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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