash flow to the
Company.
As a result of the automatic application of certain adjustment provisions
following the issuance of the 7.0 million shares, the exercise price of the
Guarantee Warrants was reduced to $7.3571 per share and the Guarantee Warrants
became exercisable for an additional 126,246 shares. Additionally, the exercise
price of the warrants associated with the Senior Notes was reduced to $12.28 per
share and the aggregate number of shares issuable upon the exercise of such
warrants was increased by 24,291 shares. The additional Guarantee Warrants and
repricing were valued at $2.4 million, and the additional Senior Notes warrants
and repricing were valued at $440,000 and will be recorded as an additional debt
discount in the third quarter.
Cash used in operating activities was $31.4 million for the first six
months of 1999 compared to $32.4 million for the comparable period in 1998. The
decrease in cash used in operating activities was primarily attributable to (i)
approximately $3.7 million of increased operating losses before depreciation,
primarily as a result of additional net expenses incurred as a result of the
ARDIS acquisition and Year 2000 compliance programs, offset by (ii) increases in
net working capital resulting primarily from increased data service equipment
revenues and timing of accounts payable. Cash used in investing activities was
$30.8 for the first six months of 1999 compared to $198.9 million for the same
period in 1998, representing the acquisition of ARDIS in March 1998, and the
funding of certain escrows required in connection with the Acquisition and
issuance of Senior Notes, offset by the issuance in January 1999 of the XM Radio
Note Receivable (as defined below). Cash provided by financing activities was
$61.2 million in the first six months of 1999 as compared to $228.1 million
during the same period in 1998 reflecting the issuance of the Senior Notes in
March 1998, offset by the repayment of other long-term debt in the first six
months of 1998, and the proceeds from the issuance of the Baron XM Radio
Convertible Note (as defined below) and draws under the New Bank Financing in
the first quarter of 1999. Proceeds from the sale of Common Stock were $2.9
million and $236,000 for the first six months of 1999 and 1998, respectively.
This $2.7 million increase was primarily related to the exercise of employee
options. Payments on long-term debt and capital leases were $3.0 million and
$16.2 million for the first six months of 1999 and 1998, respectively. In
addition, the Company incurred $220,000 of debt issuance costs in the first six
months of 1999, as compared to $15.0 million in the first six months of 1998,
which resulted from the placement of the Senior Notes and amendments to the New
Bank Financing. As of June 30, 1999, the Company had $1.3 million of cash and
cash equivalents, working capital of $17.7 million, $12.5 million of securities,
and $41.0 million of current investments restricted for the payment of interest.
The Company has arranged the financing of certain trade payables, and
as of June 30, 1999, $1.5 million of deferred trade payables were outstanding at
rates ranging from 6.10% to12.0% and are generally payable by the end of 1999.
The Company's current operating assumptions and projections, which reflect
management's best estimate of subscriber and revenue growth and operating
expenses, indicate that anticipated capital expenditures, operating losses,
working capital and debt service requirements through 1999 and beyond, can be
met by cash flows from operations, the net proceeds from the issuance of common
stock in August 1999, the net proceeds from the sale of the Senior Notes and
Warrants, together with the borrowings under the New Bank Financing and the
Vendor Financing Commitment; however, the Company's ability to meet its
projections is subject to numerous uncertainties and 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 if the Company's cash
requirements are more than projected, the Company may require additional
financing in amounts which may be material. 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 available on favorable terms.
XM Radio
--------
The Company has an investment in XM Radio, which is one of two entities
awarded a license by the FCC to provide satellite-based Digital Audio Radio
Service ("DARS") throughout the United States. XM Radio is currently engaged in
efforts to construct its satellite system. The Company is not required to
provide any additional funding to XM Radio.
On January 15, 1999, the Company issued to Baron Asset Fund ("Baron") a
$21.5 million note convertible into shares of XM Radio common stock (the "Baron
XM Radio Convertible Note"). The Company subsequently loaned approximately $21.4
million to XM Radio in exchange for XM Radio common stock and a note convertible
into XM Radio shares (the "XM Radio Note Receivable"). The Baron XM Radio
Convertible Note ranks subordinate to all other debt securities of the Company
and is fully collateralized by approximately one-half of the shares received by
the Company as a result of this transaction. The XM Radio Note Receivable is a
non-recourse note collateralized by the additional XM Radio shares that would be
received by the Company upon conversion of the note. The XM Radio Note
Receivable earns interest at LIBOR plus 5% and is due on December 31, 2004,
unless extended, in certain circumstances if XM Radio issues high yield debt
securities, and the Baron XM Radio Convertible Note accrues interest at the rate
of 6% annually, with all payments deferred until maturity, December 31, 2004, or
extinguished upon conversion. The Company has the option to satisfy the Baron XM
Radio Convertible Note by tendering the shares into which it would have been
convertible in lieu of any cash payments. The Company's June 30, 1999
consolidated condensed balance sheet reflects management's estimate of the fair
value of the XM Radio Note Receivable and Baron XM Radio Convertible Note.
Changes in the fair value of the XM Radio Note Receivable and Baron XM Radio
Convertible Note are reflected in the accompanying statement of operations as
unrealized losses on note receivable from XM Radio ($9.9 million for the
six-months ended June 30, 1999) and unrealized gain on note payable to related
party ($10.0 million for the six-months ended June 30, 1999), respectively. In
the future, the Company expects to continue to record in its financial
statements the Baron XM Radio Convertible Note at its estimated fair value.
Commitments
-----------
At June 30, 1999, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory in
the maximum amount of $1.6 million during the remainder of 1999. Additionally,
the Company had remaining contractual commitments for the development and
production of certain next generation data terminals of approximately $26.3
million, subject to final pricing negotiations, over a three-year period, with
delivery starting in the second half of 1999. The Company has the right to
terminate the research and development and inventory commitment by paying
cancellation fees of between $1 million and $2.3 million, depending on when the
termination option is exercised during the term of the contract. The Company
also has the right to terminate the inventory commitment by incurring a
cancellation penalty representing a percentage of the unfulfilled portion of the
contract. The Company has also contracted for the purchase of $26.2 million of
next generation wireless data terminals to be delivered beginning in the third
quarter of 1999. The contract contains a 50% cancellation penalty.
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 June 30, 1999, all of these subsidiaries' net assets
were restricted under these agreements. These restrictions will have an impact
on the Company's ability to pay dividends.
Regulation
-----------
The ownership and operations of the Company's communication systems are
subject to significant regulation by the FCC, which acts under authority granted
by the Communications Act of 1934, as amended (the "Communications Act"), and
related federal laws. A number of the Company's licenses are subject to renewal
by the FCC and, with respect to the Company's satellite operations, are subject
to international frequency coordination. In addition, current FCC regulations
generally limit the ownership and control of American Mobile by non-U.S.
citizens or entities to 25%. There can be no assurances that the rules and
regulations of the FCC will continue to support the Company's operations as
presently conducted and contemplated to be conducted in the future, or that all
existing licenses will be renewed and requisite frequencies coordinated.
Year 2000 Readiness
-------------------
American Mobile has developed and is implementing a Year 2000 Readiness
Program ("Year 2000 Readiness Program") to address Year 2000 issues. "Year 2000
Ready," or "Year 2000 Readiness," means that customers will experience no
material difference in performance and functionality of the Company's networks
prior to, during or after the year 2000.
The Company's Year 2000 Readiness Program uses the phased approach that
is common in its industry. The Awareness, Inventory and Assessment phases have
been completed, and American Mobile is at various stages of the Renovation,
Validation/Test and Implementation/Rollout phases, depending on the particular
system involved.
The Inventory and Assessment Phases concentrated on the Company's core
business systems: those systems, both hardware and software, whose failure
could have a material impact on its financial condition and operations. Vendors
providing critical products and services to American Mobile are also included in
this definition of core business systems. Although the core business systems are
the top priority in the Company's Year 2000 Readiness Program, American Mobile
assessed all of its software and hardware for Year 2000 Readiness.
American Mobile's plans for the Renovation, Validation/Test and
Implementation/Rollout Phases call for it to be Year 2000 Ready by the end of
the third quarter of 1999. In addition, the Company is currently scheduled to
complete renovations, implementation and rollout of its internal systems
(including its voice customer billing software, CMIS), in the fourth quarter
1999; these internal software systems do not affect the Company's ability to
pass customer traffic and therefore will not affect Year 2000 Readiness.
The complex of hardware and software that the Company maintains
consists of commercial off-the-shelf (COTS) software, as well as custom software
developed specifically for American Mobile's networks. In certain cases,
American Mobile's Year 2000 Readiness Program involves upgrading COTS software
that is unsupported by the vendor or whose Year 2000 Readiness could not be
determined. Upgrading such COTS software, as planned, provides greater certainty
regarding the Year 2000 Readiness of such products and ensures that vendor
support will be available.
The total cost of American Mobile's Year 2000 Readiness Program was
approximately $2.4 million in 1998. Expenditures for the Year 2000 Readiness
Program in 1999 are estimated to be up to $6.6 million, of which $3.3 million
was incurred as of June 30, 1999. Some of these costs, including the purchase of
software upgrades and consulting services, are expensed as incurred while other
costs, such as hardware purchases, are being treated as capital expenditures.
The estimated cost and date on which American Mobile believes its
network will be Year 2000 Ready are management's best estimates. However, there
is no guarantee that the Company will achieve these results and actual results
could differ materially from those anticipated. Some of American Mobile's
critical business systems depend significantly on software programs and third
party services that are not within the Company's control. Failure to solve Year
2000 errors within American Mobile's critical business systems could result in
possible service outages, miscalculations or disruption of operations that could
have a material impact on the Company's business. Because of the Company's heavy
dependence on software, some Year 2000 problems may not be found or the
remediation efforts may introduce new bugs that are not identified before they
impact operations. This applies to both COTS software and custom software.
If American Mobile's customers fail to become Year 2000 ready on time
with their own hardware and software systems, their applications may not
function even if American Mobile's systems are Year 2000 Ready. This will result
in reduced traffic and revenues. Also, suppliers of goods and services may
suffer Year 2000-related failures from which the Company cannot adequately
protect its business.
While management believes that the Company will be able to achieve Year
2000 Readiness in a timely manner, the schedule for completing the
implementation of several core business systems extends to the third quarter
1999 and there is a possibility that American Mobile may not become Year 2000
Ready on time or within budget. Contingency planning, as discussed below, is
currently underway to minimize the risk of business interruptions caused by Year
2000 problems within the core business systems.
American Mobile has contingency plans in place to minimize service
interruptions that can mitigate, although not eliminate, interruptions caused by
problems resulting from Year 2000 issues. For example, the Company has backup
power supplies and generators in place for certain portions of its networks in
the event of electrical power outages. In addition, for some services American
Mobile has contracted with more than one service provider. These plans, systems
and services are being incorporated into the Company's Year 2000 contingency
planning. To the extent that it is commercially reasonable to do so, American
Mobile will include other redundant or alternative sources of services in its
Year 2000 contingency planning efforts.
Accounting Standards
--------------------
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the recognition of all
derivatives as either assets or liabilities measured at fair value. In June
1999, FASB issued Statement N. 147, which defers the effective date of Statement
No. 133 until fiscal quarters beginning after June 15, 2000. The Company does
not believe that the adoption of this statement will have a material impact on
its financial position and results.
In March 1999, FASB issued an Exposure Draft on an Interpretation of
Accounting Principles Board Opinion No. 25 - Accounting for Certain Transactions
involving Stock Compensation. This proposed Interpretation would make it more
likely that expense would be required to be recognized in the case of, among
other things, stock (including stock options) issued to non-employee members of
an entity's board of directors. The Company has assessed the impact of this
proposed Interpretation and does not believe that adoption of this
Interpretation would have a material impact on its financial position and
results.
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 26,
1999, 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 27,241,534 101,040 128,645
Pradeep P. Kaul 27,145,614 196,960 224,565
Billy J. Parrott 27,340,005 2,569 30,174
Gary M. Parsons 27,342,521 53 27,658
Walter V. Purnell, Jr. 27,342,163 411 28,016
Andrew A. Quartner 27,195,838 146,736 174,341
Jack A. Shaw 27,342,574 0 27,605
Roderick M. Sherwood, III 27,342,574 0 27,605
Michael T. Smith 27,143,809 198,765 226,370
(c)(1) The vote on the ratification of Arthur Andersen LLP as
independent accountants for the Company for 1999 was 27,343,228 for, 10,848
against, 16,103 abstaining.
(2) The vote on the approval of amendments to the Company's Stock
Option Plan for Non-Employee Directors was 26,985,117 for, 324,971 against,
60,091 abstaining.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
3.2 - Amended and Restated Bylaws of American Mobile Satellite
Corporation (as amended and restated effective May 26, 1999)
(incorporated by reference to Exhibit 3.2 to the Company's
registration statement on Form S-3, Registration No.
333-81459).
10.9a - 1999 Stock Option Plan for Non-Employee Directors (as
amended and restated effective May 26, 1999) (filed
herewith).
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 - Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K
On June 9, 1999, the Company filed a Current Report on Form 8-K, in
response to Item 5- Other Events, reporting that the Company entered
into an Exchange Agreement with WorldSpace, Inc. and XM Satellite Radio
Holdings Inc.
On July 9, 1999, the Company filed a Current Report on Form 8-K, in
response to Item 2- Acquisition or Disposition of Assets and Item
7-Financial Statements and Exhibits, reporting the acquisition by the
Company of interests in XM Satellite Radio Holdings Inc. then held by
XM Ventures, a trust established by WorldSpace, Inc. The Form 8-K
included the following financial information:
(a) unaudited pro forma Company balance sheet data as of
March 31, 1999 and pro forma Company statement of
operations data for the quarter ended March 31, 1999
and the year ended December 31, 1998;
(b) audited financial statements of the Company for the
years ended December 31, 1996, 1997 and 1998, and
unaudited interim financial statements of the Company
for the quarters ended March 31, 1998 and 1999; and
(c) audited financial statements of XM Satellite Radio
Holdings Inc. for the years ended December 31, 1997
and 1998 and the period from December 15, 1992 (date
of inception) to December 31, 1998, and unaudited
interim financial statements of XM Satellite Radio
Holdings Inc. for the quarters ended March 31, 1998
and 1999 and the period from December 15, 1992 to
March 31, 1999.
On July 26, 1999, the Company filed a Current Report on Form 8-K, in
response to Item 5- Other Events, reporting that the Company's
subsidiary, XM Satellite Radio Holdings Inc., filed a registration
statement on Form S-1 with the Securities and Exchange Commission, and
reporting the Company's second quarter results.
SIGNATURES
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 16, 1999 /s/Walter V. Purnell, Jr.
-------------------------------------------
Walter V. Purnell, Jr.
President and Chief Executive Officer
/s/W. Bartlett Snell
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W. Bartlett Snell
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
EXHIBIT INDEX
Number Description
3.2 - Amended and Restated Bylaws of American Mobile Satellite
Corporation (as amended and restated effective May 26, 1999)
(incorporated by reference to Exhibit 3.2 to the Company's
registration statement on Form S-3, Registration No.
333-81459).
10.9a - 1999 Stock Option Plan for Non-Employee Directors (as
amended and restated effective May 26, 1999) (filed
herewith).
11.1 - Computations of Earnings Per Common Share (filed herewith)
27.0 - Financial Data Schedule (filed herewith)