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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-23044
AMERICAN MOBILE SATELLITE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0976127
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10802 Parkridge Boulevard
Reston, VA 20191-5416
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 758-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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The aggregate market value of shares of Common Stock held by non-affiliates at
March 25, 1999 was approximately $117,879,802.
Number of shares of Common Stock outstanding at March 25, 1999: 32,237,078.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Certain information in the Company's definitive Proxy Statement for its 1999
Annual Meeting of Stockholders is incorporated by reference in Part III of this
Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
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AMERICAN MOBILE SATELLITE CORPORATION
-------------------------------------
1998 Annual Report on Form 10-K
-------------------------------
PART I
------
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "believes,"
"intended," "will be positioned," "expects," "expected," "estimates,"
"anticipates" and "anticipated." These forward-looking statements are based on
the Company's current expectations. All statements other than statements of
historical facts included in this Annual Report, including those regarding the
Company's financial position, business strategy, projected costs and financing
needs, and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Annual Report, including, without limitation, in conjunction with the
forward-looking statements included in this Annual Report. These forward-looking
statements represent the Company's judgment as of the date hereof and readers
are cautioned not to place undue reliance on these forward- looking statements.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including the Registration
Statement on Form S-3, No. 333-71423, and Form 10-Q Quarterly Reports to be
filed by the Company subsequent to this Annual Report on Form 10-K and any
Current Reports on Form 8-K and registration statements filed by the Company.
- 1 -
Item 1. Business.
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Overview
--------
American Mobile Satellite Corporation (the "Company" or "American Mobile"),
through its subsidiaries, is a leading provider of nationwide wireless
communications services, including data, dispatch, and voice services, primarily
to business customers in the United States. The Company's combined network
offers a broad range of end-to-end wireless solutions utilizing a seamless
network consisting of the nation's largest, most fully-deployed terrestrial
wireless data network and a satellite in geosynchronous orbit.
American Mobile provides data service through a number of network
configurations, including a "terrestrial-only" service network, a
"satellite-only" service network and a "multi-mode" terrestrial and satellite
service network.
American Mobile operates the ARDIS terrestrial network which is a leading
provider of nationwide wireless data services to markets consisting primarily of
business customers with a need for reliable, two-way wireless data
communications in the field services and transportation markets.
The ARDIS wireless data network provides the widest breadth of coverage of any
single provider of terrestrial wireless service in the United States. The
network is comprised of approximately 1,800 radio towers (base stations) that
provide service to 427 of the largest cities and towns in the United States,
including virtually all metropolitan areas. The network was designed and built
using Motorola technology to provide reliable two-way data communications, deep
in-building penetration and efficient frequency usage. The extensive coverage
and deep in-building penetration provided by the ARDIS network is attractive to
customers who desire a single service provider whose nationwide scope extends
from large metropolitan areas to smaller cities and towns. Customers use
applications such as service call dispatch, asset tracking, and peer-to-peer
communications to achieve critical business objectives resulting in increased
productivity, profitability and customer satisfaction.
American Mobile's satellite-only data communications system provides data
services primarily to long-haul trucking customers. The Company's multi-mode
communications system uses the Company's integrated terrestrial and satellite
network to provide "least-cost routing" for customers' two-way data
communications by actively seeking connections to the lower cost terrestrial
network before automatically using the Company's satellite network, thereby
providing cost-effective nationwide coverage.
In addition to providing data service, American Mobile offers two forms of
mobile satellite voice communications service: nationwide dispatch service and
satellite telephone service. American Mobile is the only company that offers a
nationwide dispatch service which allows multiple users located anywhere in
American Mobile's extensive service area to share a single connection for
point-to-multipoint communication using push-to-talk handsets. American Mobile
markets its nationwide dispatch service primarily to field services users with
wide-area fleet communications needs. American Mobile's satellite telephone
service provides traditional voice, fax and data service through satellite
terminals that are similar to cellular phones.
As of December 31, 1998, American Mobile had approximately 105,700 units on its
combined satellite and terrestrial network, of which 13,000 were satellite voice
units and 92,700 were terrestrial and satellite data units.
- 2 -
XM Radio
- --------
XM Satellite Radio Inc., a subsidiary of XM Satellite Radio Holdings Inc.
(together with XM Satellite Radio Inc., "XM Radio") has been granted a license
from the Federal Communications Commission (the "FCC") to construct, launch and
operate a domestic satellite system for the provision of satellite-based digital
audio radio service ("DARS"). XM Radio made a payment of $90 million to fully
pay for its DARS license in October 1997. The Company currently owns 80% of the
capital stock of XM Radio. The remainder of XM Radio currently is owned by
WorldSpace, Inc. ("WorldSpace"), a leading international DARS company that is
planning to provide DARS service to Latin America, Africa and Asia. Through its
investment in XM Radio, WorldSpace has an option to increase its ownership in XM
Radio, subject to pending FCC approval. On January 15, 1999, American Mobile
provided an additional $21.4 million of convertible financing for its
subsidiary, XM Radio. This loan was funded through the issuance of a $21.5
million subordinated, non-recourse, note of American Mobile to Baron Asset Fund.
American Mobile's note issued to Baron Asset Fund is exchangeable into
approximately half of the additional XM Radio common stock to be received by
American Mobile as a result of the January 15 transaction.
Assuming conversion of American Mobile's convertible XM Radio notes, the
exchange by Baron Asset Fund of its exchangeable note and the exercise of the
outstanding WorldSpace options following FCC approval of the pending consent to
the transfer of control of XM Radio, as previously reported, American Mobile's
ownership in XM Radio would be 22.6%, and the ownership position of WorldSpace
upon exercise of its options, subject to FCC approval, would be 71.8%.
History
-------
The Company, a Delaware corporation, was incorporated in May 1988 by eight of
the initial applicants for the first mobile satellite services license,
following a determination by the FCC that the public interest would best be
served by granting the license to a consortium composed of all willing and
qualified applicants. In March 1991, the Company transferred the mobile
satellite services license to its wholly owned subsidiary, AMSC Subsidiary
Corporation.
In August 1989, the FCC authorized the Company to construct, launch and operate
a mobile satellite communications system. For the system's mobile links, the FCC
assigned to the Company the exclusive license to 30 MHz of L-band spectrum,
subject to international frequency coordination. L-band spectrum is considered
advantageous for mobile communications services because it is less affected by
radio propagation difficulties than are higher frequencies. The FCC licensed the
Company to provide a full range of mobile voice, data and dispatch
communications services via satellite to land, air and sea-based customers in a
service area consisting of the continental United States, Alaska, Hawaii, Puerto
Rico, the U.S. Virgin Islands and U.S. coastal waters and airspace.
On March 31, 1998, the Company acquired ARDIS (the "Acquisition") for a purchase
price of $100 million (the "Purchase Price"): $50 million in cash, and $50
million in shares of the Company's Common Stock, as approved by its stockholders
with respect to certain of the share consideration at the 1998 annual meeting of
the Company's stockholders.
- 3 -
In connection with the Acquisition, the Company and its subsidiaries entered
into agreements with respect to three financings and refinancings: (1) $335
million of Units consisting of 12 1/4% Senior Notes due 2008 and Warrants to
purchase shares of Common Stock of the Company; (2) a $100 million Revolving
Credit Facility and a $100 million Term Loan Facility (collectively, the "New
Bank Financing"); and (3) a $10 million commitment with respect to Motorola
vendor financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Upon completion of the Acquisition, ARDIS became a wholly-owned subsidiary of
AMSC Acquisition Company, Inc. ("Acquisition Company"). In connection with the
Acquisition, the Company also transferred all of its rights, title and interest
in three additional subsidiaries - American Mobile Satellite Sales Corporation,
AMSC Subsidiary Corporation and AMSC Sales Corporation, Ltd. - to Acquisition
Company. As a result, each of these entities is a wholly-owned subsidiary of
Acquisition Company that, in turn, operates as a wholly-owned subsidiary of the
Company. The Company continues to retain its direct ownership interest in XM
Radio.
The Network
-----------
Following the Acquisition, the Company's integrated network consists of (i) a
satellite in geosychronous orbit with coverage of the continental United States,
Alaska, Hawaii, Puerto Rico, the U.S. Virgin Islands and U.S. coastal waters and
airspace, and (ii) the largest two-way terrestrial data network in the United
States with coverage of 427 of the largest cities and towns in the United
States, including virtually all metropolitan areas. The network provides a wide
range of mobile data and voice services in multi-mode and single-mode
configurations.
Users of the Company's integrated terrestrial and satellite communications
network access the network through subscriber units that may be portable, mobile
or stationary devices. Generally, subscriber units enable either data or voice
communications and are designed to operate over either the terrestrial data-only
network or the satellite network, which provide both voice and data
communications. In addition, the Company's multi- mode subscriber equipment is
designed to provide least-cost routing of data messages over the integrated
terrestrial and satellite network.
Subscriber units receive and transmit wireless data or voice messages from
either terrestrial base stations or the Company's satellite, MSAT-2. Terrestrial
messages are routed to their destination via Company-owned data switches, which
connect to the public data network. Satellite messages are routed to their
destination via satellite data and voice switches, located at the Company's
headquarters, which connect to the public data and switched voice networks. A
data switch located in Lincolnshire, Illinois links the terrestrial and
satellite networks for the delivery of the Company's multi-mode data service.
The Company's terrestrial network delivers superior in-building penetration,
completion rates and response times compared to other wireless data networks
through the use of a patented single frequency reuse ("SFR") technology
developed by Motorola. SFR technology enables multiple base stations in a given
area to use the same frequency. As a result, a message sent by a subscriber can
be received by a number of base stations. This technology contrasts with more
commonly used multiple frequency reuse ("MFR") systems which provide for only
one transmission path for a given message at a particular frequency. In
comparison with MFR systems, the Company's technology provides superior
in-building penetration and response times and enables the Company to
incrementally deploy additional capacity as required, instead of in larger
increments as required by most wireless networks.
- 4 -
Business Strategy
-----------------
The Company's objective is to maximize its revenues by delivering value-added
services to end users in specific market segments. To meet this objective and to
capitalize upon the competitive advantages resulting from the combination of its
satellite and terrestrial networks, the Company intends to: (i) offer business
customers a broad range of nationwide wireless service and end-to-end data
solutions; (ii) integrate and leverage the advantages of its nationwide
terrestrial and satellite data networks; (iii) enhance market penetration by
lowering customers' "total cost of ownership"; and (iv) expand the use of
alternate distribution channels to accelerate network loading.
Offer Business Customers a Broad Range of Nationwide Wireless Solutions. The
Company believes its corporate customers prefer a single-source service provider
capable of delivering a broad range of efficient and cost effective solutions to
meet their need for mobile wireless communications. The Company believes that it
has and will continue to have a unique strategic advantage in being able to
provide one-stop shopping across a broad range of products, including two-way
paging and advanced messaging, packaged e-mail and LAN solutions, custom data
applications, dual mode terrestrial/satellite data, and satellite voice and
dispatch functions.
Integrate and Leverage Network Advantages. The Company has spent over a decade
developing and deploying its nationwide terrestrial and satellite networks and
now seeks to accelerate growth by leveraging its integrated network. Unlike many
competitors with plans to build out limited city-wide or regional terrestrial
networks or to launch satellites, the Company's technology infrastructure is in
place and operational today, with future network expansion requirements arising
primarily from increased customer demand. The Company believes that this
integrated terrestrial/satellite network provides key competitive advantages
currently unmatched by any competitor: virtually 100% nationwide geographic
coverage, guaranteed message delivery, and, in the areas covered by the ARDIS
network, deep in-building penetration. By integrating the operations of its
terrestrial and satellite networks, the Company expects to achieve operating
efficiencies and economies of scale that it believes will lead to improved
operating margins.
Enhance Market Penetration By Reducing Customers' "Total Cost of Ownership."
Historically, the most significant obstacle to the implementation of
enterprise-wide wireless data applications has been the relatively high total
cost of ownership. The total cost of ownership is comprised of three primary
elements: the cost of the subscriber unit, the required investment in software
development, and the monthly cost of network access and usage. In most of the
Company's applications, the monthly cost of network access and usage has been
the least prohibitive of these elements. Until recently, subscriber unit costs
in excess of $3,000 and custom software investments of up to several million
dollars were common. By working with business partners and vendors, and making
strategic software investments, the Company has succeeded in significantly
lowering the total cost of ownership for its customers. New subscriber units,
including low-cost two-way messaging units and laptop modem cards, are now
available for $500 or less and substantial development work is underway with
several of the Company's vendors to accelerate reductions of equipment cost,
unit weight and size. In the future, the Company expects that the increased
subscriber unit volumes associated with recent large contract awards will lead
- 5 -
to additional unit price reductions. In addition, customers can now use
off-the-shelf software applications that are relatively inexpensive, or in the
case of the Company's two-way messaging service, free. The Company believes that
these lower price points will accelerate the adoption of the Company's services
in its historical markets, and will enable the Company to develop new markets,
such as wireless point-of-sale and telemetry.
Expand Alternate Distribution Channels. The Company sells it service primarily
through a direct sales force and resellers. In order to accelerate network
loading, the Company expects to expand its use of indirect distribution
channels. To date, the Company has entered into agreements with resellers to
penetrate markets where such resellers have a market presence and significantly
greater resources than the Company, including dedicated sales personnel. In
addition, the Company is in the process of establishing relationships with
existing paging companies, paging resellers, and other targeted distribution
partners to market two-way guaranteed messaging services. The Company believes
that the resale of its network is an alternative that paging companies will
consider either as an expansion of the current two-way messaging product or as
an alternative to investment in network infrastructure for two-way messaging.
The Company intends to utilize paging companies and other similar partners with
well established distribution capabilities to develop markets outside of the
Company's historical market segments.
Marketing and Distribution
--------------------------
The Company markets its services through four primary distribution channels:
direct sales, vertical resellers, horizontal resellers and dealers.
Direct Sales
- ------------
The Company has a direct sales force that focuses on the requirements of
business customers. This sales organization is comprised of a national accounts
group that profiles and targets specific Fortune 500 accounts, and a network of
regionally based representatives who specialize in specific industry segments.
Sales to national account targets generally require a sustained marketing effort
lasting several months. Prior to making a buying decision, a majority of the
accounts exercise a due diligence process where competitive alternatives are
evaluated. The Company's employees often assist in developing justification
studies, application design support, hardware testing, planning and training.
Vertical Resellers
- ------------------
In order to penetrate quickly certain market segments characterized by
specialized technical requirements and/or unique business applications, the
Company leverages the capabilities of specialized distribution partners. These
relationships enable the Company to penetrate new market segments without
investing in the product, training and development requirements typically
associated with entry into a new market segment.
The Company's resale arrangements are specifically designed to accelerate entry
into the wireless telemetry (utility and alarm monitoring), point-of-sale,
maritime and government market segments. These business partners are responsible
for development of the end-user solutions, and purchase capacity on the
Company's data network.
- 6 -
Value added service providers ("VASPs") represent the Company's primary
distribution channel for maritime satellite telephony. VASPs purchase bulk
minutes, resell at a margin, set the price, take risk of collection and perform
all service and billing functions.
The Company currently utilizes three specialized government resellers, one of
which has included the Company's products on the General Services Administration
schedule. The Company intends to expand the distribution opportunities for its
terrestrial data products by also including them in these programs.
The Company also has various private network customers ("PNCs") that purchase
bulk satellite capacity from the Company in the form of dedicated capacity
increments or channels. PNCs use this capacity to support their own proprietary
networks and products, and maintain all associated business risks and
responsibilities.
Horizontal Resellers
- --------------------
The Company utilizes a series of resale relationships designed to reach a large
segment of the mobile workforce that does not require integration with
centralized systems, but still has a broad need for two-way messaging and
wireless e-mail access. Because these applications are generic across numerous
industries, the segment is horizontally addressable, and requires some level of
retail presence. To achieve this presence, the Company is in the process of
establishing relationships with existing paging companies, paging resellers and
other targeted distribution partners to market two-way guaranteed messaging
services. The Company also maintains relationships with manufacturers of
personal handheld computing devices, that include the Company's marketing
material with the device packaging to provide the purchaser the option of
wirelessly enabling a handheld computing device.
Dealer Channels
- ---------------
The Company also uses dealers who distribute the Company's nationwide dispatch
and satellite telephony products. These dealers typically have strong business
relationships with regional public safety entities, as well as with smaller
field service fleets. The Company believes that opportunities exist to
capitalize on the strengths of this channel by introducing a low cost
terrestrial data device with minimum integration requirements. Typically these
dealers serve as agents for sales and service and do not set pricing or provide
billing and collection services. These dealers are generally compensated with a
modest percentage of the service revenue for which they are responsible.
Customer Concentration
- ----------------------
After giving pro forma effect to the Acquisition, five existing customers
(including IBM) accounted for 40% of the Company's recurring service revenue for
the twelve months ended December 31, 1998. The loss of one or more of such
customers, or any event, occurrence or development which adversely affects the
relationship between the Company and such customer could have a material adverse
effect upon the Company.
- 7 -
Equipment; Supplier Relationships
---------------------------------
The Company has contracts with multiple vendors to supply equipment
configurations designed to operate on each of its networks. These devices are
designed to meet the requirements of specific end-user applications. The Company
continues to pursue enhancements to these devices that will result in additional
desirable features and reduced cost of ownership. Although many of the
components of the Company's products are available from a number of different
suppliers, the Company does rely upon a few key suppliers.
In connection with its mobile data communications service, the Company presently
has an agreement with Conexant Systems, Inc. (formerly Rockwell Semiconductor
Systems) to provide multi-mode data communications equipment and Vistar
Telecommunications Inc., a Canadian company, to provide multi-mode data terminal
equipment. The Company also has contracted with Vistar Telecommunications for
the development and manufacture of a new multi-mode terminal. The new terminal,
scheduled to begin delivery in the second half of 1999, will incorporate design
changes that lower the total cost of ownership. The Company believes that the
price of multi-mode terminals will continue to decline in the coming years.
There are currently over 30 different types of subscriber units available from
15 manufacturers that can operate on the terrestrial network. Examples of
portable subscriber units include ruggedized laptop computers, small external
modems, handheld or palmtop "assistants," pen based "tablets," and two-way
messaging devices, such as the Research in Motion (RIM) Inter@ctive PagerTM.
Significant developers of devices that are compatible with the network include
RIM and Itronix. RIM manufactures modems designed to be integrated into handheld
field service terminals, telemetry devices, utility monitoring and security
systems as well as other computing systems. RIM has also developed the
Inter@ctive PagerTM that operates on the Company's two-way messaging service.
RIM has developed a new generation Inter@active PagerTM that will begin delivery
in the second half of 1999. Itronix manufactures the XC-6000, a fully ruggedized
laptop computer with a standard keyboard and an integrated wireless modem.
Mobile satellite voice telephones are offered in a number of different
configurations that deliver a variety of features and options to meet specific
market needs. Mobile satellite telephones are currently available in land mobile
vehicle installed, fixed site, maritime, aeronautical, and fully transportable
(i.e., battery powered and packaged in a briefcase) configurations. Subscriber
equipment for satellite telephone service and nationwide dispatch service
includes data interface ports to allow connection to communications accessories
such as personal computers, and global positioning satellite ("GPS") tracking
devices. Recent enhancements allow users to use the dispatch product remotely
from the vehicle, via a wireless tether. The primary suppliers for the voice
terminal equipment are Westinghouse Wireless Solutions, Inc. ("Westinghouse")
and Mitsubishi Electronics America ("Mitsubishi"). The Company currently
believes it has sufficient inventory of voice terminal equipment on hand to meet
its customers' needs for the next two years and continues working with
Westinghouse and Mitsubishi to provide support and service to its voice
customers.
Tandem computer provides the ARDIS network switching computers under a
multi-year lease that extends through the year 2000, while AT&T provides network
services including a nationwide wireline data network, and leased sites which
house regional ARDIS switching equipment.
- 8 -
The Company also has a relationship with AT&T as its vendor for switched inbound
and outbound public switched telephone network services. The satellite system
terminates calls from its telephone product via both the AT&T and Sprint
networks.
ARDIS has executed multiple agreements with Motorola that provide for certain
continued support from Motorola with respect to: supply and support for the
ARDIS DataTAC network infrastructure; ongoing maintenance and service of the
ARDIS base stations; and lease administration services for approximately 37% of
ARDIS' base station site leases.
Hughes Network Systems Ltd, of the United Kingdom, manufactures and supports the
key component to the Company's multi-mode and satellite messaging products,
which is the Land Earth Station ("LES"). There are currently four LES's
operational. The platform for the Company's voice products, the communications
ground segment ("CGS"), depends upon products from multiple vendors, most of
which are generally commercially available. Northern Telecom manufactures and
supports the core voice switch. Digital Equipment Corporation supplies the
computing platform that runs the CGS.
American Mobile owns certain patents, technical data and other intellectual
property, developed in connection with its communications network. American
Mobile has joint ownership with the Canadian mobile satellite service provider,
TMI Communications and Company, Limited Partnership ("TMI") of certain other
intellectual property, and licenses intellectual property from other vendors for
operation of its network. The Company believes its ownership of and rights to
intellectual property for its system is sufficient for its business purposes.
The ARDIS network, and certain of its competitive strengths such as deep
in-building penetration, is based upon SFR technology. Motorola holds the patent
for SFR technology. ARDIS has entered into support agreements with Motorola to
provide for certain support of the operations of the ARDIS network. However,
there can be no assurance that Motorola will not enter into arrangements with
the Company's competitors, or that if it does, such arrangements would not have
a material adverse effect on the Company.
Satellite Lease and Purchase Agreements
---------------------------------------
As previously reported, on December 4, 1997, the Company entered into
simultaneous agreements with African Continental Telecommunications Ltd.
("ACTEL") to lease the Company's MSAT-2 satellite for redeployment by ACTEL over
subsaharan Africa and with TMI to acquire a one-half interest in TMI's MSAT-1
satellite. As previously reported, closing of each of the lease and purchase
were subject to the satisfaction of a number of conditions, including the
completion of financing by ACTEL. As ACTEL has not obtained the requisite
financing, the agreements were terminated on March 24, 1999.
Following the termination of the ACTEL-related agreements, the Company and TMI
each maintain operations on their two satellites, and continue to provide each
other emergency back-up and restoral services in accordance with long-standing
arrangements. See "Business-Satellite Back-up and Technology".
- 9 -
Satellite Back-up and Technology
--------------------------------
The Company has an agreement with TMI, the Canadian mobile satellite owner and
operator of MSAT-1, for back-up, restoral and additional capacity usage if the
Company's satellite fails or the Company needs additional capacity. In return,
the Company has agreed to provide TMI with similar back-up service on the
Company's MSAT-2 satellite. Each of the MSAT-1 and MSAT-2 satellites has in the
past experienced some technological malfunctions. While recent MSAT-2
malfunctions have involved either spare components or ones that did not have a
material impact on current operations, it is possible that either or both
satellites could experience future malfunctions at any time.
MSAT-2 has an expected end of service life of 2006 subject to potential
technological failures and other factors. For example, random failure of
satellite components could result in damage to or loss of MSAT-2. It is also
possible that the satellite could be damaged by electromagnetic storms or
collisions with other objects, although such occurrences are rare. Although the
actual service life of the satellite may exceed its expected service life, the
Company cannot guarantee that the expected service life will be achieved or
exceeded. Although the Company has in-orbit insurance for a failure of MSAT-2,
it is unlikely that any recovery under such insurance would fully compensate
American Mobile for losses it would sustain for such a failure. In addition, the
in-orbit insurance policy is subject to annual or biannual renewal, and American
Mobile cannot guarantee that insurance on favorable terms and at commercially
reasonable rates will remain available for coverage of MSAT-2.
Competition
-----------
The wireless communications industry is highly competitive and is characterized
by constant technological innovation. The Company competes by providing
comprehensive, end-to-end solutions and a premium level of service in the
markets it serves. End-to-end solutions have been assembled working with a
select group of business partners who develop and manufacture software,
middleware and hardware components. The Company differentiates itself with its
unmatched geographic coverage, in-building penetration, guaranteed message
delivery, and guaranteed reliability.
The Company competes with a full array of companies, from small startups to
Fortune 500 companies. Many of these competitors have greater financial,
technical and marketing resources than the Company's. Because the Company
competes in several market segments with a broad range of services, competitors
and competing technologies may address one or more of the market segments. The
Company has identified seven major classes of technologies or services that
offer capabilities competitive with the Company's services: Terrestrial
Packetized Data; Cellular/PCS; Specialized Mobile Radio ("SMR")/Enhanced
Specialized Mobile Radio ("ESMR"); Private Land Mobile Systems;
Paging/Narrowband PCS; Two-Way Messaging and Mobile Satellite Services.
Terrestrial Packetized Data. Companies using packetized data technologies
provide wireless data services that compete directly with a number of the
Company's data products. Packetized data technology relies on radio frequencies
to transmit short-burst data messages. Primary competitors using this technology
include BellSouth Wireless Data Limited Partnership ("BS Wireless Data")
(formerly RAM Mobile Data), Metricom, Teletrac and Cellnet. BS Wireless Data, a
wholly-owned subsidiary of BellSouth Corporation, operates a terrestrial-only
network that provides data services to customers primarily in the field service,
- 10 -
transportation and utility industries. The Company believes that its network
provides broader coverage, and superior in- building penetration compared to BS
Wireless Data's network. In addition, the Company is upgrading its network in
major cities so that it will operate at faster speeds than the BS Wireless Data
network. Metricom's Ricochet service provides wireless, mobile access to the
Internet, private intranets, local area networks and e-mail. Metricom currently
offers its service in limited regions comprised of San Francisco, Seattle,
Houston and Washington, D.C. Teletrac provides primarily location and vehicle
monitoring and two-way data transfer services in major metropolitan areas and
Cellnet provides wireless meter reading services.
Cellular and PCS. Cellular and PCS services compete with the Company's satellite
and terrestrial voice and data services, and presently serve the majority of
mobile communications users in the United States, with over 61,000,000 units.
Approximately 2,300 cellular and PCS systems collectively provide service
throughout most of the United States, with no single competitor providing the
breadth of coverage that is available through the Company's network. Cellular
Digital Packet Data ("CDPD"), the cellular industry's standard packet data
service, is available principally in metropolitan areas containing approximately
44% of the nation's population at the end of 1998. Some cellular and PCS
carriers offer short message capabilities, depending on the protocol they use,
and expect to offer larger capacity packet data services in the near future.
Most cellular and PCS providers have structured their services and distribution
principally to meet switched voice service requirements of broad-market users.
There is minimal direct competition between the Company's voice products and
most other cellular carriers' voice products owing to differences in equipment,
service pricing and product characteristics. HighwayMaster Communications, Inc.,
however, offers data and voice communications to the long-haul trucking industry
using its proprietary messaging and billing technologies and circuit-switched
cellular capacity which it purchases in bulk from cellular carriers.
Specialized Mobile Radio (SMR) and Enhanced Specialized Mobile Radio (ESMR)
Services. SMR is a terrestrial trunked dispatch voice and mobile telephone
service in the 800 and 900 MHz bands. ESMR is a wide-area form of SMR. SMR
services have been expanding rapidly over the past ten years and converting from
analog to digital technology. Within the limitations of available spectrum and
coverage, SMR operators compete with the Company's voice dispatch services by
providing mobile communications services, including mobile telephone, dispatch,
paging and limited data services. For certain applications, such as mobile
telephone interconnect, SMR systems are less expensive than the Company's
services, although the shared channel configuration and the economics of these
systems have traditionally caused SMR systems to be less frequently used for
voice telephone services.
ESMR systems compete with the Company's voice and data dispatch services in
metropolitan areas. NEXTEL Communications, Inc. ("Nextel") provides ESMR
services in numerous large metropolitan service areas in the United States and
is the leading provider of SMR using digital technology, frequency reuse and
lower power transmitters to transform its current SMR service into cellular-like
services, including voice telephone services. Nextel, however, does not provide
nationwide voice dispatch or data services comparable to those offered by the
Company.
Private Land Mobile Systems. Individual companies that have chosen to develop
their own private wireless data network constitute a large percentage of the
wireless marketplace for corporate fleets. An example of such a customer is
Federal Express. While these companies already have made significant investments
in their systems, in some cases recurring maintenance, upgrade and expansion
- 11 -
costs, coupled with recent steps by the FCC to charge private system owners for
the use of the radio frequencies, have caused these organizations to turn to
commercial providers such as the Company.
Narrowband PCS/Enhanced Paging. A large number of paging companies offer
messaging services on a regional or nationwide basis. Despite the low cost of
one-way paging, most traditional paging services do not provide full-function
two-way communications. Although some paging companies, such as MTel, have begun
to offer limited two-way messaging services, initial challenges in coverage,
responsiveness and throughput currently limit their adoption by the Company's
targeted business customers.
Two-Way Messaging. Unlike two-way paging, two-way messaging provides
approximately equal amounts of throughput both to and from the mobile user. Some
traditional paging companies, such as PageNet, and certain companies providing
packetized data to vertical markets, such as BS Wireless Data, are expanding
into this horizontal offering. Typical applications include wireless e-mail,
near-real time delivery of stock quotes and other time sensitive information,
and mobile workforce communications. The Company considers this to be one of the
most dynamic markets in which it competes, offering considerable opportunity and
risk because it is untested.
Mobile Satellite Services. The Company's voice and data services face
competition from a number of companies selling or developing services using a
variety of satellite technologies. The principal competing satellite-based
communications system available to the trucking market is Qualcomm
Incorporated's ("Qualcomm") OmniTracs nationwide data service. Qualcomm
currently provides low-speed mobile data services using terminals which are
priced competitively with the Company's satellite-only terminals. Qualcomm's
OmniTracs service does not provide a terrestrial communications path or
least-cost routing capabilities similar to the Company's multi-mode product. As
a result, transmissions to and from a vehicle must be routed exclusively over a
satellite network and are subject to line of sight blocking and higher
transmission costs, limiting the product's functionality and cost-effectiveness
in segments that require urban coverage or large volumes of data transmission.
NORCOM Networks Inc. ("NORCOM") is in the process of commercially deploying a
satellite-based packet data service that competes with the Company's data
services in the transportation and field service segments. NORCOM currently
purchases channel capacity on the Company's satellite over which it operates its
network, and combines its satellite data service product with terrestrial
services provided by BS Wireless Data and by the Company.
The Company's satellite services also compete for mobile maritime subscribers
with TMI, a Canadian company operating a satellite comparable to MSAT-2, and
with Inmarsat, a consortium of 70 countries that is authorized to provide
maritime voice and data services along the North American coasts. Because
Inmarsat's current system operates at a much lower power level than does the
Company's satellite, its mobile terminals must be equipped with antenna systems
that are larger and more expensive than those required for the Company's
network. The Inmarsat system also has per minute charges significantly higher
than those charged by the Company. Comsat, the U.S. signatory for Inmarsat,
applied to the FCC for authority to provide mobile satellite services ("MSS") in
the United States through Inmarsat facilities. TMI, which is technically capable
of providing service within the United States, has also applied for authority to
provide MSS to domestic customers over MSAT-1. Although the FCC has consistently
denied Comsat's application, most recently on January 9, 1998, there can be no
assurances that Comsat, TMI, or any other satellite provider, will not become
authorized to provide MSS in the United States. The FCC has granted SatCom
- 12 -
Systems, Inc., a reseller of TMI's service, temporary authority to operate a
limited number of mobile terminals in the United States so that it may conduct
market trials. (See "Regulation").
Recently, several Low Earth Orbit ("LEO") and Medium Earth Orbit ("MEO")
satellite systems have commenced deployment. These systems, which are more
complex and costly than the Company's geosynchronous network, include Iridium
LLC; Globalstar Telecommunications, Ltd., and ICO Global. When deployed, these
systems will offer certain advantages over the Company's voice telephony
service, including the ability to support small handheld telephones and, in
certain instances, reduced transmission delay. However, the Company does not
expect that these systems will provide a nationwide dispatch service or support
data service in excess of 4,800 bps. Moreover, these companies are focused
primarily on consumer-oriented and global traveler applications and not the
business markets that are the focus of the Company. Further, because these are
satellite systems, they are not expected to compete against urban in-building
data services provided by the Company.
In addition to relatively complex LEO systems designed to provide mobile voice
services, there are relatively simple "little" LEO systems that would provide
only low-speed packet data services. These systems, including ORBCOMM Global,
L.P., and LEO One USA, have access to comparatively limited spectrum and are
expected to compete for customers who require specialty applications such as
asset tracking services for unpowered trailers.
Regulation
----------
American Mobile's satellite network and ARDIS terrestrial two-way wireless data
network are regulated to varying degrees at the federal, state, and local
levels. Various legislative and regulatory proposals under consideration from
time to time by Congress and the FCC have in the past materially affected and
may in the future materially affect the telecommunications industry in general,
and American Mobile in particular. In addition, many aspects of regulation at
the federal, state and local level currently are subject to judicial review or
are the subject of administrative or legislative proposals to modify, repeal, or
adopt new laws and administrative regulations and policies. The following is a
summary of significant laws, regulations and policies affecting the operation of
American Mobile business.
General
- -------
The ownership and operation of American Mobile's satellite network and ARDIS
terrestrial network are subject to the rules and regulations of the FCC, which
acts under authority established by the Communications Act and related federal
laws. Among other things, the FCC allocates portions of the radio frequency
spectrum to certain services and grants licenses to and regulates individual
entities using that spectrum.
American Mobile operates pursuant to various licenses granted by the FCC.
American Mobile is a Commercial Mobile Radio Service ("CMRS") provider and
therefore is regulated as a common carrier. The Company must offer service at
just and reasonable rates on a first-come, first-served basis, without any
unjust or unreasonable discrimination, and it is subject to the FCC's complaint
processes. The FCC has forborne from applying numerous common carrier provisions
of the Communications Act to CMRS providers. In particular, American Mobile is
not subject to traditional public utility rate-of-return regulation, and the
Company is not required to file tariffs with the FCC for its domestic services.
- 13 -
As providers of interstate telecommunications services, American Mobile is
required to contribute to the FCC's universal service fund, which supports the
provision of affordable telecommunications to high-cost areas, and the provision
of advanced telecommunications services to schools, libraries, and rural health
care providers. Under the FCC's current rules, American Mobile is required to
contribute a percentage of the end-user telecommunications revenues it derives
from the retail sale of telecommunications services. Currently excluded from a
carrier's universal service contribution base are end-user revenues derived from
the sale of information and other non-telecommunications services and wholesale
revenues derived from the sale of telecommunications. A significant portion of
the ARDIS network revenue falls within the excluded categories, thereby reducing
American Mobile's universal service assessments. Current rules also do not
require that American Mobile imputes to its contribution base retail revenues
derived when it uses its own transmission facilities to provide a service that
includes both information service and telecommunications components. There can
be no assurances that the FCC will retain the exclusions described herein or its
current policy regarding the scope of a carrier's contribution base. A number of
parties have filed petitions for review of the FCC's universal service policy
and these appeals have been consolidated in the U.S. Court of Appeals for the
Fifth Circuit. American Mobile may also be required to contribute to state
universal service programs. The requirement to make these state universal
service payments, the amount of which in some cases may be subject to change and
is not yet determined, may have a material adverse impact on the conduct of its
business.
American Mobile is subject to the Communications Assistance for Law Enforcement
Act ("CALEA"). Under CALEA, American Mobile must ensure that law enforcement
agencies can intercept certain communications transmitted over its networks.
American Mobile must also ensure that law enforcement agencies are able to
access certain call-identifying information relating to communications over its
networks. The Company must comply with the CALEA requirements and any rules
subsequently promulgated by June 30, 2000 or face possible sanctions, including
substantial fines and possible imprisonment of company officials. It is not
clear whether the Company will be able to comply with CALEA's requirements or
will be able to do so in a timely manner. CALEA establishes a federal fund to
compensate telecommunications carriers for all reasonable costs directly
associated with modifications performed by carriers in connection with
equipment, facilities, and services installed or deployed on or before January
1, 1995. For equipment, facilities, and services deployed after January 1, 1995,
the CALEA fund is supposed to compensate carriers for any reasonable costs
associated with modifications required to make compliance "reasonably
achievable." It is possible that all necessary modifications will not qualify
for this compensation and that the available funds will not be sufficient to
reimburse American Mobile. The requirement to comply with CALEA could have a
material adverse effect on the conduct of its business.
As a matter of general regulation by the FCC, American Mobile is subject to,
among other things, payment of regulatory fees, restrictions on the level of
radio frequency emissions of its systems' mobile terminals and base stations,
and "rate integration" regulations requiring that providers of interstate
interexchange telecommunications services charge the same rates for these
services in every state, including Puerto Rico and the U.S. Virgin Islands. Any
of these regulations may have an adverse impact on the conduct of its business.
The FCC licenses of American Mobile are subject to restrictions in the
Communications Act that (i) certain FCC licenses may not be held by a
corporation of which more than 20% of its capital stock is directly owned of
record or voted by non-U.S. citizens or entities or their representatives and
(ii) that no such FCC license may be held by a corporation controlled by another
- 14 -
corporation ("indirect ownership") if more than 25% of the controlling
corporation's capital stock is owned of record or voted by non-U.S. citizens or
entities or their representatives, if the FCC finds that the public interest is
served by the refusal or revocation of such license. However, with the
implementation of the Basic Telecommunications Agreement ("BTA"), negotiated
under the auspices of the World Trade Organization ("WTO") and to which the
United States is a party, the FCC will presume that indirect ownership interests
in excess of 25% by non-U.S. citizens or entities will be permissible to the
extent that the ownership interests are from WTO-member countries. The BTA took
effect on February 5, 1998, and the FCC's implementing regulations took effect
on February 9, 1998.
American Mobile's Satellite Network
- -----------------------------------
American Mobile is licensed by the FCC to provide a broad range of mobile voice,
data and dispatch services via satellite to land, air and sea-based customers in
a service area consisting of the continental United States, Alaska, Hawaii,
Puerto Rico, the U.S. Virgin Islands and U.S. coastal waters and airspace.
American Mobile is also authorized to provide fixed site voice and data services
via satellite to locations within this service area, so long as such services
remain incidental to American Mobile's mobile communications services. American
Mobile is authorized to build, launch and operate three geosynchronous
satellites in accordance with a specified schedule. American Mobile is not in
compliance with the schedule for commencement and construction of its second and
third satellites and has petitioned the FCC for changes to the schedule. Certain
of these extension requests have been opposed by third parties. The FCC has not
acted on American Mobile's requests. The FCC has the authority to revoke the
authorizations for the second and third satellites and, in connection with such
a revocation, could exercise its authority to rescind American Mobile's license.
American Mobile believes that the exercise of such authority to rescind the
license is unlikely. The term of the license for each of American Mobile's three
authorized satellites is ten years, beginning when American Mobile certifies
that the respective satellite is operating in compliance with American Mobile's
license. The ten-year term of MSAT-2 began August 21, 1995. Although American
Mobile anticipates that the authorizations are likely to be extended in due
course to correspond to the useful lives of the satellites and that new licenses
will be granted for replacement satellites, there is no assurance of such
extension or grant.
On July 2, 1998, American Mobile filed an application for authority to launch
and operate its second-generation mobile satellite system. This satellite is
intended to support American Mobile's existing satellite services and also allow
the provision of an extended array of services, such as higher data rate
services and services to lower-power terminals. There is no guarantee that the
FCC will grant this application. The filing of the application does not commit
American Mobile to expend any resources toward this project; however, should
American Mobile decide to proceed with the construction of the follow-on
satellite, American Mobile would be required to raise substantial additional
capital to fund this project.
American Mobile's current foreign ownership level, for which the indirect
ownership limits are applicable, is at least 14%. This figure does not include
any foreign ownership of Motorola, Inc. which holds approximately a 20.23%
interest in American Mobile. Singapore, which is the domicile of Singapore
Telecom, one of American Mobile's largest shareholders, is a WTO-member country.
MSAT-2 is designed to be able to operate over the 1530-1559/1631.5-1660.5 MHz
bands (the "L-band"). American Mobile is currently licensed to operate in the
1544-1559/1645-1660.5 MHz bands (the "upper L-band"). The FCC has designated
American Mobile as the licensee for both MSS and Aeronautical Mobile Satellite
- 15 -
(Route) Service ("AMS(R)S"). AMS(R)S includes satellite communications related
to air traffic control, as well as aeronautical safety-related operational and
administrative functions. As a condition to its authorization, American Mobile
is required by the FCC to be capable of providing priority and preemptive access
for AMS(R)S traffic in the upper L-band and to be interoperable with and capable
of transferring AMS(R)S traffic to international and foreign systems providing
such service. American Mobile currently anticipates it will be able to meet
these requirements without any material adverse effect on its business. If
American Mobile is unable to meet these requirements, the FCC may authorize and
give priority spectrum access to one or more additional satellite systems that
meet the specified requirements.
American Mobile has applied for authorization to operate in the additional
1530-1544/ 1631.5-1645.5 MHz bands (the "lower L-band"). If American Mobile is
assigned spectrum in the lower L-band, it will be required by the FCC to provide
similar priority and preemptive access in that spectrum to maritime distress and
safety communications. With respect to its mobile voice terminals, American
Mobile currently anticipates it will be able to meet this requirement without
any material adverse effect on its business. The Federal Aviation Administration
("FAA") filed comments, however, in connection with American Mobile's
application to operate up to 30,000 mobile data terminals that were transitioned
from leased space segment to MSAT-2 in late 1995, stating its concern that the
mobile data terminals cannot be operated in compliance with American Mobile's
obligation to provide priority and preemptive access in the upper L-band. The
FAA has proposed that American Mobile operate the mobile data terminals in the
lower L-band. American Mobile has received successive six-month grants of
special temporary authority ("STA"), under a two-year waiver of the FCC's rules
on priority and preemptive access, to operate up to 15,100 mobile data terminals
in the lower L-band. This number was increased to 33,100 terminals pursuant to
American Mobile's acquisition of the mobile data equipment and services
previously licensed to Rockwell. The two-year waiver expired on August 1, 1997,
but remains in effect while American Mobile's request for a two-year extension
of that waiver is pending at the FCC. American Mobile will need additional
authority to increase the number of mobile data terminals that it is authorized
to operate in order to achieve planned growth in its data services. American
Mobile will also need permission from the FCC to operate mobile data terminals
with a different transmission design than those operated under its current lower
L-band authorization. Transmissions from these terminals require a wider band
width than do transmissions from American Mobile's existing terminals. American
Mobile was granted a six-month STA to operate up to 10,000 of these mobile data
terminals on February 12, 1999. American Mobile will be need additional
authorization from the FCC to operate up to 100,000 of these terminals as
contemplated. There can be no assurance that American Mobile will continue to
receive authority to operate these new mobile data terminals or any other
additional mobile data terminals in the lower L-band.
American Mobile's mobile terminal authorizations are subject to compliance with
certain requirements regarding interference protection to the Global Positioning
System ("GPS"). With the consent of the FAA, the FCC granted American Mobile's
application subject to certain conditions, including that the grant may be
modified after the interference issue is studied. The FCC is now proposing to
impose more stringent limits on the out-of-band emissions from certain mobile
terminals, including those used in connection with American Mobile's system, in
order to protect GPS and the Russian Global Navigation Satellite System
("Glonass"). Some of American Mobile's existing mobile terminals may not comply
with this proposed standard. Under the Commission's proposal, all mobile
terminals commissioned after January 1, 2002 must comply with this new limit,
and any terminals not meeting the new specifications must be retired or
retrofitted by 2005. While American Mobile believes that it will be able to
comply with the proposed 2002 deadline for newly commissioned terminals,
American Mobile will oppose the 2005 deadline for the retirement or retrofitting
- 16 -
of existing, non-compliant terminals. If adopted by the FCC, this policy could
have a material adverse effect on American Mobile's business.
American Mobile's license authorizes MSAT-2 to operate using certain telemetry,
transfer and control frequencies in the Ku-band. American Mobile operates MSAT-2
at the 101 degrees W.L. orbital location. GE American Communications, Inc. ("GE
American"), also operates a satellite at the 101 degrees W.L. orbital location.
American Mobile and GE American have an agreement covering MSAT-2 that may
require American Mobile to modify its operations or make certain payments to GE
American if American Mobile's operations cause interference to those of GE
American. While there can be no assurances, the Company does not anticipate any
interference in the operations of MSAT-2 and those of GE American.
American Mobile's subscriber equipment will operate in L-band frequencies that
are limited in available bandwidth. The feeder-link earth stations and the
network communications controller of the CGS operate in the more plentiful fixed
satellite service Ku-band frequencies. Of the 30 MHz in the upper L-band
frequencies, American Mobile is currently licensed to operate in the
1544-1559/1645.5-1660.5 MHz bands. Of the 30 MHz assigned to American Mobile by
the FCC, one MHz is limited to AMS(R)S and one-way paging and two MHz are
limited to distress and safety communications. American Mobile does not plan to
operate on these three MHz of bandwidth.
In June 1996, the FCC issued a notice of proposed rulemaking proposing to assign
to American Mobile the first 28 MHz of internationally coordinated L-band
spectrum from either the upper or lower portion of the MSS L-band. Under the
FCC's proposal, American Mobile would have first priority access to use the
lower L-band spectrum as necessary to compensate for spectrum unavailable for
coordination in the upper L-band. In the event the United States is able to
coordinate more than 28 MHz of L-band spectrum, the FCC has proposed allowing
other applicants to apply for assignment of those frequencies. Certain entities
have filed with the FCC petitions to deny American Mobile's application and
comments opposing the assignment of additional frequencies to American Mobile.
While there can be no assurances, American Mobile believes the FCC is likely to
grant American Mobile's application.
In the Ku-band frequencies, American Mobile is currently licensed to operate
MSAT-2 using 200 MHz within the bands 10.75-10.95 GHz for downlink transmissions
and 13.0-13.15 GHz and 13.2-13.25 GHz for uplink transmissions. American Mobile
has applied for authority to operate using an additional 200 MHz of spectrum
within the same bands.
Spectrum availability, particularly in the L-band, is a function not only of how
much spectrum is assigned to American Mobile by the FCC, but also the extent to
which the same frequencies are used by other systems in the North American
region, and the manner of such use. All spectrum use must be coordinated with
other parties that are providing or plan to provide mobile satellite-based
communications in the same geographical region using the same spectrum. At this
time, the other parties with which spectrum use must be coordinated include
Canada, Mexico, the Russian Federation and Inmarsat. In addition, a new Japanese
system that is to be launched this year proposes to operate in a manner that
would interfere with American Mobile's system and other systems in this region,
and this Japanese system's spectrum use will have to be coordinated with these
regional operators.
- 17 -
Use of the spectrum is determined through a series of negotiations between the
United States government and the other user agencies, pursuant to the rules and
regulations of the International Telecommunication Union ("ITU"). For the past
several years, each of the countries and international organizations that have
used or will use L-band frequencies within the North American region have been
meeting regularly to negotiate and coordinate their current and future use of
that spectrum. American Mobile estimates that international coordination will
make approximately 20 MHz of L-band spectrum available to the United States for
MSAT-2. Since the coordination process involves many parties and there is
uncertainty about the total outcome, the actual amount of spectrum available may
be more or less than that estimated. The operation of the new Japanese system
may have the effect of further reducing American Mobile's access to spectrum.
Some of the spectrum that may be available to American Mobile may include a
portion of the 28 MHz lower L-band spectrum adjacent to the frequencies already
assigned to American Mobile by the FCC.
The ITU's Radio Regulations include a table of frequency allocations that
prescribe the permitted uses of the radio spectrum. As a result of the ITU
satellite plan for parts of the Ku-band, there also may be restrictions on
American Mobile's ability to deploy feederlink earth stations in Alaska, Hawaii,
Puerto Rico, and the U.S. Virgin Islands.
During the course of the licensing process for American Mobile and several times
since, the FCC has stated that there is only enough spectrum in the MSS L-band
for the FCC to authorize a single MSS system to provide service in the United
States. In 1995, however, Comsat applied for authority to provide MSS in the
United States in the L-band over the Inmarsat satellite system. Comsat
subsequently filed an application seeking a blanket authorization for the
operation of 5,000 mobile terminals in the United States, as well as a request
for an STA to operate 50 mobile terminals in the United States. On January 9,
1998, the FCC denied Comsat's request for an STA and required that Comsat amend
its underlying applications to conform with the requirements established in the
FCC's November 1997 order on market access by foreign-licensed satellite
systems. This order conforms the FCC's regulations with the BTA and makes it
easier for foreign satellite systems from WTO-member countries to access the
United States market, while at the same time making clear that the FCC may deny
access to such satellite applicants on the basis of spectrum availability,
applicants' technical, legal, or financial qualifications, or foreign or
domestic policy factors. The order also requires Comsat to make an appropriate
waiver of immunity from any suit as part of any application to provide domestic
services over Inmarsat's system. On January 12, 1998, Comsat filed an appeal of
this order with the U.S. Court of Appeals for the D.C. Circuit, and American
Mobile is opposing this appeal as an intervenor. On February 6, 1998, Comsat
filed an application for review of the FCC's denial of its request for an STA,
and a petition for waiver of the FCC's new market access rules to permit it to
offer MSS on a temporary basis in the United States. American Mobile has opposed
these filings, which remain pending.
In its January 9, 1998 denial of Comsat's STA request, the FCC stated that it
would be willing to authorize Comsat to provide international service if Comsat
amended its blanket license application to show that service through its
terminals and Inmarsat's MSS system could be limited to international traffic.
Comsat has amended its application in order to make this showing. American
Mobile has opposed this application, which remains pending.
On October 23, 1998, the FCC issued an order permitting Comsat to provide
aeronautical services via Inmarsat to the domestic legs of the same aircraft in
international flight. As the FCC noted, this action has a minimal effect on
American Mobile's access to L-band spectrum. Additionally, the Company does not
believe this action will have any effect on revenues.
- 18 -
TMI, which is technically capable of providing service within the United States,
also hopes to provide MSS to domestic customers over MSAT-1. On March 10, 1998,
SatCom Systems, Inc. filed an application for a blanket license to operate up to
25,000 mobile terminals in the United States over MSAT-1 on a permanent basis.
American Mobile has opposed this application, which remains pending. On July 20,
1998, the International Bureau of the FCC granted SatCom an STA to operate up to
500 mobile terminals for 180 days on a private carrier basis so that it may
conduct marketing trials; this STA was subsequently extended to July 12, 1999.
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 March 30, 1998, TMI filed its own application for a blanket license to
operate up to 100,000 mobile terminals in the United States over MSAT-1 on a
permanent basis. American Mobile has opposed this application, which remains
pending.
On January 30, 1998, Kitcomm Satellite Communications Ltd. ("Kitcomm") filed a
letter of intent with the FCC to provide MSS to U.S. customers over its proposed
foreign-licensed satellite system. Kitcomm proposes to provide two-way remote
data collection, tracing, and messaging services over a global system in the
lower L-band at 1525-1530/1626.5-1631 MHz. American Mobile has opposed the
operation of this proposed system in the United States, since such operations
would likely reduce the spectrum available to American Mobile either directly or
as a result of international frequency coordination. In order to provide
domestic service, Kitcomm will also have to request authority to operate mobile
terminals in the United States, and American Mobile will oppose any FCC
application by Kitcomm that would reduce the spectrum available to American
Mobile either directly or as a result of international frequency coordination.
In addition to providing additional competition to American Mobile, a grant of
domestic authority by the FCC to one of these foreign systems would
significantly increase the demand for spectrum in the international coordination
process and could adversely affect American Mobile's business.
American Mobile is operating under waivers of certain FCC rules. In 1996, the
FCC issued an order requiring all CMRS providers to offer what are known as
"enhanced 9-1-1 services" including the ability to automatically locate the
position of all transmitting mobile terminals. American Mobile would not have
been able to offer this automatic location information without adding
substantially to the cost of its mobile equipment and reconfiguring its CGS
software. The FCC decided not to impose specific new requirements on MSS
providers, including American Mobile, at that time. The FCC did state its
expectation that such providers eventually would be required to provide
"appropriate access to emergency services." A decision to impose this
requirement on MSS providers could have a material adverse effect on American
Mobile.
The FCC enacted "rate integration" regulations requiring that providers of
interstate interexchange telecommunications services charge the same rates for
these services in every state, including Puerto Rico and the U.S. Virgin
Islands. American Mobile has opposed the imposition of this rate integration
requirement on its MSS system, so that it may preserve the flexibility to charge
more for service in areas covered by satellite beams that require more satellite
power. The FCC has denied American Mobile's request for a permanent exemption
from its rate integration requirement, but has not yet ruled on American
Mobile's request for a temporary waiver of a year or more. The FCC has granted
American Mobile an interim waiver from its rate integration requirement until
its decision on American Mobile's temporary waiver request.
- 19 -
American Mobile's ARDIS Terrestrial Network
- -------------------------------------------
American Mobile's ARDIS terrestrial network consists of base stations licensed
in the Business Radio and Specialized Mobile Radio Service, all operating in the
800 MHz frequency band. The ARDIS network is interconnected with the public
switched data network.
The FCC's licensing regime in effect when it issued licenses for the ARDIS
network provided for the issuance of individual licenses for specific channels
at specific sites. With respect to the part of the band in which all of the
ARDIS base stations operate, however, the FCC has implemented a new licensing
regime. The new licensing regime involves the auctioning of licenses for
specific channels for wide geographic areas, within which the licensee will have
substantial flexibility to operate any number of base stations, including base
stations that may operate on the same channels as incumbent licensees such as
American Mobile. The FCC proposes to prohibit the new geographic licensees from
causing interference to incumbents, but there is concern that such interference
may occur and that practical application of these rules is uncertain.
American Mobile believes that it has licenses for sufficient channels to meet
its current needs for capacity on the ARDIS network. To the extent that it needs
additional capacity, it may be required to either participate in the upcoming
auctions or acquire channels from other licensees. As part of its new licensing
regime, the FCC permits a wide-area geographic licensee, with prior FCC
approval, to sell a portion of its geographic area to another entity. This
partitioning authority may increase American Mobile's flexibility to operate
additional base stations, but the practical utility of this option is uncertain
at this time.
American Mobile operates the ARDIS network under a number of waivers of the
FCC's technical rules, including rules on station identification, for-profit use
of excess capacity, system loading, and multiple station ownership. Several of
these waivers were first obtained individually by IBM and Motorola, which
operated separate wireless data systems until forming the ARDIS joint venture in
1990. The FCC incorporated a number of these waivers into its regulations when
it implemented Congress' statutory provision creating the CMRS classification,
and American Mobile no longer requires those waivers. As of March 3, 1999, ARDIS
completed its planned construction of base stations for which extended
implementation was granted by the FCC in 1996.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulation and legislation relating to the industries in which
American Mobile operates. Other existing federal, state, and local regulations
currently are the subject of a variety of judicial proceedings, legislative
hearings, and administrative and legislative proposal which could change, in
varying degrees, the manner in which American Mobile operates. Neither the
outcome of these proceedings nor their impact on American Mobile's operations
can be predicted at this time.
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.
- 20 -
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.
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 renovation, implementation and rollout of its internal systems
(including its voice customer billing software, CMIS) in the fourth quarter of
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. 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
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.
- 21 -
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.
Employees
---------
At March 29, 1999, the Company had approximately 470 employees. None of the
Company's employees is represented by a labor union. The Company considers its
relations with its employees to be good.
Item 2. Properties.
- ------- -----------
The Company leases approximately 94,000 square feet at its headquarters office
space and network operations center in Reston, Virginia. The lease has a term
which runs through August 3, 2003 (which may be extended at the Company's
election for an additional five years). In addition, the Company leases a
back-up Ku-band radio frequency facility in Alexandria, Virginia. The Company
also leases approximately 86,000 square feet of space for office space and an
operations center in Lincolnshire, Illinois, the lease for which expires
December 31, 2000 (which may be extended at the Company's election for an
additional five years), and approximately 7,800 square feet for a remote data
center in Lexington, Kentucky, the lease for which expires April 30, 2001. The
Company also leases site space for approximately 1,700 base stations and
antennas across the country for the terrestrial network under one- to five-year
lease contracts with renewal provisions. The Company anticipates that it will be
able to gain access to additional base station sites when necessary on
acceptable terms.
Item 3. Legal Proceedings.
- ------- ------------------
As previously reported, in 1992, a former director of American Mobile filed a
lawsuit against the Company alleging violations of the Communications Act and of
the Sherman Act and breach of contract. The suit was dismissed on November 10,
1998 prior to commencement of trial pursuant to an agreement to settle the suit
by payment of $250,000, which represents the Company's estimate of its cost of
going to trial.
- 22 -
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
No matters were submitted to a vote of the Company's Stockholders during the
fourth quarter of fiscal 1998.
- 23 -
PART II
-------
Items 5, 6, 7 and 8.
- --------------------
The information called for by Items 5 through 8 of Part II is presented in a
separate section of this Annual Report on Form 10-K commencing on the page
numbers specified below:
Form 10-K Item Page
- -------------- ----
Item 5 - Market for the Registrant's Common Equity and Related Matters F-56
Item 6 - Selected Financial Data F-57
Item 7- Management's Discussion and Analysis of Financial Condition
and Results of Operations F- 1
Item 8 - Financial Statements and Supplementary Data F-19
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. None
- 24 -
PART III
--------
Items 10, 11, 12 and 13.
- ------------------------
The information called for by Part III (Items 10, 11, 12 and 13) is incorporated
herein by reference from the material included under the captions "Nominees,"
"Executive Officers," "Executive Compensation," "Security Ownership of Certain
Beneficial Owners and Management," "Agreements Among Stockholders,"
"Compensation and Stock Option Committee Interlocks and Insider Participation"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement (to be filed) for its Annual Meeting of Stockholders
to be held May 26, 1999 (the "Proxy Statement"). The Proxy Statement is being
prepared and will be filed with the Securities and Exchange Commission pursuant
to Regulation 14A, and furnished to the Company's Stockholders, on or about
April 21, 1999.
- 25 -
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
(a) 1. Financial Statements.
---------------------
The following consolidated financial statements of the Company and its
subsidiaries are included in a separate section of this Annual Report on Form
10-K commencing on the page numbers specified below:
INDEX
- -----
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... F- 2
Report of Independent Public Accountants................................. F- 19
Consolidated Statements of Loss.......................................... F -20
Consolidated Balance Sheets.............................................. F -21
Consolidated Statements of Stockholders' (Deficit) Equity................ F -22
Consolidated Statements of Cash Flows.................................... F -24
Notes to Consolidated Financial Statements............................... F -25
Quarterly Financial Data................................................. F -56
Selected Financial Data.................................................. F -57
- 26 -
2. Financial Statement Schedules.
------------------------------
Financial Statement Schedules not included with the one listed below have been
omitted because they are not required or not applicable, or because the required
information is shown in the financial statements or notes thereto.
I. Condensed Financial
Information of Registrant.................................Page S-1
2. Exhibits
3.1 - Restated Certificate of Incorporation of AMSC (as restated
effective May 1, 1996) (Incorporated by reference to Exhibit
3.1a to the Company's Quarterly Report on Form 10-Q filed
for the periods ending March 31, 1996 and June 30, 1996
(File No. 0-23044))
3.2 - Amended and Restated Bylaws of AMSC (as amended and restated
effective March 25, 1999)(filed herewith)
9.1 - Amended and Restated Stockholders' Agreement dated as of
December 1, 1993, between AMSC and certain holders of its
capital stock (Incorporated by reference to Exhibit 9.1 to
the Company's Registration Statement on Form S-1 (Reg. No.
33- 70468))
10.1 - Contract for an MSAT Spacecraft, dated December 7, 1990
between AMSC and Hughes Aircraft Company, amended June 15,
1993 (Amendment Nos. 1 through 4) and further amended
November 11, 1993 (Amendment No. 5), between AMSC Subsidiary
Corporation, as assignee of AMSC, and Hughes Aircraft
Company (Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-70468))
10.1a - Amendment No. 6 to the AMSC Hughes MSAT Spacecraft
Contract, dated October 11, 1994, between AMSC Subsidiary
Corporation, as assignee to AMSC, and Hughes Aircraft
Company (Incorporated by reference to Exhibit 10.3a to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-23044))
10.1b - Mutual Final Release, dated October 11, 1994, between
AMSC Subsidiary Corporation, Hughes Aircraft, Spar
Aerospace Limited and Lockheed Missiles & Space Company,
Inc. (Incorporated by reference to Exhibit 10.3b to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
- 27 -
10.1c - Amendment No. 7 to the AMSC Hughes MSAT Spacecraft
Contract, dated October 11, 1994, between AMSC Subsidiary
Corporation, as assignee to AMSC, and Hughes Aircraft
Company (Incorporated by reference to Exhibit 10.3c
previously filed with the Report on Form 10-K for the
period ending December 31, 1997 (File No. 0-23044)))
10.2 - Memorandum of Agreement for Satellite Capacity, dated
February 17, 1992, between AMSC Subsidiary Corporation and
Telesat Mobile Inc., as amended by Amending Agreement dated
October 18, 1993 among AMSC, AMSC Subsidiary Corporation and
TMI Communications and Company, Limited Partnership, as
successor in interest to Telesat Mobile Inc., and as further
amended by letter agreement dated October 18, 1993
(Incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.3 - Agreement for Cooperation in Joint Procurement of MSS
Systems, dated September 19, 1988, between American Mobile
Satellite Consortium Inc. and Telesat Mobile Inc.
(Incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.4 - Joint Operating Agreement, dated April 25, 1990, between
AMSC and Telesat Mobile Inc. as amended by Amending
Agreement dated October 18, 1993 among AMSC, AMSC Subsidiary
Corporation and TMI Communications and Company, Limited
Partnership, as successor in interest to Telesat Mobile Inc.
(Incorporated by reference to Exhibit 10.33 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.5 - Right of First Offer Agreement dated as of November 30, 1993
among AMSC, Hughes Communications Satellite Services, Inc.,
Singapore Telecommunications Ltd., Satellite Communications
Investments Corporation, Space Technologies Investments,
Inc., Satellite Mobile Telephone Company L.P., Transit
Communications, Inc., MTel Space Technologies, L.P. and MTel
Space Technologies Corporation (Incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
10.5a - Amendment No. 1 dated June 28, 1996, to Right of First
Offer Agreement among American Mobile Satellite
Corporation, Hughes Communications Satellite Services,
Inc., Singapore Telecommunications Ltd., Satellite
Communications Investments Corporation, Space Technologies
Investments, Inc., and Transit Communications, Inc.
(Incorporated by reference to Exhibit XI to the Amended
and Restated Schedule 13D dated July 1, 1996, filed by
Hughes Communications Satellite Services, Inc., Hughes
Communications, Inc., Hughes Aircraft Company, Hughes
Electronics Corporation and General Motors Corporation
with respect to shares of Common Stock, $.01 par value, of
American Mobile Satellite Corporation)
- 28 -
10.6*- Amended and Restated Stock Option Plan (as amended effective
May 20, 1998) (Incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement on Form S-8 (Reg.
No.333-30099))
10.6a* - Amended Form of Employee Stock Option Agreement
(Incorporated by reference to Exhibit 10.3b to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-23044))
10.7*- Employee Stock Purchase Plan, as amended June 25, 1998
(filed herewith).
10.8*- Form of Directors and Officers Indemnification Agreement
(Incorporated by reference to Exhibit 10.41 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 (File No. 0-23044))
10.9*- 1994 Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to Exhibit 10.53 to the Company's
Annual Report on Form 10-K filed for the period ended
December 31, 1996 (File No. 0-23044))
10.10*- Form of Executive Agreements (Incorporated by reference to
Exhibit 10.54 to the Company's Annual Report on Form 10-K
filed for the period ending December 31, 1996 (File No.
0-23044))
10.11*- Form of Restricted Stock Agreement (Incorporated by
reference to Exhibit 10.13b to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997
(File No. 0-23044))
10.12 - Mobile Terminal Production Agreement, dated October 6, 1992,
between AMSC Subsidiary Corporation and Westinghouse
Electric Corporation acting through Westinghouse Electronic
Systems Company (Incorporated by reference to Exhibit 10.17
to the Company's Registration Statement on Form S-1 (Reg.
No. 33-70468))
10.12a - Amendment No. 1 to Mobile Terminal Production Agreement,
dated November 21, 1994, between AMSC Subsidiary
Corporation and Westinghouse Electric Corporation acting
through Westinghouse Electronic Systems Company
(Incorporated by reference to Exhibit 10.17a to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
10.12b - Amendment No. 2 to Mobile Terminal Production Agreement,
dated January 23, 1995, between AMSC Subsidiary
Corporation and Westinghouse Electric Corporation acting
through Westinghouse Electronic Systems Company
(Incorporated by reference to Exhibit 10.17b to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
- 29 -
10.12c - Amendment No. 3 to Mobile Terminal Production Agreement,
dated March 21, 1995, between AMSC Subsidiary
Corporation and Westinghouse Electric Corporation acting
through Westinghouse Electronic Systems Company
(Incorporated by reference to Exhibit 10.17c the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
10.13 - Mobile Termination Production Contract, dated November 30,
1992, between AMSC Subsidiary Corporation and Mitsubishi
Electric Corporation (Incorporated by reference to Exhibit
10.18 to the Company's Registration Statement on Form S-1
(Reg. No. 33-70468))
10.14 - Deed of Lease at Reston, Virginia, dated February 4, 1993
and amended June 21, 1993, between AMSC Subsidiary
Corporation and Trust Company of the West as Trustee
(Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.14a - Amendment No. 4 to Deed of Lease, dated October 7, 1994,
between AMSC Subsidiary Corporation and Trust Company of
the West as Trustee (Incorporated by reference to
Exhibit 10.20a to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994 (File
No. 0-23044))
10.15 - Master Lease Agreement, dated June 23, 1993, between AMSC
Subsidiary Corporation and Digital Equipment Corporation and
Amendment to Master Lease Agreement between AMSC Subsidiary
Corporation and Digital Equipment Corporation dated August
2, 1993 (Incorporated by reference to Exhibit 10.25 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-70468))
10.16 - Telemetry, Tracking and Control Satellite Service Agreement,
dated as of August 5, 1993, between AMSC Subsidiary
Corporation and Hughes Communications Satellite Services,
Inc. (Incorporated by reference to Exhibit 10.27 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-70468))
10.17 - Agreement dated as of December 14, 1992 between AMSC
Subsidiary Corporation and GTE Spacenet Corporation
(Incorporated by reference to Exhibit 10.35 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.17a - Amendment No. 1 dated as of November 7, 1997 to the
Agreement dated as of December 14, 1992, by GTE Spacenet
Corporation and AMSC Subsidiary Corporation
(Incorporated by reference to Exhibit 10.65 previously
filed with the Report on Form 10-K for the period ending
December 31, 1997 (File No. 0-23044))
- 30 -
10.18 - Master Agreement dated March 30, 1994, between Washington
International Teleport, Inc., and AMSC (Incorporated by
reference to Exhibit 10.36a to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(File No. 0-23044))
10.18a - Contract Amendment No. A001, dated July 1, 1994, between
Washington International Teleport, Inc., and AMSC
(Incorporated by reference to Exhibit 10.36b to the
Company's Quarterly Report on Form 10-Q filed for the
period ending September 30, 1994 (File No. 0-23044))
10.18b - Contract Amendment No. A002, dated July 1, 1994, between
Washington International Teleport, Inc., and AMSC
(Incorporated by reference to Exhibit 10.36c to the
Company's Quarterly Report on Form 10-Q filed for the
period ending September 30, 1994 (File No. 0-23044))
10.19 - Asset Sale Agreement dated as of November 22, 1996, by and
among Rockwell Collins, Inc. American Mobile Satellite
Corporation and AMSC Subsidiary Corporation (Incorporated by
reference to Exhibit 10.61 to the Company's Current Report
on Form 8-K dated November 22, 1996, and filed on December
9, 1996 (File No. 0-23044))
10.20 - Stock Purchase Agreement for the Acquisition of Motorola
ARDIS Acquisition, Inc. and Motorola ARDIS, Inc. by AMSC
Acquisition Company, Inc., a Wholly-Owned Subsidiary of
American Mobile Satellite Corporation, Dated as of December
31, 1997 (Incorporated by reference to Exhibit 10.65
previously filed with the Report on Form 10-K for the period
ending December 31, 1997 (File No. 0-23044)).
10.20a - Amendment No. 1 dated March 31, 1998 to the Stock
Purchase Agreement for the Acquisition of Motorola ARDIS
Acquisition, Inc. and Motorola ARDIS, Inc. by AMSC
Acquisition Company, Inc., a Wholly-Owned Subsidiary of
American Mobile Satellite Corporation (Incorporated by
reference to Exhibit 4.2 to the Schedule 13D dated March
31, 1998, filed by Motorola, Inc.).
10.21 - Participation Rights Agreement by and among Motorola, Inc.,
American Mobile Satellite Corporation, and the parties
listed on Schedule A, dated as of December 31, 1997
(Incorporated by reference to Exhibit 10.65 previously filed
with the Report on Form 10-K for the period ending December
31, 1997 (File No. 0-23044)).
10.21a - Registration Rights Agreement by and among Motorola,
Inc., American Mobile Satellite Corporation dated as
of March 31, 1998 (Incorporated by reference to
Exhibit 4.4 to the Schedule 13D dated March 31, 1998,
filed by Motorola, Inc.)
- 31 -
10.22 - Credit Agreement by and between Motorola Inc. and ARDIS
Company dated June 17, 1998 (Incorporated by reference to
Exhibit 10.61 to the Company's Current Report on Form 10-Q
dated June 30, 1998 (File No. 0-23044)).
10.23 - Indenture of AMSC Acquisition Company, Inc., Series A and
Series B, 12 1/4% Senior Notes Due 2008, dated March 31,
1998 (Incorporated by reference to Registration Statement on
Form S-4 filed on May 15, 1998 (File No. 333-52777)).
10.24 - Debt Registration Rights Agreement dated March 31, 1998 by
and among AMSC Acquisition Company, Inc., Bear, Stearns &
Co. Inc., J.P. Morgan Securities Inc., TD Securities (USA)
Inc. and BancAmerica Robertson Stephens, and guarantors
party thereto (Incorporated by reference to Registration
Statement on Form S-4 filed on May 15, 1998 (File No.
333-52777)).
10.25 - Unit Agreement Among American Mobile Satellite Corporation,
AMSC Acquisition Company, Inc. and State Street Bank and
Trust Company as Unit Agent, dated March 31, 1998
(Incorporated by reference to Registration Statement on Form
S-4 filed on May 15, 1998 (File No. 333-52777)).
10.26 - Warrant Agreement between American Mobile Satellite
Corporation as Issuer and State Street Bank and Trust
Company as Warrant Agent dated March 31, 1998 (Incorporated
by reference to Registration Statement on Form S-4 filed on
May 15, 1998 (File No. 333-52777)).
10.27 - Warrant Registration Rights Agreement dated March 31, 1998
By and Among American Mobile Satellite Corporation and Bear,
Stearns & Co. Inc., J.P. Morgan Securities Inc., T.D.
Securities (USA) Inc., BancAmerica Robertson Stephens
(Incorporated by reference to Registration Statement on Form
S-4 filed on May 15, 1998 (File No. 333-52777)).
10.28 - Pledge and Security Agreement by and among AMSC Acquisition
Company, Inc., State Street Bank and Trust Company, as
Trustee and State Street Bank and Trust Company, as
Collateral Agent dated March 31, 1998 (Incorporated by
reference to Registration Statement on Form S-4 filed on May
15, 1998 (File No. 333-52777)).
10.29 - Guaranty Issuance Agreement, dated as of March 31, 1998,
among Hughes Electronics Corporation, Singapore
Telecommunications Ltd., and Baron Capital Partners, L.P.
and American Mobile Satellite Corporation and AMSC
Acquisition Company, Inc. (Incorporated by reference to
Exhibit 1 to the Schedule 13D dated March 31, 1998, filed by
Hughes Communications Satellite Services, Inc. )
10.29a - Amendment No. 1 to the Guaranty Issuance Agreement, dated
as of January 15, 1999, among Hughes Electronics
Corporation, Singapore Telecommunications Ltd., and Baron
Capital Partners, L.P. and American Mobile Satellite
Corporation and AMSC Acquisition Company, Inc. (filed
herewith).
- 32 -
10.29b - Amendment No. 2 to the Guaranty Issuance Agreement, dated
as of March 29, 1999, among Hughes Electronics
Corporation, Singapore Telecommunications Ltd., and Baron
Capital Partners, L.P. and American Mobile Satellite
Corporation and AMSC Acquisition Company, Inc. (filed
herewith).
10.30 - Warrant No. 1 for the Purchase of 3,750,000 Shares (subject
to adjustment) of Common Stock of American Mobile Satellite
Corporation issued to Hughes Electronics Corporation, dated
June 28, 1996 (Incorporated by reference to Exhibit XIII to
the Amended and Restated Schedule 13D dated July 1, 1996,
filed by Hughes Communications Satellite Services, Inc.,
Hughes Communications, Inc., Hughes Aircraft Company, Hughes
Electronics Corporation and General Motors Corporation with
respect to shares of Common Stock, $.01 par value, of
American Mobile Satellite Corporation).
10.30a - Amendment No. 1 to the Warrant Certificate, dated as of
March 27, 1997, by and among American Mobile Satellite
Corporation and Hughes Electronics Corporation, Singapore
Telecommunications Ltd., and Baron Capital Partners, L.P.
(Incorporated by reference to Exhibit 4 to the
Schedule 13D dated March 31, 1997, filed by Hughes
Communications Satellite Services, Inc. )
10.30b - Amendment No. 2 to the Warrant Certificate, dated as of
March 31, 1998, by and among American Mobile Satellite
Corporation and Hughes Electronics Corporation, Singapore
Telecommunications Ltd., and Baron Capital Partners, L.P.
(Incorporated by reference to Exhibit 4 to the Schedule
13D dated March 31, 1998, filed by Hughes Communications
Satellite Services, Inc. )
10.30c - Amendment No. 3 to the Warrant Certificates for the
Purchase of Shares of Common Stock of American Mobile
Satellite Corporation, dated as of April 1, 1999, by
and among American Mobile Satellite Corporation
and Hughes Electronics Corporation, Singapore
Telecommunications Ltd., and Baron Capital Partners,
L.P. (filed herewith, as an exhibit to Exhibit 10.29b
herein)
10.31 - Registration Rights Agreement dated as of June 28, 1996,
among American Mobile Satellite Corporation, Hughes
Electronics Corporation, Singapore Telecommunications Ltd.,
and Baron Capital Partners, L.P. (Incorporated by reference
to Exhibit XIV to the Amended and Restated Schedule 13D
dated July 1, 1996, filed by Hughes Communications Satellite
Services, Inc., Hughes Communications, Inc., Hughes Aircraft
Company, Hughes Electronics Corporation and General Motors
Corporation with respect to shares of Common Stock, $.01 par
value, of American Mobile Satellite Corporation).
(Incorporated by reference to Exhibit 10.57 to the Company's
Quarterly Report on Form 10-Q filed for the period ended
June 30, 1996 (File No. 0-23044))
- 33 -
10.32 - Warrant for the Purchase of Shares of Common Stock of
American Mobile Satellite Corporation, dated as of March 31,
1998 (Incorporated by reference to Exhibit 2 to the Schedule
13D dated March 31, 1998, filed by Hughes Communications
Satellite Services, Inc. )
10.32a - Amendment No. 1 to Warrant Certificates for the
Purchase of Shares of Common Stock of American Mobile
Satellite Corporation, dated as of April 1, 1999 by
and among Hughes Electronics Corporation, Singapore
Telecommunications Ltd. and Baron Capital Partners, L.P.
(filed herewith, as an exhibit to Exhibit 10.29b herein)
10.33 - Amended and Restated Registration Rights Agreement, dated as
of March 31, 1998, among American Mobile Satellite
Corporation and Hughes Electronics Corporation, Singapore
Telecommunications Ltd., and Baron Capital Partners, L.P.
(Incorporated by reference to Exhibit 3 to the Schedule 13D
dated March 31, 1998, filed by Hughes Communications
Satellite Services, Inc.)
10.34 - Term Credit Agreement dated as of March 31, 1998 among
American Mobile Satellite Corporation, Morgan Guaranty Trust
Company of New York, Toronto Dominion (Texas), Inc. and
other banks party thereto (Incorporated by reference to
Exhibit 10.61 to the Company's Current Report on Form 10-Q
dated March 31, 1998 (File No. 0-23044))
10.34a - Amendment No. 1 and Waiver to Term Credit Agreement dated
as of January 15, 1999 among American Mobile Satellite
Corporation, Morgan Guaranty Trust Company of New York,
Toronto Dominion (Texas), Inc. and other banks party
thereto (filed herewith)
10.35 - Revolving Credit Agreement dated as of March 31, 1998 among
AMSC Acquisition Company, Inc., American Mobile Satellite
Corporation, Morgan Guaranty Trust Company of New York and
Toronto Dominion (Texas), Inc. and other banks party thereto
(Incorporated by reference to Exhibit 10.61 to the Company's
Current Report on Form 10-Q dated March 31, 1998 (File No.
0-23044))
10.35a - Amendment No. 1 and Waiver to Revolving Credit Agreement
dated as of January 15, 1999 among AMSC Acquisition
Company, Inc., American Mobile Satellite Corporation,
Morgan Guaranty Trust Company of New York and Toronto
Dominion (Texas), Inc. and other banks party thereto
(filed herewith)
11.1 - Computation of Net Loss Per Share (filed herewith)
21.1 - Subsidiaries of AMSC (filed herewith)
23.1 - Consent of Arthur Andersen LLP (filed herewith)
- 34 -
23.2 - Consent of KPMG LLP (filed herewith)
27.1 - Financial Data Schedule (filed herewith)
- ------------------------------------
*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this report pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K:
On October 9, 1998, the Company filed a Current Report on Form 8-K,
describing in response to Item 5-Other Events, the resignation of
director Ho Siaw Hong, the representative from Singapore
Telecommunications, Ltd.
On October 29, 1998, the Company filed a Current Report on Form 8-K,
describing in response to Item 5-Other Events, announced the financial
results for its third quarter ended September 30, 1998. On that date it
also announced that it reached an agreement with Stratos Global
Corporation to consolidate American Mobile's marine distribution
channel. In addition, on that date, American Mobile announced that,
effective January 1,1999, its President Walt Purnell would assume the
added responsibilities of chief executive officer, with Gary Parsons
continuing as Chairman of the Board with oversight of mergers and
acquisitions, strategic planning and American Mobile's investment in XM
Satellite Radio, Inc.
On January 5, 1999, the Company filed an Amendment to its Current
Report on Form 8-K, describing in response to Item 5-Other Events,
announced that effective January 1, 1999, the Board of Directors has
appointed Walter V. Purnell, Jr. as a director of American Mobile.
On January 29, 1999, the Company filed a Current Report on Form 8-K,
describing in response to Item 5-Other Events, American Mobile provided
an additional $21.4 million of convertible financing for its
subsidiary, XM Satellite Radio Holdings, Inc. ("XM Radio").
- 35 -
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN MOBILE SATELLITE CORPORATION
By /s/Walter V. Purnell, Jr.
-------------------------
Walter V. Purnell, Jr.
President and Chief Executive Officer
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Walter V. Purnell, Jr. President and Chief
- ------------------------- Executive Officer
Walter V. Purnell, Jr. (principal executive officer) March 30, 1999
/s/W. Bartlett Snell Senior Vice President and March 30, 1999
- ------------------------- Chief Financial Officer
W. Bartlett Snell (principal financial and
accounting officer)
/s/Gary M. Parsons Chairman of the Board March 30, 1999
- -------------------------
Gary M. Parsons
/s/Douglas I. Brandon
- ------------------------- Director March 30, 1999
Douglas I. Brandon
/s/Billy J. Parrott
- ------------------------- Director March 30, 1999
Billy J. Parrott
- 36 -
/s/Jack A. Shaw
- ------------------------- Director March 30, 1999
Jack A. Shaw
/s/Roderick M. Sherwood, III
- ------------------------- Director March 30, 1999
Roderick M. Sherwood, III
- 37 -
INDEX
Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................F - 2
Report of Independent Public Accountants..................................F - 19
Consolidated Statements of Operations.....................................F - 20
Consolidated Balance Sheets...............................................F - 21
Consolidated Statements of Stockholders' (Deficit) Equity ................F - 22
Consolidated Statements of Cash Flows.....................................F - 24
Notes to Consolidated Financial Statements................................F - 25
Quarterly Financial Data..................................................F - 56
Selected Financial Data...................................................F - 57
F-1
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations
- ----------
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such statements are identified by the use of
forward-looking words or phrases including, but not limited to, "believes,"
"intended," "will be positioned," "expects," "expected," "estimates,"
"anticipates" and "anticipated." These forward-looking statements are based on
the Company's current expectations. All statements other than statements of
historical facts included in this Annual Report, including those regarding the
Company's financial position, business strategy, projected costs and financing
needs, and plans and objectives of management for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, there can be no
assurance that such expectations will prove to have been correct. Because
forward-looking statements involve risks and uncertainties, the Company's actual
results could differ materially. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Annual Report, including, without limitation, in conjunction with the
forward-looking statements included in this Annual Report. These forward-looking
statements represent the Company's judgment as of the date hereof and readers
are cautioned not to place undue reliance on these forward-looking statements.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including the Registration
Statement on Form S-3, No. 333-71423,and Form 10-Q Quarterly Reports to be filed
by the Company subsequent to this Annual Report on Form 10-K and any Current
Reports on Form 8-K and registration statements filed by the Company.
General
- -------
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the financial
condition and consolidated results of operations of American Mobile Satellite
Corporation (with its subsidiaries, "American Mobile" or the "Company"). The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
American Mobile Satellite Corporation was incorporated in May 1988 and, until
1996, was a development stage company, engaged primarily in the design,
development, construction, deployment and financing of a mobile satellite
communication system. On March 31, 1998, the Company acquired (the
"Acquisition") ARDIS Company ("ARDIS"), a wholly-owned subsidiary of Motorola,
Inc. ("Motorola") that owns and operates a two-way wireless data communications
network. With the acquisition of ARDIS, the Company became a leading provider of
nationwide wireless communications services, including data, dispatch and voice
services, primarily to business customers in the United States. The Company
offers a broad range of end-to-end wireless solutions utilizing a seamless
network consisting of the nation's largest, most fully- deployed terrestrial
wireless data network (the "ARDIS Network") and a satellite in geosynchronous
orbit (the "Satellite Network") (together, the "Network").
F-2
In connection with the Acquisition, the Company and its subsidiaries entered
into agreements with respect to the following financings and refinancings: (1)
$335 million of Units; (2) the restructuring of its existing $200 million
Revolving Credit Facility and Term Loan Facility (collectively, the "New Bank
Financings"); and (3) $10 million commitment with respect to Motorola vendor
financing. See "Liquidity and Capital Resources." Additionally, in connection
with the Acquisition and related financing, the Company transferred all of its
rights, title and interests in AMSC Subsidiary Corporation, American Mobile
Satellite Sales Corporation, and AMSC Sales Corp. Ltd. (together, "American
Mobile Subsidiaries") to Acquisition Company.
On October 16, 1997, XM Satellite Radio Inc., formerly American Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings, Inc., (together with XM
Satellite Radio Inc., "XM Radio"), was awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States, following its successful $89.9 million bid at auction on April 2, 1997.
The operations and financing of 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% (compared with the 18.3% post-exercise
position previously reported).
On December 4, 1997, the Company entered into an agreement with African
Continental Telecommunications Ltd. ("ACTEL") to lease the Company's satellite,
"MSAT-2" (the "Satellite Lease Agreement") for deployment over sub-Saharan
Africa. Simultaneously, the Company agreed with TMI Communications and Company
Limited Partnership ("TMI") to acquire a one-half ownership interest in TMI's
satellite, "MSAT-1" (the "Satellite Purchase Agreement"). As ACTEL had not
obtained the requisite financing, the agreements were terminated on March 24,
1999. Following the termination of the ACTEL-related agreements, the Company and
TMI will each maintain operations on their two satellites, and continue to
provide each other emergency back-up and restoral services in accordance with
long-standing arrangements. See Item I. "Business -- Satellite Lease and
Purchase Agreement", "-Satellite Back-up and Technology," and Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
F-3
In late 1996 the Company expanded its mobile data business through the
acquisition of Rockwell International Corporation's ("Rockwell") dual mode
mobile messaging and global positioning and monitoring service for commercial
trucking fleets ("MCSS"). In the transaction, the Company assumed Rockwell's
existing customer contracts, and acquired Rockwell's system infrastructure for
delivering their mobile data product, as well as Rockwell's rights to the
multi-mode, satellite-terrestrial product.
Given these acquisitions and the Company's historically high growth rate,
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:
o the timely completion and deployment of future products and related
services, including among other things, availability of mobile
telephones, data terminals and other equipment to be used with the
Network ("Subscriber Equipment") being manufactured by third parties
over which the Company has limited control,
o the market's acceptance of the Company's services,
o the ability and the commitment of the Company's distribution channels
to market and distribute the Company's services,
o the Company's ability to modify its organization, strategy and product
mix to maximize the market opportunities in light of changes therein,
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 capacity constraints arising from the reconfiguration of MSAT-2,
subsequent anomalies affecting MSAT-2, or power management
recommendations affecting MSAT-2 previously reported,
o 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,
o 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,
F-4
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 respond and react to changes in its business
and the industry as a result of being highly leveraged,
o the timely roll-out of certain key customer initiatives and products,
o the ability of the Company to successfully integrate ARDIS and to
achieve certain business synergies, and
o 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 not have an adverse impact on the Company.
As of December 31, 1998, there were approximately 105,700 units on the Network.
Years Ended December 31, 1998 and 1997
- --------------------------------------
Service revenues, which includes both the Company's voice and data services,
approximated $58.0 million for 1998, which constitutes a $37.3 million increase
over 1997. The significant increase in service revenues year over year was
primarily attributable to the ARDIS data service. Absent the acquisition of
ARDIS on March 31, 1998, service revenues for 1998 increased 33% year to year
from $20.7 million to $27.6 million.
Year Ended
Summary of Revenue December 31,
- ------------------- ------------
(in millions) 1998 1997 Change % Change
---- ---- ------ --------
Voice Service $14.0 $10.0 $4.0 40%
Data Service 40.1 7.6 32.5 428%
Capacity Resellers and Other 3.9 3.1 0.8 26%
Equipment Revenue 29.2 23.5 5.7 24%
The increase in service revenue from voice services was primarily a result of a
34% increase in voice customers in 1998 as compared to 1997. The increase in
service revenue from the Company's data services was a result of $30.4 million
from the ARDIS data service and a 26% increase in mobile data units during 1998.
F-5
Service revenue from capacity resellers, who handle both voice and data
services, increased primarily as a result of increased contract commitments from
current customers.
The increase in revenue from the sale of Subscriber Equipment includes the sale
of approximately $8.5 million of maritime voice equipment to Stratos Global
Corporation in the fourth quarter of 1998. Excluding this sale, revenue from the
sale of Subscriber Equipment decreased due to reductions in prices for certain
data products. ARDIS equipment sales were $1.4 million.
Year Ended
Summary of Expenses December 31,
- ------------------- ------------
(in millions) 1998 1997 Change % Change
---- ---- ------ --------
Cost of Service & Operations $58.0 $32.0 $26.0 81 %
Cost of Equipment Sales 30.4 40.3 (9.9) (25)%
Sales & Advertising 16.9 12.1 4.8 40 %
General & Administrative 17.3 14.8 2.5 17 %
Depreciation & Amortization 52.7 42.4 10.3 24 %
Cost of service and operations for 1998 includes costs to support subscribers
and to operate the Network. As a percentage of total revenues, cost of service
and operations was 67% and 72% for 1998 and 1997, respectively. The increase in
cost of service and operations was primarily attributable to (i) $26.9 million
related to ARDIS and (ii) increased interconnect charges associated with
increased service usage, offset by (iii) a reduction in information technology
costs caused by reducing the dependence on outside consultants. Absent the
acquisition of ARDIS on March 31, 1998, cost of service and operations for 1998
was $31.1, or a $.9 million decrease from 1997.
The decrease from 1997 to 1998 in the cost of equipment sold was primarily
attributable to the impact of an inventory valuation allowance of approximately
$12.0 million recorded in the fourth quarter of 1997 and the resulting decrease
in 1998 equipment prices, offset by the cost of the sale of the maritime
equipment, mentioned above.
The 40% increase in sales and advertising expenses from 1997 to 1998 was
primarily attributable to ARDIS. Absent the acquisition of ARDIS, sales and
advertising expenses for 1998 were $12.3 million, or an increase of less than 2%
over 1997. Sales and advertising expenses were 19% of total revenue in 1998 and
27% of revenue in 1997.
General and administrative expenses represented 20% and 34% of total revenue in
1998 and 1997, respectively. The dollar increase in general and administrative
F-6
expenses for 1998 compared to 1997 was primarily attributable to $5.4 million of
ARDIS costs offset by reductions of approximately $2.9 million of expenses
attributable to (i) $.9 million in taxes relating to a reversal of an accrual as
a result of obtaining a favorable property tax ruling, and (ii) reductions of
bad debt expense. Absent the acquisition of ARDIS, general and administrative
expenses for 1998 were $11.9 million.
Depreciation and amortization expense represented approximately 60% of total
revenue in 1998, as compared to 96% of total revenue in 1997. The dollar
increase in depreciation and amortization expense was primarily attributable to
the addition of ARDIS assets and step-up in the basis of ARDIS licenses. Absent
the acquisition of ARDIS, depreciation and amortization expenses for 1998 was
$40.0 million, or a reduction of $2.4 million from 1997.
Interest and other income was $4.4 million for 1998 as compared to $1.1 million
for 1997. The increase was primarily a result of interest earned on escrows
established with the proceeds from the $335 million debt offering (the "Notes").
The Company incurred $53.8 million of interest expense in 1998 compared to $21.6
million in 1997, reflecting (i) the amortization of debt discount, prepaid
interest and debt offering costs in the amount of $16.2 million in 1998,
compared to $9.4 million in 1997, (ii) interest expense on the $335 million
Notes at 12.25%, offset by lower debt balances on the New Bank Facility.
Interest expense in 1998 was significant as a result of borrowings under the New
Bank Financing, the amortization of borrowing costs incurred in conjunction with
securing the facility, and interest accrued on the Notes issued in the ARDIS
acquisition. It is anticipated that interest costs will continue to be
significant as a result of the New Bank Financing and Notes (see "Liquidity and
Capital Resources").
Net capital expenditures for 1998 for property and equipment were $12.5 million
compared to $8.6 million in 1997. The increase was largely attributable to the
acquisition of assets necessary to continue the required build-outs of the ARDIS
network.
Years Ended December 31, 1997 and 1996
- --------------------------------------
Service revenues, which include both the Company's voice and data services,
approximated $20.7 million for 1997 as compared to $9.2 million for 1996 and
represents a 125% increase year over year.
Year Ended
Summary of Revenue December 31,
(in millions) 1997 1996 Change % Change
---- ---- ------ --------
Voice Service $10.0 $5.0 $5.0 100%
Data Service 7.6 2.3 5.3 230%
Capacity Resellers and other 3.1 1.9 1.2 63%
Equipment Revenue 23.5 18.5 5.0 27%
F-7
Service revenue from voice services increased primarily as a result of a 101%
increase in voice customers during 1997. Service revenue from the Company's data
services increased as a result of additional revenue from subscribers added as a
result of the acquisition, on November 1996, of Rockwell's dual mode mobile
messaging and global positioning and monitoring service, as compared to the
revenue received in 1996 for satellite capacity leased by Rockwell. The increase
in service revenue from capacity resellers, who handle both voice and data
services, was a result of additional data customer contracts.
The increase in the sale of Subscriber Equipment was primarily attributable to
increased equipment sales of the dual-mode mobile messaging product, discussed
above.
Summary of Expenses Year Ended
(in millions) December 31,
- ------------------- ------------
1997 1996 Change % Change
---- ---- ------ --------
Cost of Service & Operations $32.0 $30.5 $1.5 5 %
Cost of Equipment Sales 40.3 31.9 8.4 26 %
Sales & Advertising 12.1 24.5 (12.4) (51)%
General & Administrative 14.8 17.5 (2.7) (15)%
Depreciation & Amortization 42.4 43.4 (1.0) (2)%
Cost of service and operations, which includes costs to support subscribers and
to operate the Satellite Network, as a percentage of total revenues, were 72%
and 110% for 1997 and 1996, respectively. The increase in cost of service and
operations was primarily attributable to (i) increased interconnect charges
associated with increased service usage by customers, and (ii) the additional
cost associated with supporting the dual mode mobile messaging product discussed
above, offset by a reduction in information technology costs affected by
reducing the dependence on outside consultants.
The cost of equipment sold represented 91% of total revenue in 1997 and 115% of
total revenue in 1996. While this percentage decrease was primarily a result of
the increase in the total revenue, the dollar increase in the cost of equipment
sold was primarily attributable to (i) increased sales as a result of the
acquisition of the dual mode messaging product, (ii) an increase of $600,000 in
inventory carrying costs as certain subscriber equipment contracts were
fulfilled, and (iii) a $12.0 million write-down of inventory to net realizable
value in 1997 as compared to a $11.1 million write-down and reconfiguration
charges in 1996.
Sales and advertising expenses as a percentage of total revenue were 27% in 1997
and 88% in 1996. The decrease of sales and advertising expenses was primarily
F-8
attributable to (i) a more focused approach to advertising as the company moved
from consumer markets to targeted business-to-business sales, and the resulting
reduction in print advertising, (ii) increased costs in the first quarter of
1996 for the development of collateral material needed to support sales and
marketing and (iii) costs incurred in the first quarter of 1996 associated with
the formal launch of service.
General and administrative expenses decreased for 1997, as compared to 1996,
primarily as a result of reductions made in staffing due to a management
restructuring in the third quarter of 1996 and the associated severance costs.
As a percentage of total revenue, general and administrative expenses
represented 34% in 1997 and 63% in 1996.
Depreciation and amortization expense represented approximately 96% and 157% of
revenue for 1997 and 1996, respectively. The decrease in depreciation and
amortization expense was attributable to the reduction of the carrying value of
the satellite as a result of the resolution, in August 1996, of claims under the
Company's satellite insurance contracts and policies and the receipt of
approximately $66.0 million, offset by a $1.0 million one-time charge, in the
second quarter of 1997, associated with increased amortization in accordance
with SFAS No.86 of certain cost associated with software development for the
mobile data product.
Interest income was $247,000 in 1997 compared to $552,000 in 1996. The decrease
was a result of lower average cash balances. The Company incurred $21.6 million
of interest expense in 1997 compared to $15.2 million of interest expense in
1996 reflecting (i) the amortization of debt discount and debt offering costs in
the amount of $9.4 million in 1997, compared to $5.7 million in 1996, and (ii)
higher outstanding loan balances as compared to 1996. During 1997, the company
received other income in the amount of $875,000 representing proceeds from the
licensing of certain technology associated with the Satellite Network.
Net capital expenditures for 1997 for property and equipment were $8.6 million
compared to capital reductions of $51.9 million in 1996. The $60.5 million
increase was largely attributable to (i) the net proceeds in 1996 of $66.0
million from the resolution of the claims under the Company's satellite
insurance contracts and policies as previously disclosed and (ii) the decrease
in asset acquisitions associated with the final build-out of the communications
ground segment (the "CGS").
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 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. These
outlays are expected to continue for the foreseeable future thereafter.
F-9
$335 Million Unit Offering
- --------------------------
In connection with the Acquisition, the Acquisition Company issued $335 million
of Units (the "Units") consisting of 12 1/4% Senior Notes due 2008 (the
"Notes"), and Warrants to purchase shares of Common Stock of the Company. Each
Unit consists of $1,000 principal amount of Notes and one Warrant to purchase
3.75749 shares of Common Stock at an exercise price of $12.51 per share. The
Warrants were valued at $8.5 million and are reflected in the balance sheet as a
debt discount. A portion of the net proceeds of the sale of the Units were used
to finance the Acquisition. In connection with the Notes, the Acquisition
Company has purchased approximately $112.3 million of pledged securities that
are intended to provide for the payment of the first six interest payments on
the Notes. The Acquisition Company incurred approximately $15 million in costs
associated with the placement of the Notes and the Acquisition. Interest
payments are due semi-annually, in arrears, beginning October 1, 1998. The Notes
are fully guaranteed by American Mobile Satellite Corporation.
New Bank Financing
- ------------------
In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries restructured the existing $200 million Bank Financing (the "New
Bank Financing") to provide for two facilities: (i) the Revolving Credit
Facility, a $100 million unsecured five-year reducing revolving credit facility,
and (ii) the Term Loan Facility, a $100 million five-year, term loan facility
with up to three additional one-year extensions subject to the lendors'
approval. The Revolving Credit Facility ranks pari passu with the Notes. The
Term Loan Facility is secured by the assets of the Company, principally its
stockholdings in XM Radio and the Acquisition Company, and will be effectively
subordinated to the Revolving Credit Facility and the Notes. The New Bank
Financing is severally guaranteed by Hughes Electronics Corporation, Singapore
Telecommunications Ltd., and Baron Capital Partners, L.P. (collectively, the
"Bank Facility Guarantors"). The lenders' placement fee for the New Bank
Financing was approximately $500,000.
The Revolving Credit Facility
- -----------------------------
The Revolving Credit Facility bears an interest rate, generally, of 50 basis
points above London Interbank Offered Rate ("LIBOR") and is unsecured, with a
negative pledge on the assets of the Acquisition Company and its subsidiaries
ranking pari passu with the Notes. The Revolving Credit Facility will be reduced
$10 million each quarter, beginning with the quarter ending June 30, 2002, with
the balance due on maturity of March 31, 2003. Certain proceeds received by the
Acquisition Company would be required to repay and reduce the Revolving Credit
Facility, unless otherwise waived by the lenders and the Bank Facility
Guarantors: (1) 100% of excess cash flow obtained by the Acquisition Company;
(2) the first $25.0 million net proceeds of the lease or sale of MSAT-2 received
by the Acquisition Company, and thereafter 75% of the remaining proceeds
received from such lease or sale (the remaining 25% may be retained by the
Acquisition Company for business operations); (3) 100% of the proceeds of any
other asset sales by the Acquisition Company; (4) 50% of the net proceeds of any
offerings of the Acquisition Company's equity (the remaining 50% to be retained
by the Acquisition Company for business operations); and (5) 100% of any major
casualty proceeds. At such time as the Revolving Credit Facility is repaid in
full, and subject to satisfaction of the restrictive payments provisions of the
F-10
Notes, any prepayment amounts that would otherwise have been used to prepay the
Revolving Credit Facility will be dividended to American Mobile Satellite
Corporation.
The Term Loan Facility
- ----------------------
The Term Loan Facility bears an interest rate, generally, of 50 basis points
above LIBOR and is secured by the assets of the Company, principally its
stockholdings in XM Radio and the Acquisition Company. The Term Loan Agreement
does not include any scheduled amortization until maturity, but does contain
certain provisions for prepayment based on certain proceeds received by the
Company, unless otherwise waived by the Banks and the Bank Facility Guarantors:
(1) 100% of excess cash flow obtained by the Company; (2) the first $25.0
million net proceeds of the lease or sale of MSAT-2 received by the Company, and
thereafter 75% of the remaining proceeds received from such lease or sale (the
remaining 25% to be retained by the Acquisition Company for business
operations); (3) 100% of the proceeds of any other asset sales by the Company;
(4) 50% of the net proceeds of any equity offerings of the Company (the
remaining 50% to be retained by the Company for business operations); and (5)
100% of any major casualty proceeds of the Company. To the extent that the Term
Loan Facility is repaid, the aforementioned proceeds that would otherwise have
been used to repay the Term Loan Facility will be used to repay and reduce the
commitment under the Revolving Credit Facility.
The Guarantees
- --------------
In connection with the New Bank Financing, the Bank Facility Guarantors 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. 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 waiver, the Company agreed to re-price their Guarantee Warrants,
effective April 1, 1999, from $12.51 to $7.50. As of February 28, 1999, the
Company had outstanding borrowings of $100 million of the Term Loan Facility at
5.8125%, and $48 million under the Revolving Credit Facility at rates ranging
from 5.4375% to 5.5%.
F-11
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.
Motorola Vendor Financing
- -------------------------
Motorola has entered into an agreement with ARDIS to provide up to $10 million
of vendor financing (the "Vendor Financing Commitment"), to finance up to 75% of
the purchase price of additional network base stations. Loans under this
facility bear interest at a rate equal to LIBOR plus 7.0% and will be guaranteed
by the Company and each subsidiary of the Acquisition Company. The terms of the
facility require that amounts borrowed be secured by the equipment purchased
therewith. As of December 31, 1998, $1.6 million was outstanding under this
facility.
Summary of Recent Financing
- ---------------------------
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 in 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.
See "Overview."
F-12
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 and will continue to
receive 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 entered into an agreement with Baron Asset Fund
("Baron") for the placement of 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 for a note convertible into XM Radio shares (the "XM
Radio Note Receivable"). The Baron XM Radio Convertible Note ranks subordinate
to any 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 additonal 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.
Deferred Trade Payables
- -----------------------
The Company has arranged the financing of certain trade payables, and as of
December 31, 1998, $5.1 million of deferred trade payables were outstanding at
rates ranging from 6.10% to12.0% and are generally payable by the end of 1999.
Purchase and Lease of Satellite
- -------------------------------
On December 4, 1997, the Company entered into two agreements with respect to two
future transactions. The Company agreed with TMI Communications and Company,
Limited Partnership ("TMI") to acquire a one-half ownership interest in TMI's
satellite, MSAT-1. Simultaneously, the Company entered into an agreement with
African Continental Telecommunications Ltd. ("ACTEL"), for the lease of MSAT-2,
for deployment over sub-Saharan Africa. Closing under the agreements was subject
to a number of conditions, some of which were not met. As ACTEL had not obtained
the requisite financing, the agreements were terminated on March 24, 1999.
F-13
Other
- -----
At December 31, 1998, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory in
the maximum amount of $11.4 million during 1999. Additionally, the Company had
remaining contractual commitments in the amount of $1.0 million for the
development of certain next generation data terminal inventory. 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 early 1999. The contract contains a 50% cancellation
penalty. Additionally, the Company has remaining contractual commitments for the
purchase of $4.7 million of base stations required to complete certain
necessary site build-outs, $1.2 million for certain software development, and
certain other multi-year operating expense contract commitments that total
approximately $2.3 million over the next two years.
On July 2, 1998, the Company filed an application with the Federal
Communications Commission ("FCC") to construct and launch a follow-on
geostationary mobile satellite for its business. The filing of the application
does not commit the Company to expend any resources toward this project;
however, should the Company decide to proceed with the construction of the
follow-on satellite, the Company would be required to raise substantial
additional capital to fund this project.
On October 28, 1998, the Company entered into agreements with Stratos Global
Corporation to consolidate the Company's marine distribution channel, including
the transfer of inventory and the assignment of certain customer contracts and
servicing agreements, in exchange for $8.5 million. Apart from the initial cash
inflow, it is not expected that this transaction will have a material impact on
the Company's financial position, results of operations, or cash flows.
All wholly owned subsidiaries of the Company are subject to financing agreements
that limit the amount of cash dividends and loans that can be advanced to the
Company. At December 31, 1998, 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.
Cash used in operating activities was $35.6 million for 1998 compared to $50.9
million for 1997. The decrease in cash used in operating activities was
primarily attributable to (i) decreased operating losses, and (ii) decreased
inventory balances. Cash used in investing activities was $210.6 for 1998
compared to $10.2 million for 1997. This increase was primarily attributable to
the acquisition of ARDIS and the funding of certain escrows required in
F-14
connection with the Acquisition and issuance of Notes. Cash provided by
financing activities was $246.3 million in 1998 as compared to $61.1 million in
1997 reflecting the issuance of the Notes, offset by the repayment of certain
vendor financing and other long-term debt. Proceeds from the sale of debt
securities and Common Stock were $335.4 million and $284,000 for 1998 and 1997,
respectively. Payments on long-term debt and capital leases were $8.3 million
and $8.8 million for 1998 and 1997, respectively. In addition, the Company
incurred $14.7 million of debt issuance costs associated with the placement of
the Notes and amendments to the New Bank Financing, as compared to $1.5 million
in 1997. As of December 31, 1998, the Company had $2.3 million of cash and cash
equivalents and working capital of $49.2 million, including $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. See
"Part I, Item 1. Business - Regulation".
On June 5, 1996, the FCC waived its one-year construction requirement and
granted ARDIS extensions of time to complete buildouts of approximately 190
sites, as required to maintain previously granted licenses. American Mobile has
completed its planned construction of base stations on the ARDIS Network for
which the extended implementation was granted by the FCC.
Other Matters
- -------------
As previously reported, the satellite has, in the past, experienced certain
technological anomalies, and there can be no assurance that the satellite will
not experience subsequent anomalies that could adversely impact the Company's
financial condition, results of operations and cash flows. See "Part I, Item 1.
Business-Satellite Back-up and Technology".
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.
F-15
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.
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 of
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. 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
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.
F-16
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 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company adopted both of these standards during 1998.
SFAS No. 130 requires "comprehensive income" and the components of "other
comprehensive income" to be reported in the financial statements and/or notes
thereto. Since the Company does not have any components of "other comprehensive
income," reported net income is the same as "comprehensive income" for the year
ended December 31, 1998 and 1997.
SFAS No. 131 requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. For purposes of adopting SFAS 131, the Company will report
only one operating segment; however, the Company has made additional footnote
disclosures about certain product lines of the business. (See Footnote 2 -
"Segment Disclosures").
F-17
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
is in the process of determining the impact the adoption of this statement will
have on its financial position and results, but it is not expected to be
significant.
F-18
Report of Independent Public Accountants
- ----------------------------------------
To American Mobile Satellite Corporation:
We have audited the accompanying consolidated balance sheets of American Mobile
Satellite Corporation (a Delaware corporation) and Subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Mobile Satellite
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Washington, D.C.
March 29, 1999
F-19
American Mobile Satellite Corporation and Subsidiaries
------------------------------------------------------
Consolidated Statements of Operations
-------------------------------------
(in thousands, except per share data)
Years Ended December 31
-----------------------
1998 1997 1996
----------- ----------- -------
REVENUES
Services $57,994 $20,684 $9,201
Sales of equipment 29,227 23,530 18,529
------- ------- ------
Total Revenues 87,221 44,214 27,730
COSTS AND EXPENSES
Cost of service and operations 58,086 31,959 30,471
Cost of equipment sold 30,449 40,335 31,903
Sales and advertising 16,854 12,066 24,541
General and administrative 17,332 14,819 17,464
Depreciation and amortization 52,707 42,430 43,390
------- ------- ------
Operating Loss (88,207) (97,395) (120,039)
INTEREST AND OTHER INCOME 4,372 1,122 552
EQUITY IN LOSS OF XM RADIO (342) (1,301) --
INTEREST EXPENSE (53,771) (21,633) (15,151)
----------- ----------- ---------
NET LOSS $(137,948) $(119,207) $(134,638)
========== ========== ==========
Basic and Diluted Loss Per Share of
Common Stock $(4.52) $(4.74) $(5.38)
Weighted-Average Common Shares
Outstanding During the Period (000's) 30,496 25,131 25,041
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
American Mobile Satellite Corporation and Subsidiaries
------------------------------------------------------
Consolidated Balance Sheets
---------------------------
(in thousands, except per share data)
as of December 31, 1998 and 1997
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $2,285 $2,106
Inventory 18,593 40,321
Prepaid in-orbit insurance 3,381 4,564
Accounts receivable-trade, net of allowance for doubtful accounts
of $935 in 1998 and $1,930 in 1997 15,325 8,140
Restricted short-term investments 41,038 --
Other current assets 13,231 9,608
------- -------
Total current assets 93,853 64,739
PROPERTY AND EQUIPMENT, net (gross balances include
$140,485 and $135,586 purchased from related parties through
1998 and 1997, respectively) 246,553 233,174
GOODWILL AND INTANGIBLES, net 53,235 --
RESTRICTED INVESTMENTS 67,199 1,000
DEFERRED CHARGES AND OTHER ASSETS, net of
accumulated amortization of $17,653 in 1998 and $14,096 in 1997 28,954 12,534
--------- ---------
Total assets $489,794 $311,447
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $33,797 $35,861
Obligations under capital leases due within one year 5,971 798
Current portion of vendor financing commitment due to related party 543 --
Current portion of deferred trade payables 4,498 15,254
Other current liabilities 162 7,520
--------- -------
Total current liabilities 44,971 59,433
LONG-TERM LIABILITIES:
Obligations under New Bank Financing 132,000 198,000
Obligations under Notes, net of discount 327,147 --
Capital lease obligations 5,824 3,147
Net assets acquired in excess of purchase price 2,028 2,725
Vendor financing commitment due to related party 1,069 --
Deferred trade payables 620 1,364
Other long-term liabilities 540 647
-------- ---------
Total long-term liabilities 469,228 205,883
Total liabilities 514,199 265,316
-------- -------
COMMITMENTS (Note 11)
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred Stock; par value $0.01; authorized 200,000 shares; no
shares outstanding -- --
Common Stock; voting, par value $0.01; authorized 75,000,000 shares;
32,198,735 shares issued and outstanding in 1998, 25,159,311 shares issued
and outstanding in 1997 322 252
Additional paid-in capital 508,084 451,892
Deferred compensation (1,528) --
Common Stock purchase warrants 59,108 36,338
Unamortized guarantee warrants (33,678) (23,586)
Cumulative loss (556,713) (418,765)
--------- ---------
STOCKHOLDERS' (DEFICIT) EQUITY: (24,405) 46,131
-------- ------
Total liabilities and stockholders' (deficit) equity $489,794 $311,447
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Stockholders' (Deficit) Equity
(in thousands, except per share data)
for the period from January 1, 1996 through
December 31, 1998
Additional
Common Stock Paid-In Deferred
Shares Par Value Capital Compensation
------ --------- ------- ------------
BALANCE, December 31, 1995 24,961,130 $250 $448,757 --
Common Stock issued under Stock Purchase Plan 39,366 -- 635 --
Common Stock purchase warrants issued for Bridge Financing -- -- -- --
Common Stock issued for exercise of stock options and award
of bonus stock 37,320 -- 612 --
Common Stock issued upon exercise of Warrants 37,500 1 844 --
Common Stock purchase warrants issued for Bank Financing -- -- -- --
Amortization of Guarantee Warrants -- -- -- --
Common Stock issued under the 401(k) Savings Plan 22,261 -- 411 --
Net Loss -- -- -- --
----------- --- --------- -----------
BALANCE, December 31, 1996 25,097,577 251 451,259 --
Common Stock issued under the 401(k) Savings Plan 31,684 1 349 --
Common Stock issued under the Stock Purchase Plan 29,930 -- 283 --
Common Stock issued for award of bonus stock 120 -- 1 --
Guarantee Warrants revaluation -- -- -- --
Amortization of Guarantee Warrants -- -- -- --
Net Loss -- -- -- --
----------- --- --------- -----------
BALANCE, December 31, 1997 25,159,311 252 451,892 --
Common Stock issued under the 401(k) Savings Plan 105,089 1 847 --
Common Stock issued under the Stock Purchase Plan 47,011 -- 278 --
Common Stock issued for ARDIS Acquisition 6,520,532 65 49,716 --
Common Stock issued for exercise of stock options and award of
bonus stock 10,681 -- 135 --
Issuance of Stock Purchase Warrants pursuant to Notes
financing -- -- -- --
Issuance of Restricted Stock 356,111 4 1,776 (1,780)
Amortization of compensation expense -- -- -- 252
Guarantee Warrants revaluation -- -- -- --
Amortization of Guarantee Warrants -- -- -- --
Expiration of Stock Purchase Warrants -- -- 3,440 --
Net Loss -- -- -- --
----------- ----- --------- -----------
BALANCE, December 31, 1998 32,198,735 $322 $508,084 ($1,528)
========== ==== ======== ========
F-22
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Stockholders' (Deficit) Equity
(in thousands, except per share data)
for the period from January 1, 1996 through
December 31, 1998
(Continued)
Common
Stock Unamortized
Purchase Guarantee Cumulative
Warrants Warrants Loss Total
-------- -------- ---- -----
BALANCE, December 31, 1995 $3,440 -- ($164,920) $287,527
Common Stock issued under Stock Purchase Plan -- -- -- 635
Common Stock purchase warrants issued for Bridge Financing 2,253 -- -- 2,253
Common Stock issued for exercise of stock options and award of
bonus stock -- -- -- 612
Common Stock issued upon exercise of Warrants (845) -- -- --
Common Stock purchase warrants issued for Bank Financing 19,000 (19,000) -- --
Amortization of Guarantee Warrants -- 1,900 -- 1,900
Common Stock issued under the 401(k) Savings Plan -- -- -- 411
Net Loss -- -- (134,638) (134,638)
-------- -------- ---------- ---------
BALANCE, December 31, 1996 23,848 (17,100) (299,558) 158,700
Common Stock issued under the 401(k) Savings Plan -- -- -- 350
Common Stock issued under the Stock Purchase Plan -- -- -- 283
Common Stock issued for award of bonus stock -- -- -- 1
Guarantee Warrants revaluation 12,490 (12,490) -- --
Amortization of Guarantee Warrants -- 6,004 -- 6,004
Net Loss -- -- (119,207) (119,207)
-------- -------- ---------- ---------
BALANCE, December 31, 1997 36,338 (23,586) (418,765) 46,131
Common Stock issued under the 401(k) Savings Plan -- -- -- 848
Common Stock issued under the Stock Purchase Plan -- -- -- 278
Common Stock issued for ARDIS Acquisition -- -- -- 49,781
Common Stock issued for exercise of stock options and award of
bonus stock -- -- -- 135
Issuance of Stock Purchase Warrants pursuant to Notes
financing 8,490 -- -- 8,490
Issuance of Restricted Stock -- -- -- --
Amortization of compensation expense -- -- -- 252
Guarantee Warrants revaluation 17,720 (17,720) -- --
Amortization of Guarantee Warrants -- 7,628 -- 7,628
Expiration of Stock Purchase Warrants (3,440) -- -- --
Net Loss -- -- (137,948) (137,948)
--------- -------- --------- ---------
BALANCE, December 31, 1998 $59,108 ($33,678) ($556,713) ($24,405)
======= ======== ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
American Mobile Satellite Corporation and Subsidiaries
------------------------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(in thousands)
Years Ended December 31,
-------------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(137,948) $(119,207) $(134,638)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of Guarantee Warrants and debt related costs 16,171 9,350 5,721
Depreciation and amortization 52,707 42,430 43,307
Equity in loss of XM Radio 342 1,301 --
Changes in assets and liabilities, net of acquisitions:
Inventory 21,947 (2,287) (27,482)
Prepaid in-orbit insurance 1,183 516 (257)
Accounts receivable - trade (105) (1,537) (5,229)
Other current assets 7,240 4,639 1,970
Accounts payable and accrued expenses 16,876 (5,820) 1,672
Deferred trade payables (6,567) 11,685 --
Deferred items - net (7,396) 8,038 1,347
--------- ---------- ----------
Net cash used in operating activities (35,550) (50,892) (113,589)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of ARDIS (52,373) -- --
Purchase of restricted investments (125,128) -- (1,000)
Payment of escrow interest (20,633) -- --
Investment in XM Radio -- (1,643) --
Insurance proceeds applied to equipment in service -- -- 66,000
Additions to property and equipment (12,470) (8,598) (14,054)
--------- --------- ----------
Net cash (used in) provided by investing activities (210,604) (10,241) 50,946
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 412 284 1,247
Proceeds from Notes and Stock Purchase Warrants 335,000 -- --
Principal payments under capital leases (3,395) (2,576) (3,994)
Principal payments under Vendor Financing (16) -- --
Proceeds from bridge loan 10,000 -- 70,000
Payment of bridge loan (10,000) -- (70,000)
Repayment of Bank Financing (100,000) -- --
Proceeds from Bank Financing and New Bank Financing 34,000 71,000 127,000
Proceeds from debt issuance -- -- 1,700
Payments on long-term debt (4,933) (6,180) (59,190)
Debt issuance costs (14,735) (1,471) (10,803)
--------- --------- ----------
Net cash provided by financing activities 246,333 61,057 55,960
Net increase (decrease) in cash and cash equivalents 179 (76) (6,683)
CASH AND CASH EQUIVALENTS, beginning of period 2,106 2,182 8,865
--------- -------- -----
CASH AND CASH EQUIVALENTS, end of period $2,285 $2,106 $2,182
======= ======= =======
Supplemental Cash Flow Information - Interest Payments $32,198 $11,785 $8,293
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
------------------------------------------------------
Notes to Consolidated Financial Statements
as of December 31, 1998, 1997 and 1996
1. ORGANIZATION, BUSINESS AND LIQUIDITY
- ---------------------------------------
American Mobile Satellite Corporation (with its subsidiaries, "American Mobile"
or the "Company") was incorporated on May 3, 1988. The FCC authorized American
Mobile to construct, launch, and operate a mobile satellite services system (the
"Satellite Network ") to provide a full range of mobile voice and data services
via satellite to land, air and sea-based customers in a service area consisting
of the continental United States, Alaska, Hawaii, Puerto Rico, the U.S. Virgin
Islands, U.S. coastal waters, international waters and airspace and any foreign
territory where the local government has authorized the provision of service. On
April 7, 1995, the Company successfully launched its first satellite ("MSAT-2"),
from Cape Canaveral, Florida. In late 1996, the Company expanded its mobile data
business through the acquisition of a dual mode mobile messaging and global
positioning and monitoring service for commercial trucking fleets.
On March 31, 1998 the Company (through its newly-formed, wholly-owned
subsidiary, AMSC Acquisition Company, Inc. ("Acquisition Company")) acquired
ARDIS Company ("ARDIS"), a wholly-owned subsidiary of Motorola Inc. that owns
and operates a two-way wireless data communications network, for a purchase
price of approximately $50 million in cash and $50 million in the Company's
Common Stock (the "Acquisition"). The Company, through the acquisition of ARDIS,
became a nationwide provider of wireless communications services, including
data, dispatch, and voice services, primarily to business customers in the
United States.
On October 16, 1997, XM Satellite Radio Inc., formerly American Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings, Inc., (together with XM
Satellite Radio Inc., "XM Radio"), was awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States, following its successful $89.9 million bid at auction on April 2, 1997.
XM Radio has and will continue to receive 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.
American Mobile is devoting its efforts to expanding its business. This effort
involves substantial risk, including successfully integrating ARDIS.
Specifically, future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. Depending on their extent and timing, these factors, individually
or in the aggregate, could have an adverse effect on the Company's financial
condition and future results of operations.
Liquidity and Financing Requirements
- ------------------------------------
Adequate liquidity and capital are critical to the ability of the Company to
continue as a going concern and to fund subscriber acquisition programs
F-25
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.
In connection with the Acquisition on March 31, 1998, and to meet its ongoing
cash requirements, the Acquisition Company issued $335 million of Units (the
"Units") consisting of 12 1/4% Senior Notes due 2008 (the "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"). The Company 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 February 28, 1999, the Company had $52 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 (See Note 8).
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 in 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.
2. SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most significant estimates relate to the valuation of
inventory and committed inventory purchases, the allowance for doubtful accounts
receivable, and the realizability of long-term assets.
F-26
Consolidation
- -------------
The consolidated financial statements include the accounts of American Mobile
and its wholly owned subsidiaries. All significant inter-company transactions
and accounts have been eliminated. As discussed in Note 1, XM Radio, a
subsidiary of the Company, was awarded a license to provide DARS and entered
into an agreement with World Space, Inc. ("World Space"), whereby World Space
acquired a 20% participation in XM Radio, and options which, if exercised, could
reduce the Company's ownership interest in XM Radio to 22.6% (compared with the
18.3% post-exercise position previously reported). 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. Additionally, the agreement gives WorldSpace certain participative
rights which provide for their participation in significant business decisions
that would be made in the ordinary course of business; therefore, in accordance
with Emerging Issues Task Force ("EITF") No. 96-16, the Company's investment in
XM Radio is carried on the equity method.
The following represents the summary financial information of XM Radio as of
December 31, 1998 and 1997.
As of As of
December 31, December 31,
(in thousands) 1998 1997
---- ----
Current assets $ 482 $ 1
Noncurrent assets 170,003 91,932
Current liabilities 130,823 82,949
Noncurrent liabilities 46,845 --
Total stockholders' (deficit) equity (7,183) 8,984
Year Ended Year Ended
December 31, December 31,
1998 1997
---- ----
Gross sales $ -- $ --
Operating expenses 16,193 1,110
Interest (income) expense (26) 549
Net loss 16,167 1,659
Cash Equivalents
- ----------------
The Company considers highly liquid investments with remaining maturities of 90
days or less at the time of acquisition to be cash equivalents.
F-27
Restricted Investments
- ----------------------
Restricted investments represent those investments made by the Company to fund
either customer obligations or required interest payments associated with the
Notes. The Company considers all required funding from these accounts due within
the next twelve months to be current and reflects these amounts as such in the
accompanying balance sheets. The Company accounts for these investments on an
amortized cost basis.
Inventories
- -----------
Inventories, which consist primarily of finished goods, are stated at the lower
of cost or market. Cost is determined using the weighted average cost method.
The Company periodically assesses the market value of its inventory, based on
sales trends and forecasts and technological changes and records a charge to
current period income when such factors indicate that a reduction to net
realizable value is appropriate. Management considers both inventory on hand and
inventory which it has committed to purchase. The Company recorded charges to
cost of equipment sold in the amount of $12.0 million and $11.1 million in 1997
and 1996, respectively, related to the realizability of the Company's inventory
investment. No such charges were made in 1998.
Other Current Assets
- --------------------
Other current assets consist of the following:
December 31,
(in thousands) 1998 1997
---- ----
Interest rate swap (Note 8) $5,964 $ --
Prepaid expenses 3,990 1,617
Deposits 3,010 6,647
Non-trade receivables and other 267 1,344
------- ------
$13,231 $9,608
======= ======
Fair Value of Financial Instruments
- -----------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of the fair value of
certain financial instruments. Cash and cash equivalents, trade accounts
receivable, accounts payable and deferred trade payables approximate fair value
because of the relatively short maturity of these instruments. The Notes are
valued at their quoted market price. The fair value of the interest rate swap is
the estimated amount that the Company would receive to terminate the swap
agreement on December 31, 1998, taking into account current interest rates and
the current creditworthiness of the swap counter parties. As a result of the
Guarantees associated with the New Bank Financing, it is not practicable to
estimate the fair value of this facility. For debt issues that are not quoted on
F-28
an exchange, interest rates currently available to the company for issuance of
debt with similar terms and remaining maturities are used to estimate fair
value.
As of December 31, 1998 As of December 31, 1997
----------------------- -----------------------
Carrying Carrying
(in thousands) Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets:
Restricted investments $108,237 $107,010 $1,000 $1,000
Interest rate swap (Note 8) 13,419 11,884 -- --
Liabilities:
Notes 327,147 211,050 -- --
Vendor financing commitment 1,612 1,612 -- --
Capital leases 11,795 11,795 3,945 3,945
Concentrations of Credit Risk
- -----------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments, restricted
investments and accounts receivable. The Company places its temporary cash
investments and restricted investments in debt securities such as commercial
paper, time deposits, certificates of deposit, bankers acceptances, and
marketable direct obligations of the United States Treasury. The Company's
intent is to hold its investments in debt securities to maturity. To date, the
majority of the Company's business has been transacted with telecommunications,
field services, natural resources and transportation companies, including
maritime and trucking companies located throughout the United States. The
Company grants credit based on an evaluation of the customer's financial
condition, generally without requiring collateral or deposits. Exposure to
losses on trade accounts receivable, for both service and for inventory sales,
is principally dependent on each customer's financial condition. The Company
anticipates that its credit risk with respect to trade accounts receivable in
the future will continue to be diversified due to the large number of customers
expected to comprise the Company's subscriber base and their expected dispersion
across many different industries and geographies.
After giving pro forma effect to the Acquisition, as of December 31, 1998, five
customers accounted for approximately 40% of the Company's service revenue, with
one of those customers accounting for approximately 19%.
Software Development Costs
- --------------------------
The Company capitalizes costs related to the development of certain software to
be used with its mobile messaging and position location service (the "Mobile
Data Communications Service") product. The Company commenced amortization of
these costs in the first quarter of 1996. These costs are amortized over three
years. As of December 31, 1998 and 1997, net capitalized software development
costs were $869,000 and $1.8 million, respectively, and are included in property
and equipment in the accompanying balance sheets.
F-29
Additionally, during 1998, the Company adopted Statement of Position ("SOP") No.
98-1 - "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." As of December 31, 1998, net capitalized internal use software
costs were $1.1 million and are included in property and equipment in the
accompanying balance sheet and are amortized over three years.
Deferred Charges and Other Assets
- ---------------------------------
Other assets primarily consist of the long term portion of the interest rate
swap purchased in connection with the New Bank Financing (see Note 8), the
unamortized financing costs and debt issue costs associated with the existing
vendor financing arrangements, the Notes, the Bank Financing and the New Bank
Financing. As of December 31, 1998, the Company had a balance of $7.5 million
representing the long-term portion of the interest rate swap, and $20.6 million
and $11.8 million of unamortized financing costs recorded at December 31, 1998
and 1997, respectively. Financing costs are amortized over the term of the
related facility using the straight line method, which approximates the
effective interest method.
Revenue Recognition
- -------------------
The Company recognizes service revenue when communications services have been
rendered. Equipment sales are recognized upon shipment of products and customer
acceptance, if required.
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred. Such costs include
internal research and development activities and expenses associated with
external product development agreements. The Company incurred research and
development costs of approximately $1.1 million in 1998, none for 1997, and
approximately $57,000 for 1996.
Advertising Costs
- -----------------
Advertising costs are charged to operations in the year incurred and totaled
$2.9 million, $3.4 million, and $6.0 million for 1998, 1997, and 1996,
respectively.
Stock Based Compensation
- ------------------------
The Company accounts for employee stock options using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Generally, no expense is recognized related to
the Company's stock options because the option's exercise price is set at the
stock's fair market value on the date the option is granted.
F-30
Assessment of Asset Impairment
- ------------------------------
The Company adopted the provisions of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or the fair value less costs to sell. Adoption of SFAS No.
121 did not have a material impact on the Company's financial position, results
of operation, or liquidity during 1998, 1997 or 1996.
The Company has assessed the satellite and its related assets as of December 31,
1998, and determined that an impairment did not exist; however, there can be no
assurance that a material provision for impairment will not be required in the
future. Management will continue to assess the recoverability of these assets on
an on-going basis.
Loss Per Share
- --------------
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Options and
warrants to purchase shares of common stock were not included in the computation
of loss per share as the effect would be antidilutive. As a result, the basic
and diluted earnings per share amounts are identical. As of December 31, 1998,
there were approximately 70,000 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 years ended December 31, 1998, 1997, and 1996.
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:
F-31
Revenue for the
Year Ended December 31,
-----------------------
(in millions) 1998 1997 1996
---- ---- ----
Voice Service $14.0 $10.0 $5.0
Data Service 40.1 7.6 2.3
Capacity Resellers and Other 3.9 3.1 1.9
Reclassification
- ----------------
Certain amounts from prior years' consolidated financial statements have been
reclassified to conform with the 1998 presentation.
New 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. The Company
is in the process of determining the impact the adoption of this statement will
have on its financial position and results, but it is not expected to be
significant.
3. STOCKHOLDERS' EQUITY
- ------------------------
The Company has authorized 200,000 shares of Preferred Stock and 75,000,000
shares of Common Stock. The par value per share is $0.01 for each class of
stock. For each share held, Common stockholders are entitled to one vote on
matters submitted to the stockholders. Cumulative voting applies for all
elections of directors of the Company.
The Preferred Stock may be issued in one or more series at the discretion of the
Board of Directors (the "Board"), without stockholder approval. The Board is
authorized to determine the number of shares in each series and all
designations, rights, preferences, and limitations on the shares in each series,
including, but not limited to, determining whether dividends will be cumulative
or non-cumulative.
Certain controlling stockholders of the Company have entered into a
Stockholders' Agreement (the "Agreement") which contains provisions relating to
the election of directors, procedures for maintaining compliance with the FCC's
alien ownership restrictions, certain restrictions on the transfer, sale and
exchange of Common Stock, and procedures for appointing directors to the
Executive Committee of the Board, among others. The Agreement continues in
effect until terminated by an affirmative vote of holders of three-fourths of
the Company's Common Stock held by parties to the Agreement. Other matters
F-32
relating to the Company's governance of the Company are set forth in the
Certificate of Incorporation and Bylaws.
As of December 31, 1998, the Company had reserved Common Stock for future
issuance as detailed below.
Shares issuable upon exercise of warrants 7,821,259
Amended and Restated Stock Option Plan for Employees 4,062,534
Stock Option Plan for Non-Employee Directors 50,000
Employee Stock Purchase Plan 143,126
Defined Contribution Plan 248,403
---------
Total 12,325,322
==========
4. PROPERTY AND EQUIPMENT
- -------------------------
Property and equipment consists of the following:
December 31,
(in thousands) 1998 1997
---- ----
Space Segment $188,150 $187,976
Ground Segment 110,942 109,691
Network equipment 49,089 --
Construction in progress 7,580 --
Office equipment and furniture 16,252 19,305
Mobile data communications service equipment 17,384 21,118
------ ------
389,397 338,090
Less accumulated depreciation and amortization 142,844 104,916
------- -------
Property and equipment, net $246,553 $233,174
======== ========
Property and equipment is recorded at cost and depreciated over its useful life
using the straight line method. Assets recorded as capital leases are amortized
over the shorter of their useful lives or the term of the lease. The estimated
useful lives of office furniture and equipment vary from 2-10 years. The ground
segment is depreciated over 8 years, the network equipment is depreciated over 7
years, and the mobile data communications service equipment is depreciated over
3 1/2 years.
The Company is depreciating its satellite over its estimated useful life of 10
years, which was based on several factors, including current conditions and the
estimated remaining fuel of MSAT-2. The original estimated useful live is
periodically reviewed using current Telemetry Tracking and Control data. To
date, no significant change in the original estimated useful life has resulted.
The telecommunications industry is subject to rapid technological change which
may require the Company to revise the estimated useful lives of MSAT-2 and the
ground segment or to adjust their carrying amounts. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over 8 years.
F-33
The costs of constructing and putting satellites into service are capitalized in
the financial statements and depreciated over the estimated useful life of the
satellite. A failure of the satellite from unsuccessful launches and/or in orbit
anomalies would result in a current write-down of the satellite value. Partial
satellite failures are recognized currently to the extent such losses are deemed
abnormal to the operation of the satellite. A partial failure which is deemed
normal would not result in a loss of satellite capacity beyond what is
considered normal satellite wear and tear. Additionally, all future incentive
arrangements relating to the construction of satellites will be capitalized at
launch.
5. GOODWILL AND INTANGIBLE ASSETS
- -- ------------------------------
Goodwill and intangible assets resulting from the Acquisition consist of the
following:
December 31,
(in thousands) 1998
----
FCC Licenses $49,179
Goodwill 6,154
-----
55,333
Less accumulated amortization 2,098
------
Goodwill and intangible assets, net $53,235
=======
Goodwill and Intangible Assets are being amortized on a straight-line basis over
20 years.
6. STOCK OPTIONS AND RESTRICTED STOCK
- -------------------------------------
The Company has two active stock option plans. The American Mobile Satellite
Corporation 1989 Amended and Restated Stock Option Plan for Employees (the
"Plan") permits the grant of non-statutory options and the award of bonus stock
up to a total of 4.5 million shares of Common Stock. Under the Plan, the
exercise price and vesting schedule for options is determined by the
Compensation Committee of the Board, which was established to administer the
Plan. Generally, options vest over a three year period and will have an exercise
price not less than the fair market value of a share on the date the option is
granted or have a term greater than ten years.
The Company also has a Stock Option Plan for Non-Employee Directors (the
"Director Plan") which provides for the grant of options up to a total of 50,000
shares of Common Stock. Directors receive an initial option to purchase 1,000
shares of Common Stock, with annual option grants to purchase 500 shares of
Common Stock. Options under the Director Plan can be exercised at a price equal
to the fair market value of the stock on the date of the grant and are fully
vested and immediately exercisable on the date of grant. Each Director Plan
option expires on the earlier of (i) ten years from the date of grant or (ii)
seven months after the Director's termination.
F-34
In January 1998, the Board of Directors granted restricted stock to certain
members of senior management. These grants include both a three-year vesting
schedule as well as specific corporate performance targets. As of December 31,
1998, the Company recorded costs of approximately $252,000 associated with the
vesting of these shares. In January 1999, performance requirements were waived
for certain senior executives, excluding the chairman and president, for the
first year of vesting. These performance requirements will remain in place, and
unless further waived by the Board of Directors, failure to meet a required
performance target would prevent the vesting of the restricted shares.
Information regarding the Company's stock option plans is summarized below:
Weighted Average
Available Granted and Option Price Per
for Grant Outstanding Share
--------- ----------- -----
Balance, December 31, 1995 184,778 590,850 $17.94
Additional shares authorized for grant 1,241,138 -- --
Granted (1,565,272) 1,565,272 18.37
Exercised and awarded -- (37,320) 16.41
Forfeited and canceled 623,356 (623,356) 23.23
-------- ---------
Balance, December 31, 1996 484,000 1,495,446 16.22
Additional shares authorized for grant 1,500,000 -- --
Granted (1,292,443) 1,292,443 12.67
Exercised and awarded -- (120) 10.28
Forfeited 1,104,828 (1,104,828) 17.15
---------- ----------
Balance, December 31, 1997 1,796,385 1,682,941 13.08
Restricted stock granted (356,111) 356,111 --
Restricted stock awarded -- (356,111) --
Additional shares authorized for grant 1,000,000 -- --
Options granted (1,406,249) 1,406,249 8.81
Exercised and awarded -- (10,681) 12.62
Forfeited 349,438 (349,438) 10.85
---------- ---------
Balance, December 31, 1998 1,383,463 2,729,071 $11.11
========== ==========
Options Exercisable at December 31:
Average
Options Exercise Price
------- --------------
1998 957,617 $13.29
1997 595,432 $14.39
1996 276,804 $17.97
F-35
The Company accounts for stock compensation costs in accordance with the
provisions of APB No. 25, "Accounting for Stock Issued to Employees." Had
compensation cost been determined based on the fair value at the grant dates for
awards under the Company's stock plans in accordance with SFAS No. 123,
"Accounting for Stock Based Compensation", the net loss would have been
increased by $8.9 million ($.29 per share) in 1998, $5.3 million ($.21 per
share) in 1997, and $2.3 million in 1996 ($.09 per share). As required by SFAS
No. 123, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions for
1998, 1997 and 1996: no historical dividend yield; an expected life of 10 years
for options and three years for restricted stock; historical volatility of 95%
in 1998, 65% in 1997, and 45% in 1996, and a risk-free rate of return ranging
from 4.85% to 6.44%.
Exercise prices for options outstanding as of December 31, 1998, are as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Average Weighted Number Weighted
Outstanding as Contractual Average Exercisable as of Average
Range of of December 31, Life Exercise December 31, Exercise
Exercise Prices 1998 Remaining Price 1998 Price
--------------- ---- --------- ----- ---- -----
$5.00 - $8.87 1,200,583 8.56 $8.80 300 $8.87
9.06 - 12.00 463,464 7.83 11.44 285,725 11.61
12.50 - 12.81 432,711 8.04 12.74 146,668 12.74
13.00 - 13.00 492,112 6.49 13.00 384,723 13.00
14.62 - 25.75 140,201 3.91 18.11 140,201 18.11
----------- --------
$5.00 - $25.75 2,729,071 7.74 $11.11 957,617 $13.29
=========== ==========
7. INCOME TAXES
- ---------------
The Company accounts for income taxes under the liability method as required in
the SFAS No. 109, "Accounting for Income Taxes." Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Potential tax benefits, related to net
operating losses and temporary differences, have been recorded as an asset, and
a valuation allowance for the same amount has been established. The Company has
paid no income taxes since inception.
The following is a summary of the Company's net deferred tax assets.
F-36
December 31
(in thousands) 1998 1997
----- ----
Net Operating Loss Carryforwards $276,034 $217,918
Deferred Taxes Related to Temporary Differences:
Tangible asset bases, lives and depreciation methods (61,977) (65,898)
Other (11,266) 8,700
-------- -----
Total deferred tax asset 202,791 160,720
Less valuation allowance (202,791) (160,720)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
Significant timing differences affecting deferred taxes in 1998 reflect the
treatment of costs associated with the Space Segment for financial reporting
purposes compared to tax purposes. As of December 31, 1998, the Company had
estimated net operating loss carryforwards ("NOLs") of $680.8 million. The NOLs
expire in years 2004 through 2018. These NOL carryforwards are subject to
certain limitations if there is determined to be a substantial change in
ownership as defined in the Internal Revenue Code.
8. LONG-TERM DEBT
- -----------------
December 31
(in thousands) 1998 1997
---- ----
Notes, net of discount $327,147 $ --
New Bank Financing - Term Loan Facility 100,000 100,000
New Bank Financing - Revolving Credit Facility 32,000 98,000
Deferred Trade Payables 5,118 11,685
Vendor Financing Commitment 1,612 --
Loan Agreement -- 4,933
-------- ---------
465,877 214,618
Less current maturities 5,041 15,254
-------- ---------
Long-term debt $460,836 $199,364
======== ========
$335 Million Unit Offering
- --------------------------
In connection with the Acquisition, the Acquisition Company issued $335 million
of Units (the "Units") consisting of 12 1/4% Senior Notes due 2008 (the
"Notes"), and Warrants to purchase shares of Common Stock of the Company. Each
Unit consists of $1,000 principal amount of Notes and one Warrant to purchase
3.75749 shares of Common Stock at an exercise price of $12.51per share. The
Warrants were valued at $8.5 million and are reflected in the balance sheet as a
debt discount. A portion of the net proceeds of the sale of the Units were used
to finance the Acquisition. In connection with the Notes, the Acquisition
Company purchased approximately $112.3 million of restricted investments that
F-37
are restricted for the payment of the first six interest payments on the Notes.
Interest payments are due semi-annually, in arrears, beginning October 1, 1998.
The Notes are fully guaranteed by American Mobile Satellite Corporation.
New Bank Financing
- ------------------
In connection with the Acquisition, the Company, the Acquisition Company and its
subsidiaries restructured the existing $200 million Bank Financing (the "New
Bank Financing") to provide for two facilities: (i) the Revolving Credit
Facility, a $100 million unsecured five-year reducing revolving credit facility,
and (ii) the Term Loan Facility, a $100 million five-year, term loan facility
with up to three additional one-year extensions subject to the lenders'
approval. The Revolving Credit Facility ranks pari passu with the Notes. The
Term Loan Facility is secured by the assets of the Company, principally its
stockholdings in XM Radio and the Acquisition Company, and will be effectively
subordinated to the Revolving Credit Facility and the Notes. The New Bank
Financing is severally guaranteed by Hughes Electronics Corporation, Singapore
Telecommunications Ltd. and Baron Capital Partners, L.P. (collectively, the
"Bank Facility Guarantors"). As of February 28, 1999, the Company had
outstanding borrowings of $100 million under the Term Loan Facility at 5.8125%,
and $48 million under the Revolving Credit Facility at rates ranging from
5.4375% to 5.5%.
The Term Loan Facility
- ----------------------
The Term Loan Facility bears an interest rate, generally, of 50 basis points
above London Interbank Offered Rate ("LIBOR"). The Term Loan Agreement does not
include any scheduled amortization until maturity, but does contain certain
provisions for prepayment based on certain proceeds received by the Company,
unless otherwise waived by the banks and the Bank Facility Guarantors,
including: (1) 100% of excess cash flow obtained by the Company; (2) the first
$25.0 million of net proceeds from the lease or sale of MSAT-2 received by the
Company, and thereafter 75% of the remaining proceeds received from such lease
or sale (the remaining 25% to be retained by the Acquisition Company for
business operations); (3) 100% of the proceeds of any other asset sales by the
Company; (4) 50% of the net proceeds of any equity offerings of the Company (the
remaining 50% to be retained by the Company for business operations); and (5)
100% of any major casualty proceeds of the Company. To the extent that the Term
Loan Facility is repaid, the aforementioned proceeds that would otherwise have
been used to repay the Term Loan Facility will be used to repay and permanently
reduce the commitment under the Revolving Credit Facility.
The Revolving Credit Facility
- -----------------------------
The Revolving Credit Facility bears an interest rate, generally, of 50 basis
points above LIBOR and is unsecured, with a negative pledge on the assets of the
Acquisition Company and its subsidiaries ranking pari passu with the Notes. The
Revolving Credit Facility will be reduced $10 million each quarter, beginning
with the quarter ending June 30, 2002, with the balance due on maturity of March
31, 2003. Certain proceeds received by the Acquisition Company would be required
to repay and reduce the Revolving Credit Facility, unless otherwise waived by
the lendors and the Bank Facility Guarantors, including: (1) 100% of excess cash
flow obtained by the Acquisition
F-38
Company, as defined; (2) the first $25.0 million of net proceeds of the lease or
sale of MSAT-2 received by the Acquisition Company, and thereafter 75% of the
remaining proceeds received from such lease or sale (the remaining 25% may be
retained by the Acquisition Company for business operations); (3) 100% of the
proceeds of any other asset sales by the Acquisition Company; (4) 50% of the net
proceeds of any offerings of the Acquisition Company's equity (the remaining 50%
to be retained by the Acquisition Company for business operations); and (5) 100%
of any major casualty proceeds. At such time as the Revolving Credit Facility is
repaid in full, and subject to satisfaction of the restrictive payments
provisions of the Notes, any prepayment amounts that would otherwise have been
used to prepay the Revolving Credit Facility will be dividended to American
Mobile Satellite Corporation.
The Guarantees
- --------------
In connection with the New Bank Financing, 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 in connection with the
original Bank Facility (together, the "Guarantee Warrants"). The Guarantee
Warrants were issued with an exercise price of $12.51 and were valued at
approximately $17.7 million.
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, an amount equal to LIBOR plus 50 basis points, is paid on a
quarterly basis directly to the respective banks on behalf of the Company, 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 consolidated 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.
F-39
Motorola Vendor Financing
- -------------------------
Motorola has entered into an agreement with ARDIS to provide up to $10 million
of Vendor Financing Commitment, to finance up to 75% of the purchase price of
additional network base stations. Loans under this facility bear interest at a
rate equal to LIBOR plus 7.0% and will be guaranteed by the Company and each
subsidiary of the Acquisition Company. The terms of the facility require that
amounts borrowed be secured by the equipment purchased therewith. Advances made
during a quarter constitute a loan, which is then amortized on a quarterly basis
over three years. As of December 31, 1998, $1.6 million was outstanding under
this facility at interest rates ranging from 12.07% to 13.0%.
Deferred Trade Payables
- -----------------------
The Company has arranged the financing of certain trade payables, and as of
December 31, 1998, $5.1 million of deferred trade payables were outstanding at
rates ranging from 6.10% to 12.00% and are generally payable by the end of 1999.
As of December 31, 1997, $11.7 million was outstanding at rates ranging from
6.23% to 14.00%.
Bridge Loan
- -----------
On December 31, 1997, the Company entered into a Bridge Loan Agreement (the
"Bridge Loan") with Hughes Communications Satellite Services, Inc. ("Hughes") in
the principal amount of up to $10 million, secured by a pledge of the Company's
interest in its 80%-owned subsidiary, XM Radio. The Bridge Loan bore interest
rate at an annual rate of 12% and was fully repaid in March 1998. No further
borrowings are available under the Bridge Loan.
Loan Agreement
- --------------
The Company entered into a Loan Agreement with Northern Telecom to finance the
purchase of certain equipment to be used in the ground segment. This Loan
Agreement was repaid in full in April 1998 and no further borrowings are
available under this Loan Agreement.
Assets Pledged and Secured
- --------------------------
All wholly owned subsidiaries of the Company are subject to financing agreements
that limit the amount of cash dividends and loans that can be advanced to the
Company. At December 31, 1998, all of the subsidiaries' net assets were
restricted under these agreements. These restrictions will have an impact on
American Mobile Satellite Corporation's ability to pay dividends.
Covenants
- ---------
The debt agreements and related Guarantee Agreements entered into by the Company
contain various restrictions, covenants, defaults, and requirements customarily
found in such financing agreements. Among other restrictions, these provisions
include limitations on cash dividends, restrictions on transactions between
American Mobile and its subsidiaries, restrictions on capital acquisitions,
material adverse change clauses, and maintenance of specified insurance
policies.
F-40
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 waiver, the Company agreed to re-price their
Guarantee Warrants, effective April 1, 1999, from $12.51 to $7.50.
9. RELATED PARTIES
- ------------------
In 1990, following a competitive bid process, American Mobile signed contracts
with Hughes Aircraft, the parent company of Hughes Communications Satellite
Services ("Hughes Communications"), an American Mobile stockholder, to construct
MSAT-2 (the "Satellite Construction Contract"). The contract contains flight
performance incentives payable by the Company to Hughes Aircraft if MSAT-2
performs according to the contract. As a result of certain previously-disclosed
performance considerations, additional contract payment issues were raised by
the Company. At present, the Company's obligation to make additional performance
payments to Hughes Aircraft remains at issue and ongoing discussions are
underway between the parties.
The Company has entered into various transactions and agreements with Motorola,
Inc. ("Motorola"), an American Mobile stockholder, which include the purchase by
American Mobile of services, network hardware and software maintenance services,
facility rentals, inventory and network gateway fees. Additionally, Motorola has
provided the Vendor Financing Commitment, which will be available to finance up
to 75% of the purchase price of additional network base stations (See Note 8).
Additionally, the Company has entered into various transactions and agreements
with affiliates of AT&T Wireless Services, Inc. ("AT&T Wireless"), an American
Mobile stockholder. The arrangements include the purchase of satellite capacity
and equipment by AT&T, the purchase by American Mobile of certain equipment for
use in the Satellite Network, the leasing of certain office equipment, and the
engagement of AT&T to be one of the Company's long-distance providers.
Additionally, the Company sublet certain office space to AT&T Wireless through
September 1996; however, as a result of the Acquisition in March 1998 and
issuance of shares to Motorola, AT&T's ownership fell below 10%; therefore, they
ceased to be deemed a related party; and, as such, the 1998 amounts do not
include transactions with AT&T.
F-41
The following table represents a summary of all related party transactions.
Years Ended December 31
(in thousands) 1998 1997 1996
---- ---- ----
Payments made to (from) related parties:
Additions to property and equipment $4,931 $200 $2,847
Proceeds from debt issuance (10,000) -- (10,000)
Payments on debt obligations 10,017 292 20,926
Payment for guarantees -- -- 3,000
Operating expenses 7,568 2,706 3,817
Satellite capacity/airtime/equipment revenue -- (2,836) (1,276)
Sublease income -- -- (205)
-------- ------- ---------
Net payments to related parties $12,516 $362 $19,109
======= ===== =======
Due to (from) related parties:
Operating expenses $698 $1,209 $185
Capital leases -- 249 446
Vendor financing 1,638 -- --
Satellite capacity/airtime revenue (3) (495) (416)
Capital acquisitions 450 2,120 1,584
-------- -------- -------
Net amounts due to related parties $2,783 $3,083 $1,799
====== ======= ======
10. LEASES
----------
Capital Leases
- --------------
The Company leases certain office equipment, ground segment equipment and
switching equipment under agreements accounted for as capital leases. Assets
recorded as capital leases in the accompanying balance sheets include the
following:
December 31
(in thousands) 1998 1997
---- ----
Ground segment equipment $ 7,263 $7,263
Switch equipment 8,346 --
Office equipment 3,069 4,033
Less accumulated amortization (6,612) (4,750)
------- -------
Total $12,066 $6,546
======== ======
Operating Leases
- ----------------
The Company leases substantially all of its base station sites through
cancellable operating leases. The majority of these leases provide for renewal
options for various periods at their fair rental value at the time of renewal.
In the normal course of business, the operating leases are generally renewed or
replaced by other leases. Additionally, the Company leases certain facilities
and equipment under arrangements accounted for as operating leases. Certain of
these arrangements have renewal terms. Total rent expense, under all operating
leases, approximated $5.9 million, $2.9 million, and $2.5 million in 1998, 1997,
and 1996, respectively.
At December 31, 1998, minimum future lease payments under noncancellable
operating and capital leases are as follows:
Operating Capital
Leases Leases
--------- -------
(in thousands)
1999 $3,436 $6,841
2000 3,517 6,043
2001 2,183 35
2002 2,190 --
2003 1,524 --
2004 and thereafter 661 --
---- ------
Total $13,511 $12,919
=======
Less: Interest 1,124
------
$11,795
=======
F-43
11. OPERATING AGREEMENTS AND COMMITMENTS
- ----------------------------------------
Joint Operating and Satellite Capacity Agreements
- -------------------------------------------------
On December 4, 1997, the Company entered into two agreements with respect to two
simultaneous transactions. The Company agreed with TMI Communications and
Company, Limited Partnership ("TMI") to acquire a one-half ownership interest in
TMI's satellite, MSAT-1, and simultaneously, the Company entered into an
agreement (the "Satellite Lease Agreement") with African Continental
Telecommunications Ltd. ("ACTEL"), for the lease of MSAT-2, for deployment over
sub-Saharan Africa. As ACTEL has not obtained the requisite financing, the
agreements were terminated on March 24, 1999; however, the Company and TMI will
remain parties to a Joint Operating Agreement and a Satellite Capacity Agreement
under which the parties agree to provide, among other things, emergency backup
and restoral services to each party during any period in which the other's
satellite is not functioning properly. Additionally, each party will be entitled
to lease excess capacity from the other party's satellite under specified terms
and conditions. The implementation of these agreements requires regulatory
approvals by the FCC and Industry Canada (formerly Canada's Department of
Industry and Science). The Company has received, and expects to continue to seek
approvals contemplated under these agreements on a timely basis.
Commitments
- -----------
At December 31, 1998, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory in
the maximum amount of $11.4 million during 1999. Additionally, the Company had
remaining contractual commitments in the amount of $1.0 million for the
development of certain next generation data terminal inventory. 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 $1.0 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 early 1999. The contract contains a 50% cancellation
penalty. Additionally, the Company has remaining contractual commitments for the
purchase of $4.7 million of base stations required to complete certain necessary
site build-outs, $1.2 million for the purchase of certain software development,
and certain other multi-year operating expense contract commitments that total
approximately $2.3 million over the next two years.
The aggregate fixed and determinable portion of all inventory commitments and
obligations for other fixed contracts is as follows:
F-44
(in thousands)
1999 $30,310
2000 31,892
2001 11,621
------
Total $73,823
=======
12. EMPLOYEE BENEFITS
- ---------------------
Defined Contribution Plan
- -------------------------
The Company sponsors a 401(k) defined contribution plan ("401(k) Savings Plan")
in which all employees can participate. The 401(k) Savings Plan provided for a
Company match of employee contributions, in the form of Common Stock, limited to
the fair market value of up to one-half of the employee's contribution not to
exceed 6% of an employee's compensation. The 401(k) Savings Plan was amended in
1998 to reflect the following changes: (i) the increase of the Company match up
to 100% of the first 4% of an employee's compensation, (ii) the addition of a
discretionary annual employer non-elective contribution, (iii) the addition of
the option to have plan benefits distributed in the form of installment
payments, and (iv) provide for the reallocation of forfeitures, if any, to
active participants. In 1998 the ARDIS Individual Capital Accumulation Plan was
merged into the 401(k) Savings Plan to allow for a combined company plan. The
Company's matching expense was $847,538 for 1998, reflecting the addition of the
ARDIS employees, $350,000 for 1997, and $411,000 for 1996.
Employee Stock Purchase Plan
- ----------------------------
The Company has an Employee Stock Purchase Plan ("Stock Purchase Plan") to allow
eligible employees to purchase shares of the Company's Common Stock at 85% of
the lower of market value on the first and last business day of the six-month
option period. An aggregate of 47,011, 29,930, and 39,366 shares of Common Stock
were issued under the Stock Purchase Plan in 1998, 1997, and 1996, respectively.
13. BUSINESS ACQUISITION
- --- --------------------
On March 31, 1998, the Company acquired ARDIS for a purchase price of
approximately $50 million in cash and $50 million in the Company's Common Stock
(the "Purchase Price"). The purchase method of accounting for business
combinations was used for the recording of the acquisition. The operating
results of ARDIS have been included in the Company's consolidated statements of
operations from the date of acquisition. The purchase price for the net assets
acquired was allocated ($1.6) million to net current assets and net current
liabilities, $50.4 million to property and equipment, $49.4 million to FCC
licenses and $1.3 million to goodwill. Additionally, the Company incurred
acquisition costs of approximately $2.6 million and recorded additional
liabilities of approximately $2.3 million
F-45
The unaudited pro forma results give effect to (i) the Acquisition, (ii) the
Notes and (iii) the New Bank Financing as if such transactions had been
consummated on January 1 of each of the periods presented.
(in thousands, except per share data) 1998 1997
---- ----
Revenues $ 97,153 $87,965
Net Loss (151,555) (176,207)
Loss per share (4.72) (5.61)
14. LEGAL, REGULATORY AND OTHER MATTERS
- ---------------------------------------
Legal and Regulatory Matters
- ----------------------------
Like other mobile service providers in the telecommunications industry, the
Company is subject to substantial domestic, foreign and international regulation
including the need for regulatory approvals to operate and expand the Satellite
Network and operate and modify subscriber equipment.
The 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 the Network and certain types of subscriber
equipment. Certain of its applications pertaining to future service have been
opposed. While the Company, for various reasons, believes that it will receive
the necessary approvals on a timely basis, there can be no assurance that the
requests will be granted, will be granted on a timely basis or will be granted
on conditions favorable to the Company. Any significant changes to the
F-46
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 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.
On October 23, 1998, the FCC issued an order permitting Comsat Corporation via
Inmarsat to provide aeronautical services to the domestic legs of the same
aircraft in international flight. As the FCC noted, this action has a minimal
effect on American Mobile's access to L-band spectrum. Additionally, the Company
does not believe this action will have a material effect on the Company's
financial position or results of operations.
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.
On July 2, 1998, American Mobile filed an application for authority to launch
and operate its second-generation mobile satellite system. This satellite is
intended to support the Company's existing satellite services and, also, allow
the provision of an extended array of services, such as higher data rate
services and services to lower-power terminals. There is no guarantee that the
FCC will grant this application. The filing of the application does not commit
F-47
the Company to expend any resources toward this project; however, should the
Company decide to proceed with the construction of the follow-on satellite, the
Company would be required to raise substantial additional capital to fund this
project.
In 1992, a former director of American Mobile filed an Amended Complaint against
the Company alleging violations of the Communications Act of 1934, as amended,
and of the Sherman Act and breach of contract. The suit was dismissed on
November 10, 1998, prior to the commencement of trial pursuant to an agreement
to settle the suit by payment by the Company of $250,000.
Other Matters
- -------------
As previously reported, the satellite has, in the past, experienced certain
technological anomalies, most significantly with respect to its eastern beam. On
August 1, 1996, the Company reached a resolution of the claims under its
satellite insurance contracts and policies and received proceeds in the amount
of $66.0 million. Based on certain engineering studies and the design of the
satellite, the Company believed that the insurance proceeds reflected the actual
cost of damage sustained to the satellite, and, as a result, the carrying value
of the satellite was reduced by the net insurance proceeds, which resulted in a
reduction of future depreciation charges beginning in the third quarter of 1996.
There can be no assurance that the satellite will not experience subsequent
anomalies that could adversely impact the Company's financial condition, results
of operations and cash flows.
The Company has received a recommendation from a subcontractor to its satellite
manufacturer that, pending further results from an ongoing investigation, the
satellite should be operated at modified power management levels. The Company
and its satellite manufacturer continue to investigate the basis, if any, for
this recommendation. Based on the information available to date, management
believes that, even if maintained, the power management recommendation would not
have a material negative effect on the Company's business plan within the next
three to five years, based on anticipated traffic patterns and anticipated
subscriber levels. In the event that traffic patterns or subscriber levels
materially exceed those anticipated, the power management recommendation, if
maintained, could have a material impact on the Company's long-term business
plan.
15. SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------
Years Ended 31
(in thousands) 1998 1997 1996
---- ---- ----
Noncash investing and financing activities:
Leased asset and related obligations $648 $182 $284
Issuance of Common Stock for Acquisition 49,781 -- --
Issuance of Restricted Stock 1,780 -- --
Issuance and repricing of Common Stock purchase warrants 26,210 12,490 21,253
Issuance of Common Stock upon exercise of Common
Stock purchase warrants -- -- 845
Vendor financing for property in service 1,628 -- 2,440
Issuance of Common Stock under the Defined Contribution Plan 848 350 411
F-48
NOTE 16 - SUBSEQUENT EVENTS
- ---------------------------
On January 15, 1999, the Company entered into an agreement with Baron Asset Fund
("Baron") for the placement of 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 for a note convertible into XM Radio shares (the "XM
Radio Note Receivable"). The Baron XM Radio Convertible Note ranks subordinate
to any 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 the outstanding WorldSpace
options, the Company's ownership in XM Radio would be 22.6% (compared with the
18.3% post-exercise position previously reported). 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.
NOTE 17 - FINANCIAL STATEMENTS OF SUBSIDIARIES
- ----------------------------------------------
In connection with 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 Notes and Revolving Credit Facility, both of which are fully and
F-49
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.
Summarized financial information with respect to American Mobile Parent,
Acquisition Company and with respect to the Subsidiary Guarantors on a combined
basis as of December 31, 1998 and for the years ended December 31, 1998 and 1997
is as follows (unaudited):
American Mobile Parent Acquisition Company
Operating Statement Data 1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
Net Revenue $1,200 $1,200 $ -- $ --
Equity in loss of subsidiaries (137,793) (149,566) (116,332) --
Operating income (loss) 13 35 (110) --
Net loss (137,948) (119,207) (137,793) --
Balance Sheet Data December 31, December 31,
(in thousands) 1998 1998
---- ----
Current assets $6,019 $41,058
Non-current assets 69,655 392,591
Current liabilities 79 10,715
Non-current liabilities 100,000 359,147
Shareholders' (Deficit) Equity (24,405) 63,787
F-50
Combined Subsidiary Guarantors
Operating Statement Data 1998 1997
---- ----
(in thousands)
Net Revenue $87,221 $44,214
Equity in loss of subsidiaries -- --
Operating loss (88,635) (99,535)
Net loss (116,332) (149,566)
Balance Sheet Data December 31,
(in thousands) 1998
----
Current assets $46,776
Non-current assets 316,728
Current liabilities 33,842
Non-current liabilities 691,445
Shareholders' Deficit (361,783)
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 December 31, 1998, 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.
F-51
AMSC Acquisition Company, Inc. and Subsidiary Guarantors
Consolidated Statements of Operations
(dollars in thousands)
(unaudited)
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -------
REVENUES
Services $57,994 $20,684 $9,201
Sales of equipment 29,227 23,530 18,529
------ ------- ------
Total Revenues 87,221 44,214 27,730
COSTS AND EXPENSES:
Cost of service and operations 58,086 31,959 30 471
Cost of equipment sold 30,449 40,335 31,903
Sales and advertising 16,733 12,030 24,541
General and administrative 17,465 14,890 16,212
Depreciation and amortization 53,233 44,535 45,496
------ ------- ------
Operating Loss (88,745) (99,535) (120,893)
INTEREST AND OTHER INCOME 3,612 1,122 552
INTEREST EXPENSE (52,660) (51,153) (44,636)
-------- -------- ---------
NET LOSS $(137,793) $(149,566) $(164,977)
========== ========== ==========
F-52
AMSC Acquisition Company, Inc. and Subsidiary Guarantor
Consolidated Balance Sheets
(dollars in thousands)
as of December 31, 1998 and 1997
(unaudited)
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $2,285 $2,106
Inventory 18,593 40,321
Prepaid in-orbit insurance 3,381 4,564
Accounts receivable-trade, net of allowance
for doubtful accounts 15,325 8,140
Current portion of restricted short-term
investments 41,038 --
Other current assets 7,212 9,608
------- -----
Total current assets 87,834 64,739
PROPERTY AND EQUIPMENT, net 246,553 250,335
RESTRICTED INVESTMENTS 56,439 --
GOODWILL AND INTANGIBLES, net 53,235 --
DEFERRED CHARGES AND OTHER ASSETS, net 33,846 36,722
------ ------
Total assets $477,907 $351,796
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses 33,718 $35,825
Obligations under capital leases due
within one year 5,971 798
Current portion of deferred trade payables 5,041 15,254
Other current liabilities 162 7,520
-------- -------
Total current liabilities 44,892 59,397
DUE TO PARENT -- 441,836
LONG-TERM LIABILITIES:
Obligations under New Bank Financing 32,000 198,000
Notes, net of discount 327,147 --
Capital lease obligations 5,824 3,147
Deferred trade payables 1,689 1,364
Net assets acquired in excess of
purchase price 2,028 2,725
Other long-term liabilities 540 647
-------- --------
Total long-term liabilities 369,228 205,883
Total liabilities 414,120 707,116
------- -------
STOCKHOLDERS' EQUITY (DEFICIT) 63,787 (355,320)
------ ---------
Total liabilities and stockholders' equity $477,907 $351,796
========= =========
F-53
AMSC Acquisition Company, Inc. and Subsidiary Guarantors
Consolidated Statements of Stockholders' Equity (Deficit)
(dollars in thousands)
for the period from January 1, 1996 through December 31, 1998
(unaudited)
Total
BALANCE, December 31, 1995 $(40,777)
Net Loss (164,977)
---------
BALANCE, December 31, 1996 (205,754)
Net Loss (149,566)
---------
BALANCE, December 31, 1997 (355,320)
Net Loss (137,793)
Investment by Parent Company 556,900
-------
BALANCE, December 31, 1998 $63,787
=======
F-54
AMSC Acquisition Company, Inc. and Subsidiary Guarantors
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Years Ended December 31
------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($137,793) $(149,566) $(164,977)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of debt discount 10,845 9,350 5,721
Depreciation and amortization 53,233 44,535 45,413
Changes in assets and liabilities:
Inventory 21,947 (2,287) (27,482)
Prepaid in-orbit insurance 1,183 516 (257)
Trade accounts receivable (105) (1,537) (5,229)
Other current assets 7,185 4,639 1,970
Accounts payable and accrued expenses 16,864 (5,844) 1,668
Deferred trade payables (6,567) 11,685 --
Deferred items - net (7,396) 8,038 1,347
-------- --------- ---------
Net cash used in operating activities (40,604) (80,471) (141,826)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ARDIS (52,373) -- --
Purchase of long-term restricted securities (96,976) -- (1,000)
Payment of escrow interest (20,633) -- --
Insurance proceeds applied to equipment in service -- -- 66,000
Additions to property and equipment (12,470) (8,598) (14,054)
-------- ------- --------
Net cash provided by (used in) investing activities (182,452) (8,598) 50,946
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding (to) from Parent (22,686) 28,220 29,485
Proceeds from Notes 335,000 -- --
Principal payments under capital leases (3,395) (2,576) (3,994)
Principal payments under Vendor Financing (16) -- --
Proceeds from short-term borrowings 10,000 -- 70,000
Payments on short-term borrowings (10,000) -- (70,000)
Repayment of Bank Financing (100,000) -- --
Proceeds from New Bank Financing and Bank Financing 34,000 71,000 127,000
Proceeds from debt issuance -- -- 1,700
Payments on long-term debt (4,933) (6,180) (59,190)
Debt issuance costs (14,735) (1,471) (10,803)
-------- ------- --------
Net cash provided by financing activities 223,235 88,993 84,198
Net increase (decrease) in cash and cash equivalents 179 (76) (6,682)
CASH AND CASH EQUIVALENTS, beginning of period 2,106 2,182 8,864
------ ------ ------
CASH AND CASH EQUIVALENTS, end of period $2,285 $2,106 $2,182
======= ======= ======
F-55
QUARTERLY FINANCIAL DATA (unaudited)
(dollars in thousands, except for per share data)
1998-quarters 1997-quarters
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
Revenues $10,022 $22,410 $21,802 $32,987 $8,685 $10,753 $10,795 $13,981
Operating expenses (1) 28,425 47,274 44,178 55,551 32,341 32,420 30,617 46,231
------- ------- ------- ------- ------- ------ ------- ------
Loss from operations (18,403) (24,864) (22,376) (22,564) (23,656) (21,667) (19,822) (32,250)
Interest and other income (expense) (6,839) (14,099) (13,922) (14,881) (3,425) (5,175) (6,442) (6,770)
------- -------- -------- -------- ------- ------- ------- -------
Net Loss (25,242) (38,963) (36,298) (37,445) (27,081) (26,842) (26,264) (39,020)
Net loss per common share (2) $(1.00) $(1.23) $(1.14) $(1.16) $(1.08) $(1.07) $(1.04) $(1.55)
Weighted-average common shares
outstanding during the period
(000s) 25,241 31,719 31,773 32,154 25,109 25,120 25,145 25,151
Market price per share (3)
High $16.13 $14.31 $10.69 $6.25 $14.75 $12.13 $10.88 $10.75
Low $6.75 $9.25 $4.50 $3.50 $9.37 $8.50 $6.23 $6.28
(1) Operating expenses include charges of approximately $12.0 million in
the fourth quarter of 1997 related to the realizability of the
Company's inventory investment.
(2) Loss per share calculations for each of the quarters are based on the
weighted average number of shares outstanding for each of the periods,
and the sum of the quarters may not necessarily be equal to the full
year loss per share amount.
(3) The Company's Common Stock is listed under the symbol SKYC on the
Nasdaq National Market System. The quarterly high and low sales price
represents the closing price in the Nasdaq National Market System. The
quotations represent inter-dealer quotations, without retail markups,
markdowns or commissions, and may not necessarily represent actual
transactions. As of February 26, 1999, there were 275 stockholders of
record of the Company's Common Stock.
F-56
Selected Financial Data
- -----------------------
Set forth below is the selected financial data for the Company for the five
fiscal years ended December 31, 1998:
(dollars in thousands, except for per share data)
1998 1997 1996 1995 1994
------ ------ ------ ------ ----
Revenues $87,221 $44,214 $27,730 $8,797 $5,240
Net Loss (137,948) (119,207) (134,638) (66,917) (21,103)
Basic and diluted Loss per Common Share $(4.52) $(4.74) $(5.38) $(2.69) $(0.86)
Dividends on Common Stock (1) None None None None None
Consolidated Balance Sheet Data:
Cash and Cash Equivalents $2,285 $2,106 $2,182 $8,865 $137,287
Property Under Construction -- -- -- -- 263,505
Total Assets 489,794 311,447 350,173 398,351 448,674
Current Liabilities 44,971 59,433 57,669 104,772 37,251
Long-Term Obligations 469,228 205,883 133,804 6,052 59,879
Stockholders' (Deficit) Equity (24,405) 46,131 158,700 287,527 351,544
(1) The Company has paid no dividends on its Common Stock since inception
and does not plan to pay dividends on its Common Stock in the
foreseeable future. In addition, the payment of dividends is subject to
restrictions described in Note 8 to the financial statements and
discussed in Management's Discussion and Analysis.
F-57
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Financial Statements
December 31, 1998 and 1997, and for the period
from December 15, 1992 (date of inception) through
December 31, 1998
(With Independent Auditors' Report Thereon)
Page
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity (Deficit) 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-18
(Continued)
Independent Auditors' Report
To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of XM Satellite
Radio Holdings Inc. and subsidiary (a development stage company) as of December
31, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
1998 and 1997, and the period from December 15, 1992 (date of inception) to
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of XM Satellite Radio
Holdings Inc. and subsidiary (a development stage company) as of December 31,
1998 and 1997, and the results of their operations and their cash flows for the
years then ended and for the period from December 15, 1992 (date of inception)
to December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 11 to
the consolidated financial statements, the Company has not commenced operations,
has negative working capital of $130,341,000, and is dependent upon additional
debt and equity financings, which raises substantial doubt about its ability to
continue as a going concern. Management's plan in regard to these matters is
also described in note 11. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
McLean, Virginia /s/KPMG LLP
February 12, 1999
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands except for share data)
1998 1997
-------- --------
Assets
------
Current assets:
Cash and cash equivalents $ 310 1
Prepaid and other current assets 172 --
--------- --------
Total current assets 482 1
Other assets:
System under construction 169,029 91,932
Property and equipment, net of accumulated depreciation
and amortization of $57 and $0 449 --
Other assets 525 --
--------- ---------
Total assets $ 170,485 91,933
========= =========
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current Liabilities:
Accounts payable $ 23,125 --
Due to related parties 13,767 445
Accrued interest on loans payable 1,907 1,886
Loans payable due to related parties 91,546 80,618
Term loan 34 --
Accrued expenses 444 --
--------- ---------
Total current liabilities 130,823 82,949
Term loan, net of current portion 53 --
Convertible notes payable due to related party 45,583 --
Accrued interest on convertible notes payable due to related party 1,209 --
--------- ---------
Total liabilities 177,668 82,949
--------- ---------
Common stock - $0.10 par value; authorized 3,000 shares;
125 shares issued and outstanding at December 31, 1998 and 1997 -- --
Additional paid-in capital 10,643 10,643
Deficit accumulated during development stage (17,826) (1,659)
-------- -------
Total stockholders' equity (deficit) (7,183) 8,984
------- -----
Commitments and contingencies (notes 4, 7, 8, 11, 12, and 13)
$ 170,485 91,933
========== ==========
See accompanying notes to consolidated financial statements.
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997, and for the
period from December 15, 1992 (date of inception)
to December 31, 1998
(in thousands except for share data)
December 15, 1992
(date of inception)
to December 31,
1998 1997 1998
-------- -------- --------
Revenue $ -- -- --
------------ ------------ ------------
Operating expenses:
Research and development 6,941 -- 6,941
Professional fees 5,242 1,090 6,332
General and administrative 4,010 20 4,030
------------ ------------ ------------
Total operating expenses 16,193 1,110 17,303
------------ ------------ ------------
Operating loss 16,193 1,110 17,303
------------ ------------ ------------
Other expenses (income):
Interest expense (income), net (26) 549 523
------------ ------------ ------------
Total other (expense) income (26) 549 523
------------ ------------ ------------
Net loss $ 16,167 1,659 17,826
------------ ------------ ============
Net loss per share:
Basic and diluted $ 129 14
============ =============
Weighted average shares used in computing
net loss per share - basic and diluted 125 119
============ =============
See accompanying notes to consolidated financial statements.
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997, and for the
period from December 15, 1992 (date of inception)
to December 31, 1998
(in thousands except for share data)
Deficit
accumulated Total
Additional during stockholders'
Common stock paid-in development equity
------------
Shares Amount capital stage (deficit)
------ ------ ---------- ------------ -------------
Issuance of common stock (December 15, 1992) 100 $ -- -- -- --
----- ------ ---------- --------- ----------
Balance at December 31, 1992 100 -- -- -- --
Net Loss -- -- -- -- --
----- ------ ---------- --------- ----------
Balance at December 31, 1993 100 -- -- -- --
Net Loss -- -- -- -- --
----- ------ ---------- --------- ----------
Balance at December 31, 1994 100 -- -- -- --
Net Loss -- -- -- -- --
----- ------ ---------- --------- ----------
Balance at December 31, 1995 100 -- -- -- --
Net Loss -- -- -- -- --
----- ------ ---------- --------- ----------
Balance at December 31, 1996 100 -- -- -- --
Contributions to paid-in capital -- -- 143 -- 143
Issuance of common stock and capital contributions 25 -- 9,000 -- 9,000
Issuance of options -- -- 1,500 -- 1,500
Net Loss -- -- -- (1,659) (1,659)
----- ------ ---------- --------- ----------
Balance at December 31, 1997 125 -- 10,643 (1,659) 8,984
Net Loss -- -- -- (16,167) (16,167)
----- ------ ---------- --------- ----------
Balance at December 31, 1998 125 $ -- 10,643 (17,826) (7,183)
===== ====== ========== ========= ========
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997, and for the
period from December 15, 1992 (date of inception)
to December 31, 1998
(in thousands)
December 15, 1992
(date of inception)
to December 31,
1998 1997 1998
-------- -------- --------
Cash flows from operating activities:
Net loss ($16,167) (1,659) (17,826)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 57 -- 57
Note discount amortization -- 33 33
Changes in operating liabilities:
Increase in prepaid and other current assets (212) -- (212)
Increase in accounts payable and accrued expense 1,701 -- 1,701
Increase in amounts due to related parties 13,322 445 13,767
Increase (decrease) in accrued interest (2) 517 515
--------- --------- ----------
Net cash provided by (used in) operating activities (1,301) (664) (1,965)
--------- --------- ----------
Cash flows from investing activities:
Purchase of property and equipment (506) -- (506)
Additions to system under construction (43,406) (90,031) (133,437)
--------- --------- ----------
Net cash used in investing activities (43,912) (90,031) (133,943)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock and capital contribution -- 9,143 9,143
Proceeds from issuance of loan payable to related party 337 80,053 80,390
Proceeds from issuance of options -- 1,500 1,500
Proceeds from issuance of convertible notes to related party 45,583 -- 45,583
Payment to establish collateral for term loan (92) -- (92)
Proceeds from term loan 92 -- 92
Repayments of term loan (5) -- (5)
Payments for deferred financing costs (393) -- (393)
--------- -------- --------
Net cash provided by financing activities 45,522 90,696 136,218
--------- -------- --------
Net increase in cash and cash equivalents 309 1 310
Cash and cash equivalents at beginning of year 1 -- --
--------- -------- --------
Cash and cash equivalents at end of year $ 310 1 310
========= ======== ========
Supplemental cash flow disclosure:
Interest capitalized $ 11,824 1,901 13,725
========= ======== ========
Interest converted into principal note balance $ 9,157 501 9,658
========= ======== ========
Accrued system milestone payments $ 21,867 -- 21,867
========= ======== ========
See accompanying notes to consolidated financial statements.
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business
XM Satellite Radio Inc. (XMSR), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State
of Delaware as a wholly owned subsidiary of American Mobile
Satellite Corporation (AMSC) for the purpose of procuring a
digital audio radio service license (DARS). Business activity for
the period December 15, 1992 through December 31, 1996 was
insignificant.
XM Satellite Radio Holdings Inc. (the Company), formerly AMRC
Holdings Inc., was incorporated in the State of Delaware on May
16, 1997 for the purpose of constructing, launching and operating
a domestic communications satellite system for the provision of
DARS. Pursuant to various financing agreements entered in 1997
between AMSC, XMSR and WorldSpace, Inc. (WSI), WSI acquired a 20
percent interest in XMSR. In May 1997, AMSC and WSI exchanged
their respective interests in XMSR for all of the Company's
common stock.
(b) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of XM
Satellite Radio Holdings Inc. and its subsidiary, XM Satellite
Radio Inc. All significant inter-company transactions and
accounts have been eliminated. The Company's management has
devoted substantially all of its time to the planning and
organization of the Company and to the process of addressing
regulatory matters, initiating research and development programs,
conducting market research, initiating construction of the
satellite system, securing content providers, and securing
adequate debt and equity capital for anticipated operations and
growth. Accordingly, the Company's financial statements are
presented as those of a development stage enterprise, as
prescribed by Statement of Financial Accounting Standards No. 7,
Accounting and Reporting by Development Stage Enterprises.
(c) Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with
an original maturity of three months or less to be cash
equivalents.
(d) Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization is
calculated using the straight-line method over the following
estimated useful lives:
Furniture, fixtures and computer equipment 3 years
Machinery and equipment 7 years
Leasehold improvements Remaining lease term
(e) System Under Construction
The Company is currently developing its satellite system. Costs
related to the project are being capitalized to the extent that
they have future benefits. As of December 31, 1998, all amounts
recorded as system under construction relate to costs incurred in
obtaining a Federal Communications Commission ("FCC") license and
approval as well as the system development.
On October 16, 1997, the FCC granted XMSR a license to launch and
operate two geostationary satellites for the purpose of providing
digital audio radio in the United States in the 2332.5 - 2345 Mhz
(space-to-earth) frequency band, subject to achieving certain
technical milestones and international regulatory requirements.
The license is valid for eight years upon successful launch and
orbital insertion of the satellites. The Company's license
requires that it comply with a construction and launch schedule
specified by the FCC for each of the two authorized satellites.
The FCC has the authority to revoke the authorizations and in
connection with such revocation could exercise its authority to
rescind the Company's license. The Company believes that the
exercise of such authority to rescind the license is unlikely.
The license asset value consists of the total payments made to
the FCC for the license of $90,031,000. Associated with this
license is capitalized interest of $10,991,000 and $1,901,000 as
of December 31, 1998 and 1997, respectively. Costs incurred for
system development were $65,273,000. Associated with the system
development costs is capitalized interest of $2,734,000 at
December 31, 1998.
The Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of (SFAS No. 121), during fiscal year 1997. SFAS No. 121
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount of fair value less costs to sell. Adoption of
this SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity during
1998 or 1997.
(f) Stock-Based Compensation
During fiscal year 1997, the Financial Accounting Standards Board
issued SFAS No. 123, Accounting for Stock-based Compensation
(SFAS No. 123), which encourages, but does not require, the
recognition of stock-based employee compensation at fair value.
SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, and to provide pro forma
net income and pro forma earnings per share disclosures for
employee stock option grants made during the year of adoption and
in future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123. Accordingly,
compensation cost for options to purchase common stock granted to
employees is measured as the excess, if any, of the fair value of
common stock at the date of the grant over the exercise price an
employee must pay to acquire the common stock.
Warrants to purchase common stock granted to other than employees
as consideration for goods or services rendered are recognized at
fair market value.
(g) Research and Development
Research and development costs are expensed as incurred.
(h) Net Loss Per Share
In December 1997, the Company adopted the provisions of SFAS No.
128, Earnings per Share, (SFAS 128). SFAS 128 supersedes APB. 15,
Earnings per Share and its related interpretations, and
promulgates new accounting standards for the computation and
manner of presentation of the Company's loss per share. SFAS 128
requires the presentation of basic and diluted loss per share.
Basic earnings per share is calculated by dividing net income by
the weighted-average number of common shares outstanding during
the period. The computation of diluted earnings per share
includes all common stock options and warrants and other common
stock, to the extent dilutive, that potentially may be issued as
a result of conversion privileges, including the convertible
notes payable due to related party. The Company has not
previously reported annual loss per share data. Due to losses
incurred during 1998 and 1997, the impact of other potentially
dilutive securities is anti-dilutive and is not included in the
diluted loss per share calculation.
(i) Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Deferred income taxes are recognized for the
tax consequences in future years of differences between the tax
bases of assets and liabilities and the financial reporting
amounts at each year-end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the sum of
tax payable for the period and the change during the period in
deferred tax assets and liabilities.
(j) Comprehensive Income
In December 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income (SFAS 130). This statement establishes
standards for reporting and displaying comprehensive income and
its components in the financial statements. This statement is
effective for all interim and annual periods with the year ended
December 31, 1998. The Company has evaluated the provisions of
SFAS 130 and has determined that there were no transactions that
have taken place during the years ended December 31, 1998 and
1997 that would be classified as other comprehensive income.
(k) Accounting Estimates
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of expenses during
the reporting period. The estimates involve judgments with
respect to, among other things, various future factors which are
difficult to predict and are beyond the control of the Company.
Significant estimates include valuation of the Company's
investment in the DARS license and the benefit for income taxes
and related valuation allowances. Accordingly, actual amounts
could differ from these estimates.
(l) Reclassifications
Certain fiscal year 1997 amounts have been reclassified to
conform to the fiscal 1998 consolidated financial statement
presentation.
(2) Related Party Transactions
The Company had related party transactions with the following
shareholders:
(a) AMSC
In 1997, AMSC contributed $143,000 for the Company to establish
the original application for the FCC license. On March 28, 1997,
the Company received $1,500,000 as a capital contribution from
AMSC. During 1998, AMSC incurred general and administrative costs
and professional fees for the Company and established an
inter-company balance of $458,000 (see note 3).
(b) WSI
On March 28, 1997, the Company received $1,500,000 as a capital
contribution from WSI. The Company issued WSI 25 shares of common
stock for this consideration.
On April 16, 1997, the Company received $15,000,000 from WSI,
which represented $6,000,000 as an additional capital
contribution and $9,000,000 as a six-month bridge loan (see note
4).
On May 16, 1997, the Company obtained a $1,000,000 working
capital loan facility from WSI. During 1997, the Company drew
down $663,000 against the facility with the remaining $337,000
drawn in 1998 (see note 4).
On October 16, 1997, the Company received $71,911,000 from WSI,
which represented an additional $13,522,000 under the bridge loan
and $58,389,000 under the additional amounts loan (see note 4).
On April 1, 1998, the Company entered into an agreement with WSI
to issue $54,536,000 in convertible notes. During 1998, the
Company drew down $45,583,000 under the agreement (see note 4).
In July 1998, the Company acquired furniture and equipment from
WSI for $104,000 and has established a due to WSI for the balance
(see note 3).
In addition to financing, the Company has relied upon certain
related parties for legal and technical services. Total expenses
incurred in transactions with related parties are as follows (in
thousands):
Year ended December 31, 1998
----------------------------
WSI AMSC Total
--- ---- -----
Research and development $ 6,624 -- 6,624
Professional fees 2,529 353 2,882
General and administrative 903 60 963
------- --- ------
$10,056 413 10,469
======= ===== =======
Year ended December 31, 1997
----------------------------
WSI AMSC Total
--- ---- -----
Professional fees $ 960 130 1,090
General and administrative -- 20 20
------- --- ------
$ 960 150 1,110
======= ===== =======
Additionally, during 1998 the Company incurred $925,000 of WSI
project management costs that were capitalized to the satellite
system.
(3) Due to Related Parties
Due to related parties included the following amounts:
December 31,
------------
1998 1997
------- ------
Advances from WSI $ 7,405 --
Due to WSI 5,904 390
Due to AMSC 458 55
------- ------
$13,767 445
------- ------
Advances represent funding provided by WSI for 30 days. If
amounts are not repaid within this time period, additional
convertible notes will be issued.
(4) Debt
(a) Loans Payable Due to Related Party
In March 1997, XMSR entered into a series of agreements
(Participation Agreement) with AMSC and WSI in which both
companies provided various equity and debt funding commitments to
XMSR for the purpose of financing the activities of XMSR in
connection with the establishment of a DARS satellite system in
the United States. On May 16, 1997 certain portions of the
Participation Agreement were subsequently ratified with
substantially the same terms and conditions under the Bridge
Loan, Additional Amounts Loan and Working Capital Credit Facility
(Loan Agreement).
The Company has loans payable with a face amount of $91,546,000
and $82,053,000 with a carrying amount of $91,546,000 and
$80,618,000 at December 31, 1998 and 1997, respectively,
outstanding with WSI as follows (in thousands):
1998 1997
---- ----
Bridge loan $25,556 23,001
Additional amounts loan 64,875 58,389
Working capital loan 1,115 663
----- ---
91,546 82,053
Discount arising from
concurrent issuance of
options (note 7), net -- (1,435)
-- -------
$91,546 80,618
======= ======
Bridge Loan
The Company executed the bridge loan with WSI in two
tranches. On April 16, 1997, the Company received proceeds
of $8,479,000 for a loan with a face amount of $9,000,000.
On October 16, 1997, the Company received proceeds of
$12,771,000 for a loan with a face amount of $13,522,000.
The first tranche was a six-month loan at LIBOR plus five
percent per annum, equaling 11.03 percent. The first tranche
was rolled over with the establishment of the second
tranche, which is a six-month loan at LIBOR plus five
percent per annum, equaling 9.94 percent at December 31,
1998 and due in April 1999. The accrued interest under the
bridge loan is compounded to the loan balance each April and
October.
Additional Amounts Loan
On October 16, 1997, the Company executed the additional
amounts loan with WSI and received proceeds of $58,219,000
for a loan with a face amount of $58,389,000. This loan is a
six-month loan at LIBOR plus five percent per annum,
equaling 9.94 percent at December 31, 1998 and due in April
1999. The accrued interest under the additional amounts loan
is compounded to the loan balance each April and October.
Working Capital Loan
On May 16, 1997, the Company executed the working capital
loan with WSI whereby the Company would receive proceeds of
$920,000 for a loan with a face amount of $1,000,000. The
Company drew down $663,000 against the line of credit
through December 31, 1997. This loan is a six-month loan at
LIBOR plus five percent per annum, with an interest rate of
10.19 percent at December 31, 1998 and due in May 1999. The
accrued interest on the loan is compounded to the balance in
May and November.
Restrictive Covenants
The financing agreements contain restrictive covenants which
include a prohibition of the Company or its subsidiary to
merge or consolidate, or sell, transfer, or otherwise
dispose of substantially all of its assets. The Company or
the subsidiary may not incur additional indebtedness in
excess of $1,000,000 without prior written consent of WSI.
Additionally, the financing agreements provide for other
restrictive covenants including a restriction on the payment
of dividends.
The Company has pledged 64.7511 percent of its share of the
issued and outstanding common stock of the subsidiary to WSI
as collateral for the financings.
(b) Convertible Notes Payable Due to Related Party
Effective April 1, 1998, the Company entered into a convertible
note agreement with WSI that provides for a maximum of
$54,536,000 through the issuance of convertible notes. The notes
mature on September 30, 2006 and carry an interest rate of LIBOR
plus five percent per annum, which was 10.15 percent as of
December 31, 1998. Under the terms of the note agreement, WSI
shall have the right to convert all or a portion of the aggregate
principal amount of the notes into shares of common stock at a
conversion price of $875,000 per share. As of December 31, 1998,
$45,583,000 had been drawn through the issuance of convertible
notes. Interest is payable upon maturity.
(c) Term Loan
On November 1, 1998, the Company reached an agreement with a
commercial bank for a $92,000 installment loan with a 36 month
term at 7 percent interest per annum. The Company pledged $92,000
as collateral for the loan and placed this balance on deposit at
the commercial bank. At December 31, 1998, the Company's
outstanding balance was $87,000.
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables,
accounts payable, accrued expenses, and the term loan approximate
their fair market value because of the relatively short duration of
these instruments as of December 31, 1998 and 1997, in accordance with
SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
The fair value of the loans and convertible notes due to related party
could not be estimated as such amounts are due to the Company's
stockholders.
(6) Common Stock
(a) 1998 Shares Award Plan
On June 1, 1998, the Company adopted the 1998 Shares Award Plan
(the Plan) under which employees, consultants, and non-employee
directors may be granted options to purchase shares of common
stock of the Company. The Company has authorized 25 shares of
common stock under the Plan. The options are exercisable in
installments determined by the compensation committee of the
Company's board of directors. The options expire as determined by
the committee, but no later than ten years from the date of
grant. Transactions and other information relating to the Plan
for the year ended December 31, 1998 are summarized below:
Outstanding options
-------------------
Weighted-
Number of average
shares exercise price
------ --------------
Balance, January 1, 1998 -- --
Options granted 14.712 $ 875,000
Options canceled or expired -- --
Options exercised -- --
------ ---------
Balance, December 31, 1998 14.712 $ 875,000
====== =========
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options outstanding Options exercisable
------------------- -------------------
Weighted-
average Weighted- Weighted-
Number remaining average Number average
Exercise outstanding at contractual exercise exercisable at exercise
price December 31, 1998 life price December 31, 1998 price
-------- ----------------- ----------- ---------- ----------------- ---------
$875,000 14.712 9.5 years $875,000 -- $875,000
======== ====== ========= ======== ==== ========
There were no stock options exercisable at December 31, 1998.
There were 10.288 shares available under the plan for future
grants at December 31, 1998. At December 31, 1998, all options
have been issued to employees.
The per share weighted-average fair value of employee options
granted during the year ended December 31, 1998 was $564,000 on
the date of grant using the Black-Sholes Option Pricing Model
with the following weighted-average assumptions:
December 31, 1998
-----------------
Expected dividend yield 0%
Volatility 56.23%
Risk-free interest rate range 4.53% to 5.67%
Expected life 7.5 years
=================
The Company applies APB Opinion No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands):
Year ended
December 31, 1998
(dollars in
thousands)
Net loss:
As reported $16,167
Pro forma 17,508
As reported -- net loss per share -- basic and diluted 129
Pro forma -- net loss per share -- basic and diluted 140
=======
(b) Restrictive Covenants
Certain actions require the unanimous affirmative vote of the
board of directors of the Company. Such actions include the entry
into, or the amendment, modification, extension or termination of
any agreements for amounts in excess of $40,000,000 or with AMSC
or WSI; the entry into any agreements outside of the ordinary
course of business; merger or consolidation; issuance of
additional shares of capital stock; and the declaration and
payment of dividends. If WSI holds more than 50 percent of the
shares of common stock, this provision requiring the unanimous
affirmative vote of the board of directors will be of no further
force and effect. Additionally, an affirmative vote of 81 percent
of all the issued and outstanding shares of common stock shall be
required to approve any voluntary filing of a bankruptcy petition
by the Company or its subsidiary.
(7) WSI Options
The Company issued WSI three options. Under the first option, WSI may
purchase 97.2222 shares of common stock at $241,714 per share to
acquire common stock. The option may be exercised in whole or in
incremental amounts between April 16, 1998 and October 16, 2002. Under
certain circumstances, AMSC may require WSI to exercise the option in
whole. The Company allocated $1,250,000 to the option. Under the
second option, WSI may purchase 128.8876 shares at $477,005 per share.
The option may be exercised between October 16, 1997 and October 16,
2003. The Company allocated $170,000 to the option. Under the third
option, WSI may purchase 3.5111 shares of common stock at $284,811 per
share. The option may be exercised between October 16, 1997 and
October 17, 2002. The Company allocated $80,000 to the option.
The exercise of these options is subject to prior approval of the FCC
to the extent that such exercise would constitute transfer of control.
The allocation was based upon independent valuation.
(8) Employee Benefit Plan
On July 1, 1998, the Company has adopted a profit sharing and employee
savings plan under Section 401(k) of the Internal Revenue Code. This
plan allows eligible employees to defer up to 15 percent of their
compensation on a pre-tax basis through contributions to the savings
plan. The company contributed $0.50 in 1998 for every dollar the
employees contributed up to 6 percent of compensation, which amounted
to $14,000.
(9) Interest Cost
The Company capitalizes a portion of interest cost as a component of
the cost of the FCC license and satellite system under construction.
The following is a summary of interest cost incurred during December
31, 1998 and 1997, and for the period from December 15, 1992 (date of
inception) to December 31, 1998 (in thousands):
December 15, 1992
(date of inception) to
1998 1997 December 31, 1998
---- ---- -----------------
Interest cost capitalized $11,824 1,901 13,725
Interest cost charged to expense -- 549 549
------- ----- ------
Total interest cost incurred $11,824 2,450 14,274
======= ====== ======
Interest costs incurred prior to the award of the license were
expensed in 1997.
(10) Income Taxes
For the period from December 15, 1992 (date of inception) to December
31, 1998, the Company filed consolidated federal and state tax returns
with its majority stockholder AMSC. The Company generated net
operating losses and other deferred tax benefits which were not
utilized by AMSC. As no formal tax sharing agreement has been
finalized, the Company was not compensated for the net operating
losses. Had the Company filed on a stand-alone basis, it would have
had no tax provision as the deferred tax benefit of approximately
$7,164,000 and $650,000 for 1998 and 1997, respectively, would have
been fully offset by a valuation allowance.
(11) Accumulated Deficit
The Company is devoting its efforts to develop, construct and expand a
digital audio radio network. This effort involves substantial risk and
future operating results will be subject to significant business,
economic, regulatory, technical, and competitive uncertainties and
contingencies. These factors individually or in the aggregate could
have an adverse effect on the Company's financial condition and future
operating results and create an uncertainty as to the Company's
ability to continue as a going concern. The financial statements do
not include any adjustments that might be necessary should the Company
be unable to continue as a going concern.
In order to commence satellite-based radio broadcasting services, the
Company will require substantial funds to develop and construct the
DARS system, develop and launch radio communications satellites,
retire debt incurred in connection with the acquisition of the DARS
license and to sustain operations until it generates positive cash
flow. At December 31, 1998, the Company has negative working capital
of $130,341,000.
At the Company's current stage of development, economic uncertainties
exist regarding successful acquisition of additional debt and equity
financing and ultimate profitability of the Company's proposed
service. The Company is currently constructing its satellites and will
require substantial additional financing before construction is
completed. Failure to obtain the required long-term financing will
prevent the Company from realizing its objective of providing
satellite-delivered radio programming. Management's plan to fund
operations and capital expansion includes the additional sale of debt
and equity securities through public and private sources. There are no
assurances, however, that such financing will be obtained.
(12) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones
that must be met for the Company to maintain its license to
operate the system. The Company believes that it is proceeding
into the system development as planned and in accordance with the
FCC milestones.
(b) Application for Review of FCC License
One of the losing bidders for the DARS licenses filed an
Application for Review by the full FCC of the Licensing Order
which granted the Company its FCC license. The Application for
Review alleges that WorldSpace has effectively taken control of
the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC
license should they rule in favor of the losing bidder. Although
the Company believes that the FCC license will withstand the
challenge, no prediction of the outcome of this challenge can be
made with any certainty.
(c) Satellite Purchase Contract
On March 20, 1998, as amended on June 5, 1998, the Company
entered into an agreement for the construction of two satellites,
two launch vehicles, and related equipment, services and spare
parts, including launch services. The total commitment under the
amended agreement, excluding financing fees, is approximately
$438,013,000 as of December 31, 1998. These amounts are due upon
the completion of certain milestones. The Company has incurred
costs of $64,348,000 as of December 31, 1998. One of the members
of the board of directors is an executive of an affiliate of the
Contractor.
Under the terms of this agreement, the Contractor shall invest
$15,000,000 in a private or public equity offering of the
Company, should it be consummated prior to March 20, 1999.
(d) Technical Services and Technology Licenses
Effective January 1, 1998, the Company entered into an agreement
with AMSC and WorldSpace Management Corporation ("WorldSpace
MC"), an affiliate of WSI, in which WorldSpace MC provides
technical support in areas related to the development of a DARS
system. Payments for services provided under this agreement are
made based on negotiated hourly rates. This agreement may be
terminated by either party on or after the date of the
commencement of commercial operation following the launch of the
Company's first satellite. There is no minimum services purchase
requirement. The Company incurred costs of $4,770,000 under the
agreement during 1998.
Effective January 1, 1998, XMSR entered into a technology
licensing agreement with AMSC and WorldSpace MC by which as
compensation for certain licensed up to technology currently
under development to be used in the XM Radio system, XMSR will
pay up to $14,300,000 over a ten-year period. In addition, XMSR
agreed to pay 1.2 percent of quarterly net revenues to WorldSpace
MC and a royalty for equipment manufactured using the technology,
if it were to use the source encoding and decoding of
transmission signals under development. No liability exists to
AMSC or WorldSpace MC should such developments prove
unsuccessful. XMSR incurred costs of $6,624,000 under the
agreement during 1998.
(e) FCC Occurrences
On October 30, 1998, AMSC and WSI submitted an application for
Consent and Transfer Control with the FCC. These entities have
requested the FCC's consent to WSI's exercise of certain options
that would increase its shareholding interest in the Company.
There have been challenges filed against the application.
(f) Leases
The Company has two noncancelable operating leases for office
space that expire over the next four years. The future minimum
lease payments under noncancelable leases as of December 31, 1998
are (in thousands):
Year ending December 31:
1999 $ 42
2000 44
2001 46
2002 48
2003 --
------
$ 180
======
Rent expense for 1998 and 1997 was $231,000 and $0, respectively.
(13) Subsequent Events
On January 12, 1999, a competitor of the Company commenced action
against the Company for patent infringement and for a declaratory
judgment of future patent infringement by the Company. There have been
no damages specified in the action and the Company is in the process
of responding to the complaint. Should it be unsuccessful in its
defense, the Company could be liable for monetary damages, and could
be forced to engineer alternative technologies related to signal
reception or seek a license from, or pay royalties to, the competitor.
The Company intends to vigorously defend against the suit; however,
the outcome is uncertain at this time.
Effective January 15, 1999, the Company issued a convertible note to
AMSC for $21,419,000. This note matures on September 30, 2006 and
carries an interest rate of LIBOR plus five percent per annum. Under
the terms of this note, AMSC shall have the right to convert all or a
portion of the aggregate principal amount of the note into shares of
common stock at a conversion price of $875,000 per share. Interest is
payable upon maturity.
(14) Quarterly Data (Unaudited) (in thousands)
1998
-------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues $ -- -- -- --
Operating loss 3,100 5,032 3,849 4,204
Loss before income taxes 3,100 5,032 3,857 4,178
Net loss 3,100 5,032 3,857 4,178
======= ======= ======= =======
Net loss per share -- basic and diluted 25 40 31 33
======= ======= ======= =======
1997
-------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues $ -- -- -- --
Operating loss -- 51 185 874
Loss before income taxes -- 270 459 930
Net loss -- 270 459 930
======= ======= ======= =======
Net loss per share -- basic and diluted -- 2 4 7
======= ======= ======= =======
The sum of quarterly per share net losses for 1997 do not necessarily agree to
the net loss per share for the year due to the timing of stock issuances.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Mobile Satellite Corporation
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of American Mobile Satellite Corporation and
Subsidiaries (a Delaware corporation) included in this Form 10-K and have issued
our report thereon dated March 29, 1999. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
Schedule I -- American Mobile Satellite Corporation -- Condensed Financial
Information of Registrant, is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Washington, D.C.,
March 29, 1999
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Condensed Balance Sheets
(in thousands) December 31,
1998 1997
ASSETS
Current portion of prepaid interest $6,019 $--
Long term portion of prepaid interest 7,942 --
Restricted long-term investments 10,760 --
Investment in subsidiaries 50,953 46,168
-------- --------
Total assets $75,674 $ 46,168
======== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable and accrued expenses $79 $37
Term Loan payable 100,000 --
-------- --------
Total Liabilities 100,079 $37
Stockholders' (Deficit) Equity:
Preferred Stock -- --
Common Stock 322 252
Additional paid-in capital 508,084 451,892
Common stock purchase warrants 59,108 36,338
Deferred compensation (1,528) --
Unamortized stock purchase warrants (33,678) (23,586)
Accumulated loss (556,713) (418,765)
--------- ---------
Total Stockholders' (Deficit) Equity (24,405) 46,131
Total Liabilities and Stockholders'
(Deficit)Equity $ 75,674 $ 46,168
======== =========
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Condensed Statements of Operations
For the Years Ended December 31,
(in thousands) 1998 1997 1996
---- ---- ----
Management fees from wholly-owned subsidiary $1,200 $1,200 $1,200
Operating Expenses
Sales and marketing 120 36 --
General and administrative 1,067 1,129 2,452
------ ------ -----
Total operating expenses 1,187 1,165 2,452
------------------------ ----- ----- -----
Income (loss) from operations 13 35 (1,252)
Interest income 8,472 31,625 31,591
Interest expenses (8,298) -- --
Equity loss in XM Radio (342) (1,301) --
----- ------- -------
Loss before net loss of Acquisition Company (155) 30,359 30,339
Net loss of Acquisition Company - Note A (137,793) (149,566) (164,977)
--------- --------- ---------
Net Loss $(137,948) $(119,207) $(134,638)
========== ========== ==========
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Condensed Statements of Cash Flows
For the Years Ended December 31,
(in thousands) 1998 1997 1996
---- ---- ----
Cash Provided from Operating Activities $ 5,054 $ 29,579 $ 28,234
Investing Activities
Purchase of restricted securities (28,152) -- --
Advances to and investment in subsidiaries (85,805) (29,863) (29,482)
-------- ----- -------
Cash (used in) investing activities (113,957) (29,863) (29,482)
Financing Activities
Proceeds from the issuance of Warrants 8,490 -- --
Proceeds from Term Facility 100,000 -- --
Proceeds from sale of Common Stock 413 284 1,248
-------- --------- --------
Cash Provided by Financing Activities 108,903 284 1,248
-------- --------- --------
(Decrease) increase for the period -- -- --
Beginning of period -- -- --
-------- --------- --------
End of period $ -- $ -- $ --
========= ========= ==========
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
Notes to Condensed Financial Statements
Note A -- Background and Basis of Presentation
American Mobile Satellite Corporation (with its subsidiaries, "American Mobile"
or the "Company") was incorporated on May 3, 1988. The FCC has authorized
American Mobile to construct, launch, and operate a mobile satellite services
system (the "Satellite Network ") to provide a full range of mobile voice and
data services via satellite to land, air and sea-based customers in a service
area consisting of the continental United States, Alaska, Hawaii, Puerto Rico,
the U.S. Virgin Islands, U.S. coastal waters, international waters and airspace
and any foreign territory where the local government has authorized the
provision of service. On April 7, 1995, the Company successfully launched its
first satellite ("MSAT-2"), from Cape Canaveral, Florida.
In late 1996, the Company expanded its mobile data business through the
acquisition of Rockwell International Corporation's ("Rockwell") dual mode
mobile messaging and global positioning and monitoring service for commercial
trucking fleets. Rockwell was a private network customer of the Company which
had purchased capacity from the Company on MSAT-2.
On March 31, 1998 the Company (through its newly-formed, wholly-owned
subsidiary, AMSC Acquisition Company, Inc. ("Acquisition Company")) acquired
ARDIS Company ("ARDIS"), a wholly-owned subsidiary of Motorola Inc. that owns
and operates a two-way wireless data communications network, for a purchase
price of approximately $50 million in cash and $50 million in the Company's
Common Stock (the "Purchase Price"). The Company, through the acquisition of
ARDIS, becomes a nationwide provider of wireless communications services,
including data, dispatch, and voice services, primarily to business customers in
the United States.
On October 16, 1997, XM Satellite Radio Inc., formerly American Mobile Radio
Corporation, an indirect subsidiary of American Mobile through its subsidiary XM
Satellite Radio Holdings Inc., formerly AMRC Holdings, Inc., (together with XM
Satellite Radio Inc., "XM Radio"), was awarded a license by the FCC to provide
satellite-based Digital Audio Radio Service ("DARS") throughout the United
States, following its successful $89.9 million bid at auction on April 2, 1997.
XM Radio has and will continue to receive 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.
S-1
In the parent Company-only financial statements, the Company's investment in
subsidiaries is stated at cost less losses of subsidiaries. The net loss of
subsidiaries is included in these financial statements using the equity method.
Certain amounts have been reclassified from prior years to reflect the push down
of interest expense related to the Revolving Credit Facility (see below) held by
its subsidiaries. The Company has entered into various transactions with its
subsidiaries which have not been eliminated in the December 31, 1998 audited
consolidated financial statements and are summarized as follows:
1998 1997 1996
---- ---- ----
Investment in and amounts due from subsidiaries $50,953 $46,167 $158,713
Management fees 1,200 1,200 1,200
Interest income 7,188 31,625 31,591
Interest expense allocated to subsidiaries 3,804 6,005 1,900
Note B -- Investment in Subsidiaries
As stated in Note A, the Company records its investment in subsidiaries on the
equity method. In connection with the Acquisition, the Company formed a new
wholly-owned subsidiary ("Acquisition Company") to hold the stock of all current
wholly-owned operating subsidiaries. The Acquisition Company has six
wholly-owned subsidiaries. Additionally, the Company has an equity investment in
XM Radio. The recoverability of such investment is subject to the risks
associated with expanding a developing business, including successfully
integrating ARDIS. Specifically, future operating results will be subject to
significant business, economic, regulatory, technical, and competitive
uncertainties and contingencies. Depending on their extent and timing, these
factors, individually or in the aggregate, could have an adverse effect on the
Subsidiaries' financial condition and future results of operations.
Adequate liquidity and capital are critical to the ability of the 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.
In connection with the Acquisition, and to meet its ongoing cash requirements,
the Acquisition Company issued $335 million of Units (the "Units") consisting of
12 1/4 % Senior Notes due 2008 (the "Notes"), and one warrant to purchase
3.75749 shares of Common Stock of the Company for each $1,000 principal amount
of Notes. The Company 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,
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.
S-2
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 in 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.
On December 4, 1997, the Company entered into an agreement with African
Continental Telecommunications Ltd. ("ACTEL") to lease the Company's satellite,
"MSAT-2" (the "Satellite Lease Agreement") for deployment over sub-Saharan
Africa. Simultaneously, the Company agreed with TMI Communications and Company
Limited Partnership ("TMI") to acquire a one-half ownership interest in TMI's
satellite, "MSAT-1" (the "Satellite Purchase Agreement"). On March 24, 1999, as
ACTEL had not obtained the requisite financing, the Company and TMI terminated
the agreements. Following the termination of the ACTEL-related agreements, the
Company and TMI will each maintain operations on their two satellites, and
continue to provide each other emergency back-up and restoral services in
accordance with long-standing arrangements. See Item I. "Business -- Satellite
Lease and Purchase Agreement", "-Satellite Back-up and Technology," and
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Note C -- Guarantee
The Company has guaranteed various obligations of Acquisition Company. These
guaranteed obligations include amounts borrowed under the New Bank Financing,
ground segment financing agreements and obligations of Acquisition Company and
its subsidiaries under certain vendor financing agreements, an office lease
agreement and various capital equipment leases.
Note D -- Legal Matters
In 1992, a former director of American Mobile filed an Amended Complaint against
the Company alleging violations of the Communications Act of 1934, as amended,
and of the Sherman Act and breach of contract. The suit was dismissed on
November 10, 1998, prior to the commencement of trial pursuant to an agreement
to settle the suit by payment by the Company of $250,000.
Note E - Subsequent Events
On January 15, 1999, the Company entered into an agreement with Baron Asset Fund
("Baron") for the placement of a $21.5 million note payable convertible into
S-3
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 for a note convertible into XM Radio shares (the
"XM Radio Note Receivable"). The Baron XM Radio Convertible Note ranks
subordinate to any 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 addition 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.
Assuming conversion of all convertible notes and exercise of the outstanding
WorldSpace options, the Company's ownership in XM Radio would be 22.6% (compared
with the 18.3% post-exercise position previously reported).
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 waiver, the Company agreed to re-price their
Guarantee Warrants, effective April 1, 1999, from $12.51 to $7.50.
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