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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, 1996
Commission file number 0-23044
AMERICAN MOBILE SATELLITE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0976127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10802 Parkridge Boulevard
Reston, VA 22091
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (703) 758-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of shares of Common Stock held by
non-affiliates at February 28, 1997 was approximately $342,139,827.
Number of shares of Common Stock outstanding at February 28, 1997: 25,111,180.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Certain information in the Company's definitive Proxy Statement for its
1997 Annual Meeting of Stockholders is incorporated by reference in Part III of
this Form 10-K.
AMERICAN MOBILE SATELLITE CORPORATION
-------------------------------------
1996 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. 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. The Company disclaims, however, any
intent or obligation to update its forward- looking statements.
Item 1. Business.
- ------- ---------
Introduction
- ------------
American Mobile Satellite Corporation ("AMSC" or the "Company") has developed
and operates North America's first high-powered, satellite-based, digital mobile
communications system (the "SKYCELL System"). AMSC currently offers low-cost,
high-quality digital mobile voice, data and dispatch communications services
primarily to business customers with a need for nationwide, reliable mobile
communications services. Since its formation in 1988, AMSC's efforts have been
focused on completing the design, construction, testing and deployment of the
SKYCELL System. The Company successfully launched its satellite ("AMSC-1") in
April 1995 and initiated commercial voice service in December 1995.
The Company currently offers two kinds of service. SKYCELL(R) voice services are
interconnected with the public switched telephone network ("PSTN"). Users make
or receive calls using the SKYCELL System through vehicle-mounted equipment
similar to a cellular telephone or mobile radio, specialized maritime and
aeronautical equipment, transportable equipment, fixed-site installed equipment
similar to ordinary wireline service, and other equipment (collectively,
"Subscriber Equipment"). The Subscriber Equipment communicates through AMSC-1 to
the communications ground station (the "CGS") located in Reston, VA, which in
turn is interconnected with the PSTN. Several vendors, including Mitsubishi
Electric Corporation and Westinghouse Electric Corporation ("Westinghouse"), are
developing and manufacturing Subscriber Equipment. See "Business -- Components
of the SKYCELL System -- Subscriber Equipment."
The Company also offers SKYCELL mobile data services, both satellite only and
"dual-mode," i.e., satellite and terrestrial, through the public switched data
network. Users send or receive data messages through vehicle-mounted Subscriber
Equipment, installed primarily in trucking fleets. These data terminals
communicate through AMSC-1 through the land earth stations ("LESs") located in
Reston, Virginia, and in some cases a switching facility located in Cedar
Rapids, Iowa. See "Business -- Satellite Data Communications Services." Several
vendors, including Rockwell Collins and Trimble Navigation, are supplying mobile
data terminals to the Company. See "Business -- Components of the SKYCELL System
- -- Subscriber Equipment".
As of December 31, 1996, the Company had 20,300 subscribers on the SKYCELL
System.
1
History
- -------
AMSC, 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 Federal Communications Commission (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, AMSC
transferred the mobile satellite services license to its wholly owned
subsidiary, AMSC Subsidiary Corporation ("AMSC Subsidiary").
In August 1989, the FCC authorized AMSC to construct, launch and operate a
mobile satellite communications system. For the SKYCELL System's mobile links,
the FCC assigned to AMSC 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, U.S. coastal waters, international waters and
airspace and any foreign territory where the local government has authorized the
provision of service (the "Service Area"). The Company is also authorized to
provide fixed- site voice and data communications services via satellite to
locations within the Service Area, so long as such services remain incidental to
the Company's mobile communications services. See "Components of SKYCELL System
- -- AMSC-1". In addition to AMSC-1, the Company's license authorizes it to build,
launch, and operate two additional geosynchronous satellites in accordance with
a specified launch schedule, which would be available for additional capacity
demands of the business.
Overview
- --------
The Company offers both voice and data services directly to end users through
its direct sales force and dealers as well as bulk satellite capacity through
distributors, resellers and private networks. The Company's service offerings
expanded significantly throughout 1996 and into 1997 with the introduction of
its SKYCELL(R) Plus point-to-multipoint dispatch service, dual-mode
satellite-terrestrial data product, and a number of advanced features, including
4800 bits per second ("bps") circuit switched data service as an added feature
of the voice service. In addition, in 1996 and into 1997, an expanded range of
both voice and data terminals became available for use in land mobile, maritime,
fixed-site, aeronautical and transportable environments. Most recently, the
Company has released a product for the recreational vehicle market that pairs
SKYCELL services with direct broadcasting satellite services, and Mitsubishi
Electronics Corporation has released its OmniQuest(R) lightweight, laptop
transportable unit. See "Business -- Satellite Telephone Services; Satellite
Data Communications Services."
The Company's sales organization and distribution strategies reflect its
experience during early 1996. The Company began 1996 with a sales effort and
distribution strategy organized along product lines, with a significant
organization and focus on consumer customer opportunities. A number of factors
led the Company to reassess and restructure its efforts, including: greater
cellular build-out levels prior to product introduction than originally
anticipated; minimal activity in cellular distribution channels, and for the
satellite roaming product developed for that consumer market; limited consumer
market receptivity to the Company's product and services; slower than
anticipated subscriber activations; technical product equipment limitations
disparately impacting the consumer market; and challenges in establishing a
nationwide retail distribution channel with anticipated sales volume, cost and
technical issues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview"
The Company now has an integrated product sales offering, divided along regional
rather than product lines. Similarly, the Company's sales experience indicated
that, in general, its products were most highly utilized in
business-to-business, fleet and remote site services where alternative
communications services were unavailable. Therefore the Company's direct
marketing program now addresses the requirements of large end-users in a number
of focused markets, including transportation, telecommunications and utilities,
and natural resources. The Company accordingly reduced its focus on retail,
consumer products, including the termination early in 1997 of its satellite
roaming service, which had provided interoperability with and billing through
cellular communications systems. All other voice products continue to be offered
to cellular customers as an extension product to their cellular service. With
the termination of the satellite roaming service, the cellular authorized
service provider program has been terminated, and carriers have been offered the
opportunity to distribute the voice product line.
2
The Company faces substantial competition in the markets for all of these
services. See "Business--Competition." As a nondominant common carrier and
commercial mobile radio service provider, the Company is not subject to
traditional public utility rate-of-return regulation in setting its charges for
services. See "Business -- Regulation." The Company's operating results and
capital and liquidity needs have been materially affected by delays experienced
in the development and deployment of the SKYCELL System and may continue to be
impacted in 1997. See "Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview." See "Business --
Technological Developments."
SKYCELL Satellite Voice Services
- --------------------------------
The Company offers satellite telephone services ("STS") on a nationwide basis
under the SKYCELL(R) name. Dispatch or private voice network ("PVN") service is
offered under the SKYCELL Plus(R) brand. As its name suggests, STS provides
simultaneous two-way connection between users. STS user terminals look much like
cellular telephones and can reach any other telephone connected to the PSTN. On
the other hand, with SKYCELL Plus many users share a single connection and
communicate using push-to-talk handsets. In keeping with its integrated sales
strategy, the Company markets both STS and PVN to the same target markets, and
some customers subscribe to both services.
STS currently supports two-way circuit-switched voice and 4800 bps data services
interconnected with the PSTN. The Company offers a wide range of STS terminals
developed to address the particular communications needs of subscribers. This
diversified product offering lets the Company address niche markets and changes
in market demand. The Company markets STS to businesses that have nationwide
coverage requirements, including those for whom nationwide dispatch meets a
fleet communications need; those that operate in geographic areas that lack
significant terrestrial coverage, including natural resource extraction;
utilities and telecommunications companies that require backup and restoral
support; maritime users seeking expanded and or less costly coverage for both
commercial and pleasure vessels. Others served include aeronautical markets,
rural areas unserved by fixed telephony, and public safety organizations.
Generally, the Company charges its STS subscribers a regular monthly access
charge and a per minute usage charge for all calls whether placed or received by
the Subscribers. The monthly access charge and per minute usage charge to STS
subscribers vary according to the Subscriber Equipment configuration (land
mobile, maritime, fixed site, aeronautical or transportable) being used and the
power and gain characteristics of the particular subscriber equipment. SKYCELL
Plus service is presently priced on a set monthly service fee basis which
includes a certain number of free minutes of usage. In practice, few SKYCELL
Plus users exceed this minimum. SKYCELL Plus rates also vary according to the
coverage available to the subscriber.
Satellite Data Communications Services
- --------------------------------------
The Company also offers nationwide "store-and-forward" mobile data or messaging
communications services in two basic forms: 1) a satellite-only product that
operates over AMSC-1; and 2) a multi-mode, satellite-terrestrial product with
least cost routing, i.e. that routes calls terrestrially and, when terrestrial
service is unavailable, over AMSC-1.
Store-and-forward service provides text-message communications between groups of
mobile or fixed data terminals and a single "hub" which is usually located in
the customer's dispatch center. Current applications of this service include one
way and two way messaging, integral GPS, automatic position determination and
reporting, and various types of remote monitoring. Subscribers using this
service and examples of its applications include long distance trucking
companies (for vehicle location monitoring and messaging en route), law
enforcement agencies (for remote data transfer), energy companies (for remote
monitoring of oil wells and deliveries) and waterway and rail transportation
companies (for remote monitoring of refrigeration units in railcars dispersed
throughout the country). However, in a store-and-forward system, an open line of
communication is not established between the sender and receiver and,
accordingly, this service is not appropriate for certain applications where
direct or real-time communications are necessary.
3
The Company offers both satellite-only and multi-mode satellite-terrestrial
mobile data service using LES's located at the Company's headquarters, together
with a switching facility for the multi-mode products located at the Company's
facilities in Cedar Rapids, each in conjunction with AMSC-1. The multi-mode
service offering currently provides terrestrial service through resale of
service provided by ARDIS Company ("ARDIS") in the United States, with the
multi-mode terminal selecting the least cost transmission path.
The satellite only data service was the Company's first offering. The Company
expanded its mobile data business late in 1996 by acquiring Rockwell
International Corporation's ("Rockwell") multi-mode mobile data and global
position tracking service for commercial trucking fleets. The acquired
multi-mode communications system uses both satellite- and land-based
technologies to provide commercial trucking fleets with two-way data
communications and global automatic vehicle location services, no matter where
their vehicles travel throughout North America. Land-based technology provides
communications while vehicles travel in urban areas where tall buildings may
block the line of sight to the satellite; satellite technology ensures the
availability of communications while vehicles travel through areas where
land-based coverage is not available.
Prior to the transaction, Rockwell was a private network customer and had
purchased satellite capacity from the Company on AMSC-1, and terrestrial
capacity from ARDIS. In the transaction, the Company assumed Rockwell's existing
customer contracts and acquired Rockwell's system for the multi-mode mobile data
service, as well as Rockwell's rights to the multi-mode equipment. The assets of
the business were acquired through the assumption of the various contracts and
obligations of Rockwell relating to the business, including its agreement with
ARDIS; no additional, direct payments were made to Rockwell under the terms of
the Asset Sale Agreement dated as of November 22, 1996.
Primary Markets and Sales Channels
- ----------------------------------
The Company has targeted six primary markets in 1997. In addition the Company
sells capacity on the AMSC-1 satellite in bulk and maintains certain
relationships with other companies to expand its coverage of certain targeted
markets or to reach additional markets, particularly aeronautical.
The primary STS markets targeted by the Company are:
Transportation. The Company offers large carriers with nationwide
fleets a variety of data and voice products including SKYCELL Plus.
These products and services permit fleet managers to communicate
simultaneously or individually with fleets of trucks, railcars,
aircraft and ships. Drivers use SKYCELL Plus service to communicate
with one another and with fleet managers by using a "push-to-talk"
handset. Because AMSC-1's power output remains constant regardless of
the number of mobile telephones receiving a transmission, this service
is expected to be an attractive and competitively distinguishing use
of the SKYCELL System.
The transportation sector is the largest market for the Company's
mobile messaging data service. Trucking companies use the Company's
communications services to maintain nearly constant nationwide contact
with drivers. Without such a service, drivers for many carriers must
stop at pay phones to call a dispatcher to report their location and
schedule status. Because dispatchers must rely on drivers to initiate
contact, carriers sometimes cannot divert trucks en route when
customer orders are placed or changed. Using the Company's mobile data
service, information related to inventory control and billing can be
relayed directly to and from trucks in the field. In addition, the
data service eliminates the concern a number of carriers have with
respect to driver over-use of voice communication products. The
Company expects that trucking firms will subscribe to the Company's
services to improve customer service, to increase vehicle and
equipment utilization, to enhance driver satisfaction and performance,
and to improve profitability through overall fleet coordination and
cost savings.
The Company's data service is offered primarily through its direct
sales force. In addition, in connection with the Rockwell acquisition,
the Company acquired a distributor of its product in Canada, Stratos
Mobile Networks (formerly New East Wireless Telecommunications) which,
together with the Company, has developed and offers a multi-mode
product operating over AMSC-1, as well as over the United States and
Canadian terrestrial networks.
4
Maritime Markets. The maritime market, including commercial vessels,
cruise ships and large pleasure vessels, as well as oil rigs and other
natural resource extraction businesses, is currently the largest
market for the Company's voice services, representing 27% of voice
subscribers. The Company offers its voice services to maritime users
through several sales channels. First, the Company has agent
relationships with a number of marine electronics dealers located
throughout the country. The dealers receive a commission for each
sale, including a portion of airtime revenue. Second, three of the
Company's most significant value-added service providers ("VASPs")
have targeted the maritime markets, and presently represent
approximately 77% of all maritime subscribers.
The Company and its resellers offer a range of Subscriber Equipment
suitable for a variety of applications. The largest include
multi-channel units for installation on cruise ships. Among the
smallest is the WaveTalk(R) unit recently introduced by Westinghouse
and the Tracphone(R) available from KVH Industries, Inc. ("KVH"). The
Company believes that maritime customers are likely to purchase its
products and services because they are more compact and less expensive
to acquire and use than the products and services offered by Inmarsat.
See "Business - Competition".
Fixed Site Telephony. The Company offers fixed site and transportable
communications services, including voice and data, to homes,
businesses, government and other fixed sites in areas lacking access
to wireline or cellular communications systems. Significant subscriber
opportunities for this fixed site and transportable service include
mines, oil rigs, and other natural resource extraction businesses, as
well as subscribers desiring back-up communications capabilities in
the event of catastrophic loss of access to wireline or wireless
systems, such as the Federal Aviation Administration Air Traffic
Control Center.
Telecommunications/Utilities. The Company provides back-up, restoral
and mobile communications services to the telecommunications and
utilities industries to ensure communications capabilities and
expedited restoral of service where terrestrial services are
unavailable as a result of coverage limitations or emergency
situations.
Government and Public Safety Organizations. The Company offers its
services to federal, state and local government and public safety
organizations, such as the American Red Cross, Federal Emergency
Management Administration, law enforcement, border patrol and other
federal, state and local government agencies needing seamless coverage
for voice and data communications. The Company anticipates addressing
this market largely through system integrators, who will resell the
service as part of their other products and services.
Aeronautical Markets: Corporate and General Aviation. The Company
offers communications services to the corporate and general aviation
markets, but not to commercial airlines. CAL Corporation of Canada
("Cal") has developed and produced the specialized aeronautical mobile
terminal which was introduced in the second half of 1996. During 1996
and into 1997, the Cal aeronautical unit was certified for use on 39
aircraft types, representing 70% of the corporate and general aviation
aircraft. See "Business -- Components of the SKYCELL System --
Subscriber Equipment." With this equipment, aircraft passengers can
make telephone calls and send and receive data or facsimiles anywhere
in the Service Area. This product is sold through CAL's direct sales
group and CAL's dealer network.
Distribution Arrangements
- -------------------------
The Company distributes STS through authorized dealers, through its own direct
marketing sales force, and through other distributors, including VASPs. The
standard dealer agreement provides that the dealer will serve as the Company's
agent for sales of the service and will provide marketing and subscriber service
(but not billing and collection) functions to support the development and
maintenance of a retail subscriber base. In return for these activities, the
dealer receives a specified percentage of the revenues generated for the Company
by the subscribers recruited by the dealer. In addition, the Company pays the
dealer a fixed amount for each newly-activated subscriber, subject to chargeback
if the subscriber does not continue service for 180 days. The standard dealer
agreement has an initial term of one year, that renews for one year terms unless
earlier terminated. Subscriber Equipment is purchased from the Company and
resold by the dealers to the subscribers.
5
Bulk Satellite Capacity
- -----------------------
The Company offers subscribers alternative programs to obtain satellite capacity
in bulk: (i) "Private Network Customers ("PNCs")," which purchase service on a
channel equivalent basis; and (ii) VASPs, which buy minutes and/or kilobytes of
system capacity in bulk. Service sold to VASPs (bulk minutes or kilobytes) is on
an on-demand basis, contending with other subscribers for capacity. Channel or
channel equivalents, however, are dedicated to the subscriber once purchased and
paid for, and are not subject to other sale, or to preemption except for
emergency purposes as provided in AMSC's FCC authorization.
Both PNC's and VASP's resell the service to their own customers, setting the
price, taking the risk of collection, and private-labelling the service. They
also purchase and resell subscriber equipment. VASP's typically purchase
subscriber equipment from AMSC for resale; PNC's, whose applications of the
Service are typically very different from STS, have built and/or purchased
special purpose subscriber equipment from third parties.
VASP's may or may not install and maintain their own network switching equipment
and facilities, routing traffic from the CGS through their own switches for
delivery to the PSTN. PNC's maintain their own network operations facilities.
AMSC has entered into approximately 12 contracts for approximately $75 million
of capacity over five years from VASP's and PNC's.
Components of the SKYCELL System
- --------------------------------
The SKYCELL System consists principally of AMSC-1, the CGS and the LESs. AMSC-1,
the CGS and the LESs have been constructed for the Company at its expense. The
Company has also entered into contracts with vendors who are developing and
manufacturing Subscriber Equipment.
AMSC-1. AMSC-1 is a Hughes HS-601 system with a payload specifically designed
for the SKYCELL System by Spar Aerospace Ltd. ("Spar"). The bus is composed of
the spacecraft and the subsystems used to maintain the proper operation of the
communications payload. AMSC-1's estimated in- orbit service life after launch
exceeded ten years.
AMSC-1 is designed to produce six overlapping spotbeams capable of providing
coverage of the Service Area. In March 1996, the Company reconfigured AMSC-1 to
provide substantially the same coverage using only five spotbeams, one covering
the eastern half of the United States and the other four covering the remaining
Service Area. See "Business -- Technological Developments; Satellite Insurance."
As reconfigured, AMSC-1 allocates half of the available power to the beam
covering the eastern half of the United States and half of the available power
to the four beams covering the remaining Service Area. Within each of such
allocations of power, the amount of power in any spotbeam may be adjusted based
upon end user requirements. See "Business -- Technological Developments;
Satellite Insurance"
The availability and quality of service depends, in part, on whether or not
there is a line of sight to AMSC-1 from the Subscriber Equipment. The angle
between the horizon and AMSC-1 from any point in the Service Area (the "look
angle") is a general indicator of the availability of a clear line of sight. Due
to the location of AMSC-1 over the equator and the curvature of the Earth, the
full range of fixed site and mobile satellite services will generally be
available where the look angle is greater than 20(degree), except in certain
cases where there are intervening hills, buildings, or other obstructions. Fixed
site and mobile satellite services generally will be available also in areas
between the 5(degree) and the 20(degree) look angle limits, provided that a
direct line of sight to AMSC-1 is available. Services will generally not be
available in the Service Area where the look angle is below 5(degree), but
certain applications (including fixed site) may be available at look angles
below 5(degree).
6
Once a satellite is placed at its orbital location, ground stations control it
until the end of its in-orbit lifetime. The Company has contracted with an
affiliate of Hughes Aircraft Company ("Hughes Aircraft") to monitor and control
AMSC-1 from telemetry, tracking and control ("TT&C") facilities in El Segundo,
California; Castle Rock, Colorado; and Spring Creek, New York.
Ground Segment and LES. The CGS serves as the central voice control facility for
voice-based network traffic on the SKYCELL System, providing call set-up
functions, connection to the public switched telephone network, billing
information for each call, as well as network security, monitoring and
management. The CGS also provides subscriber service information, maintains call
and service records, keeps network configurations and monitors problems. Other
functions include monitoring frequency spectrum usage by AMSC-1, verifying the
performance of all network elements and providing preemptive access to AMSC-1
for special aeronautical and safety services.
The CGS includes a feeder-link Ku-band earth station, a network communications
controller, a network operations center and other equipment needed to support
the interconnection of the SKYCELL System with the public switched telephone
network. The feeder-link earth station is presently the Company's only gateway
station. The network communications controller provides automatic real-time
control of the CGS, allocates channel frequencies for call set-up between mobile
telephones and the feeder-link earth station, and provides network access
security. The network operations center provides centralized monitoring of
systemwide operational performance, conducts testing and maintenance activities,
and performs certain administrative functions in connection with the operation
of the SKYCELL System.
The CGS uses hardware that generally is commercially available or readily
adaptable commercial equipment, except for the channel unit and network access
processors, which were designed by EF Data Corp.
AMSC jointly owns certain patents, technical data and other intellectual
property, including the final mobile terminal performance specification
("FMPS"), developed by Westinghouse, with the Canadian mobile satellite service
provider. See "Business -- Relationship with TMI". The Company separately owns
other patents, technical data and other intellectual property developed by
Westinghouse at the Company's sole expense. Certain of the intellectual property
used in the development of the CGS is owned by Westinghouse or licensed from
others. The Company believes its ownership of and rights to intellectual
property relating to the CGS is sufficient for its business purposes.
The LESs located in Reston, Virginia, together with the switching facility
located at the Company's offices in Cedar Rapids, provide similar functions and
capabilities for the Company's mobile data products as does the CGS for the
Company's voice products. Similar to the CGS, the LESs uses hardware that is
generally commercially available or readily adaptable commercial equipment,
except for the channel units that are provided by Hughes Network LTD. There are
currently four LESs that are located at Reston and additional LESs may be added
as capacity growth demands.
The LESs use the same feeder-link Ku-band earth station as the CGS and is
allocated, within the total AMSC allotment, unique power and spectrum for that
service. The LES architecture is a store and forward architecture based on the
Inmarsat-C standard but is not interconnected with Inmarsat hubs. The LES
provides the data call processing for messages, via AMSC-1, to and from the
mobile terminals. Also, the LES provides terrestrial interface via the Public
Switch Data Network (PSDN) for access and transmission of messages to customers
sites. The LESs also have a network operations center that provides centralized
monitoring and administrative functions in connection with the mobile data
service.
The multi-mode messaging service has an additional switching center that is
located in Cedar Rapids. This station provides for switching between the LES and
the terrestrial network that is utilized for the multi- mode messaging service.
The Cedar Rapids center provides network operations for that locale.
The Company's headquarters in Reston, Virginia, currently house the network
operations center, the network communications controller, the gateway switch and
the radio channel units. There are two Ku-band radio frequency facilities, each
consisting of an antenna and radio frequency electronics: one site is located at
the Company's Reston, Virginia facility and a leased diversity site is located
several miles away in Alexandria, Virginia. The diversity site is used to
provide backup service during periods when heavy rain reduces the quality of the
feeder link signals at the main facility. Each radio frequency facility can
support the full traffic load of the gateway station. See "Item 2, Properties."
7
Subscriber Equipment. Mobile satellite voice telephones are offered in a number
of different configurations to meet specific market needs and to have a variety
of features and options. Mobile satellite telephones consist of an L-band
transceiver, a handset or other appropriate interface depending on the
particular application, and an antenna. The mobile satellite voice telephones
use a voice codec operating at 6.4 Kbps (including error-correcting codes).
Mobile satellite telephones are currently available in land mobile vehicle
installed, fixed site, maritime, aeronautical, dual mode SKYCELL/direct to home
satellite television and fully transportable (i.e., battery powered and packaged
in a brief case) configurations.
Subscriber Equipment for STS and PVN includes data interface ports to allow
connection to communications accessories such as personal computers, and global
positioning satellite ("GPS") tracking devices. Other configurations have
additional features, such as SKYCELL Plus, point-to-multipoint communications.
Future configurations may include one-way messaging or paging (outbound from a
central facility), and reporting (one-way inbound from remote locations). The
addition of GPS services to the voice terminals, if available, requires a
separate antenna.
Manufacturers of Subscriber Equipment have developed several types of mobile
antennas for use with the SKYCELL System. The size of antenna used is the
principal determinant of the amount of satellite power required. Larger antennas
with higher gain require less satellite power to complete voice or data
communications than do smaller antennas with lower gain. As a result, the rate
charged for service using higher gain antennas is generally lower than the rate
charged for service using lower gain antennas.
The Company does not itself manufacture or independently develop mobile
telephones. The Company has entered into separate contracts (the "MT Production
Contracts") with Westinghouse and Mitsubishi Electric Corporation ("Melco")
pursuant to which those manufacturers have, at their own expense, developed
mobile voice telephones based on the FMPS. In return, the Company has granted to
Westinghouse and Melco the shared right to be the co-exclusive manufacturers of
the mobile telephones covered by the FMPS under certain circumstances. The
co-exclusivity period is for up to 18 months after the Company's commencement of
commercial voice service in December 1995, subject to extension in specified
circumstances.
The MT Production Contracts contemplated that Westinghouse and Melco would
distribute and inventory the mobile telephones for offer and sale directly to
the Company's subscribers. While, in certain circumstances, the manufacturers
have distributed their products directly, the Company to date has assumed a
considerable role in purchasing and inventorying this equipment from the
manufacturers for sale to its subscribers directly, as well as through dealers
and VASPs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations; Overview; and Liquidity and Capital Resources".
The MT Production Contracts also provide for the development of specialized
mobile telephones and related license of the FMPS to manufacturers other than
Westinghouse and Melco, under certain circumstances. Pursuant to this
arrangement, Cal has developed an aeronautical mobile telephone based on a
Westinghouse transceiver and antenna control unit; KVH has developed a
high-gain, actively stabilized maritime telephone, the Tracphone(R) based on a
Melco transceiver; International Connectors and Cable Corporation ("ICC") has
developed the fixed site, debit phone and Datron/Transco, Inc. has integrated a
single antenna, SKYCELL and direct broadcasting satellite television service
unit for recreational vehicles, boats and trucks market. In addition, each of
Westinghouse and Melco have developed specialized maritime, transportable and
fixed site units for use on the SKYCELL System.
In certain circumstances, private network subscribers (including resellers) may
also use mobile telephones other than those manufactured by Melco and
Westinghouse.
8
In connection with its mobile data communications service, the Company presently
has an agreement with Trimble Navigation, Inc. ("Trimble"), to supply its
satellite-only data unit. The Company has a remaining commitment of
approximately 7,500 units under its outstanding agreement with Trimble.
In addition, in connection with the Rockwell transaction, the Company acquired
approximately 5,000 multi-mode data satellite-terrestrial terminals from
Rockwell to be delivered in 1997 and into 1998 without payment from the Company
to Rockwell. Under the terms of its Asset Sale Agreement with Rockwell, the
Company also received a manufacturing commitment from Rockwell to continue to
supply the multi-mode units to the Company, through 1997 and into 1998, under
certain commercial terms and conditions. The Company has not yet exercised any
options available to it to acquire additional units under that Agreement. Under
the terms of the Rockwell transaction, the Company was also assigned certain of
Rockwell's rights to the multi-mode, satellite-terrestrial unit technology, with
an intent of enabling the Company to produce the units through a third party
manufacturer.
Delays occurred in the development and manufacturing of the currently available
configurations of mobile telephones. Delays have also occurred and may continue
to be encountered in the development of additional models of mobile telephones
and other Subscriber Equipment. The development of additional Subscriber
Equipment may require additional capital investment by the Company, and such
equipment will require regulatory approval. See "Business -- Regulation."
Delays in sale of inventory, or a mismatch between inventory and customer
demand, may result in significant capital and liquidity issues for the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
Technological Developments; Satellite Insurance
- -----------------------------------------------
The SKYCELL System is highly complex and took many years and great expense to
develop. The introduction of additional services may require the development,
manufacture, integration and testing of technologically advanced components.
Unforeseen problems occurred in the testing and deployment of the SKYCELL System
which added to its cost and delayed its completion, and additional problems
could occur in the future.
AMSC-1 was fully deployed and operational on May 6, 1995. As required by its
loan agreements, the Company obtained insurance in the amount of $250.0 million
to cover in-orbit failure, including a partial failure, of AMSC-1 (the "In-Orbit
Insurance").
As previously reported, AMSC-1 has, in the past, experienced certain
technological anomalies, most significantly with respect to its eastern beam,
which resulted in the Company's receipt of $66.0 million of insurance proceeds
(as discussed below, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources"). While
the Company knows of no problem with any other beam, 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.
Following receipt of the insurance settlement, the Corporation renewed its
in-orbit insurance policy for a term of October 4, 1996, through October 5,
1997, in the amount of $184 million to cover in-orbit failure, including a
partial failure, of AMSC-1 (the "In-Orbit Insurance").
The loss payment under the In-Orbit Insurance is determined pursuant to a total
or partial loss formula. For example, if 50% of AMSC-1's insured capability or
estimated remaining life is lost, then a constructive total failure is deemed to
have occurred, and the Company would be entitled to the full insured amount.
Loss of the Alaska/Hawaii and Caribbean spotbeams would constitute a partial
failure, and the Company would receive 10% of the insured amount for each beam
lost. Under the In-Orbit Insurance, the loss of a CONUS spotbeam is deemed to
constitute a constructive total failure.
Under certain conditions, with respect to certain frequency and geographic
losses, the Company would receive payment for partial loss of Satellite
capacity. The In-Orbit Insurance provides that the amount of a partial loss must
exceed 5% of AMSC-1's insured capability before the Company is entitled to
receive any payments from such partial failure, but upon reaching the 5%
threshold the loss payment covers the entire loss, including the 5%. The
In-Orbit Insurance excludes from coverage certain performance margins customary
for such policies. The In-Orbit Insurance also contains exclusions customary in
such policies. The exclusions are, inter alia, (i) insurrection and similar acts
or governmental action to prevent such acts; (ii) hostile or war-like acts;
(iii) governmental confiscation; (iv) any laser, directed energy or nuclear
anti-satellite device; (v) nuclear reaction contamination; (vi) electromagnetic
or radio frequency interference; (vii) willful or intentional acts of the
Company and its agents; and (viii) certain third party claims against the
Company.
9
A portion of the proceeds from the In-Orbit Insurance must be used to repay
indebtedness and the remaining proceeds would be insufficient to construct,
launch and insure the launch of a replacement satellite. There can be no
assurance that additional financing will be available to construct, launch and
insure a replacement satellite or, if available, will be available on terms
favorable to the Company.
Relationship With TMI
- ---------------------
TMI's System. The SKYCELL System has been implemented in coordination with the
substantially identical mobile satellite system of TMI Communications and
Company, Limited Partnership ("TMI"), a Canadian limited partnership that has
been licensed to provide mobile voice and data services via satellite in Canada.
The general partner of TMI is a wholly-owned subsidiary of BCE Inc. (previously
Bell Canada Enterprises Inc.) ("BCE"), Canada's largest provider of
telecommunications services. The Company's and TMI's satellites and fixed voice
ground segments have been constructed by the same manufacturers, enabling the
Company and TMI to benefit from shared nonrecurring development costs. See
"Business -- Components of the SKYCELL System."
Arrangements for Sharing of Capacity. In connection with the design and
construction of their respective mobile satellite communications systems, the
Company and TMI entered into an agreement (the "Satellite Capacity Agreement")
which, among other things, provides for the Company and TMI to be able to obtain
capacity on the other's satellite at negotiated rates under certain
circumstances. Implementation of the Satellite Capacity Agreement requires the
approval of the FCC, may require the approval of the Canadian Radio-Television
and Telecommunications Commission ("Canadian CRTC") and will be submitted to
Industry Canada for review. See "Business -- Regulation."
The Satellite Capacity Agreement provided that the party that launched its
satellite first would make capacity available to the other at specified rates
for up to six months; pursuant to this option, TMI acquired approximately $1.3
million of capacity on AMSC-1 prior to its launch. This capacity utilization
terminated in June 1996, following transition of TMI's customers to its own
successfully launched satellite.
The Satellite Capacity Agreement also provides that, if each of the Company and
TMI has at least one satellite in commercial service, and one party's satellite
is at full capacity while the other party has surplus capacity, the party having
surplus capacity will, upon request, make such surplus capacity available to the
other party on a month to month basis (or such longer term as may be negotiated)
upon specified terms and conditions. However, if TMI's satellite is fully
utilized, the Company would not be able to obtain surplus satellite capacity
from TMI.
The Satellite Capacity Agreement also provides that if one party's satellite
suffers a partial or complete launch or in-orbit failure, it will be entitled to
receive from the other party (and the other party is required to provide to it,
regardless of whether their satellite is fully utilized) up to 50% of the
capacity of the other party's functioning satellite until it launches a
replacement satellite. During the first year following such failure, there would
be no charge for such capacity; for the following 30 months, such capacity would
be available at specified rates. In the event of a failure of TMI's satellite,
the reciprocal backup capacity arrangements could have an adverse effect on the
Company's business. Providing capacity to TMI on AMSC- 1 under such
circumstances would result in less available capacity to provide commercial
services at potentially higher rates to the Company's own subscribers. In
addition, in the event of a failure of AMSC-1, if the Company received backup
capacity from TMI, the amount of restoral capacity available to the Company
would be limited to 50% of the capacity of TMI's satellite, resulting in a
decrease in the revenue generating capability of the SKYCELL System.
10
Potential International Mobile Satellite Service Activity
- ---------------------------------------------------------
The United States and Canada are not the only countries developing regional
mobile satellite service systems. Australia, Mexico, Japan, the Russian
Federation and Brazil have or plan to have their own domestic and/or regional
mobile satellite service systems. The Russian Federation already has a low-power
system in operation. Australia's satellite was launched in August 1992. The
Mexican satellite was launched during November 1993 and the Mexican ground
segment uses the same CGS and Subscriber Equipment technology as AMSC.
In addition, several entities have proposed separate mobile satellite systems
for Africa and Asia that would utilize high-powered geosynchronous satellites
capable of communicating with hand-held telephones. Three of these entities are
Afro-Asian Satellite Communications ("ASC"); ASEAN Cellular System ("AceS"),
with sponsors in Indonesia and Thailand; and Asia Pacific Mobile Telephone
("APMT"), with sponsors in the Peoples' Republic of China and Singapore.
According to published reports, the ASC and APMT systems are to be built by
Hughes, and the AceS system will be built by Lockheed Martin.
These systems are incompatible with the SKYCELL System, but may eventually
encourage development of compatible technical standards for mobile terminals and
network access that the Company may be able to take advantage of in the future.
The Company is capable of providing, and is as a matter of general policy
permitted by the FCC to provide, service to Central America, Colombia and
Venezuela, but will require the permission of both the FCC and local authorities
before doing so.
Competition
- -----------
The mobile communications industry is highly competitive and is characterized by
constant technological innovation. The industry includes major domestic and
international companies, many of which have financial, technical, marketing,
sales, distribution and other resources substantially greater than those of the
Company and which provide, or plan to provide, a wider range of services than
will be provided by the Company.
The Company's products and services compete with a number of communications
services, including existing satellite services, terrestrial air-to-ground
services, and terrestrial land-mobile and fixed services, and may compete with
new technologies in the future. A number of the Company's competitors can or may
be able to provide services without certain characteristics of the SKYCELL
System that may affect end user demand such as the line-of-sight requirement
associated with satellite communications, the quarter-second delay in
communications associated with geosynchronous satellites, the cost of service
and the cost and design of Subscriber Equipment. See "Business -- Components of
the SKYCELL System."
The FCC has recently allocated large amounts of additional spectrum for
communications uses or potential uses that could compete with the Company, and
additional allocations of spectrum for such uses may occur in the future.
Satellite Services. L-band mobile satellite services are available
internationally through Inmarsat, a consortium of 70 countries that provides
low-power mobile communications services by satellite. Inmarsat offers maritime
voice, facsimile and data services. Inmarsat provides services in the Atlantic,
Pacific and Indian Ocean regions, using capacity on a combination of satellites.
In addition to operating several of its own dedicated satellites, Inmarsat
leases capacity from a number of sources, including the International
Telecommunications Satellite Organization ("Intelsat"), the European Space
Agency and COMSAT. Many of these satellites cover at least a portion of the
United States. Inmarsat's charter authorizes it to offer satellite-based
aeronautical service, and Inmarsat is in the process of seeking approval from
its signatories to modify its charter to include land mobile services. See
"Business -- Regulation."
In addition to international services, Inmarsat's facilities are currently used
to provide maritime voice and data services along the North American coast,
which is within the Service Area. Currently, there is uncertainty as to whether
such facilities also may be used to provide communications services on inland
waterways. The FCC has authorized the use of Inmarsat facilities to provide
services to aircraft in international flight within U.S. territory. With respect
to domestic land mobile service, federal government policy requires all but a
few government users with unique international needs to transition from the
Inmarsat system to the SKYCELL System now that the Company is providing land
mobile service. Current U.S. policy does not permit any more extensive use of
Inmarsat facilities to provide service in the United States than described
above. The FCC is currently reexamining the policy regarding provision of
domestic satellite service by intergovernmental organizations, and by other
foreign systems operators. A repeal or modification of this prohibition could
have an adverse effect on the Company's business.
11
Because Inmarsat's current system operates at a much lower power level than does
the SKYCELL System, its mobile terminals must be equipped with antenna systems
that are much larger and more expensive than those required for the SKYCELL
System. The Inmarsat system also has per minute charges higher than those
charged by the Company. Currently, prices for Inmarsat services are
approximately $3.00- $8.00 per minute, and maritime antennas are typically two
or more feet in diameter.
The latest generation of Inmarsat satellites, designated Inmarsat 3, were
launched in 1996 but are estimated to have only 15% of the total power of
AMSC-1. The Inmarsat 3 satellites will use a portion of the same spectrum
that AMSC-1 is designed to use. Inmarsat has introduced a terminal designed
to operate on these newer satellites. Inmarsat estimates that this terminal
will sell for $3,000 to $5,000, and that charges for using this terminal
will be approximately $2.40-$5.50 per minute. COMSAT, the U.S. signatory to
Inmarsat, sells a $3,000 briefcase terminal with a $4 per minute usage
charge and has filed applications with the FCC for both temporary and
permanent authority to offer service on such terminals. This terminal can
be used only with the Inmarsat-3 satellites referred to above.
Although there can be no assurances, the Company believes that its products and
services will be available at lower prices than those offered by Inmarsat.
Intelsat and PanAmSat, L.P. also offer voice, data and fax services to
vessels in international waters.
Other than the Company's mobile data service, the principal satellite-based
communications system available to the trucking market targeted by the Company
is Qualcomm Incorporated's ("Qualcomm") OmniTracs, a nationwide data service.
Qualcomm currently provides low-speed and limited mobile data services, using
Ku-band satellites, primarily to the trucking market but also to other
transportation companies and government agencies. Presently, Qualcomm is not
licensed to provide voice services and is not regulated by the FCC as a common
carrier. Qualcomm terminals currently are priced at approximately $3,000 to
$4,500. Qualcomm's use of high-frequency Ku-band spectrum for its mobile links
makes communications on its system more susceptible to interruption during
periods of heavy precipitation or due to heavy foliage than a higher speed
system using L-band spectrum.
Qualcomm's messaging and location service currently is used primarily by
the trucking industry and competes directly with the Company's mobile data
service. See "Business -- Mobile Data Communications Services." Qualcomm has an
established subscriber base and, as a result, it is unlikely that many of
Qualcomm's subscribers will switch to the Company's data service because of the
considerable investment that such subscribers have made in Qualcomm's equipment.
The Company does anticipate, however, marketing its voice services to Qualcomm's
subscribers, either as an added feature to Qualcomm's service or on a
stand-alone basis.
Two other entities, Newcomb Communications, Inc. and Mobile Datacom Corporation,
are authorized to operate mobile terminals for the provision of data and
position location services using leased L-band space segment on a GE
transponder. Another company, NORCOM Inc., has plans to offer packet data
services to the transportation industry. NORCOM is a VASP that will be using
AMSC-1 capacity, so any competitive inroads made against the Company's mobile
data service will be partly offset by revenue from NORCOM.
Low Earth and Intermediate Orbit Satellites. There are several proposals for
complex Low Earth Orbit ("LEO") and other non-geostationary global mobile
satellite systems, including Motorola, Inc.'s Iridium system and
Loral/Qualcomm's Globalstar system. An Inmarsat affiliate, ICO Global
Communications ("ICO"), is developing a global mobile telephone system that
would deploy twelve satellites in Medium Earth Orbit ("MEO"). The ICO satellites
are to be built by Hughes Space and Communications International. Hughes
Electronics Corporation, the parent of the Company's largest stockholder, is a
strategic investor in ICO and has the right to purchase a non-exclusive U.S.
national service wholesalership for the service.
12
LEO and MEO satellites circle the planet several times per day at orbits from
several hundred to ten thousand miles above the earth. These systems are being
designed to provide communications via hand-held telephones similar in size to
today's hand-held cellular telephones. If built, these systems will offer
certain advantages over the SKYCELL System in the consumer marketplace,
including the ability to support small hand-held telephones and, in certain
instances, these systems will have less transmission delay than the minimum
quarter-second delay characteristic of communications through geosynchronous
satellites. However, these systems are projected to be substantially more
expensive to build and operate than geosynchronous satellite systems such as the
SKYCELL System. Motorola, for example, has announced an estimated initial system
cost of $3.4 billion for its Iridium system, which, it has stated, will not be
in service before 1998. In addition, the LEO systems are not expected to provide
the nationwide dispatch business fleet capabilities which are supported by the
SKYCELL System or to support data service at any rate in excess of 2,400 bps.
Moreover, the SKYCELL service is focused primarily on the business-to-business
market segment, and not primarily on the consumer market which is the focus of
the handheld LEO system. There can be no assurance, however, that LEO systems
when deployed, will not have an adverse effect on the Company's business.
In January 1995, the FCC granted licenses to three of the six entities that have
applied for licenses to operate LEO systems, and the other three applicants
(including AMSC) were given until January 1996 to demonstrate their financial
qualifications. The FCC extended this deadline to September 1996. In September
1996, MCHI and Constellation submitted showings of their financial
qualifications, which have been opposed. The Company did not attempt to make
such a showing. The Company's application was subsequently dismissed. The
applications of MCHI and Constellation remain pending. See "Business --
Regulation -- The Company's License."
In addition to relatively complex LEO systems designed to provide mobile voice
services, there are a number of proposals for relatively simple LEO systems
providing only low-speed packet data services. One such system, operated by
Orbital Communications, received a license from the FCC in October 1994 and
currently provides service utilizing two satellites. When complete, the Orbcomm
system will compete for certain segments of the trucking industry. Hence, once
its full complement of satellites is operational, there can be no assurance that
Orbcomm will not have an adverse impact of the Company's business. Two more
systems were licensed to Starsys Global Positioning, Inc., and Volunteers in
Technical Assistance, respectively, in 1995.
Terrestrial Air-to-Ground Technologies. The Company believes that the primary
competitors to its corporate and general aviation communications services will
be existing air-to-ground analog radio telephone service providers. In addition
to such providers, the FCC has granted licenses to companies to provide digital
air-to-ground public access pay telephone services principally to passengers on
commercial airlines; certain of these licensees provide or have contracted to
provide service to a number of major domestic and international airlines. One
such licensee is Claircom Communications, which is majority-owned by AT&T
Wireless Services, Inc., a major stockholder of the Company, and provides
digital air-to-ground communications services to both the commercial and the
private aviation markets through its AirOne Communications Network. Several
other digital air-to-ground licensees have also expressed an interest in serving
the corporate and general aviation market.
Terrestrial Land-Mobile Technologies. Although the Company views the SKYCELL
System as complementary to cellular communications services rather than as a
direct competitor to such services, the Company currently expects the market for
its services to vary inversely with expansions of cellular service into rural
areas currently unserved by cellular. The Company expects the number of
potential subscribers in unserved areas to decline as rural service area
networks are built out, although the extent of the buildout will depend upon a
number of factors. Various forms of mobile radio service also may be available
in areas not served by cellular.
In the future, the Company may face competition from personal communications
services ("PCS") systems, a recently introduced and developing technology, which
have been defined by the FCC as radio communications that encompass mobile and
ancillary fixed communications services that provide services to individuals and
businesses and can be integrated with a variety of competing networks. Three
blocks of PCS spectrum, totaling 90 MHz, have been licensed nationwide. Of
these, a number of systems have begun operations, and many of the remaining
systems are expected to become operational in the coming year. Three more blocks
of PCS spectrum totaling 30 MHz have been auctioned recently and licensing of
those blocks currently is underway. Expansion in terrestrial areas is expected
to be limited by the need for a substantial investment in infrastructure.
13
Specialized Mobile Radio ("SMR") is a form of radio service authorized by the
FCC. Within the limitations of available spectrum and technology, SMR operators
provide mobile communications services to business and individual users,
including mobile telephone, dispatch, paging and data services. SMR radio
services have been expanding rapidly over the past ten years and converting from
analog to digital technology. Like the Company, their main markets are
businesses, public safety agencies, and transportation companies. Examples of
SMR-based systems are discussed below. For certain applications, such as mobile
telephone interconnect, dispatch data transmission and telemetry services, SMR
systems presently 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 utilized for voice
telephone services. In addition, the SMR service does not automatically provide
nationwide dispatch capability offered by the SKYCELL system.
Digital SMR services have recently been authorized under a waiver of the
existing SMR rules by the FCC. NEXTEL Communications, Inc., which provides SMR
services in numerous large metropolitan service areas in the United States and
has recently acquired several other competing SMR providers, is among several
leading providers of SMR constructing SMR networks using digital technology,
frequency reuse and lower power transmitters to transform its current SMR
service into cellular-like services, including voice telephone services.
The ARDIS system is a mobile data service that is a commercial by-product of the
development by International Business Machines Corporation and Motorola of their
hand-held data terminals and radio modems. This system is a two-way data network
which has served principally urban field maintenance personnel with portable
wireless data terminals. The network consists of a combination of company-owned
and leased capacity on existing SMR systems.
Geotek Communications, Inc. offers voice and data communication networks for the
trunked mobile radio market. Targeted primarily to small and medium-sized
businesses managing fleets of vehicles and mobile workforces, Geotek is focused
on providing metropolitan area voice and data coverage to a radius of about 50
miles. Currently, Geotek's service is available in 11 markets with plans to
expand to 26 markets by the end of 1997.
HighwayMaster Corp. offers voice and data communications to the long-haul
trucking industry. While offering nationwide service in the United States and
Canada, HighwayMaster's service is provided through existing cellular systems,
and therefore cannot reach the geographic area of the continental U.S.
(excluding Alaska) not served by cellular systems.
RAM Mobile Data, a joint venture of RAM Broadcasting and BellSouth Enterprises,
is a mobile data service targeted primarily at businesses with field service or
distribution and maintenance organizations. The network supports two-way data
communications, using hand-held and mobile data terminals and is expected to
serve primarily high density urban markets, which are not the primary focus of
the Company's marketing efforts.
NORCOM Inc., has plans to offer packet data services to the transportation
industry. NORCOM has purchased AMSC-1 capacity and is in the process of
commissioning a packet data system developed by Westinghouse. NORCOM's system is
expected to become fully operational during 1997. Although NORCOM's service is
targeted on the transportation industry, any competitive inroads made against
the Company's mobile data service will be partly offset by revenue under
NORCOM's VASP agreement.
Regulation
- ----------
The ownership and operation of the SKYCELL System is subject to the rules and
regulations of the FCC, which acts under authority granted by the Communications
Act of 1934, as amended (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. The FCC also licenses and regulates the interstate
operations of communications common carriers. The following is only a brief
summary of certain relevant provisions of the Federal communications laws and
the regulations of the FCC.
14
Because the Company is a nondominant common carrier and Commercial Mobile Radio
Service provider, its rates are not subject to traditional public utility
rate-of-return regulation. The Company must offer service on a first come, first
serve, reasonably nondiscriminatory basis, at just and reasonable rates. The
Company is not required to file tariffs with the FCC for its domestic services,
but tariffs are required for international services. The tariffs are presumed to
be lawful, and under current FCC rules, a tariff becomes effective automatically
one day after filing. The Company is required to lease channel capacity to
resellers. The FCC, however, may limit the Company's ability to make long-term
capacity commitments in order to assure that sufficient capacity is available
for short-term use by other parties.
The FCC has preempted state regulation of the Company's rates for satellite
capacity and acted broadly to preempt state regulation of many aspects of the
provision of commercial mobile radio services. The FCC, however, has left open
the possibility of states regulating certain limited aspects of intrastate
mobile services.
The FCC has pending a proposal that would require Commercial Mobile Radio
Service providers, possibly including the Company, to provide equal access,
i.e., to offer subscribers a choice of long distance carriers. If such a
requirement is imposed on the Company, it might have to reconfigure the CGS and
raise its rate structure, resulting in higher prices for service and subscriber
confusion.
In July 1996 the FCC required all Commercial Mobile Radio Service 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. The
Company 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 Company opposed the imposition of such a
requirement on its service. The Commission decided not to impose specific new
requirements on mobile satellite service ("MSS") providers at the present time,
but stated its expectation that such providers eventually would be required to
provide "appropriate access to emergency services."
The Communications Act now requires that providers of interstate interexchange
telecommunications services charge the same rates in every state, including
Puerto Rico and the U.S. Virgin Islands. The Company has opposed the imposition
of this requirement on its MSS system, seeking to preserve the flexibility to
charge more for service in areas covered by satellite beams that require more
satellite power. Although the Company does not currently charge more for this
service, more satellite power is required for communicating to and from mobile
terminals in Alaska, Hawaii, Puerto Rico, and the U.S. Virgin Islands.
Accordingly, the Company has asked the FCC for permanent exemption from its rate
integration requirement, or at least a temporary waiver of a year or more, which
would give the Company until at least September 15, 1997 to comply. The FCC has
granted the Company an interim waiver until its decision on the Company's
temporary waiver request.
The Company's License. The Company is licensed by the FCC to provide a full
range of mobile voice, data and dispatch services via satellite to land, air and
sea-based subscribers in the Service Area. The Company is also authorized to
provide fixed site voice and data services via satellite to locations within the
Service Area, so long as such services remain incidental to the Company's mobile
communications services. The Company's license authorizes it to build, launch
and operate three geosynchronous satellites in accordance with a specified
schedule. The Company 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 the Company'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 the Company's license. The Company believes that the
exercise of such authority to rescind the license is unlikely. The term of the
license for each of the Company's three authorized satellites is ten years,
beginning when the Company certifies that the respective satellite is operating
in compliance with the Company's license. The ten-year term of AMSC-1 began
August 21, 1995. Although the Company anticipates that the authorizations will
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.
15
The FCC has designated the Company as the licensee for both Mobile Satellite
Service and Aeronautical Mobile Satellite (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, the Company is required by the FCC to be capable
of providing priority and preemptive access for AMS(R)S traffic and to be
interoperable with and capable of transferring AMS(R)S traffic to international
and foreign systems providing such service. The Company currently anticipates it
will be able to meet these requirements without any material adverse effect on
its business. If the Company 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. If the Company 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. The Company 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 in connection with
the Company's application to operate 200,000 mobile telephones to provide voice
service, stating its concern that the mobile telephones may interfere with the
expected operation of aeronautical navigation and communications systems. With
the FAA's consent, the FCC granted the Company's application subject to certain
conditions, including that the grant may be modified after the interference
issue is studied. The FAA also filed comments in connection with the Company's
application to operate up to 30,000 mobile data terminals that were transitioned
from leased space segment to AMSC-1 in late 1995, stating its concern that the
mobile data terminals cannot be operated in compliance with the Company's
obligation to provide priority and preemptive access for AMS(R)S in the upper
L-band. The FAA has proposed that the Company operate the mobile data terminals
in the lower L-band. The FCC granted the Company temporary authority to operate
up to 15,100 mobile data terminals in the lower L-band. This number was
increased to 33,100 terminals pursuant to AMSC's acquisition of the mobile data
equipment and services previously licensed to Rockwell. There can be no
assurance that the Company will continue to receive authority to operate these
terminals in the lower L-band or that the Company will receive authority to
operate additional mobile data terminals in the lower L- band.
FCC licensees are subject to other restrictions imposed by the Communications
Act, including prohibitions on the assignment of a license and on the transfer
of control of a licensee without the prior consent of the FCC. The Company will
continue to require additional authorizations from the FCC to operate the
SKYCELL System.
Full implementation of the Satellite Capacity Agreement, with respect to those
provisions which have not yet been exercised, requires the approval of the FCC,
may require the approval of the Canadian CRTC and will be submitted to Industry
Canada for review.
GTE Non-Interference Agreement. The Company's license authorizes AMSC-1 to
operate using TT&C frequencies in the 12000/14000 MHz band. In 1992, the Company
and GTE Spacenet Corporation ("GTE Spacenet"), the owner of a satellite,
SPACENET IV, which operates at 101(degree) west longitude, the same orbital
location as AMSC-1 but not in the frequencies proposed to be used by the Company
for TT&C, entered into an agreement (the "GTE Spacenet Agreement") in order to
avoid an unacceptable level of interference among AMSC-1 and SPACENET IV or
certain other existing or future GTE Spacenet satellites (such other satellites
each being a "GTE Replacement Satellite"). The GTE Spacenet Agreement is binding
on all acquirors of or successors to GTE Spacenet's rights with respect to
SPACENET IV.
In the GTE Spacenet Agreement, GTE Spacenet and the Company each acknowledge
that for so long as they operate SPACENET IV and AMSC-1, respectively, in
accordance with the technical parameters set forth in the GTE Spacenet
Agreement, co-location of AMSC-1 and SPACENET IV and the operation of SPACENET
IV and AMSC-1 as currently proposed will result in interference not exceeding an
acceptable level of interference to transmissions to and from AMSC-1 and
SPACENET IV (the "Acceptable Level"). If interference materially exceeds the
Acceptable Level, it could adversely impact the reliability of any affected
transponder on SPACENET IV and the Company's TT&C operations, in which event GTE
Spacenet and the Company would have certain rights and obligations described in
the next paragraph.
The GTE Spacenet Agreement provides that if, despite GTE Spacenet's efforts, the
level of interference between AMSC-1 and a GTE Replacement Satellite materially
exceeds the Acceptable Level, the Company has certain rights to lease or buy the
communications capacity affected by such interference on the GTE Replacement
Satellite or that cause such interference to AMSC-1, or to require GTE Spacenet
to structure transponder service and to reallocate transponder usage on a basis
that avoids interference materially above the Acceptable Level. The Company also
has certain rights to request GTE Spacenet to construct future satellites in
such a way that will not cause interference above the Acceptable Level, in which
event the Company would be required to pay GTE Spacenet the resulting additional
costs. The procedures adopted in the GTE Spacenet Agreement will reduce, but
will not eliminate, the risk that interference will exceed the Acceptable Level.
16
If the foregoing procedures are not sufficient to avoid interference exceeding
the Acceptable Level between AMSC-1 and a GTE Replacement Satellite, the Company
at its discretion would be required either to cease to operate AMSC-1 in a
manner that causes interference to the GTE Replacement Satellite above the
Acceptable Level (which could have an adverse effect on the Company's business)
or, to the extent feasible and at its own expense, to relocate AMSC-1 to another
orbital location.
Alien Ownership. The Communications Act provides that 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 (AMSC Subsidiary, as the holder of the FCC license to construct
and operate the Company's mobile satellite services system, is subject to these
restrictions). Further, the Communications Act provides that no FCC license may
be held by a corporation controlled by another corporation 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 ("Alien Ownership"), if the
FCC finds that the public interest is served by the refusal or revocation of
such license (AMSC controls AMSC Subsidiary and therefore is subject to these
restrictions). The Communications Act and related FCC policies place similar
restrictions on Alien Ownership of other direct or indirect equity interests in
a licensee or its parent, as well as on nonequity investments by non-U.S.
citizens or entities or their representatives if such investments are combined
with material involvement by the investor in the business of the licensee or
parent. As of January 1, 1997, AMSC's Alien Ownership was estimated to be
approximately 21%. Among the steps that the Company might take in the future to
effect compliance with the FCC's Alien Ownership restrictions are: restricting
the purchase of shares by foreign investors; precluding the exercise of warrants
held by foreign investors; and, if possible, redeeming shares owned by foreign
stockholders from time to time. The stockholders' agreement to which AMSC and
certain of its stockholders are party also contains procedures for reducing the
risk that the Company will fail to comply with the FCC's Alien Ownership
restrictions as a result of the ownership of the stockholders party to that
Agreement or their respective holdings in AMSC. Each stockholder party to that
agreement who, together with its affiliates, owns in excess of five percent of
the Common Stock ("Specified Stockholder") is required to certify annually (and
in the event of changes) as to that party's level of Alien Ownership. If counsel
for AMSC is unable to confirm AMSC's continued compliance with the FCC's Alien
Ownership requirements, each Specified Stockholder whose Alien Ownership
attributable to AMSC has increased since the last certification as the result of
certain defined actions must, in general, take steps promptly to reduce the
Alien Ownership attributed to it or be subject to an option exercisable by AMSC
to purchase such portion of that stockholder's shares in AMSC for $1 per share,
as is necessary to effect compliance. There can be no assurance that these or
the other steps described above will be effective to insure AMSC's compliance
with the FCC's Alien Ownership requirements.
Spectrum Availability and International Frequency Coordination. The Company's
Subscriber Equipment will operate in L-band frequencies, which 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. AMSC-1 is designed to cross-connect the
L-band links from the Subscriber Equipment with their corresponding Ku-band
links to the feeder-link earth stations and the network communications
controller. Using Ku-band for the feeder links optimizes the use of the scarce
L-band spectrum. The use of the Ku-band, however, requires coordination with
terrestrial users, which could restrict the placement of feeder-link earth
stations. In the L-band frequencies, the Company is currently licensed to
operate in the 1544-1559/1645.5-1660.5 MHz bands. AMSC-1 is designed to be able
to operate over the 1530-1559/1631.5-1660.5 MHz bands. The Company has applied
for authorization to operate over the additional 1530-1544/1631.5-1645.5 MHz
bands. Of the 30 MHz assigned to the Company 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. The Company does not plan to operate on these three MHz of
bandwidth.
17
The Company has filed an application with the FCC to operate AMSC-1 using an
additional 28 MHz of L-band frequencies adjacent to those already assigned to
the Company by the FCC (the "lower L-band"). In June 1996, the FCC issued a
notice of proposed rulemaking proposing to assign to the Company the first 28
MHz of internationally coordinated L-band spectrum from either the upper or
lower portion of the MSS L- band. The Company 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 U.S. is able
to coordinate more than 28 MHz of L-band spectrum, the FCC proposes allowing
other applicants to apply for assignment of those frequencies. Certain entities
have filed with the FCC petitions to deny the Company's application and comments
opposing the assignment of additional frequencies to the Company, but the
Company believes that there are several reasons why the agency will grant the
Company's application. There is a possibility that the FCC will auction the
additional frequencies to the highest bidder. Congress has given the FCC
authority to auction spectrum for which there are mutually exclusive
applications, but it is the Company's position that these additional frequencies
should not be auctioned because only the Company is able to use the frequencies
efficiently. No competing applications have been filed to use the lower L-band.
In the Ku-band frequencies, the Company is currently licensed to operate AMSC-1
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. The Company has
applied for authority to operate using an additional 200 MHz of spectrum within
the same bands.
The SKYCELL System is restricted by the amount of L-band spectrum available to
it. Spectrum availability is a function not only of how much spectrum is
assigned to the Company 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
which 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.
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 ITU. The ITU is a specialized agency within the United
Nations organization responsible for the international regulation of
telecommunications. For the past several years, each of the countries and
international organizations that have 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. Representatives of the Company
have participated in certain of these negotiations in support of the U.S.
delegation.
The Company estimates that international coordination will make approximately 20
MHz of L-band spectrum available to the United States for AMSC-1. 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. Some of the spectrum that may be available to the Company may
include a portion of the 28 MHz lower L-band spectrum adjacent to the
frequencies already assigned to the Company by the FCC. In anticipation of that
possibility, the Company filed the application described above requesting
specific authority from the FCC to operate using these additional frequencies.
The ITU's Radio Regulations include a table of frequency allocations that
prescribe the permitted uses of the radio spectrum. A significant portion of the
spectrum assigned to the Company by the FCC is allocated internationally solely
to aviation safety communications on a primary basis. The U.S. government has
taken the position internationally that the U.S. mobile satellite service
system, while it will provide other communications services as well, qualifies
as an aviation safety system and, as a result, all of the system's
communications are entitled to use all of the spectrum that may be coordinated
for the system. While the Company is aware that some international organizations
may disagree with the U.S. position, the U.S. interpretation has not been
formally challenged at the ITU. There can be no assurances, however, that a
challenge will not occur in the future. As a result of the ITU satellite plan
for 10700-10950 MHz, 11200-11450 MHz and 12750-13250 MHz, the United States has
not coordinated international use of the 10700-10950 MHz, 11200-11450 MHz and
12750-13250 MHz band for earth station feeder links in Alaska, Hawaii, Puerto
Rico, and the Virgin Islands. Accordingly, feeder-link earth stations may not
operate in these locations. The Company does not currently anticipate a need for
earth stations in these areas, and if such a need developed, the Company would
not be able to operate feeder-link earth stations without ITU coordination.
There can be no assurance that the ITU would accept any such request.
18
Possible Additional Satellite Projects
- --------------------------------------
In December 1992, AMSC formed a new wholly-owned subsidiary, American Mobile
Radio Corporation ("AMRC"), for the purpose of pursuing an FCC authorization to
construct, launch and operate a domestic communications satellite system for the
provision of digital audio radio service ("DARS"). AMRC's application for the
authorization contemplates that AMRC will construct, launch and operate two
domestic communications satellites and that the system will be used largely to
provide subscription audio services. The application provides that the DARS and
the SKYCELL System will largely use separate facilities. There are several other
applications to provide DARS that may be mutually exclusive with those of AMRC.
On March 3, 1997, the FCC issued a Report and Order for auction of two licenses
for the provision of DARS. The Order provides for an auction among the four
original applicants, including AMRC, and provides for a deposit of $3 million,
together with a minimum bid of $8 million for each license. On March 14, 1997,
the Company entered into an agreement with WorldSpace, Inc. with respect to the
funding of AMRC, pursuant to which the investor has obtained an initial 20%
interest in AMRC. The auction is scheduled to begin April 1.
In April 1994, a subsidiary of the Company, Personal Communications Satellite
Corporation, filed an application to construct an MSS system in the 1970-1990
MHz and 2160-2180 MHz bands. The FCC subsequently allocated the 1970-1990 MHz
band to terrestrial personal communications services and has initiated a
proceeding to allocate the 1990-2025 MHz and 2165-2200 MHz bands to the Mobile
Satellite Service. Additional spectrum in the 2 GHz band was allocated
internationally to MSS at the 1995 World Radiocommunication Conference, but none
of this spectrum has been allocated domestically to MSS.
Employees
- ---------
At February 1, 1997, the Company had approximately 297 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.
- --------------------
AMSC-1 is owned by the Company, and has been pledged as security for all of the
Company's outstanding debt financing, other than amounts owed to Northern
Telecom Finance Corporation.
The Company leases its headquarters office space and network operations center
at 10802 and 10800 Parkridge Boulevard, Reston, Virginia 20191 (the "Reston
Site"). The lease has a term of at least ten years which runs from August 4,
1993, through August 3, 2003 (which may be extended at the Company's election to
a total of 15 years). The annual base rent is approximately $1.33 million,
adjusted annually as provided in the lease. The Company is utilizing the Reston
Site as both its corporate headquarters and as the network operations center for
the CGS, including the Company's primary feeder-link to AMSC-1. The Company
believes that the Reston Site is well-suited for its present and anticipated
needs.
In March 1994, the Company entered into an agreement with Washington
International Teleport ("WIT") to lease a satellite earth station located in
Alexandria, Virginia to serve as the Company's diversity site for its Reston,
Virginia site. The agreement contemplates a 10-year lease at a monthly fee of
$47,000, with advance payments aggregating $350,000 paid in three installments
upon execution of the agreement and on January 1 and February 1, 1995, and a
service start date of no earlier than March 1, 1995. At the end of the initial
term, the lease will automatically be extended for an additional five years,
with a monthly fee of $30,000, unless either WIT or the Company elect not to
renew the agreement.
In November 1996, the Company entered into a short term lease with Rockwell,
terminating on June 30, 1998, for purposes of transitioning to the Company the
multi-mode data operations acquired from Rockwell. The monthly lease rate is
approximately $17,000. The Lease is terminable by the Company on 30 days'
notice.
19
Item 3. Legal Proceedings.
- ---------------------------
In 1992, a former director of AMSC filed an Amended Complaint against the
Company alleging violations of the Communications Act of 1934, as amended, and
of the Sherman Act and breach of contract. The suit seeks damages for not less
than $100 million trebled under the antitrust laws plus punitive damages,
interest, attorneys' fees and costs. In mid-1992, the Company filed its response
denying all allegations. The Company's motion for summary judgment, filed on
March 31, 1994, was denied on April 18, 1996. The matter, originally set for
trial in November 1996, has been rescheduled for trial in December 1997.
Management believes that the complaint is without merit, and the ultimate
outcome of this matter will not be material to the Company's financial position,
results of operations or its cash flows.
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 1996.
20
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-30
Item 6 - Selected Financial Data F-31
Item 7- Management's Discussion and
Analysis of Financial Condition and
Results of Operations F-1
Item 8 - Financial Statements and
Supplementary Data F-8
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
---------------------
None.
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 21, 1997 (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, 1997.
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 to Financial Statements.......................................F-i
Independent Auditor's Report - Arthur Andersen LLP..................F-8
Consolidated Statements of Loss for the years ended
December 31, 1994, 1995 and 1996.................................F-9
Consolidated Balance Sheets as of December 31, 1996 and 1995.......F-10
Consolidated Statement of Stockholders' Equity for the period
December 31, 1993 through December 31, 1996.....................F-11
Consolidated Statements of Cash Flow for the years ended
December 31, 1994, 1995 and 1996................................F-13
Notes to Financial Statements......................................F-14
21
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
3. Exhibits.
3.1 -- Amended and Restated Certificate of Incorporation of AMSC
(as amended effective January 31, 1996) (Incorporated by
reference to Exhibit 10.15h to the Company's Quarterly
Report on Form 10-Q filed for the period ending June 30,
1996 (File No. 0-23044)) 3.2 -- Amended and Restated Bylaws
of AMSC (as amended and restated effective February 29,
1996)(Incorporated by reference to Exhibit 10.15h to the
Company's Quarterly Report on Form 10-Q filed for the period
ending June, 1996 (File No. 0- 23044))
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))
9.2 -- Voting Agreement dated as of March 1, 1994, between
Donaldson, Lufkin & Jenrette Securities Corporation and AMSC
(Incorporated by reference to Exhibit 9.2 to the Company's
Annual Report on Form 10-K filed for the fiscal year ending
December 31, 1993 (File No. 0-23044))
10.2 -- Sublease Agreement for Facility at Washington, D.C., dated
as of June 21, 1990, supplemented September 12, 1991,
modified November 4, 1992 and modified again January 7,
1993, between AMSC and Fulbright & Jaworski (Incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-70468))
10.3 -- 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))
10.3a -- 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))
10.3b -- 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))
22
10.7 -- 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))
10.8a -- [Reserved]
10.11 -- 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))
10.13* -- Amended and Restated Stock Option Plan (as amended effective
April 25, 1996) (Incorporated by reference to Exhibit 10.13
to the Company's Quarterly Report on Form 10-Q filed for the
period ending June 30, 1996 (File No. 0-23044))
10.13a*-- Form of Employee Stock Option Agreement (Incorporated by
reference to Exhibit 10.13a to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(File No. 0-23044))
10.13b*-- 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))
10.15 -- Credit Agreement, dated August 31, 1992 and amended November
17, 1992 and March 23, 1993, among AMSC Subsidiary
Corporation, Bank of America National Trust and Savings
Association, as Agent, and the Other Financial Institutions
Parties Thereto, further amended by letter agreement dated
October 14, 1993 between AMSC Subsidiary Corporation, Bank
of America National Trust and Savings Association, as Agent,
and the banks from time to time parties to the Credit
Agreement (Incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (Reg. No.
33-70468))
10.15a -- Third Amendment to Credit Agreement dated as of July 7,
1994, among AMSC Subsidiary Corporation, Bank of America
National Trust and Savings Association, as Agent, and the
Other Financial Institutions Parties Thereto (Incorporated
by reference to Exhibit 10.15a to the Company's Quarterly
Report on Form 10-Q filed for the period ending June 30,
1994 (File No. 0-23044))
10.15b -- Fourth Amendment to Credit Agreement dated as of March 15,
1995, among AMSC Subsidiary Corporation, Bank of America
National Trust and Savings Association, as Agent, and the
other Financial Institutions Parties Thereto. (Incorporated
by reference to Exhibit 10.15b to the Company's Quarterly
Report on Form 10-Q filed for the period ending March 31,
1995 (File No. 0-23044)).
10.15c -- Intercreditor and Collateral Agency Agreement dated as of
March 15, 1995, among the Secured Parties from time to time
party thereto and Bank of America National Trust and Savings
Association, as Collateral Agent. (Incorporated by reference
to Exhibit 10.15c to the Company's Quarterly Report on Form
10-Q filed for the period ending March 31, 1995 (File No.
0-23044))
23
10.15d -- Amended and Restated Security Agreement dated as of March
15, 1995, between AMSC Subsidiary Corporation and Bank of
America National Trust and Saving Association, as Collateral
Agent. (Incorporated by reference to Exhibit 10.15d to the
Company's Quarterly Report on Form 10-Q filed for the period
ending March 31, 1995 (File No. 0-23044))
10.15e -- Amended and Restated Parent Pledge Agreement dated as of
March 15, 1995, between AMSC and Bank of America National
Trust and Saving Association, as Collateral Agent.
(Incorporated by reference to Exhibit 10.15e to the
Company's Quarterly Report on Form 10-Q filed for the period
ending March 31, 1995 (File No. 0-23044))
10.15f -- Amended and Restated Continuing Guaranty dated as of March
15, 1995, made by AMSC in favor of Bank of America National
Trust and Saving Association, as Collateral Agent.
(Incorporated by reference to Exhibit 10.15f to the
Company's Quarterly Report on Form 10-Q filed for the period
ending March 31, 1995 (File No. 0-23044))
10.15g -- Fifth Amendment to Credit Agreement dated as of May 31,
1995, among AMSC Subsidiary Corporation, Bank of America
National Trust and Savings Association, as Agent, and the
other Financial Institutions Parties Thereto. (Incorporated
by reference to Exhibit 10.15g to the Company's Quarterly
Report on Form 10-Q filed for the period ending June 30,
1995 (File No. 0-23044))
10.15h -- Sixth Amendment to Credit Agreement dated as of September 5,
1995, among AMSC Subsidiary Corporation, Bank of America
National Trust and Savings Association, as Agent, and the
Other Financial Institutions Parties Thereto. (Incorporated
by reference to Exhibit 10.15h to the Company's Quarterly
Report on Form 10-Q filed for the period ending September
30, 1995 (File No. 0-23044))
10.15i -- Exhibit A to Sixth Amendment to Credit Agreement dated as of
September 5, 1995, among AMSC Subsidiary Corporation, Bank
of America National Trust and Savings Association, as Agent,
and the Other Financial Institutions Parties Thereto.
(Incorporated by reference to Exhibit 10.15i to the
Company's Quarterly Report on Form 10-Q filed for the period
ending September 30, 1995 (File No. 0-23044))
10.16 -- Deferred Payment Agreement, dated September 15, 1992 and
amended February 2, 1993, between AMSC Subsidiary
Corporation and Westinghouse Electric Corporation, further
amended by letter agreement dated October 18, 1993 between
AMSC Subsidiary Corporation and Westinghouse Electric
Corporation (Incorporated by reference to Exhibit 10.16 to
the Company's Registration Statement on Form S-1 (Reg. No.
33-70468))
10.16a -- Letter Agreement, dated August 30, 1994, between AMSC
Subsidiary Corporation and Westinghouse Electric Corporation
(Incorporated by reference to Exhibit 10.16a to the
Company's Quarterly Report on Form 10-Q filed for the period
ending September 30, 1994 (File No. 0-23044))
10.16b -- Letter Agreement, dated February 28, 1995, between AMSC
Subsidiary Corporation and Westinghouse Electric
Corporation. (Incorporated by reference to Exhibit 10.16b to
the Company's Quarterly Report on Form 10-Q filed for the
period ending March 31, 1995 (File No. 0-23044))
10.16c -- Letter Agreement to Deferred Payment Agreement, dated July
31, 1995, between AMSC Subsidiary Corporation and
Westinghouse Electric Corporation. (Incorporated by
reference to Exhibit 10.16c to the Company's Quarterly
Report on Form 10-Q filed for the period ending September
30, 1995 (File No. 0-23044))
24
10.16d -- Letter Agreement to Deferred Payment Agreement, dated
September 11, 1995, between AMSC Subsidiary Corporation and
Westinghouse Electric Corporation. (Incorporated by
reference to Exhibit 10.16d to the Company's Quarterly
Report on Form 10-Q filed for the period ending September
30, 1995 (File No. 0-23044))
10.16e -- Letter Agreement to Deferred Payment Agreement, dated
February 13, 1997, between AMSC Subsidiary Corporation and
Westinghouse Electric Corporation (filed herewith).
10.16f -- Letter Agreement to Deferred Payment Agreement, dated March
11, 1997, between AMSC Subsidiary Corporation and
Westinghouse Electric Corporation (filed herewith).
10.17 -- 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))
10.17a -- 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))
10.17b -- 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))
10.17c -- 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))
10.18 -- Mobile Terminal 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))
10.18a -- Addendum Number One dated June 29, 1994, to Mobile Terminal
Production Contract between AMSC Subsidiary Corporation and
Mitsubishi Electric Corporation (Incorporated by reference
to Exhibit 10.18a to the Company's Quarterly Report on Form
10-Q filed for the period ending June 30, 1994 (File
No.0-23044))
10.18b -- Memorandum of Agreement, dated November 30, 1994, between
AMSC Subsidiary Corporation and Mitsubishi Electric
Corporation (Incorporated by reference to Exhibit 10.18b to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
10.19 -- Codec License Agreement, dated February 2, 1993 and amended
March 26, 1993, between AMSC Subsidiary Corporation and
Digital Voice Systems, Inc. (Incorporated by reference to
Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
25
10.20 -- 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))
10.20a -- 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))
10.21 -- Authorized Service Provider Agreement, dated March 1, 1993,
between AMSC Subsidiary Corporation and McCaw Cellular
Communications, Inc. (Incorporated by reference to Exhibit
10.21 to the Company's Registration Statement on Form S-1
(Reg. No. 33-70468))
10.23 -- Term Loan Agreement dated May 28, 1993, between AMSC
Subsidiary Corporation and Northern Telecom Finance
Corporation, amended by letter agreement dated October 14,
1993 between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation. (Incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
10.23a -- First Amendment to Term Loan Agreement dated as of April 8,
1994, between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation (Incorporated by reference to
Exhibit 10.23a to the Company's Quarterly Report on Form
10-Q filed for the period ending June 30, 1994 (File No.
0-23044))
10.23b -- Second Amendment to Term Loan Agreement, dated August 1,
1995, between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation. (Incorporated by reference to
Exhibit 10.23b to the Company's Quarterly Report on Form
10-Q filed for the period ending September 30, 1995 (File
No. 0-23044))
10.23c -- Third Amendment to Term Loan Agreement, dated November 7,
1995, between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation (Incorporated by reference to
Exhibit 10.23c to the Company's Quarterly Report on Form
10-Q filed for the period ending September 30, 1996 (File
No. 0-23044))
10.23d -- Fourth Amendment to Term Loan Agreement, dated October 1,
1996, between AMSC Subsidiary Corporation and Northern
Telecom Finance Corporation (Incorporated by reference to
Exhibit 10.23d to the Company's Quarterly Report on Form
10-Q filed for the period ending September 30, 1996 (File
No. 0-23044))
10.24a -- Volume Purchasing Agreement, dated March 10, 1995, between
AMSC Subsidiary Corporation and TNL Navigation Limited
(Incorporated by reference to Exhibit 10.24a the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0-23044))
10.24b -- First Amendment to Volume Purchasing Agreement, dated March
10, 1995, between Trimble Navigation Limited and AMSC (filed
herewith)
10.24c -- Second Amendment to Volume Purchasing Agreement, dated
January 28, 1997, between Trimble Navigation Limited and
AMSC (filed herewith)
10.25 -- 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))
26
10.26 -- [Reserved]
10.27 -- 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))
10.28 -- Service Agreement for Mobile Telephone Service and related
tariff dated September 3, 1993, between AMSC Subsidiary
Corporation and Maritime Cellular Network, Inc.
(Incorporated by reference to Exhibit 10.28 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-70468))
10.28a-- Modification to Agreement for Mobile Telephone Service,
dated September 5, 1995, between AMSC Subsidiary Corporation
and Maritime Cellular Networks, Inc. (Incorporated by
reference to Exhibit 10.28a to the Company's Quarterly
Report on Form 10-Q filed for the period ending September
30, 1995 (File No. 0-23044))
10.30 -- Agreement dated October 11, 1993, among AMSC, Hughes
Communications Satellite Services, Inc., Singapore
Telecommunications Ltd., Space Technologies Investments,
Inc., MTel Space Technologies Corporation and MTel Space
Technologies, L.P. (Incorporated by reference to Exhibit
10.30 to the Company's Registration Statement on Form S-1
(Reg. No. 33-70468))
10.31 -- Form of Authorized Service Provider Agreement (Incorporated
by reference to Exhibit 10.31 to the Company's Registration
Statement on Form S-1 (Reg. No. 33- 70468))
10.32 -- 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))
10.33 -- 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))
10.34*-- Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.34 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
10.35 -- 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))
10.36a-- 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))
10.36b-- 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))
10.36c-- 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)) 27
10.37 -- Mobile Satellite Services Agreement dated November 15, 1993
and related tariff between AMSC Subsidiary Corporation and
National Satellite Networks, Inc. (Incorporated by reference
to Exhibit 10.37 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-70468))
10.37a-- First Amendment to Mobile Satellite Services Agreement
dated as of March 31, 1994, between AMSC Subsidiary
Corporation and National Satellite Network Holdings, Inc.
(Incorporated by reference to Exhibit 10.10a to the
Company's Quarterly Report on Form 10-Q filed for the period
ending June 30, 1994 (File No. 0-23044))
10.37b-- Facilities Management and Services Agreement dated November
1, 1995 between NORCOM and AMSC. (Incorporated by reference
to Exhibit 10.10a to the Company's Annual Report on Form
10-K filed for the period ending December 31, 1995 (File No.
0-23044))
10.40 -- Letter Agreement dated as of December 8, 1993, between AMSC
Subsidiary Corporation and Andersen Consulting (Incorporated
by reference to Exhibit 10.40 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993
(File No. 0-23044))
10.41*-- 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))
10.42 -- DTE Design, Development, and Manufacturing Agreement, dated
September 28, 1994, between AMSC Subsidiary Corporation and
Omnidata International, Inc. (Incorporated by reference to
Exhibit 10.42 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (File No.
0-23044))
10.43 -- Side Letter Agreement regarding sales of Non-Squint Mast
Antennas to AMSC, dated February 16, 1995, between AMSC
Subsidiary Corporation, Tecom Industries, Inc. and
Westinghouse Electric Corporation, acting though
Westinghouse Electronics Systems Company (Incorporated by
reference to Exhibit 10.43 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (File
No. 0-23044))
10.44 -- CAL Corporation Agreement for the development of the
aeronautical MSAT terminal, dated December 22, 1994, between
AMSC Subsidiary Corporation and CAL Corporation
(Incorporated by reference to Exhibit 10.44 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 0- 23044))
10.44a-- Skycell(sm) Satellite Telephone Service Authorized Sales
Sales Agent Agreement between AMSC and CAL Corporation dated
December 20, 1995 (Incorporated by reference to Exhibit
10.44a to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 (File No. 0-23044))
10.45 -- Contract for System Enhancement, dated February 1, 1994,
between AMSC Subsidiary Corporation and Westinghouse
Electric Corporation acting through Westinghouse Electronic
Systems Company (Incorporated by reference to Exhibit 10.45
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (File No. 0-23044))
28
10.46 -- Agreement for the Manufacture, Delivery and Installation of
Satellite Communications Equipment Supporting 6 TDMs per LES
and working to AMSC Satellite, dated November 21, 1994,
between Hughes Network Systems Limited and AMSC Subsidiary
Corporation (Incorporated by reference to Exhibit 10.46 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 0-23044))
10.46a-- Amendment One to Agreement Number 742-94, dated December
15, 1994, between Hughes Network Systems Limited and AMSC
Subsidiary Corporation (Incorporated by reference to Exhibit
10.46a to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No. 0-23044))
10.47 -- Form of Authorized Sales Agent Agreement (Incorporated by
reference to Exhibit 10.47 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (File
No. 0-23044))
10.48 -- Letter Agreement dated April 3, 1995 among J.P. Morgan
Securities Inc., Morgan Guaranty Trust Company of New York,
Toronto Dominion Securities (USA) Inc., The Toronto-Dominion
Bank, and American Mobile Satellite Corporation.
(Incorporated by reference to Exhibit 10.48 to the Company's
Quarterly Report on Form 10-Q filed for the period ending
June 30, 1995 (File No. 0-23044))
10.49 -- General Services Agreement between AMSC Subsidiary
Corporation and AT&T Corp., acting though its Network
Systems Group, dated April 4, 1995 (certain attachments have
not been provided and will be furnished to the Commission
upon request) (Incorporated by reference to Exhibit 10.49 to
the Company's Quarterly Report on Form 10-Q filed for the
period ending June 30, 1995 (File No. 0-23044))
10.50 -- Securities Purchase Agreement dated as of January 19, 1996
among AMSC Subsidiary Corporation, American Mobile Satellite
Corporation, Toronto Dominion Investments, Inc., Morgan
Guaranty Trust Company of New York, Hughes Communications
Satellite Services, Inc. and The Toronto Dominion Bank.
(Incorporated by reference to Exhibit 10.50 to the Company's
Current Report on Form 8-K filed January 23, 1996 (File No.
0-23044))
10.51 -- Agreement for Development of High-Gain Maritime Mobile
Terminals between AMSC and KVH Industries, Inc. dated
September 19, 1995. (Incorporated by reference to Exhibit
10.51 to the Company's Annual Report on Form 10-K filed for
the period ended December 31, 1996 (File No. 0-23044))
10.52 -- Private Voice Network Service, Satellite Telephone Service,
Facsimile, and Circuit Switched Data Service Agreement
between AMSC and AT&T Corporation dated October 17, 1995.
(Incorporated by reference to Exhibit 10.52 to the Company's
Annual Report on Form 10-K filed for the period ended
December 31, 1996 (File No. 0-23044))
10.53*-- 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))
10.54*-- Form of Executive Agreements (filed herewith)
10.55 -- $150,000,000 Credit Agreement dated as of June 28, 1996,
among AMSC Subsidiary Corporation, American Mobile Satellite
Corporation, the Banks Listed Therein, Morgan Guaranty Trust
Company of New York, as Documentation Agent, and Toronto
Dominion (Texas), Inc., as Administrative Agent.
(Incorporated by reference to Exhibit 10.55 to the Company's
Quarterly Report on Form 10-Q filed for the period ended
June 30, 1996 (File No. 0-23044))
29
10.56 -- $75,000,000 Credit Agreement dated as of June 28, 1996,
among AMSC Subsidiary Corporation, American Mobile Satellite
Corporation, the Banks Listed Therein, Morgan Guaranty Trust
Company of New York, as Documentation Agent, and Toronto
Dominion (Texas), Inc., as Administrative Agent.
(Incorporated by reference to Exhibit 10.56 to the Company's
Quarterly Report on Form 10-Q filed for the period ended
June 30, 1996 (File No. 0-23044))
10.57 -- Guaranty Issuance Agreement dated as of June 28, 1996, by
and among Hughes Electronics Corproation, Singapore
Telecommunications Ltd., Baron Capital Partners, L.P., AMSC
Subsidiary Corporation and American Mobile Satellite
Corporation (Incorporated by reference to Exhibit XII 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))
10.57a-- Amendment No. 1 to Guaranty Issuance Agreement, dated as of
March 27, 1997 (filed herewith)
10.58 -- Guaranty dated as of June 28, 1996, made by Hughes
Electronics Corporation to Toronto Dominion (Texas), Inc.,
as Administrative Agent. (Incorporated by reference to
Exhibit 10.58 to the Company's Quarterly Report on Form 10-Q
filed for the period ended June 30, 1996 (File No. 0-23044))
10.59 -- 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). (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))
10.60 -- 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))
10.61 -- 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))
11.1 -- Computation of Net Loss Per Share (filed herewith)
30
21.1 -- Subsidiaries of AMSC (filed herewith)
23.1 -- Consent of Arthur Andersen LLP (filed herewith)
23.2 -- Consent of Deloitte & Touche LLP (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))
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 November 22, 1996, the Company filed a Current Report on Form 8-K
describing in response to Item 2 - Acquisition or Disposition of Assets
the acquisition of the assets of Rockwell Collins,Inc. ("Rockwell")
relating to its Land Transportation Electronics' Mobile Communications
Satellite Service business (the "Business") through which Rockwell had
sold mobile messaging hardware and services to commercial trucking
fleets.
On February 6, 1997, the Company filed an Amendment to its Current
Report on Form 8-K providing under Item 7 - Financial Statements, Pro
Forma Financial Information and Exhibits the financial statements to
AMSC's acquisition previously filed on December 9, 1996.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AMERICAN MOBILE SATELLITE CORPORATION
By /s/GARY M. PARSONS
------------------
Gary M. Parsons,
President and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/GARY M. PARSONS President, Chief Executive March 28, 1997
- ------------------------ Officer and Director
Gary M. Parsons (principal executive officer)
/s/CHRISTOPHER COLAVITO
- ---------------------------- Vice President and Controller March 28, 1997
Christopher Colavito (principal accounting officer)
/s/JACK A. SHAW Chairman of the Board of Directors March 28, 1997
- ----------------------------
Jack A. Shaw
/s/STEVEN D. DORFMAN
- ---------------------------- Director March 28, 1997
Steven D. Dorfman
/s/DAVID A. JULIANO
- ---------------------------- Director March 28, 1997
David A. Juliano
/s/BILLY J. PARROTT
- ---------------------------- Director March 28, 1997
Billy J. Parrott
/s/ANDREW A. QUARTNER
- ---------------------------- Director March 28, 1997
Andrew A. Quartner
/s/RODERICK M. SHERWOOD, III
- ---------------------------- Director March 28, 1997
Roderick M. Sherwood, III
/s/MICHAEL T. SMITH
- ------------------------ Director March 28, 1997
Michael T. Smith
/s/ALBERT L. ZESIGER
- ------------------------ Director March 28, 1997
Albert L. Zesiger
32
INDEX
Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................F-1
Report of Independent Public Accountants.....................................F-8
Consolidated Statements of Loss..............................................F-9
Consolidated Balance Sheets.................................................F-10
Consolidated Statements of Stockholders' Equity.............................F-11
Consolidated Statements of Cash Flows.......................................F-13
Notes to Consolidated Financial Statements..................................F-14
Quarterly Financial Data....................................................F-30
Selected Financial Data.....................................................F-31
F-i
Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
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, "AMSC" 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. Until 1996,
the Company was a development stage company, engaged primarily in the design,
development, construction, deployment and financing of a mobile satellite
communications system (the "SKYCELL System"). In December 1995, the Company
initiated commercial voice service. During 1996, the Company transitioned to an
operating company, and currently operates North America's first high-powered,
satellite-based, digital mobile communications system. The SKYCELL System
includes the Company's first satellite ("AMSC-1") launched successfully in April
1995, and a fixed communications ground segment (the "CGS").
In addition to historical information, this Form 10-K Annual Report contains
forward-looking statements. The forward- looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the "Factors that could affect Future Operating Results" and
"Liquidity and Capital Resources" sections. Readers are cautioned not to place
undue reliance on these forward- looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission, including the Form 10-Q
Quarterly Reports to be filed by the Company subsequent to this Form 10-K Annual
Report and any Current Reports on Form 8-K filed by the Company.
Overview
- --------
The Company's future operating results could be adversely affected by a number
of uncertainties and factors, including (i) the timely completion and deployment
of all the Company's products and related services, including among other
things, availability of mobile telephones, data terminals and other equipment to
be used with the SKYCELL System ("Subscriber Equipment") being manufactured by
third parties over which the Company has limited control, (ii) the market's
acceptance of the Company's services, (iii) the ability and the commitment of
the Company's Authorized Sales Agents and other distribution channels to market
and distribute the Company's services, (vi) the Company's ability to modify its
organization, strategy and product mix to maximize the market opportunities in
light of changes therein, (v) competition from existing companies which provide
services using existing communications technologies and the possibility of
competition from companies using new technology in the future, (vi) capacity
constraints arising from the reconfiguration of AMSC-1 as previously disclosed,
(vii) additional technical anomalies that may occur within the SKYCELL System,
including those relating to AMSC-1, which could impact, among other things, the
operation of the SKYCELL System and the cost, scope or availability of in-orbit
insurance, (viii) the ability of the Company to fully integrate certain
components of the mobile data service, (ix) Subscriber Equipment inventory
responsibilities and liabilities assumed by the Company including the ability of
the Company to realize the value of its inventory, and (x) the Company's ability
to satisfy the conditions to borrowing or secure additional financing as may be
necessary.
The Company's operating results and capital and liquidity needs have been
materially affected by delays experienced in the development and deployment of
the SKYCELL System. In particular, the Company's marketing efforts have been
materially affected by delays experienced in the development and availability of
Subscriber Equipment. Initial Subscriber Equipment for Satellite Telephone
Service ("STS") use did not become commercially available until December 1995
with additional configurations not available until the second, third and fourth
quarters of 1996. In addition, the CGS did not support facsimile capability
until January 1997. The impact of these delays on the Company's marketing
F-1
efforts 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 SKYCELL System or Subscriber Equipment
will not be encountered in the future and not have an adverse impact on the
Company.
In addition, the markets for wireless communications services are characterized
by rapid technological and other changes. The Company's success depends, in
part, on its ability to respond and adapt to such changes. The delays
experienced in the deployment of the SKYCELL System and the availability of
Subscriber Equipment, together with changes in market conditions, have already
caused the Company to shift its marketing focus away from its initial satellite
roaming service consumer product to targeted business applications, such as the
maritime, natural resources, transportation, and telecommunications industries.
As of December 31, 1996, there were approximately 20,300 subscribers on the
SKYCELL System. Charges to operations for depreciation expense for the SKYCELL
System began in the fourth quarter of 1995 and accordingly, it is expected that
future charges will be significant. Additionally, the Company discontinued
capitalization of interest costs in the fourth quarter of 1995 upon the
commencement of full commercial service. Interest expense in 1996 is significant
as a result of borrowings under the Interim Financing, the Short-Term Notes, and
the Bank Financing, as well as the amortization of borrowing costs incurred in
conjunction with securing these facilities. It is anticipated that interest
costs will continue to be significant as a result of the Bank Financing,
discussed below.
The Company expanded its mobile data business late in 1996 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 AMSC-1. In the transaction, the
Company assumed Rockwell's existing customer contracts, and acquired Rockwell's
system infrastructure for delivering their mobile data product, as well as
Rockwell's rights to the multi-mode, satellite-terrestrial product. The assets
of the business were acquired through the assumption of the various contracts
and obligations of Rockwell relating to the business; no additional, direct
payments were made to Rockwell under the terms of the Asset Sale Agreement dated
as of November 22, 1996.
Years Ended December 31, 1996 and 1995
- --------------------------------------
Service revenues, which include both the Company's voice and data services,
approximated $9.2 million for 1996 as compared to $6.9 million for 1995. Service
revenue from voice services approximated $5.0 million in 1996, including
approximately $1.3 million attributable to satellite capacity leased to TMI
Communications and Company, Limited Partnership ("TMI"), a Canadian Limited
Partnership, under a commitment which was completed in May 1996. Service revenue
from the Company's data and position location services ("Mobile Data
Communications Service") approximated $4.0 million in 1996, as compared to $6.9
for 1995, a reduction of $2.9 million. Prior to 1996, the Company provided its
Mobile Data Communications Service using satellite capacity leased from the
Communications Satellite Corporation ("COMSAT"), the cost of which was passed
through to one customer ("Rockwell"). The decrease in Mobile Data Communications
Service revenue reflects the reduced revenue from Rockwell resulting from lower
billings for the use of the lower cost AMSC-1 versus billings attributable to
the leased COMSAT satellite applied on a pass-through basis. Of the data service
revenues, 36% and 75% were attributable to Rockwell for 1996 and 1995,
respectively. As previously mentioned in the Overview, the Company acquired the
dual mode mobile messaging and global positioning and monitoring service of
Rockwell in November 1996. At December 31, 1996 and 1995, receivables relating
to service revenues were $1.8 and $405,000, respectively.
Revenue from the sale of mobile data terminals and mobile telephones increased
from $1.9 million in 1995 to $18.5 million in 1996, primarily attributable to
(i) the Company's introduction of certain voice products in the fourth quarter
of 1995 and the resulting sale of mobile telephones, and (ii) the increased
availability of mobile data terminals in 1996 compared to 1995 following a
contract signed with a mobile data terminal manufacturer in February 1995.
The Company's costs and expenses have primarily increased in connection with the
start of full commercial service in December 1995. Cost of service and
operations for 1996, which includes costs to support subscribers and to operate
the SKYCELL System, were $30.5 million for 1996, an increase of $6.5 million
from 1995. Cost of service and operations for 1996 and 1995, as a percentage of
operating expenses, were 27% and 30%, respectively. The dollar increase in cost
F-2
of service and operations was primarily attributable to (i) additional personnel
and related costs to support both existing and anticipated customer demand, (ii)
increased costs associated with the on-going maintenance of the Company's
billing systems and the CGS, and (iii) $6.5 million of insurance expense for
in-orbit insurance coverage for AMSC-1, offset by the elimination of COMSAT
lease expense reflecting the transition of the Company's customers from the
leased satellite to AMSC-1. The decrease as a percentage of operating expenses
was attributable to the overall increase in total operating expenses. The cost
of equipment sold increased to $31.9 million in 1996 from $4.7 million in 1995,
and represented 22% of total operating expenses in 1996 versus 6% of total
operating expenses in 1995. The increase in both dollars and as a percentage of
operating expenses of the cost of equipment sold is primarily attributable to
(i) the Company's introduction of certain voice products in the fourth quarter
of 1995 and the resulting sale of mobile telephones, (ii) the availability of
mobile data terminals in 1996 compared to 1995, (iii) a $4.2 million charge in
1996 for the reconfiguration of certain components to better meet customer
requirements, and (iv) a $6.9 million write down of inventory to net realizable
value. Sales and advertising expenses were $24.5 million in 1996, compared to
$22.8 million in 1995. Sales and advertising expenses as a percentage of
operating expenses were 17% in 1996 and 29% in 1995. The dollar increase of
sales and advertising expenses was primarily attributable to (i) additional head
count and personnel related costs associated with the increase in sales staff,
and (ii) increased costs directly associated with the increase in subscriber
acquisition programs, offset by a $1.4 million charge, in 1995, associated with
the re-acquisition of defective equipment located at a customer site and
settlement of related disputes. The decrease as a percentage of operating
expenses was attributable to the overall increase in total operating expenses.
General and administrative expenses for 1996 were $17.5 million, an increase of
$1.0 million as compared to 1995. As a percentage of operating expenses, general
and administrative expenses represented 12% in 1996 and 21% in 1995. The dollar
increase in general and administrative expenses for 1996 compared to 1995 was
primarily attributable to (i) approximately $675,000 of severance costs
associated with a management restructuring and (ii) an increase in facilities
rents and utilities of $236,000. The decrease of general and administrative
expenses as a percentage of operating expenses was attributable to the overall
increase in operating expenses. Depreciation and amortization expense was $43.4
million and $11.2 million in 1996 and 1995, respectively, representing
approximately 29% and 15% of operating expenses for 1996 and 1995, respectively.
Both the dollar increase and the increase as a percentage of operating expenses
in depreciation and amortization expense was attributable to the commencement of
depreciation of both AMSC-1 and related assets and the CGS in the fourth quarter
of 1995.
Interest and other income was $552,000 in 1996 compared to $4.5 million in 1995.
The decrease was a result of lower average cash balances. The Company incurred
$15.2 million of interest expense in 1996 compared to $916,000 of interest
expense in 1995 reflecting (i) the discontinuation of interest cost
capitalization as a result of substantially completing the SKYCELL System in the
fourth quarter of 1995, (ii) the amortization of debt discount and debt offering
costs (including Guarantee Warrants (see "Liquidity and Capital Resources"))
relating to the Bridge Financing and Bank Financing (see "Liquidity and Capital
Resources"), and (iii) higher outstanding loan balances as compared to 1995.
Net capital reductions, including additions financed through vendor financing
arrangements, for 1996 for property and equipment were $51.0 million compared to
capital expenditures of $86.7 million in 1995. The decrease was largely
attributable to (i) the net proceeds of $65.8 million from the resolution of the
claims under the Company's satellite insurance contracts and policies (see
"Liquidity and Capital Resources"), (ii) the purchase, in the first quarter of
1995, of launch insurance at a cost to the Company of $42.8 million in
connection with the Company's launch contract with Martin Marietta Commercial
Launch Series, Inc., and (iii) the decrease in construction activity as certain
components of the CGS were completed.
Years Ended December 31, 1995 and 1994
- --------------------------------------
Service revenues increased $3.2 million to $6.9 million for 1995 compared with
$3.7 million for 1994. The increase in revenues was primarily attributable to
additional satellite capacity leased by a customer. Until December 1995, the
Company provided its Mobile Data Communications Service using satellite capacity
leased from COMSAT that the Company resold to its customers. In December 1995,
the Company transitioned all Mobile Data Communications Service customers from
the COMSAT satellite to AMSC-1. All of the Company's service revenues through
1995 are attributable to its Mobile Data Communications Service which commenced
revenue service in 1992. Of these service revenues, 75% and 70% were
attributable to one customer for the years ended December 31, 1995 and 1994,
F-3
respectively. At December 31, 1995 and 1994, receivables relating to operating
revenues were $405,000 and $446,000, respectively. Equipment revenues increased
to $1.9 million in 1995, as compared to $1.6 million in 1994, primarily as a
result of increased Mobile Data Communications Service customers.
Operating expenses were $79.3 million for 1995, an increase of $44.5 million
from 1994. The Company's operating expenses have primarily increased in
connection with the commencement of full commercial service in December 1995.
Cost of service and operations expenses were $23.9 million and $10.3 million,
representing approximately 30% of operating expenses for both 1995 and 1994. The
dollar increase in service and operations expenses was primarily attributable to
additional customer demand for the Company's Mobile Data Communications Service
requiring (i) additional satellite capacity leased from COMSAT, commencing in
December 1994, (ii) additional personnel and related costs to support both
existing and anticipated demand and (iii) $1.8 million of insurance expense
attributable to the 1995 portion of the in-orbit insurance premium for coverage
of AMSC-1. Cost of equipment sales increased from $2.3 million in 1994 to $4.7
million in 1995, and represented approximately 6% of operating expenses in 1995
as compared with 7% in 1994. The increase in the cost of equipment sold
reflected (i) an increased demand for Mobile Data Communications Service and
(ii) a $1.9 million write down of certain inventory components to net realizable
value. The decrease in cost of equipment sales as a percentage of operating
expenses was attributable to the overall increase in operating expenses. Sales
and marketing expenses were $23.8 million and $6.0 million, representing
approximately 29% and 17% of operating expenses for 1995 and 1994, respectively.
Both the dollar increase and the increase as a percentage of operating expenses
in sales and marketing expenses were primarily attributable to (i) significant
increases in head count and personnel related costs, including an increase in
the sales staff and the development and staffing of a customer service center to
support the commencement of full commercial service, (ii) increased advertising
and promotional costs associated with the commencement of full commercial
service, including $2.5 million of inventory charges associated with a
promotional program to promote sales of mobile telephones and mobile data
terminal inventory, (iii) a $1.8 million writedown of certain assets to net
realizable value, (iv) a $1.8 million charge associated with the temporary delay
in the delivery of certain subscriber equipment, (v) a $1.4 million charge
associated with the reacquisition of defective equipment located at a customer
site and settlement of related claims, and (vi) additional costs associated with
the transition of customers from COMSAT leased space capacity to AMSC-1. General
and administrative expenses were $16.7 million and $11.7 million, representing
approximately 21% and 33% of operating expenses for 1995 and 1994, respectively.
The dollar increase in general and administrative expenses was primarily
attributable to an increase of $5.9 million in personnel-related costs
associated with hiring and training staff to support the Company's information
systems and technology needs and to operate the billing systems developed by the
Company to support the commencement of full commercial service. The decrease as
a percentage of operating expenses in general and administrative expenses was
attributable to the overall increase in operating expenses. Depreciation and
amortization expense was $11.2 million and $4.5 million in 1995 and 1994,
representing approximately 14% and 13% of operating expenses for 1995 and 1994,
respectively. Both the dollar increase and the increase as a percentage of
operating expenses in depreciation and amortization expense was attributable to
the commencement of depreciation of both AMSC-1 and related assets and the CGS
in the fourth quarter of 1995.
Interest and other income was $4.5 million in 1995 compared to $8.5 million in
1994. The decrease was primarily attributable to lower average cash balances.
Interest expense in 1995 was $916,000. Interest costs in 1994 were capitalized
as part of the Company's construction activities.
The Company incurred $5.6 million and capitalized $4.7 million of interest costs
in 1995 compared to $3.5 million incurred and capitalized in 1994. The increase
in interest costs was primarily attributable to both higher borrowing rates and
higher outstanding loan balances. Capital expenditures, including additions
financed through vendor financing arrangements, for 1995 for property under
construction were $86.7 million compared to $58.8 million in 1994. The increase
in capital expenditures was primarily attributable to the purchase of launch
insurance at a cost to the Company of $42.8 million in connection with the
Company's launch contract with Martin Marietta Commercial Launch Services, Inc.,
offset by the decrease in construction activity as the components of the SKYCELL
System were readied for full commercial service. As a result of placing the
SKYCELL System in service in the fourth quarter of 1995, all related assets have
been reclassified to Property and Equipment in the accompanying consolidated
balance sheet.
F-4
Liquidity and Capital Resources
- -------------------------------
Adequate liquidity and capital are critical to the ability of the Company to
continue as a going concern and to fund subscriber acquisition programs
necessary to reach cash positive and profitable operations. To satisfy its
ongoing financing needs, the Company, on June 28, 1996, established a $225
million debt facility with Morgan Guaranty Trust Company and Toronto Dominion
Bank (the "Bank Financing") consisting of two facilities: (i) a $150 million
five-year, multi-draw term loan facility (the "Term Loan Facility") with
quarterly payments commencing March 31, 1999 through and including June 30,
2001, and (ii) a $75 million five-year revolving credit facility with a bullet
maturity on June 30, 2001 (the "Working Capital Facility"). As a result of the
receipt of insurance proceeds in excess of $60.0 million (see below), the Bank
Financing was subsequently reduced to $219 million. Proceeds from the Bank
Financing were used to repay the Company's interim financing and to refinance
short-term Vendor Financing, and will be used for general working capital
purposes. As of March 20, 1997, the Company had drawn down $144.0 million of the
Term Loan Facility at an annual interest rate of 5.8125% and $18.0 million of
the Working Capital Facility at annual interest rates ranging from 5.6875% to
5.8125%. The Company concluded that it could not complete the Bank Financing
without substantial credit support from its principal stockholders (the
"Guarantees"). HEC, Singapore and Baron Capital Partners, L.P. (the
"Guarantors") guaranteed $200 million of the Bank Financing (the "Guarantee
Agreement") in exchange for compensation consisting principally of cash fees and
warrants (the "Guarantee Warrants"), allowing the Guarantors to purchase 5
million shares of the Company's Common Stock at a price of $24 per share. Under
the terms of the Bank Financing and the Guarantee Agreement, borrowings under
the Bank Financing are contingent upon the satisfaction by the Company of
certain performance tests relating to net revenues, number of subscribers,
operating cash flow and earnings before interest, taxes, depreciation and
amortization. Because of the slower than anticipated build-up of subscribers and
related revenues, during the third and fourth quarters of 1996, the Company did
not meet all of these performance tests and required, and obtained, waivers from
the Guarantors permitting the Company to borrow up to $155 million under the
Bank Financing. The Company subsequently received an additional waiver from the
Guarantors to borrow up to $162 million under the Bank Financing.
On March 27, 1997, the Company reached agreement with the Guarantors to
eliminate the performance tests which must be satisfied for subsequent
borrowings. In consideration for this agreement, the Company agreed with the
Guarantors to reduce the exercise price of the Guarantee Warrants to $13 per
share and to issue additional warrants to the Guarantors relating to 500,000
shares at the reduced exercise price. The Guarantee Warrants, at the date of
original issuance, were valued at $19.0 million; the Guarantee Warrants, as
modified, have not yet been formally valued. The Guarantee Warrants expire on
June 28, 2001. The revised Guarantee Agreement places limitations on the
quarterly borrowings which the Company can make under the line as follows: $170
million, $180 million, $190 million and $200 million in the first, second, third
and fourth quarters of 1997, respectively. The Company would continue to be
subject to maintaining certain subscriber, revenue and debt to subscriber ratios
if the Guarantees are released. Additionally, the Bank Financing places certain
restrictions on the Company's ability to pay dividends, other indebtedness,
transactions with affiliates, and the acquisition of capital assets. The Bank
Financing is secured by the pledge of substantially all of the assets of the
Company and certain of its subsidiaries.
The Company may need additional financing in 1997 beyond the Bank Financing.
There can be no assurance that if additional financing is required, that such
financing will be available or that the terms thereof will be favorable to the
Company. If the Bank Financing is not sufficient, the Company may not have
adequate capital to fund its future operations.
Following negotiations of certain existing vendor debt arrangements (the "Vendor
Financing") and ground segment obligations ("Ground Segment Obligations"),
aggregating $11.1 million at December 31, 1996, the Company has arranged to
defer repayment of the Vendor Financing and a portion of the Ground Segment
Obligation from September 30, 1996, until various dates in 1997.
The effect of these matters, among others, is that the Company estimates that
its peak financing requirement in 1997 under the Bank Financing will be
approximately $190 million. The Company's actual peak financing requirements may
differ materially from this estimate based on, among other factors, shortfalls
from estimated levels of operating cashflows due to delays in the introduction
of certain products and services, the unavailability of Subscriber Equipment and
insufficient demand for the Company's inventory of Subscriber Equipment and/or
services. The Company expects that operating revenues will be insufficient to
cover operating expenses until sometime in 1998 or beyond. See "Overview."
F-5
The Company filed a claim for indemnity under its launch insurance with respect
to the anomalies leading to the reconfiguration of AMSC-1 (see "Other Matters").
On August 1, 1996, the Company reached a resolution of the claims under its
satellite insurance contracts and policies, and received gross proceeds in the
amount of $66.0 million which were used to repay the Working Capital Facility
and portions of the Term Loan Facility and the Vendor Financing. The carrying
value of the satellite was reduced by the amount of the net insurance proceeds,
which resulted in a reduction of depreciation charges beginning in the third
quarter of 1996.
At December 31, 1996, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory
approximating $28.6 million and capital expenditure commitments of approximately
$387,000. (See Note 10 to the consolidated financial statements).
A wholly owned subsidiary of the Company is subject to financing agreements that
limit the amount of cash dividends and loans that can be advanced to the
Company. At December 31, 1996, all of the subsidiary's net assets of
approximately $178.0 million were restricted under these agreements. These
restrictions will have an impact on American Mobile Satellite Corporation's
ability to pay dividends.
The Company has conducted preparatory work for the development of the next
generation of its mobile communications satellite ("AMSC-2"). Based on observed
demand for satellite mobile communication services, and the slower than
anticipated acquisition of subscribers, the Company does not expect to expend
substantial resources in 1997 to proceed with the construction of AMSC-2. If the
Company decides to proceed with the construction of AMSC-2 in 1998, the Company
would expect to launch AMSC-2 in 2001. If the Company decides to proceed with
the deployment of AMSC-2, the total cost of constructing, launching and insuring
AMSC-2 and constructing related ground systems is currently estimated to be
approximately $600-$700 million. The Company would be required to raise
substantial additional capital to finance this project.
Cash used in operating activities was $113.6 million for 1996 compared to $53.3
million for 1995. The increase in cash used in operating activities was
primarily attributable to (i) increased operating losses, (ii) inventory
purchases and (iii) the payment of accounts payable and accrued expenses
reflecting the availability of cash as a result of the Bank Financing. Cash
provided by investing activities was $50.9 million for 1996 compared to cash
used of $55.2 million in 1995. The increase was primarily attributable to (i)
the proceeds from the settlement of the Company's claims under its satellite
insurance contracts and policies and (ii) a reduction in cash used for capital
expenditures from $83.8 million in 1995 to $14.1 million in 1996. The reduction
in capital expenditures in 1996 was primarily due to the decrease in
construction activity as certain of the components of the SKYCELL System were
readied for full commercial service. Cash provided by financing activities was
$56.0 million in 1996 compared to cash used of $19.9 million in 1995, reflecting
the proceeds from the Bank Financing, offset by the repayment of certain Vendor
Financing and other long-term debt. Proceeds from the sale of debt securities
and Common Stock were $2.9 million and $10.2 million for 1996 and 1995,
respectively. Payments on long-term debt and capital leases were $63.2 million
and $29.0 million for 1996 and 1995, respectively. In addition, the Company also
incurred $10.8 million and $1.1 million of debt issuance costs associated with
the placement of the Bank Financing in 1996 and 1995, respectively. As of
December 31, 1996, the Company had $2.2 million of cash and cash equivalents and
working capital of $8.5 million.
F-6
Regulation
- ----------
Like other mobile communications service providers in the telecommunications
industry, the Company is subject to substantial and constantly changing
domestic, foreign and international regulations governing the operations of the
SKYCELL System and mobile data terminals and mobile telephones. Currently, there
are a variety of regulatory issues being considered by the Federal
Communications Commission (the "FCC") which could impact the Company's financial
condition and future operating results. Certain of these matters, including
proposals to (i) impose an equal access requirement on certain mobile radio
service providers, which may include the Company, and (ii) require that mobile
radio service providers make enhanced 911 emergency services available to mobile
radio callers, are discussed in Item 1, "Business -- Regulation," above. At the
present time there is not sufficient information available to determine what the
impact to the Company's financial condition or future operating results would
be, if any, from proposals that are currently being considered by the FCC.
Other Matters
- -------------
As previously reported, the satellite has, in the past, experienced certain
technological anomalies, most significantly with respect to its eastern beam
which resulted in the Company's receipt of $66.0 million of insurance proceeds
as discussed above (see "Liquidity and Capital Resources"). There can be no
assurance that the satellite will not experience subsequent anomalies that could
adversely impact the Company's financial condition, results of operations and
cash flows.
Accounting Standards
- --------------------
In 1995, the Financial Accounting Standards Board issued 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." This Statement
requires that impairment losses for such assets be based upon the fair value of
the assets. The Statement, applicable to fiscal years beginning after December
15, 1995, was adopted by management as the primary basis by which the Company
measures impairment of the SKYCELL System and its related components. The impact
of adopting the Statement in 1996 has not resulted in the recording of a
provision for impairment of long-lived assets, but there can be no assurance
that a material provision for impairment will not be required in the future.
Also during 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement encourages, but does
not require, a fair value based method of accounting for employee stock options
or similar equity instruments. During 1996, the Company elected to adopt the
provisions of SFAS No. 123 by disclosing - on a pro forma basis - the net loss
per share as if the fair value method had been adopted. Accordingly, adoption of
the Statement in the fiscal year ending December 31, 1996 had no impact on the
Company's financial condition or reported results of operations.
F-7
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, 1996 and 1995, and the related consolidated statements of loss,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 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 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Washington, D.C.
March 27, 1997
F-8
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Loss (dollars in thousands, except per share data)
for the years ended December 31, 1996, 1995, and 1994
Years Ended December 31
-----------------------
1996 1995 1994
REVENUES
Services $9,201 $6,873 $3,662
Sales of equipment 18,529 1,924 1,578
------ ----- -----
Total Revenues 27,730 8,797 5,240
COSTS AND EXPENSES:
Cost of service and operations 30,471 23,948 10,327
Cost of equipment sold 31,903 4,676 2,329
Sales and advertising 24,541 22,775 5,973
General and administrative 17,464 16,681 11,674
Depreciation and amortization 43,390 11,218 4,541
------ ------ -----
Operating Loss (120,039) (70,501) (29,604)
INTEREST AND OTHER INCOME 552 4,500 8,501
INTEREST EXPENSE (15,151) (916) -
---------- --------- ---------
NET LOSS ($134,638) ($66,917) ($21,103)
========== ========= =========
LOSS PER SHARE OF COMMON STOCK ($5.38) ($2.69) ($0.86)
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING DURING THE PERIOD (000's) 25,041 24,900 24,672
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
American Mobile Satellite Corporation and Subsidiaries
Consolidated Balance Sheets (dollars in thousands, except share data) as of
December 31, 1996 and 1995
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $2,182 $8,865
Inventory 38,034 10,552
Prepaid in-orbit insurance 5,080 4,823
Accounts receivable-trade, less allowance for doubtful accounts
of $1,548 in 1996 and $231 in 1995 6,603 1,375
Other current assets 14,247 7,412
------ ------
Total current assets 66,146 33,027
PROPERTY AND EQUIPMENT IN SERVICE - NET (gross balances include $134,737 and
$130,998 purchased from related parties through 1996 and 1995, respectively 267,863 362,105
DEFERRED CHARGES AND OTHER ASSETS:
(net of accumulated amortization of $10,597 in 1996 and $8,860 in 1995)
(gross balances include $3,000 paid to related parties in 1996) 16,164 3,219
------ -----
Total assets $350,173 $398,351
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $42,625 $34,462
Obligations under capital leases due within one year 3,931 2,446
Obligation to related party for equipment financing - 6,874
Current portion of long-term debt 11,113 60,990
------ ------
Total current liabilities 57,669 104,772
LONG-TERM LIABILITIES:
Obligations under Term Loan Facility 127,000 -
Capital lease obligations 2,557 6,052
Fair value of assets acquired in excess
of purchase price (Note 12) 3,395 -
Other long-term liabilities 852 -
------- -----
Total long-term liabilities 133,804 6,052
------- -----
Total liabilities 191,473 110,824
COMMITMENTS (Notes 9 and 10)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01: authorized 200,000 shares;
no shares issued - -
Common Stock, voting, par value $0.01: authorized 75,000,000 shares;
25,097,577 shares issued and outstanding in 1996; 24,961,130 shares
issued and outstanding in 1995 251 250
Additional paid-in capital 451,259 448,757
Common Stock purchase warrants 23,848 3,440
Unamortized guarantee warrants (17,100) -
Retained loss (299,558) (164,920)
--------- ---------
Total stockholders' equity 158,700 287,527
--------- ---------
Total liabilities and stockholders' equity $350,173 $398,351
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (dollars in thousands, except
share data) for the period from December 31, 1993 through December 31, 1996
Common Stock Additional
Amount Shares Par Paid-in
per share Value Capital
BALANCE, December 31, 1993 24,542,652 $245 $440,585
Common Stock issued in March, June, and September
pursuant to Launch Services Contract $21.00 245,712 3 5,158
Common Stock issued in May and December for exercise
of stock options and award of bonus stock 15.69 701 - 11
Common Stock issued in July under Stock Purchase Plan 10.84 9,690 - 105
Net Loss - - -
---------- ---- --------
BALANCE, December 31, 1994 24,798,755 248 445,859
Common Stock issued in January under Stock Purchase Plan 10.84 8,707 - 94
Common Stock issued in April pursuant to
Launch Services Contract 21.00 81,909 1 1,719
Common Stock issued throughout the year for exercise
of stock options and award of bonus stock 16.16 32,026 1 518
Common Stock issued in July under Stock Purchase Plan 10.73 22,170 - 238
Common Stock issued in March, June, September
and December under the 401(k) Savings Plan 18.76 17,563 - 329
Net Loss - - -
---------- ---- --------
BALANCE, December 31, 1995 24,961,130 250 448,757
Common Stock issued in January under Stock Purchase Plan 21.89 13,432 - 294
Common Stock purchase warrants issued in January for Bridge Financing - - -
Common Stock issued throughout the year for exercise
of stock options and award of bonus stock 16.41 37,320 - 612
Common Stock issued upon exercise of Warrants 22.53 37,500 1 844
Common Stock purchase warrants issued in July for Bank Financing - - -
Amortization of guarantee warrants - - -
Common Stock issued in July under Stock Purchase Plan 13.17 25,934 - 341
Common Stock issued in March, June, September
and December under the 401(k) Savings Plan 18.47 22,261 - 411
Net Loss - - -
---------- ---- --------
BALANCE, December 31, 1996 25,097,577 $251 $451,259
---------- ---- --------
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
Consolidated Statements of Stockholders' Equity (dollars in thousands, except
share data) for the period from December 31, 1993 through December 31, 1996
(continued)
Common Unamortized
Stock Purchase Guarantee Retained
Warrants Warrants Loss Total
BALANCE, December 31, 1993 $3,440 $ - ($76,900) $367,370
Common Stock issued in March, June, and September
pursuant to Launch Services Contract - - - 5,161
Common Stock issued in May and December for exercise
of stock options and award of bonus stock - - - 11
Common Stock issued in July under Stock Purchase Plan - - - 105
Net Loss - - (21,103) (21,103)
------- -------- -------- --------
BALANCE, December 31, 1994 3,440 - (98,003) 351,544
Common Stock issued in January under Stock Purchase Plan - - - 94
Common Stock issued in April pursuant to
Launch Services Contract - - - 1,720
Common Stock issued throughout the year for exercise
of stock options and award of bonus stock - - - 519
Common Stock issued in July under Stock Purchase Plan - - - 238
Common Stock issued in March, June, September
and December under the 401(k) Savings Plan - - - 329
Net Loss - - (66,917) (66,917)
-------- ------ -------- ---------
BALANCE, December 31, 1995 3,440 - (164,920) 287,527
Common Stock issued in January under Stock Purchase Plan - - - 294
Common Stock purchase warrants issued in January for Bridge Financing 2,253 - - 2,253
Common Stock issued throughout the year for exercise
of stock options and award of bonus stock - - - 612
Common Stock issued upon exercise of Warrants (845) - - -
Common Stock purchase warrants issued in July for Bank Financing 19,000 (19,000) - -
Amortization of guarantee warrants - 1,900 - 1,900
Common Stock issued in July under Stock Purchase Plan - - - 341
Common Stock issued in March, June, September
and December 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
-------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
American Mobile Satellite Corporation and Subsidiaries
Consolidated Statements of Cash Flows (dollars in thousands) for the years ended
December 31, 1996, 1995, and 1994
Years Ended December 31
-----------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($134,638) ($66,917) ($21,103)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount and issuance costs 5,721 - -
Depreciation and amortization 43,307 11,218 4,541
Changes in assets and liabilities:
Inventory (27,482) (10,438) (34)
Prepaid in-orbit insurance (257) (4,823) -
Trade accounts receivable (5,229) 218 (383)
Other current assets 1,970 (4,230) (964)
Accounts payable and accrued expenses 1,672 23,414 790
Other assets and liabilities 1,347 (1,730) (1,285)
----- ------- -------
Net cash used in operating activities (113,589) (53,288) (18,438)
CASH FLOWS FROM INVESTING ACTIVITIES:
Insurance proceeds applied to equipment in service 66,000 - -
Additions to property and equipment (14,054) (83,776) (50,762)
Proceeds from sales of short-term investments - 28,717 66,178
Purchases of short-term investments - - (94,895)
Deferred charges and other assets (1,000) (169) (763)
Other asset sales - - 438
------ ------ ------
Net cash provided by (used in) investing activities 50,946 (55,228) (79,804)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 1,247 2,569 5,277
Principal payments under capital leases (3,994) (538) (141)
Payments on notes payable - - (27,667)
Proceeds from short-term borrowings 70,000 - -
Payments on short-term borrowings (70,000) - -
Proceeds from Term Loan Facility 127,000 - -
Proceeds from debt issuance 1,700 7,630 19,000
Payments on long-term debt (59,190) (28,486) (4,000)
Debt issuance costs (10,803) (1,081) -
------ ------ -----
Net cash provided by (used in) financing activities 55,960 (19,906) (7,531)
Net decrease in cash and cash equivalents (6,683) (128,422) (105,773)
CASH AND CASH EQUIVALENTS, beginning of period 8,865 137,287 243,060
----- ------- -------
CASH AND CASH EQUIVALENTS, end of period $2,182 $8,865 $137,287
====== ====== ========
Supplemental Cash Flow Information:
Interest Payments $9,431 $5,574 $2,787
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
AMERICAN MOBILE SATELLITE CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
as of December 31, 1996, 1995 and 1994
- --------------------------------------
1. ORGANIZATION, BUSINESS AND LIQUIDITY
- ---------------------------------------
American Mobile Satellite Corporation was incorporated on May 3, 1988, by eight
of the initial applicants for the mobile satellite services license, following a
determination by the Federal Communications Commission ("FCC") that the public
interest would be best served by granting the license to a consortium of all
willing, qualified applicants. The FCC has authorized American Mobile Satellite
Corporation to construct, launch, and operate a mobile satellite services system
(the "SKYCELL System") to provide a full range of mobile voice and data services
via satellite to land, air and sea-based customers in a service area consisting
of the continental United States, Alaska, Hawaii, Puerto Rico, the U.S. Virgin
Islands, U.S. coastal waters, international waters and airspace and any foreign
territory where the local government has authorized the provision of service. In
March 1991, American Mobile Satellite Corporation transferred the mobile
satellite services license ("MSS license") to a wholly owned subsidiary, AMSC
Subsidiary Corporation ("AMSC Subsidiary"). American Mobile Satellite
Corporation has six other subsidiaries, two of which are inactive and four whose
limited activities do not require material resources at this time. On April 7,
1995, the Company successfully launched its first satellite ("AMSC-1"), from
Cape Canaveral, Florida.
American Mobile Satellite Corporation (together with its subsidiaries "AMSC" or
the "Company") is devoting its efforts to expanding a developing business. As
further discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations, this effort involves substantial risk. Specifically,
future operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies. The
integration of the components of the SKYCELL System is a complex undertaking.
Delays in the integration of the SKYCELL System have already occurred and there
can be no assurance that further delays will not occur. 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 operating
results.
Liquidity and Financing Requirements
- ------------------------------------
Adequate liquidity and capital are critical to the ability of the Company to
continue as a going concern and to fund subscriber acquisition programs
necessary to reach cash positive and profitable operations. To satisfy its
ongoing financing needs, the Company, on June 28, 1996, established a $225
million debt facility with Morgan Guaranty Trust Company and Toronto Dominion
Bank (the "Bank Financing") consisting of two facilities: (i) a $150 million
five-year, multi-draw term loan facility (the "Term Loan Facility") with
quarterly payments commencing March 31, 1999 through and including June 30, 2001
and (ii) a $75 million five-year revolving credit facility with a bullet
maturity on June 30, 2001 (the "Working Capital Facility"). As a result of the
receipt of insurance proceeds in excess of $60.0 million (see below), the Bank
Financing was subsequently reduced to $219 million. Proceeds from the Bank
Financing were used to repay the Interim Financing and the Short-Term Notes (see
Note 7) and to refinance existing short-term vendor debt arrangements (the
"Vendor Financing"), and for general working capital purposes. As of March 20,
1997, the Company had drawn down $144.0 million of the Term Loan Facility at an
annual interest rate of 5.8125% and $18.0 million of the Working Capital
Facility at annual interest rates ranging from 5.6875% to 5.8125%. The Company
concluded that it could not complete the Bank Financing without substantial
credit support from its principal stockholders (the "Guarantees"). HEC,
Singapore and Baron Capital Partners, L.P. (the "Guarantors") guaranteed $200
million of the Bank Financing in exchange for compensation consisting
principally of cash fees and warrants (the "Guarantee Warrants"), allowing the
Guarantors to purchase 5 million shares of the Company's Common Stock at a price
of $24 per share. Under the terms of the Bank Financing and the Guarantee
Agreement, borrowings under the Bank Financing are contingent upon the
satisfaction by the Company of certain performance tests relating to net
revenues, number of subscribers, operating cash flow and earnings before
interest, taxes, depreciation and amortization. Because of the slower than
anticipated build-up of subscribers and related revenues, during the third and
fourth quarters of 1996, the Company did not meet all of these performance tests
and required, and obtained, waivers from the Guarantors permitting the Company
to borrow up to $155 million under the Bank Financing. The Company subsequently
received an additional waiver to borrow up to $162 million under the Bank
Financing.
F-14
On March 27, 1997, the Company reached agreement with the Guarantors to
eliminate the performance tests which must be satisfied for subsequent
borrowings. In consideration for this agreement, the Company agreed with the
Guarantors to reduce the exercise price of the Guarantee Warrants to $13 per
share and to issue additional warrants to the Guarantors relating to 500,000
shares at the reduced exercise price. The Guarantee Warrants, at the date of
original issuance, were valued at $19.0 million; the Guarantee Warrants, as
modified, have not yet been formally valued. The Guarantee Warrants expire on
June 28, 2001. The revised Guarantee Agreement places limitations on the
quarterly borrowings which the Company can make under the line as follows: $170
million, $180 million, $190 million and $200 million in the first, second, third
and fourth quarters of 1997, respectively. The Company would continue to be
subject to maintaining certain subscriber, revenue and debt to subscriber ratios
if the Guarantees are released. Additionally, the Bank Financing places certain
restrictions on the Company's ability to pay dividends, other indebtedness,
transactions with affiliates, and the acquisition of capital assets. The Bank
Financing is secured by the pledge of substantially all of the assets of the
Company and certain of its subsidiaries.
The Company may need additional financing in 1997 beyond the Bank Financing.
There can be no assurance that if additional financing is required, that such
financing will be available or that the terms thereof will be favorable to the
Company. If the Bank Financing is not sufficient, the Company may not have
adequate capital to fund its future operations. The Company expects that
operating revenues will be insufficient to cover operating expenses until
sometime in 1998 or beyond.
The Company filed a claim for indemnity under its launch insurance with respect
to the anomalies leading to the reconfiguration of AMSC-1 (see "Other Matters").
On August 1, 1996, the Company reached a resolution of the claims under its
satellite insurance contracts and policies, and received gross proceeds in the
amount of $66.0 million which were used to repay the Working Capital Facility
and portions of the Term Loan Facility and the Vendor Financing. The carrying
value of the satellite was reduced by the amount of the net insurance proceeds,
which resulted in a reduction of depreciation charges beginning in the third
quarter of 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------
Development Stage Company
- -------------------------
Consistent with Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises," the Company ceased
to be considered a development stage company in the fourth quarter of 1996 with
the generation of significant revenue from its voice products and services.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most significant estimates relate to the recorded
reserves for inventory and committed inventory purchases and the allowance for
doubtful accounts receivable.
Consolidation
- -------------
The consolidated financial statements include the accounts of AMSC and its
subsidiaries, all of which are wholly owned. All significant intercompany
transactions and accounts have been eliminated.
F-15
Cash Equivalents and Short-term Investments
- -------------------------------------------
The Company considers highly liquid investments with remaining maturities of 90
days or less at the time of acquisition to be cash equivalents. Short-term
investments are stated at amortized cost, which approximates market and consist
of securities with maturities in excess of three months but less than one year.
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.
For purposes of evaluating market value of its inventory, consideration is given
to the rapid technological changes which occur in the wireless
telecommunications industry and the impact those changes may have on the
saleability of its inventory. In evaluating the realizability of the Company's
inventory investment, management considers both inventory on hand and inventory
which it has committed to purchase. During 1996 and 1995, the Company recorded
charges to Cost of Equipment Sold in the amount of $11.1 million and $1.9
million, respectively, related to the realizability of the Company's inventory
investment.
Fair Value of Financial Instruments
- -----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of the fair value of certain financial instruments. For purposes of
this disclosure, the fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between willing
parties. Cash and cash equivalents, trade accounts receivable and accounts
payable approximate fair value because of the relatively short maturity of these
instruments. As a result of the Guarantees by certain related parties (see Note
1) associated with the Bank Financing, it is not practicable to estimate the
fair value of the Bank Facility. The fair value of other debt approximates
carrying value because the related debt has variable interest cost based
on current market rates.
Concentrations of Credit Risk
- -----------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments, short-term
investments and accounts receivable. The Company places its temporary cash
investments and short-term investments in debt securities such as commercial
paper, time deposits, certificates of deposit, bankers acceptances, and
marketable direct obligations of the United States Treasury. The Company's
intent is to hold its investments in debt securities to maturity. To date, the
majority of the Company's business has been transacted with telecommunications,
natural resources and transportation companies, including maritime and trucking
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. Exposure to losses on trade accounts
receivable, for both service and for inventory sales, is principally dependent
on each customer's financial condition. Sales to one customer approximated 16%
and 75% of service revenues for the years ended December 31, 1996 and 1995,
respectively. The Company anticipates that its credit risk with respect to trade
accounts receivable in the future will continue to be diversified due to the
large number of customers expected to comprise the Company's base and their
expected dispersion across many different industries and geographies.
Property and Equipment
- ----------------------
Property and equipment is recorded at cost and depreciated over its useful life
using the straight line method. Assets recorded as capital leases are amortized
over the shorter of their useful lives or the term of the lease. The estimated
useful lives of office furniture and equipment vary from 2-10 years, and the
Communications Ground Segment ("CGS") is depreciated over 8 years.
F-16
In the fourth quarter of 1995, with the successful completion of the
construction of the Company's SKYCELL System and the offering and availability
of certain voice products and related services, the Company transferred assets
previously classified as Property under Construction to Property and Equipment
in Service. In connection with this transition, the Company commenced
depreciation of the SKYCELL System in the fourth quarter of 1995. The Company is
depreciating the Space Segment over its estimated useful life of 10 years, which
was based on several factors, including current conditions and the estimated
remaining fuel of AMSC-1. The original estimated useful live is periodically
reviewed using current Telemetry Tracking and Control ("TT&C") data. To date, no
significant change in the original estimated useful life has resulted. The
telecommunications industry is subject to rapid technological change which may
require the Company to revise the estimated useful lives of AMSC-1 and the CGS
or to adjust their carrying amounts. The Company has also capitalized certain
costs to develop and implement its computerized billing system. These costs are
included in property and equipment and are depreciated over 8 years.
Software Development Costs
- --------------------------
The Company capitalizes costs related to the development of certain software to
be used with its mobile messaging and position location service (the "Mobile
Data Communications Service") product. The Company commenced amortization of
these costs in the first quarter of 1996. These costs will be amortized over
three years. As of December 31, 1996 and 1995, net capitalized software
development costs were $3.6 million and $1.9 million, respectively, and are
included in property and equipment in the accompanying balance sheets.
Deferred Charges and Other Assets
- ---------------------------------
Other assets primarily consist of unamortized financing costs and debt issue
costs associated with the existing Vendor Financing arrangements and the Bank
Financing. The Company had $14.9 million and $2.4 million of unamortized
financing costs recorded at December 31, 1996 and 1995, 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. Total expenses related to development
of technologies and improvement to technologies approximated $57,000, $1.8
million, and $1.0 million for 1996, 1995, and 1994, respectively.
Advertising Costs
- -----------------
Advertising costs are charged to operations in the year incurred and totaled
$6.0 million, $6.5 million, and $1.2 million for 1996, 1995, 1994, 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. Effective January
1, 1996, the Company adopted SFAS No. 123 by making the required footnote
disclosures (see Note 5). Accordingly, adoption of this new standard has no
impact on the Company's reported financial position or results of operations.
F-17
Assessment of Asset Impairment
- ------------------------------
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" requires that impairment losses for such
assets be based upon the fair value of the assets, and was adopted by the
Company as the primary basis by which the Company measures impairment of the
SKYCELL System and its related components. The impact of adopting the Statement
in 1996 has not resulted in the recording of a provision for impairment of
long-lived assets, but there can be no assurance that a material provision for
impairment will not be required in the future.
Loss Per Share
- --------------
Loss per common share is based on the weighted-average number of shares of
Common Stock outstanding during the period. Stock options and warrants are not
reflected in the computation since their effect would be antidilutive.
Reclassifications
- -----------------
Certain amounts for prior years have been reclassified to conform with current
year presentation.
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 noncumulative.
Certain controlling stockholders of the Company have entered into a
Stockholders' Agreement (the "Agreement") which contains provisions relating to
the election of directors, procedures for maintaining compliance with the FCC's
alien ownership restrictions, certain restrictions on the transfer, sale and
exchange of Common Stock, and procedures for appointing directors to the
Executive Committee of the Board, among others. The Agreement continues in
effect until terminated by an affirmative vote of holders of three-fourths of
the Company's Common Stock held by parties to the Agreement. Other matters
relating to the Company's governance of the Company are set forth in the
Certificate of Incorporation and Bylaws.
As of December 31, 1996, the Company had reserved Common Stock for future
issuance as detailed below.
Shares issuable upon exercise of warrants, Interim Financing Warrants
and Guarantee Warrants 5,974,596
Amended and Restated Stock Option Plan for Employees 1,929,446
Stock Option Plan for Non-Employee Directors 50,000
Employee Stock Purchase Plan 220,067
Defined Contribution Plan 35,176
--------
Total 8,209,285
=========
F-18
4. PROPERTY AND EQUIPMENT
- -------------------------
Property and equipment consists of the following:
December 31
(in thousands) 1996 1995
Space Segment $187,386 $253,302
Ground Segment 104,227 95,650
Office equipment and furniture 16,684 13,494
Mobile Data Communications Service 21,013 18,216
------ ------
329,310 380,662
Less accumulated depreciation and amortization 61,447 18,557
------ ------
Property and equipment, net $267,863 $362,105
======== ========
F-19
5. STOCK OPTIONS
- ----------------
The Company has two active stock option plans. The American Mobile Satellite
Corporation 1989 Amended and Restated Stock Option Plan for Employees (the
"Plan") permits the grant of non-statutory options and the award of bonus stock
up to a total of 2 million shares of Common Stock. On January 24, 1996, the
Board authorized an amendment to the Plan to increase the number of shares
authorized to 3.5 million, subject to shareholder approval in May 1997. 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. The Director Plan was approved by the shareholders on
April 27, 1995. 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.
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, 1993 388,127 370,228 $18.70
Granted (54,105) 54,105 17.82
Exercised and awarded -- (701) 15.69
Forfeited 15,856 (15,856) 18.29
------- --------
Balance, December 31, 1994 349,878 407,776 18.60
Additional shares authorized for grant 50,000 -- --
Granted (275,480) 275,480 16.88
Exercised and awarded -- (32,026) 16.10
Forfeited 60,380 (60,380) 18.50
------- --------
Balance, December 31, 1995 184,778 590,850 17.94
Additional shares authorized for grant 1,241,138 -- --
Granted (1,565,272) 1,565,272 18.37
Exercised and awarded -- (37,320) 16.41
Forfeited and cancelled 623,356 (623,356) 23.23
-------- ---------
Balance, December 31, 1996 484,000 1,495,446 $16.22
Options Exercisable at December 31:
1996 276,804 $17.97
1995 219,272 $18.31
1994 175,471 $17.73
As described in Note 2, the Company accounts for stock compensation costs in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
F-20
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, the
net loss would have been increased by $2.3 million ($.09 per share) and $664,000
($.03 per share) in 1996 and 1995, respectively. As required by SFAS No. 123,
the fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1996 and
1995: no historical dividend yield; an expected life of 10 years; historical
volatility of 45% and a risk-free rate of return ranging from 5.5% to 7.7%. The
weighted-average fair values of the options granted during 1996 and 1995 were
$6.93 and $6.44 per share, respectively. The weighted-average contractual lives
of the options outstanding at December 31, 1996, was 8.7 years, and the options
vested at December 31, 1996, had a weighted-average contractual life of 5.8
years.
6. INCOME TAXES
- ---------------
The Company accounts for income taxes under the liability method as required in
the Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
laws and rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Under this method, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Potential
tax benefits, related to net operating losses and temporary differences, have
been recorded as an asset, and a valuation allowance for the same amount has
been established. The Company has paid no income taxes since inception.
The following is a summary of the Company's net deferred tax assets.
December 31
(in thousands) 1996 1995
Net Operating Loss for Income Tax Purposes 170,710 $40,358
Deferred Taxes Related to Temporary Differences:
Tangible asset bases, lives and depreciation methods (64,889) (16,997)
Other 6,229 3,578
------ -------
Total deferred tax asset 112,050 26,939
Less valuation allowance (112,050) (26,939)
--------- --------
Net deferred tax asset $ -- $ --
========= ========
Significant timing differences affecting deferred taxes in 1996 were the
treatment of costs associated with the Space Segment for financial reporting
purposes compared to tax purposes. As of December 31, 1996, the Company had net
operating loss carryforwards ("NOLs") of $424.7 million. The NOLs expire in
years 2004 through 2011. 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.
7. LONG-TERM DEBT
- -----------------
December 31
(in thousands) 1996 1995
Term Loan Facility $127,000 $ ---
Launch Services Financing --- 40,000
Deferred Payment Agreement 5,180 14,196
Equipment Financing Agreement --- 6,874
Term Loan Agreement 5,933 6,794
----- -----
138,113 67,864
Less current maturities 11,113 67,864
------ ------
Long-term debt $127,000 $ ---
======== =========
F-21
Bank Financing - Term Loan and Working Capital Facility
- -------------------------------------------------------
To satisfy its ongoing financing needs, the Company, on June 28, 1996,
established a $225 million debt facility with Morgan Guaranty Trust Company and
Toronto Dominion Bank (the "Bank Financing") consisting of two facilities: (i) a
$150 million five-year, multi-draw term loan facility (the "Term Loan Facility")
with quarterly payments commencing March 31, 1999 through and including June 30,
2001 and (ii) a $75 million five-year revolving credit facility with a bullet
maturity on June 30, 2001 (the "Working Capital Facility"). As a result of the
receipt of insurance proceeds in excess of $60.0 million (see below), the Bank
Financing was subsequently reduced to $219 million. Proceeds from the Bank
Financing were used to repay the Interim Financing and the Short-Term Notes (see
Note 7) and to refinance short-term Vendor Financing, and for general working
capital purposes. As of March 20, 1997, the Company had drawn down $144.0
million of the Term Loan Facility at an annual interest rate of 5.8125% and
$18.0 million of the Working Capital Facility at annual interest rates ranging
from 5.6875% to 5.8125%. The Company concluded that it could not complete the
Bank Financing without substantial credit support from its principal
stockholders (the "Guarantees"). HEC, Singapore and Baron Capital Partners, L.P.
(the "Guarantors") guaranteed $200 million of the Bank Financing in exchange for
compensation consisting principally of cash fees and warrants (the "Guarantee
Warrants"), allowing the Guarantors to purchase 5 million shares of the
Company's Common Stock at a price of $24 per share. Under the terms of the Bank
Financing and the Guarantee Agreement, borrowings under the Bank Financing are
contingent upon the satisfaction by the Company of certain performance tests
relating to net revenues, number of subscribers, operating cash flow and
earnings before interest, taxes, depreciation and amortization. Because of the
slower than anticipated build-up of subscribers and related revenues, during the
third and fourth quarters of 1996, the Company did not meet all of these
performance tests and required, and obtained, waivers from the Guarantors
permitting the Company to borrow up to $155 million under the Bank Financing.
The Company subsequently received an additional waiver to borrow up to $162
million under the Bank Financing.
On March 27, 1997, the Company reached agreement with the Guarantors to
eliminate the performance tests which must be satisfied for subsequent
borrowings. In consideration for this agreement, the Company agreed with the
Guarantors to reduce the exercise price of the Guarantee Warrants to $13 per
share and to issue additional warrants to the Guarantors relating to 500,000
shares at the reduced exercise price. The Guarantee Warrants, at the date of
original issuance, were valued at $19.0 million; the Guarantee Warrants, as
modified, have not yet been formally valued. The Guarantee Warrants expire on
June 28, 2001. The revised Guarantee Agreement places limitations on the
quarterly borrowings which the Company can make under the line as follows: $170
million, $180 million, $190 million and $200 million in the first, second, third
and fourth quarters of 1997, respectively. The Company would continue to be
subject to maintaining certain subscriber, revenue and debt to subscriber ratios
if the Guarantees are released. Additionally, the Bank Financing places certain
restrictions on the Company's ability to pay dividends, other indebtedness,
transactions with affiliates, and the acquisition of capital assets. The Bank
Financing is secured by the pledge of substantially all of the assets of the
Company and certain of its subsidiaries.
The Company may need additional financing in 1997 beyond the Bank Financing.
There can be no assurance that if additional financing is required, that such
financing will be available or that the terms thereof will be favorable to the
Company. If the Bank Financing is not sufficient, the Company may not have
adequate capital to fund its future operations.
F-22
Additionally, the Company incurred $15.3 million of bank financing costs related
to the placement of the Term Loan and Working Capital Facility and Guarantees.
Such costs have been capitalized and reflected as Deferred Charges and Other
Assets in the accompanying balance sheets.
Notes Payable to Bank - Launch Services Financing
- -------------------------------------------------
In 1992, the Company signed a contract with General Dynamics Commercial Launch
Services Inc. ("GDCLS"), to provide an Atlas IIA launch vehicle and associated
services, including a combination launch service and satellite risk coverage
package for up to $250 million, for the launch of AMSC-1. In connection with the
launch services contract (the "Contract") with Martin Marietta Commercial Launch
Services, Inc. ("MMCLS") (as assignee of GDCLS), AMSC Subsidiary entered into a
$54.2 million revolving credit and term loan facility ("Credit Agreement") with
a syndicate of banks to partially finance the cost of the launch services.
Borrowings under the Credit Agreement are subject to periodic interest rate
adjustments at either LIBOR plus .75% or the higher of a participating bank's
reference rate or .5% above the Federal Funds rate. As of December 31, 1995,
$40.0 million had been borrowed and was outstanding under this arrangement at an
annual interest rate of 6.75%. The Company made payments in 1995 to reduce the
outstanding principal amount under the Credit Agreement to $40.0 million in
accordance with the terms of the Credit Agreement. Principal repayments on
outstanding borrowings commenced on March 29, 1996 and quarterly thereafter with
any outstanding balance due in full on June 30, 2001. As the Company anticipated
that it would be in violation of certain financial covenants under the Credit
Agreement, the outstanding balance was repaid in full on September 30,1996. As
of December 31, 1996, no amounts remained outstanding or available for
borrowing.
Deferred Payment Agreement
- --------------------------
In 1992, the Company entered into a contract ("CGS Contract") with Westinghouse
Electric Corporation ("Westinghouse") pursuant to which Westinghouse was
responsible for designing and constructing the Ground Segment and developing the
final specification for mobile telephones. In connection with the CGS Contract,
Westinghouse agreed to defer payment, including interest thereon, under certain
terms and conditions, for the basic purchase price and for change orders and
options elected by the Company (the "Deferred Payment Agreement").
Since 1992, the Deferred Payment Agreement has been amended on occasion to
reflect, among other things, (i) for 1994, the waiver by Westinghouse of certain
obligations and rights under the Deferred Payment Agreement in exchange for a
$5.0 million prepayment, (ii) for 1995, the waiver by Westinghouse of unpaid
interest of $1.4 million in exchange for a $10.0 million prepayment, (iii) for
1995, in exchange for the Company's agreement to repay in full by September 30,
1996 all amounts due under the Deferred Payment Agreement, Westinghouse agreed
to waive all current and future interest charges and obligations and defer
AMSC's compliance with certain financial covenants to September 30, 1996 and
(iv) for 1995, an amendment to the Deferred Payment Agreement to reflect final
acceptance of the Ground Segment in October 1995. During 1996, the Company made
repayments in the amount of $9.4 million and in September 1996 arranged to
further defer repayment of the balance of amounts due under the Deferred Payment
Agreement until 1997 in exchange for interest on the outstanding balance. As of
December 31, 1996, $5.2 million remained outstanding at an annual interest rate
of 12%.
The effect of the above amendments is that (i) repayment of obligations would
commence on January 31, 1996 with quarterly payments thereafter until September
30, 1996, when all remaining amounts were deferred until 1997, and (ii) a
reduction in the cost of the Ground Segment of $ 1.4 million reflecting the
contractor's adjustment of the contracted cost. At December 31, 1996, all
amounts under the Deferred Payment Obligation were reflected as current portion
of long-term debt in the accompanying balance sheet, and no additional financing
was available under the Deferred Payment Agreement.
While Westinghouse committed to defer such amounts, its commitment has been
reduced, as permitted in the Deferred Payment Agreement, by the financing
provided by Digital Equipment Corporation ("DEC") and Northern Telecom Finance
Corporation ("Northern Telecom"). The financing provided by DEC for
F-23
certain Ground Segment equipment has been accounted for as a capital lease in
the accompanying financial statements (see Note 9). The Company entered into a
Term Loan Agreement (the "Loan Agreement") with Northern Telecom to finance the
purchase of certain equipment to be used in the Ground Segment. As amended in
1994, the Loan Agreement provided for principal borrowings up to $7.5 million
plus $1.1 million for accrued interest. Amounts outstanding under the Loan
Agreement bore interest at a floating rate of LIBOR plus 4.5% per annum through
September 1996 and were to be repaid over 5 years commencing in the second
quarter of 1995. In September 1996, the Company arranged to reduce the interest
rate to a floating rate of LIBOR plus 2.5% through maturity and to further defer
amounts due under the Loan Agreement to 1997. As of December 31, 1996, $5.9
million was outstanding at an annual interest rate of 7.94%, and all amounts
borrowed under the Loan Agreement were classified as current portion of long
term debt in the accompanying balance sheet.
Equipment Financing to Related Party
- ------------------------------------
The Company entered into a contract to purchase from Hughes Network Systems Ltd.
("HNS Ltd."), an affiliate of Hughes, $9.1 million of certain equipment to be
used with its Mobile Data Communications Service products. In addition, the
Company purchased from HNS Ltd., on behalf of an AMSC customer, equipment
aggregating $5.2 million, with such amounts passed through to AMSC's customer at
acceptance. Equipment purchases were fully financed by HNS Ltd. at LIBOR plus
150 basis points, with interest payable quarterly. Principal amounts outstanding
under this arrangement were due in full on December 31, 1996. Final payment was
made on December 17, 1996 and as of December 31, 1996, no amounts remained
outstanding or available for borrowing.
Interim Financing and Short-Term Notes
- --------------------------------------
The Company commenced borrowings under the Interim Financing on January 24,
1996, and had borrowed the full $40.0 million available under that facility at
April 4, 1996. The terms of the Interim Financing were amended in connection
with HEC's guaranty of that facility. As amended, the Interim Financing bore
interest at an annual rate increasing from 11% to 15% until April 18, 1996, and
at an annual rate of 5.75% thereafter. The Interim Financing, as amended,
matured and was repaid on July 1, 1996. Additionally, the lenders received
100,000 warrants (the "Interim Financing Warrants"), valued at $2.2 million at
date of issue, that allow them to purchase Common Stock at $.01 per share. The
Interim Financing Warrants expire in January 2001.
The Company on April 22 and on June 12, 1996 issued Short-Term Notes in the
aggregate principal amount of $30.0 million. The Short-Term Notes bore interest
at annual rates ranging from 5.6% to 5.7%, and, as amended, matured and were
repaid on July 1, 1996. See Note 1.
The Company incurred interest costs of approximately $15.1 million, $5.6
million, and $3.5 million in 1996, 1995, and 1994, respectively. All interest
costs incurred in 1994, and through September 30, 1995 were capitalized as part
of the Company's construction activities. The capitalization of interest was
discontinued in the fourth quarter of 1995 when the SKYCELL System was deemed
substantially complete and ready for its intended use. Interest cost paid, net
of amounts capitalized, was $ 327,000 in 1995. Interest costs incurred prior to
1992 were expensed.
Assets Pledged and Secured
- --------------------------
All of the Company's assets at December 31, 1996 are pledged as collateral under
its various financing agreements. At December 31, 1996 AMSC Subsidiary's net
assets of approximately $178.0 million were restricted under the terms of its
financing agreements.
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 AMSC
and its subsidiaries, restrictions on capital acquisitions, material adverse
change clauses, and maintenance of specified insurance policies. The Company did
not expect to be in compliance with certain financial covenants of its existing
Vendor Financing agreements, and the Company has received waivers and amendments
for these covenants for the period up to and including December 31, 1996.
Additionally, the Company was not in compliance with certain Guarantor covenants
for the period ended December 31, 1996. The Company received waivers and
amendments for these covenants for the period up to and including December 31,
1996.
F-24
8. RELATED PARTIES
- ------------------
In 1990, following a competitive bid process, AMSC signed contracts with Hughes
Aircraft, the parent company of Hughes Communications Satellite Services
("Hughes Communications"), an AMSC stockholder, to construct AMSC-1 (the
"Satellite Construction Contract"). AMSC-1 is designed to have ten years of
in-orbit useful service. The contract also contains flight performance
incentives payable by the Company to Hughes Aircraft if AMSC-1 performs
according to the contract. The total incentives owed, if earned, will be $7.1
million, plus interest, with payment amounts otherwise due deferred until
January 1998. The costs of the incentives are capitalized in the period earned.
The Company also in 1990 selected HNS Ltd., an affiliate of Hughes Aircraft, to
design, manufacture, and implement the Company's Mobile Data Communications
Service. In 1991, the Company entered into an agreement with Hughes
Communications to provide assistance in the launch services procurement process
and certain other management services through the launch date. Additionally, in
1996, Hughes loaned the Company $10.0 million as part of its participation in
the Interim Financing.
The Company has entered into various transactions and agreements with affiliates
of AT&T Wireless Services, Inc. ("AT&T Wireless"), an AMSC stockholder. The
arrangements include the purchase by AMSC of certain equipment for use in the
SKYCELL System, the leasing of certain office equipment, and the engagement of
AT&T to be one of the Company's long-distance providers. Additionally, the
Company sublet certain office space to AT&T Wireless through September 1996. The
following table represents a summary of all related party transactions.
Years Ended December 31
(in thousands) 1996 1995 1994
Payments made to (from) related parties:
Additions to property under construction $ --- $3,029 $1,749
Additions to property and equipment in service 2,847 265 3,731
Proceeds from debt issuance (10,000) --- ---
Payments on debt obligations 20,926 251 27,797
Payment for Guarantees 3,000 --- ---
Operating expenses 3,817 1,453 ---
Sublease income (205) (239) (228)
Loan to officer --- --- (200)
Collection of loan to officer --- --- 200
Other --- (506) ---
------- ------- --------
Net payments to related parties $20,385 $4,253 $33,049
======= ====== =======
Due to (from) related parties:
Mobile Data Communications Service Financing $ --- $7,180 $ ---
Capital leases 446 631 ---
Operating expenses 185 708 ---
Capital acquisitions 1,584 1,924 1,247
Other --- --- (506)
------ ------- ------
Net amounts due to related parties $2,215 $10,443 $741
====== ======= ======
F-25
9. LEASES
- ---------
Capital Leases
- --------------
The Company leases certain office equipment and Ground Segment equipment under
agreements accounted for as capital leases. Assets recorded as capital leases in
the accompanying balance sheets include the following:
December 31
(in thousands) 1996 1995
Ground Segment equipment $7,263 $7,263
Office equipment 4,088 2,137
Less accumulated amortization 2,826 877
----- ---
Total $8,525 $8,523
====== ======
Amortization of the Ground Segment equipment began with the commencement of full
commercial service in December 1995.
In January 1996, the Company refinanced certain computer hardware components
under a sale/leaseback arrangement. The Company received proceeds in the amount
of $1.7 million. The transaction was accounted for as a financing, wherein the
property remains on the books and continues to be depreciated. A financing
obligation representing the proceeds was recorded, and is reduced based on
payments under the lease. The sale/leaseback has a three-year term.
Operating Leases
- ----------------
The Company leases certain facilities and equipment under arrangements accounted
for as operating leases. Certain of these arrangements have renewal terms. The
office lease has an original lease term of ten years expiring in 2003, with a
renewal option, and escalation clauses. Total rent expense, under all operating
leases, approximated $2.5 million, $10.6 million, and $6.9 million in 1996,
1995, and 1994, respectively.
At December 31, 1996, minimum future lease payments under noncancelable
operating and capital leases are as follows:
Operating Capital
(in thousands) Leases Leases
1997 2,157 4,364
1998 2,218 2,128
1999 2,148 365
2000 2,044 215
2001 2,085 --
2002 and thereafter 4,286 --
------ -------
Total $14,938 $7,072
=======
Less - Interest 584
------
Total obligation under capital leases $6,488
======
F-26
10. OPERATING AGREEMENTS AND COMMITMENTS
- ----------------------------------------
Joint Operating and Satellite Capacity Agreements
- -------------------------------------------------
The Company is party to a Joint Operating Agreement and a Satellite Capacity
Agreement with a Canadian entity, TMI Communications and Company, Limited
Partnership, under which the parties would use their best efforts to construct,
launch, and operate compatible satellites. The parties to these agreements will
provide, among other things, emergency backup and restoral services to each
other 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, 1996, the Company had remaining contractual commitments to
purchase both mobile data terminal inventory and mobile telephone inventory
approximating $28.6 million and capital expenditure commitments of approximately
$387,000.
The aggregate fixed and determinable portion of all inventory commitments,
capital expenditure commitments and obligations for other fixed contracts for
the next five years is as follows.
(in thousands)
1997 $27,993
1998 5,548
1999 1,280
2000 426
2001 and thereafter --
-------
Total $35,247
=======
Additionally, the Company may enter into additional commitments that may require
the purchase of mobile telephone and mobile terminal inventory in amounts that
could be material to the Company's financial condition.
11. EMPLOYEE BENEFITS
- ---------------------
Defined Contribution Plan
- -------------------------
The Company sponsors a 401(k) defined contribution plan ("401(k) Savings Plan")
in which all employees can participate. Effective January 1, 1995, the 401(k)
Savings Plan provides for a Company match of employee contributions, in the form
of Common Stock, limited to the fair market value of up to one-half of the
employee's contribution not to exceed 6% of an employee's salary. The Company's
matching expense was $411,000 for 1996 and $329,000 for 1995.
Employee Stock Purchase Plan
- ----------------------------
In December 1993, the Company adopted the Employee Stock Purchase Plan ("Stock
Purchase Plan") to allow eligible employees to purchase shares of the Company's
Common Stock at 85% of the lower of market value on the first and last business
day of the six-month option period. An aggregate of 39,366 and 30,877,and 9,690
shares of Common Stock were issued under the Stock Purchase Plan in 1996, 1995,
and 1994 respectively.
F-27
12. BUSINESS ACQUISITION
- -------------------------
On November 22, 1996, the Company acquired the assets of Rockwell Collins, Inc.
("Rockwell") relating to its Land Transportation Electronics Mobile
Communications Satellite Service business (the "Business") through which
Rockwell had sold mobile messaging hardware and services to commercial trucking
fleets. The assets of the Business were acquired from Rockwell through the
assumption by the Company of the various contracts and obligations of Rockwell
relating to the Business; no additional direct payments were made or are to be
made under the terms of the Asset Sale Agreement, dated as of November 22, 1996.
The assets of the business acquired from Rockwell include tangible equipment,
completed inventory and future inventory deliveries which will be used in
connection with fulfilling the contracts transferred with the Business. The
Company intends to continue such use in operating the Business.
The purchase method of accounting for business combinations was used. The
operating results of the Business have been included in the Company's
consolidated statements of loss from the date of acquisition and were
insignificant in 1996. The Company's preliminary estimate of the fair value
of the assets acquired was $9.5 million and liabilities assumed was $6.1
million. The fair value of assets acquired in excess of purchase price
arising from the acquisition in the amount of $3.4 million will be amortized
over five years on a straight line basis.
The pro forma results below (unaudited) assume the acquisition occurred at the
beginning of the year ended December 31, 1995 (dollars in thousands, except per
share data).
1996 1995
Revenue $33,333 $23,600
Net Loss $(148,434) $(91,028)
Loss per share $(5.93) ($3.66)
13. LEGAL AND REGULATORY AND OTHER MATTERS
- ------------------------------------------
Legal and Regulatory Matters
- ----------------------------
Like other mobile service providers in the telecommunications industry, the
Company is subject to substantial domestic, foreign and international regulation
including the need for regulatory approvals to both complete and operate the
SKYCELL System and operate mobile data terminals and mobile telephones.
The successful operation of the SKYCELL System 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 commence full commercial revenue service. The
Company has filed applications with the FCC and expects to file applications in
the future with respect to the operation of the SKYCELL System and certain types
of mobile data terminals and mobile telephones. 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 theapplications 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.
F-28
The Company's license requires that it comply with a construction and launch
schedule specified by the FCC for each of the three authorized satellites. The
second and third satellites are not in compliance with the schedule for
commencement of construction. The Company has asked the FCC to grant extensions
of the deadlines for the second and third satellites. Certain of these extension
requests have been opposed by third parties. The FCC has not acted on the
Company's requests. The FCC has the authority to revoke the authorizations for
the second and third satellites and in connection with such revocation could
exercise its authority to rescind the Company's license. The Company believes
that the exercise of such authority to rescind the license is unlikely.
In 1992, a former director of AMSC filed an Amended Complaint against the
Company alleging violations of the Communications Act of 1934, as amended, and
of the Sherman Act and breach of contract. The suit seeks damages for not less
than $100 million trebled under the antitrust laws plus punitive damages,
interest, attorneys fees and costs. In mid-1992, the Company filed its response
denying all allegations. The Company's motion for summary judgment, filed on
March 31, 1994, was denied on April 18, 1996. The matter has now been set for
trial beginning December 1997. Management believes that the complaint is without
merit, and the ultimate outcome of this matter will not be material to the
Company's financial position, results of operations or cash flows.
In October 1996, a vendor filed a complaint against the Company concerning the
production of approximately 7,500 mobile data terminals. The Company resolved
its disagreement with the vendor in January 1997 without additional liability to
the Company. The suit was withdrawn in February 1997, and production and
delivery of the remaining 7,500 mobile data terminals is scheduled to commence
in March, 1997.
Other Matters
- -------------
As previously reported, the satellite has, in the past, experienced certain
technological anomalies, most significantly with respect to its eastern beam. On
August 1, 1996, the Company reached a resolution of the claims under its
satellite insurance contracts and policies and received proceeds in the amount
of $66.0 million which were used to repay the Working Capital Facility and
portions of the Term Loan Facility and the Vendor Financing. 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.
The satellite has not experienced any anomalies other than those previously
reported, however, 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.
14. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------- -----------
Years Ended December 31
(in thousands) 1996 1995 1994
Noncash investing and financing activities:
Leased asset and related obligations $284 $1,351 $2,436
Issuance of Common Stock purchase warrants 21,253 --- ---
Issuance of Common Stock upon exercise of Common
Stock purchase warrants 845 --- ---
Vendor Financing for property under construction --- 7,561 10,229
Vendor Financing for property in service 2,440 4,560 ---
Issuance of Common Stock under the Defined Contribution Plan 411 329 ---
Net assets acquired as a result of Business Acquisition (Note 12) 3,488 --- ---
F-29
QUARTERLY FINANCIAL DATA (unaudited)
- ------------------------------------
(dollars in thousands, except for share data)
1996-quarters 1995-quarters
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Revenues $4,369 $6,749 $7,405 $9,207 $1,854 $1,813 $2,057 $3,073
Operating expenses (1) 31,371 45,747 33,914 36,737 9,957 11,285 15,585 42,471
------- ------- ------- ------- ------ ------- ------- ------
Loss from operations (27,002) (38,998) (26,509) (27,530) (8,103) (9,472) (13,528) (39,398)
Interest and other
income (expense) (2,875) (4,511) (3,493) (3,720) 1,774 1,339 1,026 (555)
------- ------- ------- ------- ------ ------ ------ -----
Net Loss (29,877) (43,509) (30,002) (31,250) (6,329) (8,133) (12,502) (39,953)
Net loss per common
share (2) $(1.20) $(1.74) $(1.20) $(1.24) $(0.26) $(0.33) $(0.50) $(1.60)
Weighted-average common shares
outstanding during the period
(000s) 24,995 25,012 25,065 25,092 24,808 24,899 24,941 24,947
Market price per share (3)
High $33.25 $20.00 $17.50 $14.62 $20.75 $30.25 $28.25 $31.25
Low $16.00 $15.00 $10.75 $9.25 $12.50 $18.78 $21.50 $19.00
(1) Fourth quarter of 1995 includes a charge of $7.0 million for the costs
associated with the temporary delay in the delivery of certain subscriber
equipment, and the write-down of certain assets of Mobile Data Communications
Service, including inventory, to net realizable value.
(2) Loss per share calculations for each of the quarters are based on the
weighted average number of shares outstanding for each of the periods, and the
sum of the quarters may not necessarily be equal to the full year loss per share
amount.
(3) The Company's Common Stock is listed under the symbol SKYC on the Nasdaq
National Market System. The Company's Common Stock was not publicly traded prior
to December 14, 1993. The quarterly high and low sales price represents the
closing price in the Nasdaq National Market System. The quotations represent
inter-dealer quotations, without retail markups, markdowns or commissions, and
may not necessarily represent actual transactions.
F-30
Selected Financial Data
- -----------------------
Set forth below is the selected financial data for the Company for the five
fiscal years ended December 31, 1996:
(dollars in thousands, except for per share data)
1996 1995 1994 1993 1992
Revenues $27,730 $8,797 $5,240 $852 $277
Net Loss $(134,638) $(66,917) $(21,103) $(25,180) $(24,281)
Net Loss per Common Share $(5.38) $(2.69) $(0.86) $(2.49) $(2.71)
Dividends on Common Stock (1) None None None None None
Consolidated Balance Sheet Data:
Cash and Cash Equivalents $2,182 $8,865 $137,287 $243,060 $6,713
Property Under Construction --- --- 263,505 204,740 121,804
Total Assets 350,173 398,351 448,674 460,382 146,823
Current Liabilities 57,669 104,772 37,251 36,309 16,256
Long-Term Obligations 133,804 6,052 59,879 56,703 37,745
Stockholders' Equity 158,700 287,527 351,544 367,370 92,822
(1) The Company has paid no dividends on its Common Stock since inception and
does not plan to pay dividends on its Common Stock in the foreseeable future. In
addition, the payment of dividends is subject to restrictions described in Note
7 to the financial statements and discussed in Management's Discussion and
Analysis.
F-31
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 27, 1997. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index 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.
Washington, D.C.,
March 27, 1997
S-1
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
-------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
(Parent Company Only)
Condensed Balance Sheets
December 31,
1996 1995
(in thousands of dollars)
ASSETS
Investment in and amounts due from wholly-owned subsidiaries $158,713 $287,527
--------- --------
Total assets $158,713 $287,527
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $13 $ --
Stockholders' Equity
Preferred Stock -- --
Common Stock 251 250
Additional paid-in capital 451,259 448,757
Common stock purchase warrants 23,848 3,440
Unamortized stock purchase warrants (17,100) --
Accumulated loss (299,558) (164,920)
--------- ---------
Total Stockholders' Equity $158,700 $287,527
-------- --------
Total Liabilities and Stockholders' Equity $158,713 $287,527
======== ========
S-2
SCHEDULE I
AMERICAN MOBILE SATELLITE CORPORATION
-------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
---------------------------------------------
(Parent Company Only)
Condensed Statements of Loss
For the Years Ended December 31,
1996 1995 1994
Revenues
Mgmt fees from wholly-owned subsidiary $1,200 $1,200 $1,200
Operating Expenses
Engineering operations -- 87 158
Sales and marketing -- 91 91
General and administrative 2,452 595 439
----- ----- ----
Total operating expenses 2,452 773 688
(Loss) income from operations (1,252) 427 512
Interest income -- 3,258 7,524
Interest expense (1,900) -- --
------- ------ -------
(Loss) income before Net loss of AMSC SUB (3,152) 3,685 8,036
Net loss of AMSC SUB -- Note A (131,486) (70,602) (29,139)
--------- -------- --------
Net Loss $(134,638) $(66,917) $(21,103)
========== ========= =========
S-3
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,
1996 1995 1994
Cash Provided From Operating Activities $1,424 $5,067 $7,151
Investing Activities:
Advances to and investment in subsidiaries (2,672) (162,778) (68,833)
Sales (Purchases) of short-term investments-net -- 28,717 (28,717)
--------- --------- ---------
Cash (Used in) Investing Activities (2,672) (134,061) (97,550)
Financing Activities:
Proceeds from sale of Common Stock 1,248 2,569 5,277
Repayment of Convertible Subordinated Notes -- -- (27,667)
--------- --------- ---------
Cash Provided by (Used in) Financing Activities 1,248 2,569 (22,390)
Decrease for the period -- (126,425) (112,789)
Beginning of period -- 126,425 239,214
--------- --------- --------
End of period $ -- $ -- $126,425
======== ======= ========
S-4
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 was incorporated on May 3, 1988,
by eight of the initial applicants for the mobile satellite services license,
following a determination by the Federal Communications Commission ("FCC") that
the public interest would be best served by granting the license to a consortium
of all willing, qualified applicants. The FCC has authorized American Mobile
Satellite Corporation to construct, launch, and operate a mobile satellite
services system (the "SKYCELL System") to provide a full range of mobile voice
and data services via satellite to land, air, and sea-based customers in a
service area consisting of the continental United States, Alaska, Hawaii, Puerto
Rico, the U.S. Virgin Islands, U.S. coastal waters, international waters and
airspace and any foreign territory where the local government has authorized the
provision of service. In March 1991, American Mobile Satellite Corporation
transferred the mobile satellite services license ("MSS license") to a wholly
owned subsidiary, AMSC Subsidiary Corporation (AMSC SUB"). American Mobile
Satellite Corporation has six other subsidiaries, two of which are inactive and
four whose limited activities do not require material resources at this time.
In the parent Company-only financial statements, the Company's
investment in subsidiaries is stated at cost less losses of AMSC SUB. The net
loss of AMSC SUB is included in these financial statements using the equity
method. The Company has entered into various transactions with its wholly-owned
subsidiaries. These transactions are eliminated in the audited consolidated
financial statements and are summarized as follows:
1996 1995 1994
---- ---- ----
(in thousands of dollars)
Investment in and amounts due from wholly-owned
subsidiaries $158,713 $287,527 $195,351
Management fees 1,200 1,200 1,200
Interest income 29,485 23,445 9,548
Parent company-only financial statements should be read in conjunction
with the Company's consolidated financial statements.
S-5
Note B -- Investment in AMSC SUB
As stated in Note A, the Company records its investment in AMSC SUB on
the equity method. The recoverability of such investment is subject to the risks
associated with the development of establishing a new business. Specifically,
future operating results of AMSC SUB will be subject to significant business,
economic, regulatory, technical and competitive uncertainties and contingencies.
Additionally, adequate liquidity and capital are critical to the ability of AMSC
SUB to continue as a going concern.
AMSC SUB, in January 1996, entered into a $40.0 million bank credit
facility (the "Interim Financing"). The lenders received warrants to purchase an
aggregate of 100,000 shares of Common Stock at $.01 per share. To satisfy its
ongoing financing needs, the Company, on June 23, 1996, established a $225
million debt facility with Morgan Guaranty Trust Company and Toronto Dominion
Bank (the "Bank Financing") consisting of two facilities: (i) a $150 million
five-year, multi-draw term loan facility (the "Term Loan Facility") with
quarterly payments commencing March 31, 1999 through June 30, 2001, and (ii) a
$75 million five-year revolving credit facility with a bullet maturity on June
30, 2001 (the "Working Capital Facility"). The Company concluded that it could
not complete the Bank Financing without substantial credit support from its
principal stockholders (the "Guarantees"). Hughes Electronics Corporation
("HEC"), Singapore Telecommunications, Ltd. ("Singapore") and Baron Capital,
L.P. (the "Guarantors") guaranteed $200 million of the Bank Financing (the
"Guarantee Agreement") in exchange for compensation consisting principally of
cash fees and warrants (the "Guarantee Warrants"). The Guarantee Warrants allow
the Guarantors to purchase 5 million shares of the Company's Common Stock at a
price of $24 per share.
Because of the slower than anticipated build-up of subscribers and related
revenues, during the third and fourth quarters of 1996, the Company did not meet
all of the performance tests required to obtain certain borrowing levels under
the Guarantee Agreement and required, and obtained, waivers from the Guarantors
permitting the Company to borrow up to $155 million under the Bank Financing.
The Company subsequently received an additional waiver from the Guarantors to
borrow up to $162 million under the Bank Financing. On March 27, 1997, the
Company reached agreement with the Guarantors to eliminate the performance tests
which must be satisfied for subsequent borrowings. In consideration for this
agreement, the Company agreed with the Guarantors to reduce the exercise price
of the Guarantee Warrants to $13 per share and to issue additional warrants to
the Guarantors relating to 500,000 shares at the reduced exercise price. The
Guarantee Warrants, at the date of original issuance, were valued at $19.0
million; the Guarantee Warrants, as modified, have not yet been formally valued.
The Guarantee Warrants expire on June 28, 2001.
S-6
Note C -- Guarantee
The Company has guaranteed various obligations of AMSC SUB. These
guaranteed obligations include amounts borrowed under AMSC SUB's Bank Financing,
ground segment financing agreements and obligations of AMSC SUB under an office
lease agreement.
Note D -- Legal Matters
In 1992, a former director of the Company filed an Amended Complaint against the
Company alleging violations of the Communications Act of 1934, as amended, and
the Sherman Act and breach of contract. The suit seeks damages for not less than
$100 million trebled under the antitrust laws plus punitive damages, interest,
attorney's fees and costs. In mid 1992, the Company filed its response denying
all allegations. The Company's motion for summary judgment, filed on March 31,
1994, was denied on April 18, 1996. The matter has now been set for trial
beginning December, 1997. Management believes that the complaint is without
merit, and the ultimate outcome of this matter will not be material to the
Company's financial condition, results of operations or cash flows.
S-7