-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WdrAWH53Z0GEqh8XlGH+2fcxnuN7LS/El7iMj60YSPBr63SM7vXjL6mtUDGfb6EZ hY9aJQjrpR7frXIn0TL6ZA== 0000913665-99-000017.txt : 19990514 0000913665-99-000017.hdr.sgml : 19990514 ACCESSION NUMBER: 0000913665-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN MOBILE SATELLITE CORP CENTRAL INDEX KEY: 0000913665 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 930976127 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-71423 FILM NUMBER: 99620703 BUSINESS ADDRESS: STREET 1: 10802 PARKRIDGE BLVD CITY: RESTON STATE: VA ZIP: 22091 BUSINESS PHONE: 7037586000 MAIL ADDRESS: STREET 1: 10802 PARKRIDGE BLVD CITY: RESTON STATE: VA ZIP: 22091 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDING 3/31/99 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 March 31, 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 March 31, 1999: 32,303,098 PART I-FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three Months Ended March 31, REVENUES 1999 1998 ---- ------ Services $16,164 $6,418 Sales of equipment 4,066 3,604 ------- ------- Total Revenues 20,230 10,022 COSTS AND EXPENSES Cost of service and operations 17,870 7,728 Cost of equipment sold 4,528 3,881 Sales and advertising 4,749 3,022 General and administrative 4,769 3,631 Depreciation and amortization 13,772 10,163 ------- ------- Operating Loss (25,458) (18,403) INTEREST EXPENSE (15,930) (6,638) INTEREST AND OTHER INCOME 1,739 141 EQUITY IN LOSS OF XM RADIO -- (342) -------- ------- NET LOSS ($39,649) ($25,242) ========= ========= BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK ($1.23) ($1.00) WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING DURING THE PERIOD (000'S) 32,225 25,241
See notes to consolidated condensed financial statements. -1- PART I-FINANCIAL INFORMATION Item 1. Financial Statements (continued) AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In thousands) March 31, December 31, ASSETS 1999 1998 CURRENT ASSETS Cash and cash equivalents $8,131 $2,285 Inventory 17,440 18,593 Prepaid in-orbit insurance 1,932 3,381 Accounts receivable - net 16,752 15,325 Restricted short-term investments 41,038 41,038 Note receivable from XM Radio 21,687 -- Other current assets 15,055 13,231 ------ ------ Total current assets 122,035 93,853 PROPERTY & EQUIPMENT - net 239,017 246,553 GOODWILL & INTANGIBLES - net 52,772 53,235 RESTRICTED INVESTMENTS 68,623 67,199 DEFERRED CHARGES & OTHER ASSETS - net 26,151 28,954 ------ ------ Total assets $508,598 $489,794 ======== ========
See notes to consolidated financial statements. -2-
(In thousands) March 31, December 31, LIABILITIES & STOCKHOLDERS' DEFICIT 1999 1998 CURRENT LIABILITIES Accounts payable & accrued expenses $41,839 $33,797 Obligations under capital leases due within one year 4,816 5,971 Vendor financing due to related party within one year 1,569 543 year Deferred trade payables due within one year 2,584 4,498 Other current liabilities -- 162 --------- --------- Total current liabilities 50,808 44,971 LONG-TERM LIABILITIES Obligations under New Bank Financing 159,000 132,000 Obligations under Notes, net of discount 327,359 327,147 Capital lease obligations 5,657 5,824 Net assets acquired in excess of purchase price 1,855 2,028 Vendor financing due to related party 3,031 1,069 Note payable to related party 21,769 -- Deferred trade payables 442 620 Other long-term liabilities 535 540 --------- --------- Total long-term liabilities 519,648 469,228 --------- --------- Total liabilities 570,456 514,199 STOCKHOLDERS' DEFICIT Preferred Stock -- -- Common Stock 324 322 Additional paid-in capital 509,074 508,084 Deferred compensation (2,305) (1,528) Common Stock purchase warrants 60,588 59,108 Unamortized guarantee warrants (33,177) (33,678) Cumulative loss (596,362) (556,713) --------- --------- Total stockholders' deficit (61,858) (24,405) --------- --------- Total liabilities and stockholders' deficit $508,598 $489,794 ========= =========
See notes to consolidated financial statements. -3- PART I-FINANCIAL INFORMATION Item 1. Financial Statements (continued) AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three Months Ended March 31 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($39,649) ($25,242) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of guarantee warrants, debt discount and issuance costs 4,552 2,524 Depreciation and amortization 13,772 10,163 Equity in loss in XM Radio -- 342 Changes in assets and liabilities: Inventory 1,153 1,986 Prepaid in-orbit insurance 1,449 1,675 Trade accounts receivable (1,427) 3,744 Other current assets (1,369) (661) Accounts payable and accrued expenses 8,568 (12,197) Deferred trade payables (2,092) 6,436 Deferred items - net (931) 293 ---------- --------- Net cash used in operating activities (15,974) (10,937) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (2,541) (1,126) Purchase of XM Radio note receivable (21,419) -- Acquisition of ARDIS -- (51,382) Purchase of long-term, restricted investments (1,424) (140,892) ---------- --------- Net cash used in investing activities (25,384) (193,400) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Common Stock 162 103 Principal payments under capital leases (1,322) (135) Principal payments under Vendor Financing (90) -- Proceeds from New Bank Financing 27,000 2,000 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) Proceeds from Notes and Stock Purchase Warrants -- 335,000 Debt issuance costs (46) (13,458) ---------- --------- Net cash provided by financing activities 47,204 223,510 Net increase in cash and cash equivalents 5,846 19,173 CASH AND CASH EQUIVALENTS, beginning of period 2,285 2,106 ---------- --------- CASH AND CASH EQUIVALENTS, end of period $8,131 $21,279 ========== =========
See notes to consolidated financial statements. -4- PART I-FINANCIAL INFORMATION Item 1. Financial Statements (continued) AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 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. Additionally, the Company has an investment in XM Satellite Radio Inc., which, through its subsidiary XM Satellite Radio Holdings Inc. (together with XM Satellite Radio 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's investment in XM Radio is currently not material to the Company's financial position, results of operations or cash flows. The Company is not required to provide any additional funding. 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. 2. Significant Accounting Policies Basis of Presentation The unaudited consolidated condensed financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. While the Company believes that the disclosures made are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 1998 Annual Report on Form 10-K The consolidated balance sheet as of March 31, 1999, and the consolidated statements of operations and cash flows for the three months ended March 31, 1999 and 1998, have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 1999, and for all periods presented have been made. The balance sheet at December 31, 1998 has been taken from the audited financial statements. -5- 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 March 31, 1999, there were approximately 84,000 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 months ended March 31, 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 Three Months Ended March 31, (in millions) 1999 1998 ---- ---- Voice Service $3.0 $3.2 Data Service 12.0 2.3 Capacity Resellers and Other 1.2 0.9
-6- 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 year ending December 31, 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 $2.1 million and $1.5 million in the three-month periods ended March 31, 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 three-month period ended March 31, 1999, as compared to $1.1 million for communication services and equipment purchases in the three-month period ended March 31, 1998. Total indebtedness to related parties as of March 31, 1999 approximated $27.5 million, with amounts due from related parties as of March 31, 1999 totaling $21.7 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 for the foreseeable future to fund interest expense, capital expenditures and working capital prior to the time that it begins to generate positive cash flow from operations and for the foreseeable future thereafter. On March 31, 1998, AMSC Acquisition Company, Inc. ("Acquisition Company"), a wholly-owned subsidiary of American Mobile Satellite Corporation, 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 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. 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, depreciation, amortization and taxes ("EBITDA") and service revenue. In exchange for this elimination of covenants, the Company agreed to reprice their 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 April 30, 1999, the Company had $41.0 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 March 31, 1999, $4.6 million was outstanding under this facility. -7- 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 sale of the $335 million Senior Notes and Warrants, together with the borrowings under the $200 million New Bank Financing, the Vendor Financing Commitment and deferred terms on certain trade payables; 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 As previously mentioned (see "Organization and Business"), the Company has an investment in XM Satellite Radio Inc., which, through its subsidiary XM Satellite Radio Holdings Inc. (together with XM Satellite Radio 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's investment in XM Radio is currently not material to the Company's financial position, results of operations or cash flows. The Company is not required to provide any additional funding. 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 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. Assuming conversion of all convertible notes and exercise of outstanding options to purchase XM Radio common stock held by World Space, the Company's ownership in XM Radio would be 22.6%. The XM Radio Note Receivable earns interest at LIBOR plus 5% and is due on the September 30, 2006 maturity date, and the Baron XM Radio Convertible Note accrues interest at the rate of 6% annually, with all payments deferred until maturity 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. -8- Summarized financial information for XM Radio as of March 31, 1999, and for the three months ended March 31, 1999 and 1998, and for the period from December 15, 1992 (date of inception) through March 31, 1999 is set forth below.
December 15, 1992 Three Months through dollars in thousands Ended March 31, March 31, 1999 1998 1999 ---- ---- ----- Gross sales $ -- $ -- $ -- Operating expenses 4,421 1,367 21,724 Loss from operations 4,421 1,367 21,724 Interest expense (55) 39 468 Net loss 4,366 1,406 22,192
As of As of March 31, December 31, 1999 1998 --------- ------------ Current assets $ 4,401 $ 482 Noncurrent assets 218,804 170,003 Current liabilities 155,842 130,823 Noncurrent liabilities 78,913 46,845 Total stockholders' deficit (11,550) (7,183)
4. 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. -9- 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 an application for 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. 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. On December 18, 1998, SatCom filed a request for a six-month extension of this STA, which was extended to July 12, 1999. 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. -10- 5. Commitments At March 31, 1999, the Company had remaining contractual commitments to purchase both mobile data terminal inventory and mobile telephone inventory in the maximum amount of $12.0 million during 1999. Additionally, the Company had remaining contractual commitments in the amount of $635,000 for the development of certain next generation data terminals. Contingent upon the successful research and development efforts, the Company would have maximum additional contractual commitments for mobile communications data terminal inventory in the amount of $27.0 million over a three-year period starting in 1999. The Company has the right to terminate the research and development and inventory commitment by paying cancellation fees of between $1 million and $2.5 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 mid-1999. The contract contains a 50% cancellation penalty. Additionally, the Company has remaining contractual commitments for the purchase of $392,000 of base stations required to complete certain necessary site build-outs, and $1.2 million for certain software development. 6. AMSC Acquisition Company Financial Statements In connection with the Company's acquisition of ARDIS Company in March 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 $335 million of Notes. American Mobile Satellite Corporation ("American Mobile Parent") is a guarantor of the Notes. The 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. Acquisition Company is a holding company with no material operations. It holds the Senior Notes and Revolving Credit Facility, both of which are fully and unconditionally guaranteed on a joint and several basis by all of its subsidiaries, and holds the inter-company notes receivable from its subsidiaries. Separate company financial statements for Acquisition Company have not been prepared, as management believes the differences between the Acquisition Company and the Subsidiary Guarantors statements to be immaterial, and therefore not material information to the investors. -11- Summarized financial information with respect to American Mobile Parent, Acquisition Company and with respect to the Subsidiary Guarantors on a combined basis as of March 31, 1999 and for the three months ended March 31, 1999 and 1998 is as follows (unaudited):
American Mobile Parent Acquisition Company Three months Ended March 31, Three Months Ended March 31, Operating Statement Data 1999 1998 1999 1998 ---- ---- ----- ---- (in thousands) Net Revenue $ 300 $ 300 $ -- $ -- Equity in loss of subsidiaries (37,197) (32,613) (29,818) -- Operating income (loss) 110 526 190 -- Net loss (39,649) 25,242 (37,197) --
As of As of Balance Sheet Data March 31, 1999 March 31, 1999 -------------- -------------- (in thousands) Current assets $ 27,651 $ 41,038 Non-current assets 34,182 394,009 Current liabilities 421 20,988 Non-current liabilities 123,270 386,359 Shareholders' (Deficit) Equity (61,858) 27,700
Combined Subsidiary Guarantors Three Months Ended March 31, Operating Statement Data 1999 1998 ---- ---- (in thousands) Net Revenue $ 20,230 $ 10,022 Equity in loss of subsidiaries -- -- Operating loss (25,758) (18,928) Net loss (29,818) (32,613)
As of Balance Sheet Data March 31, 1999 -------------- (in thousands) Current assets $ 53,346 Non-current assets 312,901 Current liabilities 29,399 Non-current liabilities 728,449 Shareholders' Deficit (391,601)
-12- Major differences between the financial statements of Parent and Acquisition Company include (i) the Term Loan Facility which, as of the Acquisition, is an obligation of Parent and, as such, the related debt and interest costs are not included in the Acquisition Company financial statements for the periods ended and as of March 31, 1999, and (ii) certain immaterial inter-company management fees and expenses between the Parent and Acquisition Company are not eliminated at the Acquisition Company level. The consolidated condensed unaudited financial statements of Acquisition Company are set forth below. -13- AMSC Acquisition Company, Inc. Combined Condensed Statements of Operations (dollars in thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 ---- ---- REVENUES Services $16,164 $6,418 Sales of equipment 4,066 3,604 ----- ----- Total Revenues 20,230 10,022 COSTS AND EXPENSES: Cost of service and operations 17,870 7,728 Cost of equipment sold 4,528 3,881 Sales and advertising 4,749 2,993 General and administrative 4,879 3,659 Depreciation and amortization 13,772 10,689 ------ ------ Operating Loss (25,568) (18,928) INTEREST AND OTHER INCOME 1,181 141 INTEREST EXPENSE (12,810) (13,826) -------- -------- NET LOSS $(37,197) $(32,613) ========= =========
-14- AMSC Acquisition Company, Inc. Combined Condensed Balance Sheets (dollars in thousands) (Unaudited)
March 31, December 31, ASSETS 1999 1998 ---- ---- CURRENT ASSETS: Cash and cash equivalents $8,131 $2,285 Inventory 17,440 18,593 Accounts receivable 16,752 15,325 Restricted short-term investments 41,038 41,038 Prepaid in-orbit insurance 1,932 3,381 Other current assets 9,091 7,212 ----- ----- Total current assets 94,384 87,834 PROPERTY AND EQUIPMENT - NET 239,017 246,553 GOODWILL - NET 52,772 56,439 RESTRICTED INVESTMENTS 57,678 53,235 DEFERRED CHARGES AND OTHER ASSETS - NET 32,672 33,846 ------ ------ Total assets $476,523 $477,907 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $41,418 $33,718 Obligations under capital leases due within one year 4,816 5,971 Current portion of long-term debt 4,153 5,041 Other current liabilities -- 162 ------- --- Total current liabilities 50,387 44,892 DUE TO PARENT 557 -- LONG-TERM LIABILITIES: Obligations under New Bank Financing 59,000 32,000 Senior Notes, net of discount 327,359 327,147 Capital lease obligations 5,657 5,824 Other long-term debt 3,473 1,689 Net assets acquired in excess of purchase price 1,855 2,028 Other long-term liabilities 535 540 --- --- Total long-term liabilities 397,879 369,228 Total liabilities 448,823 414,120 ------- ------- STOCKHOLDERS' EQUITY 27,700 63,787 ------ ------ Total liabilities and stockholders' equity $476,523 $477,907 ======== ========
-15- AMSC Acquisition Company, Inc. Combined Condensed Statements of Cash Flows (dollars in thousands) (Unaudited)
Three Months Ended March 31, 1999 1998 ---- ---- CASH FLOWS USED IN OPERATING ACTIVITIES: Net loss $(37,197) $(32,613) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of debt discount 1,786 2,524 Depreciation and amortization 13,772 10,689 Changes in assets and liabilities: Inventory 1,153 1,986 Prepaid in-orbit insurance 1,449 1,675 Trade accounts receivable (1,427) 3,744 Other current assets (1,424) (661) Accounts payable and accrued expenses 8,147 (12,182) Deferred trade payables (2,092) 6,436 Deferred items - net (542) 293 -------- -------- Net cash used in operating activities (16,375) (18,109) Additions to property and equipment (2,541) (1,126) Acquisition of ARDIS -- (51,382) Purchase of long-term restricted cash securities (1,239) (113,000) -------- --------- Net cash used in investing activities (3,780) (165,508) CASH FLOWS FROM FINANCING ACTIVITIES: Funding from Parent 413 (12,127) Principal payments under capital leases (1,322) (135) Proceeds from Bank Financing 27,000 2,000 Repayment of Bank Financing -- (100,000) Proceeds from bridge financing -- 10,000 Repayment of bridge financing -- (10,000) Proceeds from Senior Notes -- 326,510 Principal payments under vendor Financing (90) -- Debt issuance costs -- (13,458) ------- -------- Net cash provided by financing activities 26,001 202,790 Net increase in cash and cash equivalents 5,846 19,173 CASH AND CASH EQUIVALENTS, beginning of period 2,285 2,106 ------- -------- CASH AND CASH EQUIVALENTS, end of period $8,131 $21,279 ======= ========
-16- 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, "believes," "intended," "will be positioned," "expects," "expected," "estimates," "anticipates" and "anticipated." These forward-looking statements are based on the Company's current expectations. All statements other than statements of historical facts included in this 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. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Quarterly Report, including, without limitation, in conjunction with the forward-looking statements included in this Quarterly Report. These forward-looking statements represent the Company's judgment as of the date hereof and readers are cautioned not to place undue reliance on these forward- looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the Cautionary Statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Form 10-K Annual Report filed on March 30, 1999, the Registration Statement on Form S-3, No. 333-71423, 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. The Company offers a broad range of end-to-end wireless solutions utilizing a seamless network consisting of the nation's largest, most fully-deployed terrestrial wireless data network (the "ARDIS Network") and a satellite in geosynchronous orbit (the "Satellite Network") (together, the "Network"). The Company and its 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 (collectively, the "New Bank Financings"); and (3) $10 million commitment with respect to Motorola vendor financing. See "Liquidity and Capital Resources." -17- 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. The operations and financing of XM Radio are maintained separate and apart from the operations and financing of American Mobile (see "Liquidity and Capital Resources"). Through its investment in XM Radio, WorldSpace has an option to increase its ownership in XM Radio subject to FCC approval. On October 30, 1998 the Company and WorldSpace jointly filed an application for consent to the transfer of control of XM Radio in anticipation of future exercise of the World Space options. On January 15,1999, the Company provided an additional $21.4 million of convertible financing for XM Radio through an issuance of a $21.5 million subordinated, non-recourse note of the Company to Baron Asset Fund. The Company's note issued to Baron Asset Fund 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. Assuming conversion of all convertible notes and exercise of the outstanding WorldSpace options, the Company's ownership in XM Radio would be 22.6%. Given the acquisition of ARDIS, 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 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 the Networks and the cost of developing, selling and providing its products and services. The Company is, and will continue to be, highly leveraged. The Company's future operating results could be adversely affected by a number of uncertainties and factors, including: -18- (a) the timely completion and deployment of future products and related services, including among other things, availability of an adequate supply of mobile telephones, data terminals and other equipment to be used with the Network ("Subscriber Equipment") being manufactured by third parties over which the Company has limited control, (b) the market's acceptance of the Company's services, (c) the ability and the commitment of the Company's distribution channels to market and distribute the Company's services, (d) the Company's ability to modify its organization, strategy and product mix to maximize the market opportunities in light of changes therein, (e) competition from existing companies that provide services using existing communications technologies and the possibility of competition from companies using new technology in the future, (f) capacity constraints arising from the reconfiguration of MSAT-2, subsequent anomalies affecting MSAT-2, or power management recommendations affecting MSAT-2, each as previously reported, (g) additional technical anomalies that may occur within the Satellite Network, including those relating to MSAT-2, which could impact, among other things, the operation of the Satellite Network and the cost, scope or availability of in-orbit insurance, (h) subscriber equipment inventory commitments assumed by the Company including the ability of the Company to realize the value of its inventory in a timely manner, (i) 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, (j) the Company's ability to respond and react to changes in its business and the industry as a result of being highly leveraged, (k) the timely roll-out of certain key customer initiatives and products, (l) the ability of the Company to successfully integrate ARDIS and to achieve certain business synergies, and (m) the ability of the Company to manage growth effectively. The Company's operating results and capital and liquidity needs have been materially affected by delays experienced in the acquisition of subscribers and the related equipment sales. The impact of this delay has substantially decreased the Company's anticipated revenues and increased the Company's capital and liquidity needs. No assurance can be given that additional delays relating to the acquisition of subscribers and equipment sales will not be encountered in the future and will not have an adverse impact on the Company. As of March 31, 1999, there were approximately 113,000 units on the Network. -19- Three Months Ended March 31, 1999 and 1998 Service revenues, which includes both the Company's voice and data services, approximated $16.2 million for the three months ended March 31, 1999, which is a $9.8 million, or 153%, increase over the same period in 1998. The significant increase in service revenues year over year was primarily attributable to the inclusion, in the three months ended March 31, 1999, of revenues attributable to the ARDIS data service.
Three Months Ended Summary of Revenue March 31, (in millions) 1999 1998 Change % Change ---- ---- ------ -------- Voice Service $3.0 $3.2 ($0.2) (6)% Data Service 12.0 2.3 9.7 422 Capacity Resellers and Other 1.2 0.9 0.3 33 Equipment Sales 4.1 3.6 0.5 14
The decrease in service revenue from voice services was primarily a result of reduced per-minute rates as a result of the sale of the assets of our maritime division, in October 1998, to a reseller, partially offset by a 21% increase in voice customers in the first quarter of 1999 as compared to 1998. The increase in service revenue from the Company's data services was due principally to the inclusion in the three months ended March 31, 1999 of approximately $9.4 million from the ARDIS data service. 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.
Three Months Ended Summary of Expenses March 31, (in millions) 1999 1998 Change % Change ---- ---- ------ -------- Cost of Service & Operations $17.9 $7.7 $10.2 132% Cost of Equipment Sales 4.5 3.9 0.6 15 Sales & Advertising 4.7 3.0 1.7 57 General & Administrative 4.8 3.6 1.2 33 Depreciation & Amortization 13.8 10.2 3.6 35
-20- 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 the first quarter discussion reflects the costs of the consolidated entity. Cost of service and operations for the first quarter of 1999 includes costs to support subscribers and to operate the network. As a percentage of total revenues, cost of service and operations was 88% and 77% for the first quarter of 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 increase from the first quarter of 1998 to the first quarter of 1999 in the cost of equipment sold was primarily attributable to the increase in the volume of sales of the various data products. Sales and advertising expenses were 23% of total revenue during the first quarter of 1999 and 30% of total revenue in the same period in 1998. The 57% increase in sales and advertising expenses from the first quarter of 1998 to the first quarter of 1999 was primarily attributable to increased headcount costs resulting from the ARDIS acquisition. -21- General and administrative expenses represented 24% and 36% of total revenue in the first quarter of 1999 and 1998, respectively. The $1.1 million increase in general and administrative expenses quarter over quarter for 1999 compared to 1998 was primarily attributable to (i) headcount costs related to additional staffing as a result of the ARDIS acquisition, and (ii) occupancy costs resulting from the leasing of the two ARDIS office locations. Depreciation and amortization expense represented approximately 68% of total revenue in the first quarter of 1999, as compared to 101% of total revenue in the first quarter of 1998. The $3.6 million increase in depreciation and amortization expense was primarily attributable to the addition of ARDIS assets and step-up in the basis of ARDIS licenses. Interest and other income was $1.7 million for first quarter of 1999 as compared to $0.1 million for same period in 1998. The increase was primarily a result of interest earned on certain required escrows established with the proceeds from the Senior Notes. The Company incurred $15.9 million of interest expense in the first quarter of 1999 compared to $6.6 million in the same period of 1998, reflecting (i) interest expense on the Senior Notes at 12.25%, offset by lower debt balances on our 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 $4.6 million in the first quarter of 1999, compared to $2.5 million in the first quarter of 1998. It is anticipated that interest costs will continue to be significant as a result Senior Notes and of the borrowings under our term loan and revolving credit facilities. (See "Liquidity and Capital Resources"). Net capital expenditures for the first quarter of 1999 for property and equipment were $2.5 million compared to $1.1 million in 1998. The increase was largely attributable to the acquisition of assets necessary to continue the build-outs of the ARDIS 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 American Mobile Satellite Corporation, 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 April 30, 1999, the Company had $41.0 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 March 31, 1999, $4.6 million was outstanding under this facility. -22- 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 repricing 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. Additionally, 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 reprice 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 April 30, 1999, the Company had outstanding borrowings of $100 million of the Term Loan Facility at 5.5%, and $59 million under the Revolving Credit Facility at rates ranging from 5.4375% to 5.6875%. 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 -23- 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. Deferred Trade Payables The Company has arranged the financing of certain trade payables, and as of March 31, 1999, $3.0 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, can be met by cash flows from operations, the net proceeds from the sale of the Senior Notes and Warrants, together with the borrowings under the $200 million New Bank Financing, the Vendor Financing Commitment and deferred terms on certain trade payables; 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 As previously mentioned (see "Organization and Business"), XM Radio was a winning bidder for, and on October 16, 1997, was awarded an FCC license to provide DARS throughout the United States. XM Radio has received, and is expected to continue to receive, substantially all of the funding for this business from independent sources in exchange for debt and equity interests in XM Radio. Accordingly, it is not expected that the development of this business will have a material impact on the Company's financial position, results of operations, or cash flows. The Company's equity interest in XM Radio may, however, even on a fully diluted basis, become a material asset of the Company. 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 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 the September 30, 2006 maturity date, and the Baron XM Radio Convertible Note accrues interest at the rate of 6% annually, with all payments deferred until maturity 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. -24- Commitments At March 31, 1999, the Company had remaining contractual commitments to purchase both mobile data terminal inventory and mobile telephone inventory in the maximum amount of $12.0 million during 1999. Additionally, the Company had remaining contractual commitments in the amount of $635,000 for the development of certain next generation data terminals. Contingent upon the successful research and development efforts, the Company would have maximum additional contractual commitments for mobile communications data terminal inventory in the amount of $27.0 million over a three-year period starting in 1999. The Company has the right to terminate the research and development and inventory commitment by paying cancellation fees of between $1 million and $2.5 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 mid-1999. The contract contains a 50% cancellation penalty. Additionally, the Company has remaining contractual commitments for the purchase of $392,000 of base stations required to complete certain necessary site build-outs, and $1.2 million for certain software development. 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 March 31, 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. -25- Cash used in operating activities was $16.0 million for the first quarter of 1999 compared to $10.9 million for the comparable period in 1998. The increase in cash used in operating activities was primarily attributable to (i) approximately $3.0 million of increased operating losses, primarily as a result of additional net expenses incurred as a result of the ARDIS acquisition and Year 2000 compliance programs and (ii) increases in net working capital resulting primarily from increased data service revenues. Cash used in investing activities was $25.4 for the first quarter of 1999 compared to $193.4 million for the first quarter of 1998, representing (i) 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. Cash provided by financing activities was $47.2 million in the first quarter of 1999 as compared to $223.5 million in the first quarter of 1998 reflecting the issuance of the Notes in March 1998, offset by the repayment of other long-term debt in the first quarter of 1998, and the proceeds from the issuance of the Baron XM Radio Convertible Note and draws under the New Bank Financing in the first quarter of 1999. Proceeds from the sale of Common Stock were $162,000 and $103,000 for the first three months of 1999 and 1998, respectively. Payments on long-term debt and capital leases were $1.3 million and $100,000 for the first three months of 1999 and 1998, respectively. In addition, the Company incurred $40,000 of debt issuance costs in the first quarter of 1999, as compared to $13.5 million in the first quarter of 1998, which resulted from the placement of the Notes and amendments to the New Bank Financing. As of March 31, 1999, the Company had $8.1 million of cash and cash equivalents, working capital of $21.7 million of securities, and $41.0 million of investments restricted for the payment of interest. 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 standard 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. -26- 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 $7.4 million, of which approximately $1.5 million was incurred as of March 31, 1999. Some modification costs, including the purchase of software upgrades and consulting services, are expensed as incurred while other modification 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 based on 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 -27- 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. American Mobile anticipates having additional Year 2000 contingency plans in place by June 1999. 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. 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. -28- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.33a - Amendment No. 1, dated as of May 10, 1999, to Amended and Restated Registration Rights Agreement among American Mobile Satellite Corporation and Hughes Electronics Corporation, Singapore Telecommunications Ltd., and Baron Capital Partners, L.P. (filed herewith) 11.1 - Computations of Earnings Per Common Share (filed herewith) 27.0 -- Financial Data Schedule (filed herewith) -29- 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: May 13, 1999 By: /s/Walter V. Purnell, Jr. ------------------------------------ Walter V. Purnell, Jr. President and Chief Executive Officer /s/W. Bartlett Snell ------------------------------------- W. Bartlett Snell Senior Vice President and Chief Financial Officer (principal financial and accounting officer) -30- EXHIBIT INDEX Number Description 10.33a - Amendment No. 1, dated as of May 10, 1999, to Amended and Restated Registration Rights Agreement among American Mobile Satellite Corporation and Hughes Electronics Corporation, Singapore Telecommunications Ltd., and Baron Capital Partners, L.P. (filed herewith) 11.1 - Computations of Earnings Per Common Share (filed herewith) 27.0 - Financial Data Schedule (filed herewith) EX-10.33A 2 AMENDED AND RESTATED REGISTRATION RIGHTS AMENDMENT EXHIBIT 10.33a AMENDMENT NO. 1 TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT AMENDMENT NO. 1, dated as of May 10, 1999 (this "Amendment"), by and among American Mobile Satellite Corporation, a Delaware corporation (the "Company"), Hughes Electronics Corporation ("Hughes"), Singapore Telecommunications Ltd. ("Singapore Telecom"), and Baron Capital Partners, L.P. ("Baron," and collectively with Hughes and Singapore Telecom, the "Guarantors"), to the Amended and Restated Registration Rights Agreement dated as of March 31, 1998 (said Agreement, as the same may be amended, supplemented or otherwise modified from time to time, being the "Registration Rights Agreement," and the terms defined therein being used herein as therein defined unless otherwise defined herein), by and among the Company and the Guarantors. WITNESSETH: WHEREAS, the Guarantors have certain piggyback registration rights under the Registration Rights Agreement; and WHEREAS, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (the "SEC") on January 29, 1999 in connection with an offering of its common stock (the "Offering"), which registration statement was declared effective by the SEC on March 31, 1999; and WHEREAS, Hughes declined to exercise its piggyback rights under the Registration Rights Agreement with respect to the Offering. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: Section 1. Consideration for Amendment. The Company has agreed to this Amendment in consideration for Hughes's election not to exercise its piggyback rights under the Registration Rights Agreement with respect to the Offering. Section 2. Extension of Period for Demand Registration in Section 2.1(a). Section 2.1(a) of the Registration Rights Agreement is hereby amended so that each and every reference therein to "March 31, 2005" is replaced with "March 31, 2007." Section 3. Additional Demand Registration for Hughes. Subject to the terms and conditions contained herein, Hughes may, at any time prior to March 31, 2007, make a written request of the Company for a Demand Registration with respect to its Registrable Securities (the "Hughes Demand Registration"), which request shall be in addition to the two Demand Registrations provided for in Section 2.1 of the Registration Rights Agreement (the "Guarantor Group Demand Registrations"). The Hughes Demand Registration may not be exercised by Hughes (or its permitted assignee) until the earlier of (i) both of the Guarantor Group Demand Registrations having been exercised and completed in accordance with the terms of Section 2.1, and (ii) such time as when Guarantors other than Hughes (or such Guarantors' assignees) do not own any Registrable Securities. In order to exercise the Hughes Demand Registration, Hughes shall follow the procedures set forth in Section 2.1, and Hughes's election to exercise the Hughes Demand Registration shall be subject to all of the terms and conditions contained in Section 2.1; provided, that, in the case of a Hughes Demand Registration, the first paragraph of Section 2.1(a) shall not be applicable, and all references in Section 2.1 to the "Demanding Group" shall be deemed, where applicable, to refer solely to "Hughes." If the Hughes Demand Registration is exercised by Hughes in accordance with the terms hereof, the Guarantors other than Hughes will be entitled to exercise piggyback rights pursuant to Section 2.2 of the Registration Rights Agreement, with respect to any Registrable Securities owned by such Guarantors at that time. In the case of a Hughes Demand Registration in which the Guarantors other than Hughes wish to exercise their piggyback rights, Registrable Securities owned by such other Guarantors and desired to be included in such Hughes Demand Registration shall be accorded the priority set forth in Section 2.1(c)(x)(iv), in the case of registrations occurring up to and including the Subordination Termination Date, or Section 2.1(c)(y)(ii), in the case of registrations occurring after the Subordination Termination Date. For the avoidance of doubt, in the case of a Hughes Demand Registration, the Guarantors other than Hughes shall not be deemed to be part of the "Demanding Group" for the purpose of determining priority of registration in accordance with Section 2.1(c), or for any other purpose. Section 4. Assignment of Rights Under Registration Rights Agreement. The Company and each of the Guarantors hereby agrees that the Registration Rights Agreement (as amended hereby) and the rights of any Guarantor thereunder may be transferred and assigned to any entity that acquires any Registrable Securities from time to time; provided, that no such assignment shall be effective unless (i) the assigning Guarantor (or its permitted assignee) notifies the Company in writing of such assignment, and (ii) the prospective assignee agrees in writing to be bound by, and become a party to, the Registration Rights Agreement. Section 5. Miscellaneous. (a)Upon the effectiveness of this Amendment, each reference in the Registration Rights Agreement to "this Agreement," "hereunder," "herein," or words of like import shall mean and be a reference to the Registration Rights Agreement as amended hereby. (b)Except as specifically amended hereby, the Registration Rights Agreement shall remain in full force and effect and is hereby ratified and confirmed. (c)The execution and delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power, or remedy which the Company or any Guarantor may have under the Registration Rights Agreement. (d)This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. (e)The Company acknowledges its obligation, under Section 4 of the Guaranty Issuance Agreement, to pay, upon demand, to each Guarantor, the amount of any and all reasonable expenses, including, without limitation, the reasonable fees and expenses of such Guarantor's counsel and of any experts and agents, which such Guarantor has incurred or may incur in connection with the negotiation, preparation or administration of this Amendment. (f)This Amendment shall be governed by and construed in accordance with the laws of the state of New York. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. AMERICAN MOBILE SATELLITE CORPORATION By: /s/ Randy S. Segal ------------------ Name: Randy S. Segal Title: Senior Vice President and General Counsel HUGHES ELECTRONICS CORPORATION By: /s/ Mark McEachen ----------------- Name: Mark McEachen Title: Senior Vice President SINGAPORE TELECOMMUNICATIONS LTD. By: /s/ Hoh Wing Chee ----------------- Name: Hoh Wing Chee Title: VP (International Network) BARON CAPITAL PARTNERS, L.P. By: Baron Capital Management Inc., A General Partner By: /s/ Linda S. Martinson ---------------------- Name: Linda S. Martinson Title: Vice President and General Counsel EX-11 3 COMPUTATIONS OF EARNINGS PER COMMON SHARE EXHIBIT 11.1 AMERICAN MOBILE SATELLITE CORPORATION --------------------------------------- COMPUTATIONS OF EARNINGS PER COMMON SHARE --------------------------------------- (in thousands, except per share amounts) ---------------------------------------
Three Months Ended March 31, 1999 1998 ---- ---- BASIC EARNINGS PER SHARE CALCULATION Net Loss ($39,649) ($25,242) ========= ========= Net Loss per common share ($1.23) ($1.00) ======= ======= Weighted-average common shares outstanding 32,225 25,241 ======= ====== DILUTED EARNINGS PER SHARE CALCULATION Net Loss ($39,649) ($25,242) ========= ========= Net Loss per common share ($1.23) ($1.00) ======= ======= Weighted-average common shares (1) 32,309 25,336 ====== ====== (1) Calculated as follows: Historical weighted average number of shares outstanding 32,225 25,241 Assumed exercise of stock options -- 33 Assumed exercise of stock purchase 84 62 -------- -------- warrants 32,309 25,336 ====== ======
EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's unaudited Consolidated Statement of Loss, Consolidated Balance Sheet, and Consolidated Statement of Cash Flows, in each case for the three months ended March 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 U.S. Dollars 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 8,131 131,348 16,752 0 17,440 122,035 239,017 0 508,598 50,598 526,227 0 0 324 (62,182) 508,598 4,066 20,230 4,528 27,388 13,772 0 15,930 (39,649) 0 (39,649) 0 0 0 (39,649) (1.23) 0
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