SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
ARF COMMUNICATIONS B, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
C/O OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
505 PARK AVENUE
NEW YORK, NEW YORK 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 753-7200
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock Class A
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
This sheet shows the location in this Information Statement of the
information required to be included in such Information Statement in response to
the items of the Form 10 -- General Form For Registration of Securities Pursuant
to Section 12(b) or (g) of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
ITEM DESCRIPTION LOCATION IN
NO. REGISTRATION STATEMENT
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<S> <C> <C>
1. Business............................................. Prospectus Summary; Risk Factors; The
Company; Business; Certain
Transactions; Capitalization
2. Financial Information................................ Selected Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
3. Properties........................................... Not Applicable
4. Securities Ownership of Certain
Beneficial Owners and Management..................... The Company; Management
5. Directors and Officers............................... Management
6. Executive Compensation............................... Management
7. Certain Relationships and Related Transactions....... The Company; Certain Transactions
8. Legal Proceedings.................................... Risk Factors -- Antitrust Investigation
9. Market Price of and Dividends on The Dividend Policy; Shares Eligible for
Registrant's Common Equity and Related Future Sale
Stockholder Matters..................................
10. Recent Sales of Unregistered Securities.............. Not Applicable
11. Description of Registrant's Securities to be
Registered........................................... Description of Capital Stock
12. Indemnification of Directors and Officers............ Indemnification of Directors and Officers
13. Financial Statements and Supplementary Data Index to Financial Statements and the
statements referenced thereon
14. Changes In and Disagreements with Accountants
on Accounting and Financial Matters.................. Not Applicable
15. Financial Statement and Exhibits..................... Financial Statements
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(b) Exhibits
Exhibit Number Description
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3.1 Articles of Incorporation (to be adopted just prior to
the spin-off)
3.2 By-laws (to be adopted just prior to the spin-off)
5.1 Opinion of Olshan Grundman Frome & Rosenzweig LLP*
10.1 Expenses Agreement dated as of July 31, 1996 among AER
Force Communications B, L.P., a Delaware limited
partnership, AER Force Communications Inc., a New York
corporation, and Lynch PCS Corporation F, a Delaware
corporation.
10.2 Limited Partnership Agreement of AER Force Communications
B, L.P. entered into as of July 26, 1996, by and between
AER Force Communications Inc., a New York corporation, as
general partner, and Lynch PCS Corporation F, a Delaware
corporation, as the Initial Limited Partner.
10.3 Loan Agreement dated as of August 12, 1996 by and between
AER Force Communications B, L.P., a Delaware limited
partnership, and Lynch PCS Corporation F, a Delaware
corporation.
10.4 Form of Security Agreement
10.5 Form of Installment Payment Plan Note
23.1 Consent of Ernst & Young LLP
23.2 Consent of Olshan Grundman Frome & Rosenzweig LLP
(contained in Exhibit 5.1)
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* To be filed by amendment.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 18, 1997
ARF COMMUNICATIONS B, INC.
By:/s/ T. Gibbs Kane, Jr.
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Name: T. Gibbs Kane, Jr.
Title: Treasurer
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PRELIMINARY COPY -- SUBJECT TO COMPLETION
[Lynch Corp. Letterhead]
September ___, 1997
To Lynch Stockholders:
I am writing to advise you about a spin-off of the stock of ARF Communications
B, Inc. (the "Company"), which you will receive shortly through a dividend on
your Lynch common stock.
The Company is the successor to a partnership which was formed in 1996 by a
subsidiary of Lynch and an FCC- qualified small business to acquire F-Block PCS
licenses in the FCC auction. The partnership acquired five such licenses in 1997
covering a population of approximately 21 million, including the cities of Los
Angeles and Washington, D.C. The net cost of the licenses was $19 million, of
which $15.2 million is being financed by the U.S. government. A subsidiary of
Lynch provided $3.6 million of the balance of the debt financing; originally as
debt which, together with accrued interest (including commitment fees), is to be
converted into preferred stock at the time of the spin-off.
For each share of Lynch common stock owned by you on __________, 1997, you will
receive one share of Class A Common Stock of the Company. The distribution is
expected to be made on or about ___________, 1997. Lynch shareholders, in the
aggregate, will receive 39.9% of the outstanding Common Stock of the Company.
Due to FCC regulations, Lynch shareholders will receive Class A Common Stock,
which will have lesser voting rights and minority representation on the Board of
Directors. However, from an economic standpoint the two different classes of
common stock will be treated equally.
For further information about the Company and the spin-off, please read the
enclosed Information Statement. As described more fully in the Information
Statement, while the spin-off will be taxable to shareholders, the amount will
probably be fairly small.
I believe that while there are substantial risks attendant to this investment,
the Company represents a significant opportunity for Lynch stockholders.
Very truly yours,
Mario J. Gabelli
Chairman
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TABLE OF CONTENTS
PAGE
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THE COMPANY...................................................................1
CAPITALIZATION................................................................4
RISK FACTORS..................................................................5
SELECTED FINANCIAL DATA......................................................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................19
THE WIRELESS COMMUNICATIONS INDUSTRY.........................................21
LIMITATIONS OF CELLULAR TELEPHONE INDUSTRY...................................22
LEGISLATION AND GOVERNMENT REGULATION........................................26
MANAGEMENT...................................................................36
CERTAIN TRANSACTIONS.........................................................38
PRINCIPAL STOCKHOLDERS.......................................................39
DESCRIPTION OF CAPITAL STOCK.................................................40
DESCRIPTION OF CERTAIN INDEBTEDNESS..........................................43
FEDERAL INCOME TAX CONSEQUENCES..............................................43
EXPERTS ....................................................................44
GLOSSARY ....................................................................45
INDEX TO FINANCIAL STATEMENTS...............................................F-1
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THE COMPANY
As used in this Information Statement with respect to a given area, the
term "POPs" refers to the aggregate number of persons located in such area,
based on the 1996 estimated U.S. population data in the 1996 PCS Atlas and Data
Book published by Paul Kagan Associates, Inc. ("Kagan Associates") and the 1990
U.S. Census and the Population Estimate Program, U.S. Bureau of the Census,
release date March 20, 1997. Unless the context otherwise requires, references
to the "Company" herein refers to ARF Communications B, Inc. See the "Glossary"
beginning on page 43 for a definition of certain terms used herein. Certain of
the information contained in this Information Statement, including information
with regard to the Company's prospective business and its financial situation,
are forward looking statements. This Information Statement contains certain
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. Actual
results could differ materially from those projected in the forward-looking
statements as a result of certain of the risk factors set forth below and
elsewhere in this Information Statement. For a discussion of important risk
factors that could affect such matters, see "Risk Factors" beginning on page 5.
The Company was incorporated in August, 1997, as a successor to Aer
Force Communications B, L.P. The Company holds five 10 megahertz personal
communications services ("PCS") licenses to serve a population of approximately
21 million, including two of the top ten markets, Los Angeles and Washington
D.C., plus Sarasota, Florida, Reno, Nevada and Santa Barbara, California. The
total cost of these licenses was approximately $19 million, after a 25% bidding
credit provided by the Federal Communications Commission ("FCC"). 80% of the
cost of the licenses (or $15.2 million) was financed over ten years by the U.S.
government (the "Government Financing"), with only payments of interest during
the first two years.
The Company believes that its PCS licenses have substantial potential.
However, it has not yet determined whether to develop its PCS licenses on its
own, joint venture its licenses with other PCS or wireless telephone licenses
holders or operators or others, or sell some or all of its licenses.
Accordingly, the Company has not yet adopted a business plan or determined how
to finance its operations.
The demand for wireless communications services in the United States
has grown dramatically during the last five years. The number of cellular
subscribers has grown from 5.3 million at December 31, 1990 to 44.0 million at
December 31, 1996, representing a compound annual growth rate of 42%. Over the
same time period, the wireless telephony penetration rate has grown from
approximately 3% to approximately 17%, and is forecasted by Kagan Associates to
reach approximately 47% by 2006.
The Company's address is c/o Olshan Grundman Frome & Rosenzweig LLP,
505 Park Avenue, Suite 1600, New York, New York 10022. Its telephone number is
(212) 753-7200. This Information Statement is first being mailed to Lynch
stockholders on or about _________, 1997.
LICENSES
The Company has five 10 megahertz F-Block PCS licenses as follows:
<TABLE>
<CAPTION>
Population Cost (after 25%
BTA No. BTA Name 1996 POPS Growth Rates (1) Bidding Credit)
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<S> <C> <C> <C> <C>
262 Los Angeles, CA 15,513,588 1.07% $4,473,750
461 Washington, D.C. 4,476,304 1.48% 8,835,000
408 Sarasota-Bradenton, FL 554,056 1.28% 1,653,000
372 Reno, NV 465,782 3.10% 1,787,250
406 Santa Barbara-Santa Maria, CA 385,573 0.71% 2,208,721
</TABLE>
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(1) Average compounded annual growth rates in populations between 1990
through 1996, based upon the 1990 U.S. Census and the Population
Estimate Program, U.S. Bureau of the Census, Release date March 20,
1997.
POTENTIAL FUTURE ARRANGEMENTS WITH RIVGAM
Rivgam Communicators, LLC ("Rivgam"), is an entity indirectly owned by
Gabelli Funds, Inc. ("GFI"), of which Mario J. Gabelli is the Chairman and Chief
Executive Officer and the principal shareholder. Rivgam holds 10 MHz D - and
E-Block PCS Licenses covering approximately 33 million POPs in 11 BTAs,
including the Los Angeles, Washington, DC and Reno, Nevada markets where the
Company also holds F-Block PCS licenses. The cost of the licenses to Rivgam were
as follows: BTA 262 Los Angeles - $31.9 million, BTA 461 Washington, D.C. - $4.1
million, and BTA 372 Reno, Nevada - $1.7 million. Rivgam did not qualify for or
receive bidding credits or U.S. government financing. Rivgam also holds 10 MHz D
- - or E-Block licenses in Baltimore, Maryland, Philadelphia, Pennsylvania, San
Diego, California, Buffalo, New York, Las Vegas, Nevada, Bakersfield,
California, Atlantic City, New Jersey and Las Cruces, New Mexico.
After the Spin Off, Rivgam's controlling shareholder GFI and Mr.
Gabelli will be substantial holders of the Company's Class A Common Stock. In
addition, Mr. Gabelli and his son will be directors of the Company. See "Risk
Factors -- Other PCS and Wireless Telephone Interests," "Principal Stockholders"
and "Management." For various reasons, including possibly more favorable terms
or requirements for raising capital, it may be necessary or advisable for the
Company to enter into joint venture and/or working or other arrangements
(collectively "Arrangements") with holders of additional 10 MHz licenses. Rivgam
would be a logical party with which to enter into such arrangements, which may
cover BTAs other than where there is an overlap. See "Risk Factors -- 10 MHz
Licenses" and "-- Limited Territory Coverage." The ability of the Company to
enter into any arrangements with Rivgam may be limited by law or FCC
regulations, and there can be no assurance that the Company will be able to
enter into such arrangements on terms which are favorable to it or at all. See
"Risk Factors -- Government Regulation."
SPIN OFF
Lynch Corporation ("Lynch) currently owns all of the issued and
outstanding shares of Class A Common Stock and Preferred Stock of the Company.
The 1,417,048 shares of Class A Common Stock owned by Lynch which will be
distributed in the Spin Off represent 39.9% of the outstanding Common Stock of
the Company. Lynch has declared a dividend on its Common Stock of one share of
Class A Common Stock for each share of Lynch Common Stock, payable on _________,
1997, to shareholders of record on __________, 1997 (the "Spin Off"). The
remaining 355,150 shares of Class A Common Stock will be transferred to GFI in
satisfaction of the interest which GFI had in the partnership interest of
Lynch's subsidiary in the Company's predecessor. Lynch currently intends to
retain ownership of the Preferred Stock but reserves the right to dispose of
that investment as it deems appropriate.
The Company has no current plan to list or register the Class A Common
Stock on any national securities exchange or on the NASDAQ market. Accordingly,
there can be no assurance that a trading market will develop for the Class A
Common Stock, and the ability to buy or sell shares of Class A Common Stock may
be limited.
The value of the stock distributed as a dividend in the Spin Off will
be taxable to the recipient, although the Company believes that the taxable
amount will be fairly small. See "Federal Income Tax Consequences."
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PROCEEDS OF THE SPIN-OFF AND FUTURE FUNDING REQUIREMENTS
The Spin Off will not result in any net proceeds to the Company or
Lynch. The Company will need to obtain capital in the near future in order to
fund its interest payment obligations on the Government Financing and for
working capital and general corporate purposes. There can be no assurance that
the Company can raise sufficient capital to fund its obligations and finance the
construction of its networks. Because the Company has incurred losses since
inception and has not yet adopted a business plan or determined how to finance
its operations and will need to obtain capital in the near future to fund its
interest payment obligations and for working capital and general corporate
purposes, the report of Ernst & Young LLP as to its 1997 and 1996 financial
statements contains a going concern emphasis paragraph.
On March 31, 1997, the FCC suspended C- and F-Block interest payments
on the Government Financing until further notice. The Company expects that the
FCC will announce the date when F-Block interest payments will resume once it
resolves issues surrounding the restructuring of C-Block licenses (which is
expected by the end of the year), although the FCC could order F-Block payments
to resume while C-Block payments remain suspended.
If it had not been suspended, the Company's first quarterly interest
payment of approximately $126,534 (on $8.1 million of F-Block debt at 6.25% for
all licenses except Washington, DC) would have been due July 28, 1997. The
Company's first quarterly interest payment of approximately $110,438 on the
Washington, DC license (based upon a $7.1 million principal amount at an
interest rate of 6.25%) would be due September 27, 1997, unless the suspension
is still in effect or the FCC otherwise modifies the interest payment schedule
for the F-Block. Such modifications could take the form of providing for a lead
time, or resumption of, interest payments or converting to an annual payment
basis.
Beginning in the third license year, quarterly payments under the
Government Financing will increase substantially as the Company begins to
amortize principal as well as pay interest. See "Risk Factors -- Substantial
Debt Obligations to the U.S. Government."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and does not expect to pay cash dividends on either class of its Common
Stock in the foreseeable future. To the extent the Company obtains financing in
the future, such funding sources may prohibit the payment of dividends. The
Company currently intends to retain its earnings, if any, for use in its
business. See "Risk Factors--Absence of Dividends" and "Description of Certain
Indebtedness."
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CAPITALIZATION
The following table sets forth the pro forma capitalization of the
Company effective immediately prior to the Spin Off. The Spin Off will not
affect the capitalization of the Company. This table should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Information Statement.
Government Financing(1) $15,166,177
Redeemable Preferred Stock(2) 7,300,000
Class A Common Stock(3) 177
Class B Common Stock(3) 178
Additional Paid - in Capital(4) 449,645
Shareholders Deficit Cumulative Losses(5) (2,890,658)
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Total Shareholders Deficit $(2,440,658)
(1) See "Description of Certain Transactions"
(2) See "Description of Capital Stock - Preferred Stock"
(3) See "Description of Capital Stock - Common Stock"
(4) Assumes an additional capital contribution of $250,000.
(5) Does not include losses after June 30, 1997
1,417,048 of the outstanding shares of Class A Common Stock
(approximately 80%) and all of the shares of the outstanding Preferred Stock are
owned by Lynch. 355,150 of the outstanding shares of Class A Common Stock
(approximately 20%) are owned by GFI. All of the outstanding shares of Class B
Common Stock (1,779,301) are owned by Aer Force Communications Inc. ("AFC"), all
of whose capital stock is owned by Victoria G. Kane. See "Principal
Stockholders." All the long-term debt is installment debt owed to the U.S.
Government for the PCS licenses acquired by the Company. See "Description of
Certain Indebtedness -- Government Financing."
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RISK FACTORS
DEVELOPMENT STAGE COMPANY; HISTORICAL AND EXPECTED FUTURE OPERATING LOSSES
The Company was incorporated in August 1997 as a successor to a
partnership organized in July 1996. The Company is at an early stage of
development and has no operating history. Consequently, the Company does not
have any meaningful historical financial information upon which a prospective
investor could evaluate an investment in the Class A Common Stock of the Company
to be distributed to Lynch stockholders in the Spin Off. The Company has
incurred cumulative net losses through June 30, 1997 of approximately $2.9
million. These losses arose primarily from interest expense on loans for
organizational and start-up activities and the Company's acquisition of PCS
licenses in the F-Block Auction. The Company is subject to all of the risks
typically associated with a start-up entity.
The Company has not yet determined whether it intends to develop its
PCS licenses on its own, joint venture its licenses with other PCS or wireless
telephone license holders or operators or others, or sell some or all of its
licenses. There are various FCC restrictions applicable to any joint venture or
sale or other transfer of its licenses. If a license is sold for cash, the
Company will need to redeem a corresponding proportion of the Preferred Stock.
See "-- F-Block License Requirements," "Foreign Ownership Limitations," and
"Description of Capital Stock -- Preferred Stock."
If the Company determines to sell some or all of the licenses, not only
will it have to comply with certain FCC transfer restrictions, but there is no
assurance that any such sale could be effected on a profitable or timely basis.
In addition, some or all of the consideration to be received in any such sale
may not be cash and may be dependent, directly or indirectly, on the successful
development by the purchaser of the licenses or other licenses or activities of
the acquiror.
Accordingly, many of the risks listed below relating to the development
of PCS licenses may apply if the Company decides to joint venture its PCS
licenses or even to sell its licenses. However, certain joint venturers or
purchasers may already operate wireless telephone or other telecommunications
operations or have greater background and experience in developing wireless
telephony and possess greater organizational, management and/or financial
resources. If the Company decides to joint venture its PCS licenses or sell its
licenses other than for cash, the Company may be at risk with respect to the
other operations of the joint venture or purchaser.
If the Company decides to develop its PCS licenses (either on its own
or as part of a joint venture), it (or the joint venture) would have to develop
and implement a business plan, which may require attracting and retaining
qualified individuals as managers and employees and developing a business
infrastructure. As such, no assurance can be given as to the timing and extent
of revenues and expenses, or the Company's (or the joint venture's) ability to
successfully manage all the tasks associated with developing and maintaining a
successful enterprise. Any failure by management to guide and control growth
effectively, which includes implementing adequate systems, procedures and
controls in a timely manner, could have a material adverse effect on the
Company's business, financial condition and results of operations.
If the Company (or a joint venture) develops the PCS licenses, it will
incur significant operating losses and generate negative cash flow from
operating activities during the next several years while it seeks to develop and
construct its PCS networks and build a customer base. These losses and negative
cash flow could be substantial and increase during the initial years of the
build-out and operation of its PCS networks. There can be no assurance that the
Company (or a joint venture) can successfully launch its services, or that it
will achieve or sustain profitability or positive cash flow from operating
activities in the future. If the Company (or a joint venture) cannot achieve
operating profitability or positive cash flow from operating activities, it may
not be able to meet its debt service or working capital requirements and,
consequently, the Class A Common Stock may have little or no value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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SUBSTANTIAL DEBT OBLIGATIONS TO THE U.S. GOVERNMENT
The Company has or must execute notes to the U.S. Government
documenting the Company's installment payment obligations and a security
agreement creating a first priority security interest in favor of the FCC in the
PCS licenses (and the proceeds of any sale thereof) in the event of a default.
The aggregate debt obligation of the Company to the U.S. Government pursuant to
the Government Financing will be approximately $15.2 million. The Company will
be required to make interest expense payments based on an interest rate of
6.25%. The Company will be required to make quarterly payments of interest only
for the first two years of the license and payments of interest and principal
over the remaining eight years of the license term. In the event that the
Company is unable to meet its obligations under the Government Financing, or it
(or any of its affiliates) is involved in certain insolvency or bankruptcy
proceedings, or otherwise violates regulations applicable to holders of FCC
licenses, the FCC could take a variety of actions, including requiring immediate
repayment of amounts due under the Government Financing, repayment of certain
bidding credits, revoking the Company's PCS licenses and fining the Company an
amount equal to the difference between the price at which the Company acquired
the licenses and the amount of the winning bids at their reauction, plus an
additional penalty of three percent of the lesser of the subsequent winning bid
and the Company's bid amount. On March 31, 1997, the FCC suspended interest
payments on installment payment obligations with respect to C-Block and F-Block
PCS licenses while it determines whether to give any relief to license holders
with respect to the installment payment terms. The FCC's principal concern is
the reported financial problems encountered by numerous C-Block PCS licensees.
The suspension is still in effect but the Company expects that the FCC will
resolve the matters by the end of the year. There can be no assurance that the
Company will be able to meet its obligations under the Government Financing or,
in the event of a failure to meet such obligations, first the FCC will not
require immediate repayment of amounts due under the Government Financing or
revoke the Company's PCS licenses. In either such event the Company may be
unable to meet its obligations to other creditors.
ABILITY TO SERVICE DEBT; SUBSTANTIAL LEVERAGE; SIGNIFICANT CAPITAL REQUIREMENTS;
RESTRICTIVE COVENANTS
The Company's leverage is substantial in relation to its equity. At the
time of the Spin Off, the Company's total indebtedness will be $15.2 million; it
will have $7.3 million of Preferred Stock subject to mandatory redemption under
certain circumstances; and its initial stockholders' deficit will be
approximately $2.4 million.
Based upon the interest rate of 6.25%, the Company will need $948,000
per year to pay interest on the Government Financing in years one and two, and
$2,424,000 per year to pay interest and principal on the Government Financing in
years three through ten. The Company does not expect to have any revenue from
operations in years one and two and does not know when, if ever, it may have
positive cash flow from operations. Unless the Company raises additional funds,
it cannot meet its interest obligations on the Government Financing when
payments, which are currently suspended, are resumed. The Company will have to
raise funds shortly in order to make interest payments on the Government
Financing and for working capital and general corporate purposes. There is no
assurance that the Company can raise sufficient funds. The report of the
Company's independent auditors with respect to the financial statements of the
Company for the period from July 26, 1996 (inception) to December 31, 1996, the
six months ended June 30, 1997 and the period from July 26, 1996 (inception) to
June 30, 1997 contains a paragraph as to the Company's ability to continue as a
going concern. Among the factors cited by the auditors as raising substantial
doubt as to the Company's ability to continue as a going concern is that, with
respect to the periods covered, the Company has incurred losses since inception
and has not yet adopted a business plan or determined how to finance its
operations and will need to obtain capital in the near future in order to fund
its interest payment obligations on the Government Financing and for working
capital and general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the notes thereto and the Report of Independent
Auditors included therein.
In addition, if the Company (or a joint venture) determines to develop
and build out the licenses, substantial additional funds will be required. The
Company has not estimated how much construction of a PCS system would
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cost or determined how it would obtain the necessary funds. Any borrowings from
third parties are likely to contain various restrictions, including restrictions
that significantly limit or prohibit, among other things, the ability of the
Company to incur indebtedness, make prepayments of certain indebtedness, pay
dividends, make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets and engage in mergers and consolidations.
If the Company fails to comply with the restrictive covenants with respect to
such borrowings, the Company's obligation to repay such obligations may be
accelerated. In addition to the restrictive covenants such borrowings may
require the Company to maintain certain financial ratios. The failure of the
Company to maintain such ratios would constitute events of default,
notwithstanding the ability of the Company to meet its debt service obligations.
An event of default would allow the lender to accelerate the maturity of such
indebtedness.
In addition, the Company has an obligation to redeem its Preferred
Stock on the earlier of (i) October 1, 2009, (ii) upon a change of control of
the Class A or Class B Common Stock or (iii) upon the sale of one or more PCS
licenses directly or indirectly for cash in an amount proportional to that
number of persons covered by the sale of such licenses compared to the total
persons covered by the Company's five initial PCS licenses, in each case based
on the 1996 or most recent subsequent estimate by the United States Bureau of
Census. See "Description of Capital Stock -- Transfer Restriction -- Preferred
Stock."
The successful implementation of a Company strategy (which may include
the sale of some or all of its PCS licenses), among other things, is necessary
for the Company to be able to meet its debt service and significant capital
requirements. In addition, if the Company (or a joint venture) determines to
develop the licenses, the Company's ability to satisfy its debt service
obligations once its PCS networks are operational will be dependent upon the
Company's future performance, which is subject to a number of factors that are
beyond the Company's control. There can be no assurance that the Company's PCS
networks can be completed or that, once completed, the Company will generate
sufficient cash flow from operating activities to meet its debt service and
working capital requirements. Any failure or delay in meeting these debt service
requirements, and in particular, the requirements of the Government Financing,
could have a material adverse effect upon the Company's business, results of
operations and financial condition. See "--Substantial Debt Obligations to the
U.S. Government."
The Company's ability to obtain any additional necessary financing or
refinancing will depend on, among other things, its financial condition, any
restrictions governing its indebtedness and other factors, including market
conditions, that are beyond the control of the Company. Further, in the event
the implementation of its PCS networks is delayed or the Company does not
generate sufficient cash flow to meet its debt service or capital requirements,
the Company may need to seek additional financing. There can be no assurance
that any such financing or refinancing could be obtained on terms that are
favorable to the Company, or at all. In the absence of such financing or
refinancing, the Company could be forced to dispose of assets in order to make
up for any shortfall in the payments due on its indebtedness under circumstances
that might not be favorable to realizing the highest price for such assets. A
substantial portion of the Company's assets consist of intangible assets,
principally PCS licenses granted by the FCC, the value of which will depend upon
a variety of factors. Such licenses may only be transferred to other entities
that meet the FCC requirements for F-Block license holders during the first five
years of the initial license term, which may significantly impact the ability of
the Company to realize the value of such licenses. Further, transfers to
entities not meeting such requirements in years six through ten of the initial
license term will subject the Company to substantial unjust enrichment
penalties. There can be no assurance that the Company's assets could be sold, or
sold quickly enough, or for a sufficient amount, to enable the Company to meet
its obligations. "-- F-Block License Requirements" and "-- Foreign Ownership
Limitations."
MANAGEMENT OF GROWTH; NEED TO ESTABLISH INFRASTRUCTURE
Implementation of the Company's plans will place substantial demands on
the Company's executive resources. As of the date hereof, the Company has no
employees, and the Company's directors and officers only provide a limited
amount of time to the affairs of the Company. If the Company (or a joint
venture) is to develop the licenses, it will need to hire a significant number
of employees, including a Chief Operating Officer and possibly a Chief Executive
Officer and/or Chief Financial Officer. There can be no assurance that the
Company (or a joint
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venture) will be able to manage effectively the development of its operations
and facilities, to attract and retain qualified personnel, or to achieve the
rapid execution necessary to exploit fully the market opportunity for the
Company's wireless communications services. Any inability to manage growth
effectively could have a material adverse effect on the Company's business,
results of operation and financial condition. See "-- Dependence on Key
Personnel," and "Management."
PCS NETWORK CONSTRUCTION AND IMPLEMENTATION RISKS
If the Company (or a joint venture) is to develop the PCS licenses, the
proposed construction and implementation of its PCS networks would involve a
high degree of risk including, but not limited to, network design, site
selection and acquisition, equipment availability and microwave relocation. See
"--Relocation of Incumbent Fixed Microwave Licenses." The Company (or a joint
venture) would intend to rely on third parties to undertake substantially all of
the construction and implementation of its PCS networks. There can be no
assurance that the Company (or a joint venture) can successfully develop and
implement the Company's PCS networks. Any failure to do so would have a material
adverse effect upon the Company. If the Company's construction plan is not
properly implemented on a timely basis, the Company may not be able to provide
services competitive with those provided by the cellular and other PCS operators
in its markets. In such event, the Company's PCS subscriber growth would be
limited and the Company's business, results of operations and financial
condition would be materially adversely affected. Successful development of a
PCS operation would be dependent, among other things, (i) on proper network
design, including the appropriate choice of technology to be utilized, (ii) the
ability to lease or acquire numerous sites for the location of base station
transmitter equipment and (iii) the availability for purchase of infrastructure
equipment which may be in short supply.
In addition, each of the Company's PCS licenses is subject to an FCC
requirement that the Company construct PCS networks that provide adequate
service to at least one-quarter of the population in each such PCS market within
five years of the date which the license was granted (the "License Grant Date")
of the applicable license or make a showing of substantial service in its
licensed area within five years of the license grant date. There can be no
assurance that this required coverage will be achieved by the Company in
accordance with FCC requirements, and failure to comply with these requirements
in any market could cause revocation of the Company's PCS licenses or the
imposition of fines or other sanctions by the FCC. See "-- Government
Regulation" and "Legislation and Government Regulation." In addition, winners of
A-Block and B-Block PCS licenses, which were granted in June 1995, and certain
C-Block licenses which were granted between September 1996 and January 1997 have
a significant head-start in constructing their networks. Likewise, the incumbent
cellular licensees in each market have been operating their networks for
five-to-10 years, and are upgrading their networks to use digital technology.
Thus, the construction and implementation of the Company's PCS networks must be
completed on a timely basis, and any delays could have a material adverse effect
on the Company.
DEPENDENCE ON OTHER THIRD PARTIES
If the Company (or a joint venture) determines to develop the PCS
licenses, the Company will likely rely significantly upon third parties to
provide equipment and services, to distribute the Company's products and
services and to provide certain functions such as customer billing. There can be
no assurance that such third parties will provide acceptable equipment and
services on a timely basis and any failure to do so will have a material adverse
effect upon the Company's business, results of operations and financial
condition. See "-- PCS Network Construction and Implementation Risks."
RISKS RELATING TO SELECTION OF DIGITAL TECHNOLOGY
If the Company (or a joint venture) were to develop the PCS licenses,
it will be required to choose from among several competing and potentially
incompatible digital technologies in order to build and operate a PCS system.
Certain of the newer technologies, such as Code Division Multiple Access
("CDMA"), offer potential benefits, but have been implemented only on a limited
basis in the United States and abroad and are unproven,
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particularly with respect to PCS. To some extent, the choice of technology may
be substantially influenced by what other PCS licensees choose and what
financing may be provided by the supplier of the equipment. There can be no
assurance that the Company will choose the appropriate technology or that the
technology chosen will be successful. The selection of a particular protocol
technology could adversely affect the ability of the Company to successfully
offer PCS service. See "Wireless Communications Industry."
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
For a period of up to five years after the grant of a PCS license, PCS
licensees may be required to share spectrum with existing fixed microwave
licensees operating on the F-Block spectrum. To secure a sufficient amount of
unencumbered spectrum to operate its PCS networks efficiently, the Company may
need to pay to relocate existing microwave paths to alternate spectrum locations
or transmission technologies. In an effort to balance competing interests of
existing microwave users and newly authorized PCS licensees, the FCC has adopted
(i) a transition plan to relocate such microwave incumbents and (ii) a cost
sharing plan so that if the relocation of an incumbent benefits more than one
PCS license, the benefitting PCS licensees are required to share the costs of
the relocation. The transition and cost sharing plans expire on April 4, 2005,
at which time remaining microwave incumbents in the PCS spectrum will be
responsible for their costs to relocate to alternate spectrum locations. There
can be no assurance that the Company will be able to reach timely agreements to
relocate these incumbents on terms acceptable to the Company. Any delay in the
relocation of such licensees may adversely affect the Company's ability to
commence timely commercial operation of its PCS networks. Furthermore, depending
on the terms of such agreements, if any, the Company's ability to operate its
PCS networks profitably may be adversely affected.
See "Legislation and Government Regulation."
LIMITED TERRITORY COVERAGE
If the Company (or a joint venture) were to develop the PCS licenses,
its areas of services would be relatively limited, and it would be necessary to
enter into joint ventures or other affiliation arrangements with other service
providers to give its customers a broader area of services and those other
providers would have to have compatible technology.
COMPETITION
PCS is a new technology and service and, as a result, the level and
timing of development of a customer base for PCS applications, on which the
Company's future revenues depend significantly, is uncertain. In the development
of the PCS market, the Company and other PCS licensees will be competing with
the more established cellular industry, as well as other wireless communications
technologies, existing and future, with similar service offerings. Many of the
Company's PCS and cellular telephone competitors, including joint ventures
involving the nation's largest local and long distance telephone carriers and
cable television companies, have substantially greater access to capital than
the Company, substantially greater financial, technical, marketing, sales and
distribution resources than those of the Company, and significantly more
experience than the Company in providing wireless services. Several of the
Company's competitors are expected to market other services, such as cable
television service, landline telephone service and internet access with their
wireless communications service offerings. In addition, several competitors are
operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless communications networks that cover most of the United
States.
Assuming that the Company (or a joint venture) determines to develop
its PCS licenses, the Company will compete directly with up to five other PCS
providers in each of its markets. Providers holding the A- and B-Block licenses
auctioned by the FCC will have an advantage over the F-Block licensees because
the A- and B-Block licenses were granted on June 23, 1995, giving these
companies a significant head start in building out and operating their PCS
networks. C-Block licenses were awarded in September 1996 and January 1997 and
will have a lesser time advantage over D, E and F-Block licenses. Other PCS
licensees in the Company's license areas include Cox Enterprises, American
Personal Communications, Pacific Telesis, Nextwave, AT&T, Inc., Rivgam
Communicators
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L.L.C., OPCSE-Galloway Consolidated, Aerial Communications, PCS Prime Co.,
Sprint COM, Inc., BellSouth Wireless, Inc., Sprint Spectrum, PCS 2000, L.P.,
Alpine PCS, Inc. and Entertainment Unlimited. The FCC recently modified its
rules to permit the partitioning and disaggregation of broadband PCS licenses
into licenses to serve smaller service areas, which could allow other new
entrants to enter wireless markets served by the Company. Additionally, the
Company will compete with existing cellular providers in its markets, most of
which have infrastructure in place, have an established brand identity, have
generated positive cash flow and have been operational for as many as ten years
or more. The Company expects that many cellular operators will upgrade their
networks to provide comparable digital services in competition with the Company.
Cellular operators in the Company's license areas include BellSouth, Bell
Atlantic NYNEX Mobile, GTE Mobilenet, Air Touch and GTE Mobilenet.
The success of the Company's PCS service business will depend upon its
ability to compete, especially with respect to pricing, service, reliability and
availability of features, such as data and voice transmission, call waiting,
call forwarding and short messaging capability. In addition to PCS and cellular
operators, the Company may also face competition from other existing
communications technologies, such as conventional mobile telephone services,
specialized mobile radio ("SMR") service, enhanced SMR ("ESMR") service, paging
services (including two-way digital paging), and domestic and global mobile
satellite service ("MSS"). Nextel is providing competitive wireless
communications pursuant to an ESMR system. In the future, cellular and PCS
service will also compete more directly with traditional landline telephone
service operators, energy utilities, local multipoint distribution service
("LMDS") providers, and cable and wireless cable operators seeking to offer
communications services by leveraging their existing infrastructure. The FCC in
the spring of 1997 also auctioned 30 MHZ of spectrum in the 2.3 GHz band for
wireless communications services ("WCS"). The FCC has proposed that WCS
providers be permitted to offer a broad range of fixed, mobile radio location
and satellite broadcast services, some of which could be in competition with the
Company's service offerings. The FCC has also announced rules for the auction of
1300 megahertz ("MHz") of spectrum in the 27.5 - 29.5 Ghz and 31.0 - 31.3 Ghz
bands for LMDS commencing in December 1997. The FCC contemplates that the LMDS
spectrum would provide very high subscriber capacity for two-way video
telecommunications. The Company may also face competition from new technologies.
OTHER PCS AND WIRELESS TELEPHONE INTERESTS
Victoria G. Kane, a director of the Company and the sole shareholder of
AFC, the holder of all of the Class B Common Stock (which constitutes 50.1% of
the common stock of the Company), is also the majority stockholder of Fortunet
Wireless Communications Corporation, which is the General Partner and 50.1%
equity owner of Fortunet Communications, L.P. Fortunet owns 30 MHz C-Block PCS
licenses for 31 BTAs but currently has no interest in PCS licenses in any of the
BTAs where the Company has licenses. Ms. Kane, AFC, and/or Fortunet may
participate, directly or indirectly, in other spectrum auctions or in other
telecommunications investments.
Mario J. Gabelli is a director of the Company and the Chairman and
Chief Executive Officer and the largest shareholder of Lynch. Mr. Gabelli is
also the Chairman and Chief Executive Officer of GFI which, immediately prior to
the Spin Off, will own 10% of the Common Stock of the Company. Lynch owns all of
the Preferred Stock of the Company. GFI is also the owner of Rivgam, which owns
10MHz D and E Block PCS licenses in 11 BTAs, including Los Angeles, Washington,
D.C. and Reno, Nevada where the Company has licenses. GFI also has a 49.9%
interest in Bal/Rivgam L.L.C., which won licenses in the 2.3 GHz band for WCS.
One of the 2.3 GHz licenses includes Los Angeles where the Company has a
license. A Lynch subsidiary has a 49.9% limited partnership interest in Fortunet
Communications, L.P. Each of Lynch, GFI and Mr. Gabelli may also participate
directly or indirectly, in the other spectrum auctions, including the LMDS
auction scheduled to commence later this year or in other telecommunications
investments. See "--Competition."
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10MHZ LICENSES
Cellular telephone licenses are for 25 MHz of spectrum each and the PCS
licenses in the A, B and C- Blocks are for 30 MHz of spectrum each. The D, E and
F-Block licenses, which have only 10MHz of spectrum, therefore have less
capacity with which to provide wireless telephone service. This may eventually
limit growth opportunities as demand increases in the future for mobile PCS
services. In addition, the cost to build out a digital mobile PCS system to an
equivalent standard may be greater with a 10 MHz license than with either a 25
MHz cellular or 30 MHz PCS license. Potential lenders may also require that 10
MHz licensees have arrangements for additional spectrum. As a result, the
Company may either initially, or at a later time, have to joint venture or make
other arrangements with holders of additional spectrum in order to provide the
amount or breath of service to be or remain competitive, or may consider the
provision of telephone services other than mobile PCS such as fixed wireless
local loop, data or internet access. The ability of the Company to enter into
certain arrangements is limited by FCC regulations, and there can be no
assurance that the Company will be able to enter into such arrangements on terms
favorable to it or at all.
LIMITED OPERATING HISTORY FOR PCS NETWORKS
PCS networks have an extremely limited operating history in the United
States and there can be no assurance that operation of these networks will
become profitable. In addition, the extent of potential demand for PCS in the
Company's markets cannot be estimated with any degree of certainty. The wireless
communications industry is experiencing significant technological changes, as
evidenced by the increasing pace of digital upgrades in existing analog wireless
systems, evolving industry standards, ongoing improvements in the capacity and
quality of digital technology, shorter development cycles for new products and
enhancements, and changes in end-user requirements and preferences. There is
also uncertainty as to the extent of customer demand. As a result, the future
prospects of the industry and the Company and the success of PCS and other
competitive services remain uncertain.
GOVERNMENT REGULATION
The spectrum licensing, construction, operation, sale and
interconnection arrangements of wireless communications networks are regulated
to varying degrees by state regulatory agencies, the FCC, Congress, the courts
and other governmental bodies. There can be no assurance that any of these
governmental bodies having jurisdiction over the Company will not adopt or
change regulations or take other actions that would adversely affect the
Company's business, financial condition or results of operations. Although the
FCC has issued rules regarding the F-Block Auction and numerous other matters,
not all of them have been subject to FCC or judicial interpretation.
Accordingly, for certain matters (such as the structure of its Board of
Directors and management), the Company is relying on public and private informal
interpretation of the rules from the staff of the FCC. The FCC is not bound by
such informal interpretation of FCC staff and there can be no assurance that the
FCC or the courts will agree with the staff's interpretation. Many of these
rules also require ongoing compliance that the Company may not be able to
satisfy despite diligent efforts. A failure to comply with FCC rules could
subject the Company to serious penalties and have a material adverse effect upon
the Company's business, results of operations and financial condition. In
addition, although the Company's PCS licenses are renewable after the expiration
of their 10-year terms, there can be no assurance that the Company's licenses
will be renewed.
The Telecommunications Act of 1996 (the "1996 Act") mandates
significant changes in existing regulation of the telecommunications industry
that are intended by Congress to promote competitive development of new service
offerings, to expand public availability of telecommunications services and to
streamline regulation of the industry. Included in these mandates are
requirements that local exchange carriers ("LECs") must: (i) permit other
competitive carriers, which may include PCS licensees, to interconnect to their
networks; (ii) establish reciprocal compensation agreements with competitive
carriers to terminate traffic on each other's networks and (iii) offer resale of
their telecommunications services. In addition, incumbent LECs are required to
offer interconnection and access to unbundled network elements at cost-based
rates (plus a reasonable profit), as well as significant resale discounts.
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The implementation of these mandates by the FCC and state authorities
potentially involves numerous changes in established rules and policies that
could adversely affect the Company's business, financial condition and results
of operations.
In March 1997, CAI Wireless Systems, Inc. (and certain subsidiaries)
("CAI") filed petitions to deny various D, E and F-Block PCS licenses, including
the Company's license for Washington, D.C., because it feared that PCS
operations might cause interference with petitioners' wireless cable services.
In June 1997 the FCC dismissed all of those petitions on the grounds that CAI
failed to establish standing because it failed to allege specific facts
supported by affidavit demonstrating that applicants would cause CAI
interference if their applications were granted. It is possible that CAI, or
others similarly situated, might attempt to raise this issue at a later date.
The FCC has proceedings in process that could open up other frequency
bands for wireless telecommunications and PCS-like services. There can be no
assurance that these proceedings will not adversely affect the Company and the
Company's ability to offer a full range of PCS services. See "Risk Factors --
Substantial Debt Obligations to the U.S. Government" "-- F-Block License
Requirements," "-- Foreign Ownership Limitations, "-- Effect of Control by
Certain Stockholders" and "Legislation and Government Regulation."
F-BLOCK LICENSE REQUIREMENTS
When the FCC allocated spectrum to public auction for PCS, it
designated the F-Block as an "Entrepreneurs' Block." FCC rules require F-Block
applicants and licensees (collectively, "Entrepreneurs") to meet various
qualifications.
The FCC has determined that Entrepreneurs that qualify as a Very Small
Business and win PCS licenses are eligible to receive a loan from the U.S.
Government for 80% of the dollar amount of their winning bids in the F-Block
Auction (a "F-Block Loan"). The Government Financing provided to the Company is
F-Block Loans. See "Description of Certain Indebtedness." In order to ensure
continued compliance with the FCC rules, the FCC has announced its intention to
conduct random audits during the initial 10-year PCS license terms. There can be
no assurance that the Company will continue to satisfy any of the F-Block
license requirements, and the failure to do so would have a material adverse
effect on the Company.
Entrepreneurs Requirements. In order to hold a F-Block license, an
entity must have: (i) less than $125 million in gross revenues (the
"Entrepreneurs Revenues Limit") for the two years preceding the auction and (ii)
less than $500 million in total assets (excluding the value of C-Block licenses)
(the "Entrepreneurs Asset Limit" and, together with the Entrepreneurs Revenues
Limit, the "Entrepreneurs Requirements"). To qualify for the F-Block Auction, an
entity had to have met the Entrepreneurs Revenues Limit for each of the two
years prior to the auction and the Entrepreneurs Asset Limit at the time it
filed its application to qualify for the F-Block Auction on FCC Form 175 (the
"Short Form"). For at least five years after obtaining an F-Block license, a
licensee must continue to meet the Entrepreneurs Requirements, which are
modified for such five-year period to exclude certain assets and revenues from
being counted toward the Entrepreneurs Asset Limit and the Entrepreneurs
Revenues Limit, respectively. Additional amounts are excluded if the licensee
maintains an organizational structure that satisfies the Control Group
Requirements described below. In calculating a licensee's gross revenues for
purposes of the Entrepreneurs Requirements, the FCC includes the gross revenues
of the licensee's affiliates, those persons or entities that hold interests in
the licensee, and the affiliates of such persons or entities.
By claiming status as an Entrepreneur, the Company qualified for the
F-Block Auction. If the FCC were to determine that the Company did not satisfy
the Entrepreneurs Requirements at the time it participated in the F- Block
Auction or that the Company fails to meet the ongoing Entrepreneurs
Requirements, the FCC could revoke the Company's PCS licenses, fine the Company
or take other enforcement actions, including imposing the Unjust Enrichment
Penalties described below. See "Legislation and Government Regulation - F-Block
License Requirements Transfer Restrictions - Unjust Enrichment." Although the
Company believes it has met the
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Entrepreneurs Requirements, there can be no assurance that it will continue to
meet such requirements or that, if it fails to continue to meet such
requirements, the FCC will not take action against the Company, which could
include revocation of its PCS licenses.
Very Small Business Requirements. An entity that meets the
Entrepreneurs Requirements may also apply to receive certain preferential
financing terms if it meets certain requirements to qualify as a Small Business
or a Very Small Business (the "Small Business Requirements" or "Very Small
Business Requirements"). The preferential financing terms for Very Small
Businesses, include a 25% bidding credit (the "Bidding Credit") and the ability
to make quarterly interest-only payments on its F-Block Loan for the first two
years of the license term. To meet the Very Small Business Requirements, a
licensee must have had annual average gross revenues of not more than $15
million for the three calendar years preceding the date it filed its Short Form.
In calculating a licensee's gross revenues for purposes of the Very Small
Business Requirements, the FCC includes the gross revenues of the licensee's
affiliates, those persons or entities that hold interests in the licensee, and
the affiliates of such persons or entities.
By claiming status as a Very Small Business, the Company qualified for
the 25% Bidding Credit and the most favorable installment payment terms. If the
FCC were to determine that the Company does not qualify as a Very Small
Business, the Company could, at a minimum, be forced to give up any benefits for
which it was not eligible. Further, the FCC could revoke the Company's PCS
licenses, fine the Company or take other enforcement actions, including imposing
the Unjust Enrichment Penalties. Although the Company has structured itself to
meet the Very Small Business Requirements, there can be no assurance that it
will remain in compliance with these requirements or that, if it fails to
continue to meet such requirements, the FCC will not take action against the
Company, which could include revocation of its PCS licenses.
Control Group Requirements. If an F-Block licensee maintains an
organizational structure in which at least 25% of its total equity on a fully
diluted basis is held by a control group (the "Control Group") that meets
certain requirements (the "Control Group Requirements"), the FCC excludes
certain assets and revenues from such licensee's total revenues and assets,
thereby making it easier for the licensee to meet the Entrepreneurs Requirements
and the Very Small Business Requirements. The Control Group Requirements mandate
that the Control Group, among other things, have both actual and legal control
of the licensee. Further, the FCC permits licensees to qualify under the Control
Group Requirements pursuant to an alternative structural option (the "Qualifying
Investor Option"), in which: (i) an established group of investors meeting
certain financial qualifications (the "Qualifying Investors") that own at least
15% of the equity interest on a fully diluted basis and 50.1% of the voting
power in the F-Block licensee and (ii) additional members ("Additional Control
Group Members") that hold at least 10%, on a fully diluted basis, of the equity
interest in the F-Block licensee. Additional Control Group Members must be
either: (a) the same Qualifying Investors of the Control Group, (b) members of
the licensee's management or (c) non-controlling institutional investors,
including venture capital firms. To take advantage of the FCC's Qualifying
Investor Option, a F-Block licensee must have met the Qualifying Investor Option
requirements at the time it filed its Short Form and must continue to meet the
Qualifying Investor Option requirements for three years following the License
Grant Date. Commencing the fourth year of the license term, the FCC rules (i)
eliminate the requirement that the Additional Control Group Members meet certain
qualifications and (ii) allow the licensee to reduce the minimum required equity
interest held by the Control Group's Qualifying Investors from 15% to 10%.
In order to meet the Control Group Requirements, the Company's
Certificate of Incorporation provides that the Company's Class B Common Stock,
as a class, must constitute 50.1% of the voting power of the Company. There can
be no assurance that the Company will remain in compliance with the Control
Group Requirements or, if it fails to continue to meet such requirements, that
the FCC will not take action against the Company, which could include revocation
of its PCS licenses. Although the Company has taken these and other steps to
meet the Control Group Requirements, there can be no assurance that the Company
has or will continue to meet the Control Group Requirements, and the failure to
meet such requirements would have a material adverse effect on the Company.
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Asset and Revenue Calculation. In determining whether an entity
qualifies as an Entrepreneur and/or as a Very Small Business, the FCC counts the
gross revenues and assets of the entity's "financial affiliates" toward the
entity's total gross revenues and total assets. Financial affiliation can arise
from common investments, familial or spousal relationships, contractual
relationships, voting trusts, joint venture agreements, stock ownership, stock
options, convertible debentures and agreements to merge. Affiliates of
noncontrolling investors with ownership interests that do not exceed the
applicable FCC nonattributable investor ownership thresholds are not attributed
to F-Block licensees for purposes of determining whether such licensees
financially qualify for the applicable F-Block Auction preferences. The
Entrepreneurs Requirements and the Very Small Business Requirements provide
that, to qualify as a nonattributable investor, an entity may not own more than
25% of the Company's total equity on a fully diluted basis. There can be no
assurance that the Company will not exceed these passive investor limits or
otherwise violate the Entrepreneur Requirements and/or the Very Small Business
Requirements.
In addition, if an entity makes bona fide loans to a F-Block licensee,
the assets and revenues of the creditor would not be attributed to the licensee
unless the creditor is otherwise deemed an affiliate of the licensee, or the
loan is treated by the FCC as an equity investment and such treatment would
cause the creditor/investor to exceed the applicable ownership interest
thresholds (for purposes of both the financial affiliation and foreign ownership
rules). Although the FCC permits a creditor/investor to use standard terms to
protect its investment in F-Block licensees, such as covenants, rights of first
refusal and super-majority voting rights on specified extraordinary issues, the
FCC has stated that it will be guided, but not bound, by criteria used by the
Internal Revenue Service to determine whether a debt investment is bona fide
debt. The FCC's application of its financial affiliation rules is largely
untested and there can be no assurance that the FCC or the courts will not treat
certain of the company's lenders or investors as financial affiliates of the
Company.
Transfer Restrictions. In addition, the FCC prohibits F-Block licensees
from assigning or transferring control of any of their F-Block licenses for a
period of at least five years from the License Grant Date to any entity that
fails to satisfy the Entrepreneurs Requirements during such period. After the
fifth year, all transfers and assignments remain subject to the Unjust
Enrichment Penalties. The effect of this prohibition will likely deter or delay
unsolicited changes in control of the Company. See "Legislation and Government
Regulation -- F-Block License Requirements -- License Transfer Restrictions --
Unjust Enrichment" and "Description of Capital Stock Antitakeover Effects of
Provisions of the Certificate of Incorporation, Bylaws, Delaware Law and Control
Group Requirements."
The Company (i) believes that it has structured itself to satisfy the
Entrepreneurs Requirements, (ii) intends to diligently pursue and maintain its
qualification as a Very Small Business and (iii) has structured the Class A and
Class B Common Stock in a manner intended to ensure compliance with the
applicable FCC Rules, The Company has relied on representations of its investors
to determine its compliance with the FCC's rules applicable to F-Block
licensees. There can be no assurance, however, that the Company's investors or
the Company itself will continue to satisfy these requirements during the term
of any PCS license granted to the Company or that the Company will be able to
successfully implement divestiture or other mechanisms included in the Company's
Certificate of Incorporation which are designed to ensure compliance with FCC
rules. Any non-compliance with FCC rules could subject the Company to serious
penalties, including revocation of its PCS licenses. See "-- Substantial Debt
Obligations to the U.S. Government; "-- Effect of Control by Certain
Stockholders," "-- Foreign Ownership Limitations" and "Legislation and
Government Regulation."
FOREIGN OWNERSHIP LIMITATIONS
The FCC must determine that it is in the public interest for more than
25% of the capital contribution of the parent of a PCS licensee to be owned,
directly or indirectly, or voted by non-U.S. citizens or their representatives,
by a foreign government or its representatives or by a foreign corporation (and
such licenses are so held). The restrictions on foreign ownership could also
adversely affect the ability of the Company to attract additional equity
financing from entities that are, or are owned by, non-U.S. entities. The FCC
Form 600 (the
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"Long Form") filed by the Company with the FCC after the completion of the
F-Block Auction indicates that the Company's foreign ownership does not exceed
25%. However, if the foreign ownership of the Company were to exceed 25% in the
future, the FCC could revoke the Company's PCS licenses. Further, the Company's
Certificate of Incorporation enables the Company to redeem shares from holders
of the Common Stock whose acquisition of shares results in a violation of such
limitation. The restrictions on foreign ownership could adversely affect the
Company's ability to attract additional equity financing from entities that are,
or are owned by, non-U.S. entities. See "Description of Capital Stock -- Common
Stock -- Redemption by the Company" and "Legislation and Government Regulation."
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could eliminate or loosen foreign ownership
limitations but could also increase the Company's competition. Under this
agreement, the United States and other members of the WTO committed themselves
to opening their telecommunications markets to competition and foreign ownership
and to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telephone companies, effective as early as
January 1, 1998. Under the WTO agreement, the United States agreed to eliminate
the foreign ownership limits if the alien investment is domiciled in another WTO
country; however there can be no assurance as to when or if the FCC will change
its policy.
EFFECT OF CONTROL BY AFC
As the Control Group of the Company, AFC has at least 50.1% of the
voting power of the outstanding equity of the Company and will be entitled to
elect up to three members (the "Class B Directors") to the Company's Board of
Directors, who will have votes comprising a total of three full votes. It also
has to have actual control of the Company. The remaining members of the Board of
Directors, as elected by the holders of Class A Common Stock, will have votes
comprising a total of two full votes. There can be no assurance that the Company
has met or will be able to continue to meet the Control Group Requirements. See
"--F-Block License Requirements."
Control of the Company by AFC will likely deter and delay unsolicited
changes in control of the Company. In addition, other provisions of the
Company's Certificate of Incorporation and Bylaws as well as provisions under
Delaware Law may discourage potential acquisition proposals. See "Description of
Capital Stock -- Antitakeover Effects of Provisions of the Certificate of
Incorporation, Bylaws, Delaware Law and Control Group Requirements."
DEPENDENCE ON KEY DIRECTORS AND OFFICERS
The Company has no employees. Accordingly, the Company's future
performance depends in substantial part upon the continued contributions of its
key directors and officers. The loss of the services of these directors and/or
officers, who have no obligation to continue as such, could have a material
adverse effect upon the Company's business, results of operations and financial
condition. The Company believes there is and will continue to be intense
competition for personnel with experience in the wireless industry as the
emerging PCS market develops. There can be no assurance that the Company can
attract, assimilate or retain other highly qualified personnel in the future.
See "Management of Growth; Need to Establish Infrastructure and "Effect of
Control by Certain Stockholders."
HEALTH RISKS
Allegations have been raised that the use of hand-held cellular/PCS
phones may pose health risks to humans due to RF emissions from the handsets.
Studies performed by wireless telephone equipment manufacturers dispute these
allegations, and a major industry trade association and certain governmental
agencies have stated publicly that the use of such phones poses no undue health
risk. Regardless of the truth of these allegations, they could have an adverse
effect on the Company. In addition, digital wireless telephones have been shown
to cause interference to some electronic devices, such as hearing aids and
pacemakers.
-15-
<PAGE>
Concerns over RF emissions also may have the effect of discouraging the
use of wireless communication devices, such as the PCS phones to be used with
the Company's networks. The FCC currently is conducting a rulemaking proceeding
to update the guidelines and methods used for evaluating RF emissions from radio
equipment, including wireless telephones. The FCC's proposal, if adopted, would
impose more restrictive standards on RF emissions from devices such as hand-held
PCS telephones. Although CDMA handsets operate at lower power than other
wireless handsets and therefore would comply with the proposed standards, if
adopted, the same concerns about RF emissions could remain present with CDMA
handsets. These concerns could have an adverse effect on the Company's financial
condition and the results of its operations.
ANTITRUST INVESTIGATION
The United States Department of Justice has initiated an investigation
to determine whether there has been bid rigging and market allocation for
licenses auctions by the FCC for PCS. The Company, together with various other
bidders in the PCS auctions, has received a civil investigative demand ("CID")
requesting documents and information relating to bidding, and in June 1997, the
Company complied with the CID. The Company has not heard from the Justice
Department since that date and does not know what further action, if any, the
Justice Department may take.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends and currently intends not
to pay any dividends for the foreseeable future. To the extent the Company
requires additional funding currently not provided for in its financing plan,
such funding sources may likely prohibit the payment of dividends. See
"--Significant Capital Requirements; Financing risks."
POTENTIAL SALES LIMITATIONS; SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE
EFFECT ON FUTURE MARKET PRICES
It is not currently intended that the Class A Common Stock will be
listed or registered on any national securities exchange or on the NASDAQ
market. Accordingly, there is no assurance that a trading market will develop
for the Class A Common Stock, and the ability to buy or sell shares of Class A
Common Stock may be limited.
Sales of substantial amounts of Class A Common Stock in the trading
market which develops could materially adversely affect the market price of the
stock. Such sales also might make it more difficult for the Company to sell
equity or equity-related securities in the future at a time and price the
Company deems appropriate.
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SELECTED FINANCIAL DATA
The following selected financial data are derived from financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. Ernst & Young LLP's report on the financial statements for
the period from July 26, 1996 (inception) to December 31, 1996, the six months
ended June 30, 1997 and the period from July 26, 1996 (inception) to June 30,
1997, which appears elsewhere herein, includes an explanatory paragraph which
describes an uncertainty about the Company's ability to continue as a going
concern. The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information included herein.
<TABLE>
<CAPTION>
PERIOD FROM
JULY 26 (INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31,
1996 JUNE 30, 1997 JUNE 30, 1997
------ ------------- -------------
(ACTUAL) (ACTUAL) (PRO FORMA)
STATEMENTS OF OPERATIONS DATA
<S> <C> <C> <C>
Revenue........................................ $-- $-- $--
Interest Expense (including commitment
fees).......................................... 1,579,000 1,312,000 --(1)
Partners' Loss................................. (1,579,000) (1,312,000) --(1)
Number of Common Shares Outstanding............ N.A. N.A. 3,552,000(2)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997 JUNE 30, 1997
----------------- ------------- -------------
(ACTUAL) (ACTUAL) (PRO FORMA)
BALANCE SHEET DATA
<S> <C> <C> <C>
Cash and cash equivalents...................... $ -- $ -- $250,000(3)
Deposits with FCC.............................. 12,000,000 -- --
PCS licenses................................... -- 18,958,000 18,958,000
Total assets................................... 12,000,000 19,184,000 19,434,000(3) (4)
Loan from FCC ................................. -- 15,166,000 15,166,000
Loan from Limited Partner ..................... 11,800,000 2,708,000 --(4)
Redeemable Preferred Stock..................... -- -- 5,686,000(4)
EQUITY DATA
Partners' contributions........................ 200,000 200,000 --
Common stock................................... -- -- 355
Additional paid-in-capital..................... -- -- 449,645
Accumulated losses............................. (1,578,500) (2,890,658) (2,890,658)
------------------------------------------------------------------------------
Total (deficit)................................ (1,378,500) (2,690,658) (2,440,658)
</TABLE>
- ------------------------------
(1) Assumes that the debt obligation of the Company to Lynch PCS Corporation F
(the "Limited Partner"), was converted to Preferred Stock at January 1,
1997.
(2) Assumes that limited partnership has been converted to a corporation
effective June 30, 1997.
-17-
<PAGE>
(3) Assumes that the general and Limited Partners had made additional capital
contributions to the Company in the aggregate amount of $250,000 as of
June 30, 1997.
(4) Assumes that the debt obligation of the Company to the Limited Partner
(including accrued interest and commitment fees of $2,978,000) was
converted to Preferred Stock at June 30, 1997.
-18-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Information Statement, including the following discussion,
contains certain 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. Actual results could differ materially from those projected in the
forward-looking statements as a result of certain of the risk factors commencing
on page 5 as well as other factors described below and elsewhere in this
Information Statement.
The Company is a development stage company with no significant results
of operations to date. The Company's principal expense to date has been interest
(including commitment fees) plus minor administrative expenses. The ability of
the Company (or a joint venture) to develop a profitable PCS business is subject
to substantial risks enumerated under "Risk Factors" and elsewhere in this
Information Statement.
Unless the Company sells its PCS business or joint ventures its PCS
licenses with an entity that has the capacity to provide substantial funds, the
Company will need to raise substantial capital to fund its installment payments
to the U.S. Government and the build out of its PCS licenses. Under the
Government Financing, the Company has to make payments of approximately $948,000
in each of the first two years, and $2,424,000 in each of years three through
ten. The interest payments have been suspended, however, until the FCC resolves
issues surrounding restructuring C-Block licenses. The Company does not have a
reliable estimate of the cost to build out its PCS licenses but it is likely to
be substantial.
The Company will have to raise funds shortly in order to make interest
payments on the Government Financing and for working capital and general
corporate purposes. There can be no assurance that the Company can raise
sufficient funds. The report of the Company's independent auditors with respect
to the financial statements of the Company for the period from July 26, 1996
(inception) to December 31, 1996, the six months ended June 30, 1997 and the
period from July 26, 1996 (inception) to June 30, 1997 contains a paragraph as
to the Company's ability to continue as a going concern. Among the factors cited
by the auditors as raising substantial doubt as to the Company's ability to
continue as a going concern is that, with respect to the periods covered, the
Company has incurred losses since inception and has not yet adopted a business
plan or determined how to finance its operations and will need to obtain capital
in the near future in order to fund its interest payment obligations and for
working capital and general corporate purposes. See "Risk Factors" and the
Financial Statements of the Company and the notes thereto and the Report of
Independent Auditors included herein.
RESULTS OF OPERATIONS
Interest Expense
For the period from July 26 (inception) - December 31, 1996 and the six
month period ended June 30, 1997, interest expense consisted of amounts
(including commitment fees) accrued on the indebtedness of the Company to the
Limited Partner prior to the grant of PCS licenses (on April 28, 1997 with
respect to four licenses and June 27, 1997 with respect to the fifth license).
Subsequent to the dates of grant, interest expense (including commitment fees on
outstanding balances) was capitalized.
Partners' Loss
Partners' loss for both the periods ended December 31, 1996 and June
30, 1997 resulted primarily from interest charges (including commitment fees).
-19-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The principal amount of indebtedness at December 31, 1996 and June 30,
1997 consisted of $11,800,000 and $17,874,000, not including accrued interest
and commitment fees, compared to accumulated deficits of ($1,379,000) and
($2,691,000), respectively. During such periods the Company had no revenues or
operating profit and cannot predict when it may have any revenues or operating
profits. The indebtedness (including accrued interest and commitment fees) of
the Company to the Limited Partner ($5,686,000 at June 30, 1997) is expected to
be converted into a like principal amount of redeemable Preferred Stock, with a
dividend payable in additional Preferred Stock. The Company will, however, have
to pay interest on the Government Financing of approximately $948,000 per year
in each of the first two years as well as administrative and other expenses. The
Company will have to raise funds in order to meet those cash commitments, and
there can be no assurance that it will be able to do so. See "Risk Factors."
-20-
<PAGE>
THE WIRELESS COMMUNICATIONS INDUSTRY
GROWING DEMAND FOR WIRELESS SERVICES
Demand for wireless communications has grown rapidly over the past
decade and has been driven by technological advancements and increased
competition. Wireless communication products and services have evolved from
basic tone-only paging services to mass-market cellular technology services and
are now entering the next generation of development with the evolution of
wireless communication technology. Each new generation of wireless communication
products and services has generally been characterized by improved product
quality, broader service offerings and enhanced features.
The Company believes that the demand for wireless communications will
continue to grow dramatically and that PCS will capture a significant share of
the wireless market. Currently, wireless telephony penetration in the United
States is estimated to be 17% as of December 31, 1996 and, according to Kagan
Associates, is expected to grow to 47% by 2006. As reported by the Cellular
Telecommunications Industry Association ("CTIA"), the compound annual growth
rate of cellular subscribers exceeded 42% from 1990 through 1996. Despite this
rapid growth in the number of cellular subscribers, wireless minutes of use only
represent approximately one percent of total telecommunications switched minutes
of traffic, due in part to capacity constraints which discourage cellular
operators from aggressively pricing their services.
INDUSTRY OVERVIEW
General. Wireless communications networks use a variety of radio
frequencies to transmit voice and data signals. Wireless communications
technologies include one-way radio applications, such as paging or beeper
services, and two-way radio applications, such as cellular telephone, SMR
networks and emerging PCS services. Each application operates on a distinct
portion of radio frequency spectrum. Although the principal wireless voice
application to date has been cellular telephony, PCS is expected to develop
rapidly.
Cellular. The cellular telephone industry commenced in 1983 when the
FCC began granting two 20 MHz licenses per market throughout the United States.
In 1986, the FCC granted an additional 5 MHz of spectrum per cellular license to
provide a total of 25 MHz for each cellular operator. Today, there are two
cellular operators in each market.
PCS. In order to increase competition in wireless communications,
promote improved quality and service, and make available the widest possible
range of wireless services to U.S. consumers, Federal legislation was enacted in
1993 directing the FCC to allocate radio frequency spectrum for PCS by
competitive bidding. The FCC established PCS service areas in the United States
based upon Rand McNally & Co.'s market definition of 51 major trading areas
("MTAs") and 493 basic trading areas ("BTAs"), which are the geographic
territories for which PCS licenses have been or will be auctioned.
PCS licenses differ from existing cellular licenses in three basic
ways: location of the licensed frequencies on the radio spectrum, amount of
spectrum allocated per license and geographic area licensed. PCS networks will
operate at higher frequencies (120 MHz in the 1850-1990 MHz frequency band)
compared to cellular frequencies (50 MHz in the 800-900 MHz frequency band).
Also, PCS licenses will permit the use of spectrum blocks of 30 MHz or 10 MHz
(like those held by the Company) versus spectrum blocks of 25 MHz for cellular
licenses. Finally, the geographic areas for PCS licenses are divided differently
than for cellular licenses. PCS is segmented among 51 MTAs for A- and B-Block
licenses and 493 BTAs for other PCS licenses, including F-Block licenses, as
opposed to cellular's 306 metropolitan statistical areas and 428 rural service
areas.
In March 1995, the FCC awarded two 30 MHz licenses (the A- and B-Block
PCS licenses) in each of the MTAs. In May 1996, the FCC completed the C-Block
auction, resulting in the award of one license for 30 MHz
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<PAGE>
of spectrum in each of the BTAs. In July 1996, the FCC reauctioned 18 C- Block
licenses for which the high bidders failed to make initial post-auction down
payments. In January 1997, the FCC completed the auction of D-, E- and F- Block
licenses, which are for licenses of only 10 MHz of spectrum in each of the BTAs.
Although the F-Block licenses were reserved for Entrepreneurs, the D- and
E-Block licenses are not reserved for any specific class of applicants.
LIMITATIONS OF CELLULAR TELEPHONE INDUSTRY
Despite its widespread availability and growth to date, analog cellular
services have several limitations, including inconsistent service quality, lack
of privacy, limited capacity and, currently, the inability to transfer data
without a modem. Most current cellular services transmit voice and data signals
over analog-based systems, which use one continuous electronic signal that
varies in amplitude or frequency over a single radio channel accommodating one
conversation. In contrast, digital networks, including PCS networks, convert
voice or data signals into a stream of digits and typically use voice
compression techniques to allow a single radio channel to carry multiple
simultaneous signal transmissions. This enhanced capacity, along with
improvements in digital protocols, allows PCS and other digital wireless
technologies to offer greater call privacy and single number service, and more
robust data transmission features.
The Company believes that due to relatively high per minute airtime
charges and unpredictable monthly bills, there is a price-sensitive mass
consumer market that refrains from subscribing to or extensively using cellular
services. The Company believes that if the mass consumer market were offered
significantly lower per minute airtime charges and more predictable and
affordable pricing plans, mass consumers would increase their use of wireless
communications services, contributing to a new phase of growth in the industry.
The Company also believes that business customers who are high- volume users of
wireless communications will be attracted to lower priced airtime service, as
they would realize substantial aggregate savings. The Company believes that PCS
operators have the opportunity to capture a substantial market share due to
technical and other advantages that they will have relative to incumbent
cellular operators, including (i) greater flexibility to reduce per minute
airtime usage charges, (ii) increased network capacity, (iii) enhanced voice
quality and (iv) the ability to include enhanced capabilities such as advanced
calling features, data transmissions to and from portable computers, and short
messaging and facsimile services without need of a modem.
THE PCS SOLUTION
PCS operators plan to construct all-digital wireless telephony networks
and will compete primarily with existing cellular telephone operators. PCS
operators using digital technology will have several technical and capacity
related advantages relative to analog cellular providers. The Company believes
that the enhanced capacity of PCS networks will allow PCS operators to offer
wireless communications services at per minute airtime prices significantly
below the per minute airtime prices currently being charged by cellular
operators. As a result PCS subscribers are expected to use more airtime minutes
per month than cellular subscribers due to both lower effective airtime pricing
and enhanced features. The Company believes that PCS operators will realize
substantial revenue growth from broad penetration and greater levels of usage.
PCS was introduced in the United States in the Washington, D.C. MTA in
late 1995. Despite the PCS network having a much smaller geographic coverage
area than existing cellular competitors and no current roaming capability,
approximately 90,000 customers subscribed for PCS services in the first seven
months of commercial availability. The Company believes that the experience in
international markets where PCS has already been introduced provides additional
support for the potential growth of PCS in the United States. For example, in
approximately three years, the two PCS operators in the United Kingdom have
gained over 1.1 million subscribers. In Japan, approximately 600,000 new PCS
subscriptions were activated during the first year of operations.
-22-
<PAGE>
INDUSTRY OUTLOOK
Industry sources expect the wireless telecommunications market in
general and the PCS market in particular to grow at a rapid rate in the United
States. Kagan Associates forecasts wireless telephony penetration at
approximately 47% by 2006. Wireless communication technology developments are
expected to evolve and continue to drive mass consumer growth as users demand
more sophisticated services and products. The Company believes that wireless
communications penetration rates will increase as prices fall and greater
emphasis is placed on the development and use of mass retail distribution
channels.
DIGITAL TECHNOLOGY SELECTION
There are three prominent network technologies that provide digital
service in the 1850-1990 MHz frequency band: CDMA, TDMA and GSM.
PCS service areas are divided into multiple regions called "cells,"
each of which contains a base station consisting of low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The base station in each cell is
connected to a base station controller and each base station controller is
connected to a switching office by microwave, fiber optic cable, telephone wires
or a hard-wired interface. The switching office controls the operation of the
wireless telephone networks for its entire service area, performing inter-base
station hand-offs, managing call delivery to handsets, allocating calls among
the cells within the networks and connecting calls to and from the local
landline telephone system or to a long distance telephone carrier. Wireless
service providers have interconnection agreements with various LECs and long
distance carriers, thereby integrating wireless telephone networks with landline
telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long distance networks,
subscribers can receive and originate both local distance calls from their
wireless telephones.
The signal strength of a transmission between a handset and a base
station declines as the handset moves away from the base station, so the
switching office and the base stations monitor the signal strength of calls in
progress. In an analog system, when the signal strength of a call declines to a
predetermined level, the switching office may "hand off" the call to another
base station that can establish a stronger signal within the handset. It a
handset leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is available to hand off
the call to an adjacent system.
There are different radio air-interface standards established in the
United States for the provisions of PCS to multiple users over the allocated
spectrum. The primary methods of digital wireless communications widely accepted
by the wireless industry are based on TDMA and CDMA. These multiple access
techniques provide for communications over the radio channel either by dividing
it into distinct time slots and transmitting user-specific data in each time
slot (a method known as TDMA) or by assigning specific codes to each packet of
user data that in conjunction with many other users' data comprise a signal (a
method known as CDMA). While the FCC has mandated that licensed cellular
networks in the U.S. must utilize compatible analog signaling protocols, the FCC
has intentionally avoided mandating a universal digital signaling protocol for
PCS. Three principal competing, incompatible digital wireless standards have
been proposed by various vendors for use in PCS networks; CDMA, GSM and TDMA. An
older version of TDMA developed in Europe, GSM constitutes the oldest and most
extensive PCS technology in international markets. TDMA, while currently being
offered by cellular providers in certain U.S. cities, has, in the Company's
opinion, often been associated with poor sound quality and numerous dropped
calls. CDMA is currently being deployed by a number of cellular and PCS
providers in the U.S., and also has been implemented on a commercial basis in
Hong Kong and South Korea. CDMA networks are in operation in over 40 cities
worldwide and at least 100 additional networks are currently under construction.
Although CDMA has only recently been widely deployed in the U.S., it is the
mostly widely subscribed by PCS service providers and the
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<PAGE>
Company believes that CDMA technology will be less costly to deploy and will
provide better quality, greater capacity and more flexibility than either GSM or
TDMA.
Because these protocols are incompatible with each other as well as
with analog cellular, a subscriber utilizing a GSM handset, for example, will be
unable to use his handset when traveling in an area covered only by a CDMA or
TDMA based network unless he carries a dual-mode/dual-band handset that permits
the subscriber to use the analog cellular networks in that area. For this
reason, the success of each protocol will depend both on its ability to offer
quality wireless service and on the extent to which its users will be able to
use their handsets when roaming outside their service area. PCS service
providers holding licenses covering 99% of the U.S. population have announced an
intent to use CDMA technology, including all of the top 100 markets in the U.S.
COMPETITION
The wireless communications market in the United States is expected to
become increasingly competitive. Cellular operators and other wireless services
providers are already exploiting existing wireless technology and have
established and continue to augment wireless telecommunications networks that
will directly compete with many of the services to be offered by the Company.
Additionally, other PCS operators are expected to compete with the Company in
each market. The success of the Company will depend largely upon its ability to
satisfy the mass consumer and business markets, which the Company believes have
not been adequately served by existing cellular service operators. The Company
plans to compete with cellular and other PCS operators on the basis of
affordable pricing, predictable monthly bills and voice transmission quality.
Cellular Operators. The Company will compete with established cellular
telephone service operators in the markets it intends to enter. Principal
cellular providers in the Company's markets are AT&T Wireless Services, Inc.,
BellSouth Mobility, Inc., GTE Mobile Communications Inc., AirTouch
Communications, Inc., Centennial Cellular Corp., U.S. Cellular Corp.,
Independent Cellular Network Inc. and Palmer Wireless, Inc. Under FCC rules,
cellular telephone service licensees have enjoyed a duopoly because the FCC only
permits two licensees in each market. Cellular licensees to date have faced
limited competition from businesses that "resell" cellular telephone service to
customers, but the Company could face additional competition from resellers of
cellular and PCS networks.
The introduction of digital transmission technologies to supplant
traditional analog cellular systems will increase the capacity and quality of
existing cellular telephone systems once deployed. However, the Company believes
that upgrading from analog to digital is expensive and that it will likely be
several years before cellular networks are fully converted to digital
technology. The Company expects the analog infrastructure to continue to be used
for the foreseeable future due in part to a lack of a national digital
technology standard. The Company further expects that many cellular licensees
will also attempt to acquire an additional 10 MHz PCS license in the D- and E-
Block auctions in areas in which they currently provide cellular telephone
services, as permitted by the FCC under its PCS licensing rules. This would
provide the cellular operators with greater capacity and potentially allow them
to add additional customers and offer more advanced services in their markets in
the near term. The Company believes that by providing low-priced services and
new wireless features on its digital PCS networks, it will be competitive with
cellular services.
Other PCS Operators. The Company will compete with A- and B-Block
licensees, many of whom are cellular-affiliated companies that will utilize PCS
spectrum in new markets to expand their national or regional coverage as well as
C-Block licenses. Principal A-, B- and C-Block licensees in the Company's
markets are PCS PrimeCo, Cox Enterprises, American Personal Communications,
Nextwave, PCS 2000 L.P., Alpine PCS, Inc., Pacific Telesis, Sprint Spectrum,
Aerial Comm. and AT&T PCS, whose A- and B-Block licenses were granted in June
1995, and whose C-Block licenses were granted in September 1996 have all had
substantial lead-time to develop their networks and some of these parties,
particularly the A- and B-Block licenses have significantly greater financial,
technical, marketing and other resources than the Company.
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<PAGE>
In addition, the Company will compete with the D- and E-Block license
winners (principally, ATT Wireless PCS, Inc., Rivgam Communicators, L.L.C.,
Sprint Comm., OPSCE-Galoway Consol., Bell South Wireless, Inc. and Entertainment
Unlimited) to the extent that such licenses are not acquired by existing
cellular or A-, B- or C- Block PCS licenses. Although the D- and E- and F-Block
licenses are for only 10 MHz (as is the Company's) entities can, subject to
FCC's rules limiting entities to 45 MHz of cellular, broadband PCS and SMR
spectrum in a given market, can acquire 10 MHz licenses and consolidate them so
as to design a 20 MHz or 30 MHz PCS system which could have more capacity than
the Company's.
SMR and "Enhanced" SMR Services. As a result of advances in digital
technology, some service providers have begun to design and deploy digital
mobile networks, which are referred to as "Enhanced SMR" or "ESMR." ESMR
networks increase the capacity of SMR system frequencies to a level that may be
competitive with that of analog cellular networks. SMR service providers offer
or plan to offer fleet dispatch services, short messaging, data services and
interconnected voice telephony services over wide geographic service areas.
Given similar developments in the deployment of digital technology in the
cellular operators' networks, it is unclear at this time whether the quality and
capacity of SMR-based digital mobile networks will be able to compete
effectively with analog and digital cellular and PCS networks. However, Nextel
has begun offering, apparently successfully, a competitive wireless service
based on ESMR.
Other Competition. The FCC has adopted rules to authorize additional
wireless mobile services. First, the FCC has authorized the use of the 37 and 39
GHz bands for the provision of fixed and mobile communications services. The FCC
auctioned 30 MHz of spectrum in the 2.3 GHz band for WCS which auction ended in
May 1997. FCC rules permit WCS providers to offer a broad range of fixed,
mobile, radio location and satellite broadcast services, some of which could be
in competition with the Company's service offerings. Second, in May 1996 the FCC
adopted final rules to permit Interactive Video and Data Service ("IVDS")
licensees to provide mobile two-way data services. Because of the limited amount
of spectrum allocated for IVDS, however, it is expected to be technically
infeasible to provide voice services to IVDS customers for the foreseeable
future. Third, the FCC authorized the use of LMDS licenses to provide certain
fixed and mobile services. Fourth, the FCC has proposed to reallocate former
federal government spectrum located at 4 GHz for a broad range of wireless fixed
and mobile services, and is expected to reallocate additional former federal
government spectrum for wireless mobile services in the future. The Company may
also face competition from MSS. Finally, the FCC recently modified its rules to
permit the partitioning and disaggregation of broadband PCS licenses into
licenses to serve smaller service areas, and/or use smaller spectrum blocks. The
purpose of the FCC's rule change was to permit existing PCS licensees and new
PCS entrants to have greater flexibility to determine how much spectrum and
geographic area they need or desire in order to provide PCS service. The FCC's
action could also result in A-, B-, C-, D-, and/or E- Block PCS licensees in the
Company's PCS markets partitioning or disaggregating their licenses in a manner
that provides increased competition to the Company. See "Legislation and
Government Regulation."
In addition, as a result of the enactment of the 1996 Act, regional
energy utility companies are expected to enter the wireless and wireline
telecommunications markets by leveraging their significant capital assets,
brand-name value, existing customer base and infrastructure advantages in their
geographical areas of operation. Similarly, the 1996 Act also eliminates
barriers for cable television system operators to provide wireline local loop
services over their existing wireline infrastructure. See "Risk Factors--
Competition."
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<PAGE>
LEGISLATION AND GOVERNMENT REGULATION
As a recipient of licenses acquired through the F-Block Auction, the
Company's ownership structure and operations are and will be subject to
substantial FCC regulation.
OVERVIEW
FCC Authority. The Communications Act of 1934, as amended (the
"Communications Act"), grants the FCC the authority to regulate the licensing
and operation of all non-federal government radio-based services in the United
States. The scope of the FCC's authority includes (i) allocating radio
frequencies, or spectrum, for specific services, (ii) establishing
qualifications for applicants seeking authority to operate such services,
including PCS applicants, (iii) approving initial licenses, modifications
thereto, license renewals, and the transfer or assignment of such licenses, (iv)
promulgating and enforcing rules and policies that govern the operation of
spectrum licensees, (v) the technical operation of wireless services,
interconnection responsibilities between and among PCS, other wireless services
such as cellular, and landline carriers, and (vi) imposition of fines and
forfeitures for any violations of those rules and regulations. Under its broad
oversight authority with respect to market entry and the promotion of a
competitive marketplace for wireless providers, the FCC regularly conducts
rulemaking and adjudicatory of proceedings to determine and enforce rules and
policies potentially affecting broadband PCS operations.
Regulatory Parity. The FCC has adopted rules designed to create
symmetry in the manner in which it and the states regulate similar types of
mobile service providers. According to these rules, all "commercial mobile radio
service" ("CMRS") providers that provide substantially similar services will be
subject to similar regulation. A CMRS service is one in which the mobile radio
service is provided for a profit, interconnected to the public switched
telephone networks, and made available to the public. Under these rules,
providers of PCS, SMR, and ESMR services are subject to regulations similar to
those governing cellular carriers if they offer an interconnected commercial
mobile service. The FCC announced that it would forbear from applying several
regulations to these services, including its rules concerning the filing of
tariffs for the provision of interstate services. Congress specifically
authorized the FCC to forbear from applying such regulation in the Omnibus
Budget Reconciliation Act of 1993. With respect to PCS, the FCC has stated its
intent to continue monitoring competition in the PCS service marketplace. The
FCC also concluded that Congress intended to preempt state and local rate and
entry regulation of all CMRS providers, including PCS, but established
procedures for state and local governments to petition the FCC for authority to
continue or initiate such regulation.
Commercial Mobile Radio Service Spectrum Ownership Limit. The FCC has
limited the amount of broadband CMRS spectrum (including cellular, broadband PCS
and SMR) in which an entity may hold an attributable interest in a given
geographic area to 45 MHz. For these purposes only PCS and other CMRS licenses
are attributed to an entity where its investments exceed certain thresholds or
the entity is an officer or director of a broadband PCS, cellular or SMR
licensee. Thus, entities with attributable interests in cellular licenses (which
are for 25 MHz) in certain markets cannot hold more than 20 MHz of PCS spectrum
in the same markets. The Company's ability to raise capital from entities with
attributable broadband CMRS interests in certain geographic areas is likely to
be limited by this restriction.
Other FCC Requirements. The FCC had been conducting rulemakings to
address interconnection issues among CMRS carriers and between CMRS and LECs.
These proceedings were significantly affected by the 1996 Act and FCC
rulemakings conducted pursuant to the 1996 Act. See "--1996 Act" and "--FCC
Interconnection Proceedings."
The FCC has adopted rules that prohibit broadband PCS, cellular and
certain SMR licensees from unreasonably restricting the resale of their
services. The FCC has determined that the availability of resale will increase
competition at a faster pace by allowing new entrants to the wireless market
quickly through the resale of their competitors' services while they are
building out their own facilities. This prohibition will expire five years
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after the FCC concludes its initial licensing of broadband PCS spectrum, which
concluded in 1997. Additionally, the FCC requires such carriers to provide
manual roaming service to subscribers of other such carriers, through which
traveling subscribers of other carriers may make calls after establishing a
method of payment with a host carrier.
The FCC has revised its rules to permit CMRS operators, including PCS
licensees, to use their assigned spectrum to provide fixed local loop and other
services on a co-primary basis with mobile services. The FCC is continuing its
rulemaking proceeding to determine the extent to which such fixed services fall
within the scope of CMRS regulation.
The FCC has imposed number portability requirements on broadband PCS,
cellular, and certain SMR providers. By December 31, 1998, such licensees, as
well as LECs, must provide their customers with the ability to change carriers
while retaining phone numbers. CMRS providers subject to the number portability
requirements must have the capability of delivering calls from their networks to
ported numbers anywhere in the United States. By June 30, 1999, such providers
must be able to offer number portability without impairment of quality,
reliability, or convenience when switching service providers, including the
ability to support roaming throughout their networks. The FCC has solicited
further comment on the appropriate cost-recovery methods regarding long-term
number portability.
FCC rules that will take effect in October 1997 require cellular, PCS,
and certain SMR carriers to transmit 911 emergency calls from handsets that
transmit mobile identification numbers to Public Safety Answering Points
("PSAPs") without any credit checks or validation and require that such carriers
must be capable of transmitting 911 calls from individuals with speech or
hearing disabilities through means such as text telephone devices. By April 1998
such carriers must relay the mobile telephone number of the originator of a 911
call as well as the location of the cell that is handling the call. By October
2001, such carriers must be able to provide the PSAP with the location of the
mobile caller within a radius of 125 meters. Several parties filed petitions
currently pending at the FCC requesting, among other things, that the FCC
reconsider the requirement that wireless carriers transmit calls that do not
have a code identification of PSAPs. The FCC has issued a Further Notice seeking
additional comment on the future of mobile emergency calling technology and
capabilities.
In August 1996 the FCC adopted new guidelines and methods for
evaluating the effects of radiofrequency emissions from transmitters including
PCS mobile telephones and base stations. The new guidelines, which are generally
more stringent than previous requirements, were effective immediately for
hand-held devices and otherwise became effective January 1, 1997.
Other Federal Regulations. Wireless networks are subject to certain
Federal Aviation Administration and FCC guidelines regarding the location,
lighting and construction of transmitter towers and antennas. In addition, the
FCC has authority to enforce certain provisions of the National Environmental
Policy Act as they would apply to the Company's facilities. The Company intends
to use common carrier point-to-point microwave and traditional landline
facilities to connect base station sites and to link them to their respective
main switching offices. These microwave facilities have historically been
separately licensed by the FCC on a first-come, first-served basis (although the
FCC has proposed to auction certain such licenses) and are subject to specific
service rules.
Wireless providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent wireless users,
permittees and licensees in order to avoid electrical interference between
adjacent networks. In addition, the height and power of base station
transmitting facilities and the type of signals they emit must fall within
specified parameters.
State and Local Regulation. The scope of state regulatory authority
covers such matters as the terms and conditions of interconnection between LECs
and wireless carriers under FCC oversight, customer billing information
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and practices, billing disputes, other consumer protection matters, certain
facilities construction issues, transfers of control, the bundling of services
and equipment and requirements relating to making capacity available to third
party carriers on a wholesale basis. In these areas, particularly the terms and
conditions of interconnection between LECs and wireless providers, the FCC and
state regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively.
The FCC and a number of state regulatory authorities have initiated
proceedings or indicated their intention to examine access charge obligations,
mutual compensation arrangements for interconnections between LECs and wireless
providers, the pricing of transport and switching facilities provided by LECs to
wireless providers, the implementation of "number portability" rules to permit
telephone customers to retain their telephone numbers when they change telephone
service providers, and alterations in the structure of universal service
funding, among other matters.
Proceedings with respect to the foregoing policy issues before the FCC
and state regulatory authorities could have a significant impact on the
competitive market structure among wireless providers and the relationships
between wireless providers and other carriers.
GENERAL PCS REGULATIONS
In June 1994 the FCC allocated spectrum for broadband PCS services
between the 1850 to 1990 MHz bands. Of the 140 MHz available for PCS services,
the FCC created six separate blocks of spectrum identified as the A-, B-, C-,
D-, E- and F-Blocks. The A-, B- and C-Blocks are each allocated 30 MHz of
spectrum, the D-, E- and F-Blocks are allocated 10 MHz each. For each block, the
FCC adopted a 10-year PCS license term with an opportunity to renew. 20 MHz of
spectrum within the PCS band is reserved for unlicensed use.
The FCC adopted a "rebuttable presumption" that all PCS licensees are
common carriers, subject to Title II of the Communications Act. Accordingly,
each PCS licensee deemed to be a common carrier must provide services upon
reasonable request and the rates, terms and conditions of service must not be
unjustly or unreasonably discriminatory.
Structure of PCS Block Allocations. The FCC defines the geographic
contours of the licenses within each PCS block based on the MTAs and BTAs
developed by Rand McNally & Co. The FCC awarded A- and B-Block licenses in 51
MTAs. The C-, D-, E- and F-Block spectrum were allocated on the basis of 493
smaller BTAs. In addition, there are spectrum aggregation caps on PCS licensees
limiting them to 45 MHz of broadband CMRS spectrum (e.g., no more than one 30
MHz PCS license and one 10 MHz license) in any given market.
All but three of the 102 total A-Block licenses and all B-Block
licenses were auctioned in 1995. The three A-Block licenses were awarded
separately pursuant to the FCC's "pioneer's preference" program. The auctioned
A- and B- Block licenses were awarded in June 1995. The C- and F-Block spectrums
are reserved for Entrepreneurs. See "--F-Block License Requirements." The FCC
completed its auction for C-Block licensees in May, 1996 and reallocated 18
C-Block licenses on which initial auction winners defaulted in a reauction that
ended in July 1996. The FCC completed its auction for the D-, E-, and F-Block
licenses in January 1997.
In December 1996 the FCC adopted rules permitting broadband PCS
carriers to partition any service areas within their license areas and/or
disaggregate any amount of spectrum within their spectrum blocks to entities
that meet the eligibility requirements for the spectrum blocks. The purpose of
the FCC's rule change was to permit existing PCS licensees and new PCS entrants
to have greater flexibility to determine how much spectrum and geographic area
they need or desire in order to provide PCS service. Thus, A-, B-, D-, and
E-Block licensees may sell or lease partitioned or disaggregated portions of
their licenses at any time to entities that meet the minimum eligibility
requirements of the Communications Act. Entrepreneur (C- and F-) Block
licensees, such as the Company, may only sell or lease partitioned or
disaggregated portions of their licenses to other qualified
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entrepreneurs during the first five years of their license terms. Thereafter, if
Entrepreneur Block licensees partition or disaggregate to non-entrepreneurs,
they must repay a proportional share of the outstanding balance on their
installment payments and a share of any bidding credits that they received.
1996 ACT
On February 8, 1996, the President signed the 1996 Act, which effected
a sweeping overhaul of the Communications Act. In particular, the 1996 Act
substantially amended Title II of the Communications Act, which governs
telecommunications common carriers. The policy underlying this legislative
reform was the opening of the telephone exchange service markets to full
competition. The 1996 Act makes all state and local barriers to competition
unlawful, whether they are direct or indirect. It directs the FCC to initiate
rulemaking proceedings on local competition matters and to preempt all
inconsistent state and local laws and regulations. The 1996 Act requires
incumbent wireline LECs to open their networks to competition through
interconnection and access to unbundled network elements and prohibits state and
local barriers to the provision of interstate and intrastate telecommunications
services.
The 1996 Act prohibits state and local governments from enforcing any
law, rule or legal requirement that prohibits or has the effect of prohibiting
any person from providing interstate or intrastate telecommunications services.
States retain jurisdiction under the 1996 Act to adopt laws necessary to
preserve universal service, protect public safety and welfare, ensure the
continued quality of telecommunications services and safeguard the rights of
consumers.
Implementation of the provisions of the 1996 Act will be the task of
the FCC, the state public utility commissions and a joint federal-state board.
Much of the implementation of the 1996 Act is being completed in numerous
rulemaking proceedings with short statutory deadlines. These proceedings address
issues and proposals that were already before the FCC in pending rulemaking
proceedings affecting the wireless industry as well as additional areas of
telecommunications regulation not previously addressed by the FCC and the
states.
Some specific provisions of the 1996 Act which are expected to affect
wireless providers are summarized below:
Expanded Interconnection Obligations: The 1996 Act establishes a
general duty of all telecommunications carriers, including F-Block PCS
licensees, to interconnect with other carriers, directly or indirectly. The 1996
Act also contains a detailed list of requirements with respect to the
interconnection obligations of LECs. These "interconnect" obligations include
resale, number portability, dialing parity, access to rights-of-way and
reciprocal compensation.
LECs designated as "incumbents" (i.e., those providing landline local
exchange telephone service at the time the 1996 Act was adopted) have additional
obligations including: to negotiate in good faith; to interconnect on terms that
are reasonable and non-discriminatory at any technically feasible point at
cost-based rates (plus a reasonable profit); to provide non- discriminatory
access to facilities and network elements on an unbundled basis; to offer for
resale at wholesale rates any service that LECs provide on a retail basis; and
to provide actual co-location of equipment necessary for interconnection or
access.
The 1996 Act establishes a framework for state commissions to mediate
and arbitrate negotiations between incumbent LECs and carriers requesting
interconnection, services or network elements. The 1996 Act establishes
deadlines, policy guidelines for state commission decision making and federal
preemption in the event a state commission fails to act.
Review of Universal Service Requirements. The 1996 Act contemplates
that interstate telecommunications providers, including CMRS providers, will
"make an equitable and non-discriminatory contribution" to support the
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cost of providing universal service. The FCC recently determined that
telecommunications providers would base their contributions on end user
interstate and intrastate revenues.
Prohibition Against Subsidized Telemessaging Services. The 1996 Act
prohibits incumbent LECs from subsidizing telemessaging services (i.e., voice
mail, voice storage/retrieval, live operator services and related ancillary
services) from their telephone exchange service or exchange access and from
discriminating in favor of its own telemessaging operations.
Conditions on RBOC Provision of In-Region InterLATA Services. The 1996
Act generally requires that before engaging in landline long distance services
in the states in which they provide landline local exchange service referred to
as in-region interLATA services, the Regional Bell Operating Companies ("RBOCs")
must (1) provide access and interconnection to one or more unaffiliated
competing facilities-based providers of telephone exchange service, or after 10
months after enactment of the 1996 Act, no such provider requested such access
and interconnection more than three months before the RBOCs has applied for
authority and (2) demonstrate to the FCC its satisfaction of the 1996 Act's
"competitive checklist."
The specific interconnection requirements contained in the competitive
checklist, which the RBOCs must offer on a non-discriminatory basis, include
interconnection and unbundled access; access to poles, ducts, conduits and
rights-of-way owned or controlled by the RBOCs; unbundled local loops, unbundled
transport and unbundled switching; access to emergency 911, directory
assistance, operator call completion and white pages; access to telephone
numbers, databases and signaling for call routing and completion; number
portability; local dialing parity; reciprocal compensation; and resale.
The 1996 Act eliminates the previous prohibition on RBOC provision of
out- of-region, interLATA services and all interLATA services associated with
the provision of CMRS service, including in-region CMRS service.
RBOC Commercial Mobile Joint Marketing. The RBOCs are permitted to
market jointly and sell wireless services in conjunction with telephone exchange
service, exchange access, intraLATA and interLATA telecommunications and
information services.
CMRS Facilities Siting. The 1996 Act limits the rights of states and
localities to regulate placement of CMRS facilities so as to "prohibit" or
prohibit effectively the provision of wireless services or to "discriminate"
among providers of such services. It also eliminates environmental effects from
RF emissions (provided the wireless system complies with FCC rules) as a basis
for states and localities to regulate the placement, construction or operation
of wireless facilities. The FCC's implementation of these provisions and the
scope thereof have neither been adopted by the agency nor reviewed by the
courts.
Equal Access. The 1996 Act provides that wireless providers are not
required to provide equal access to common carriers for toll services. The FCC
is authorized to require unblocked access subject to certain conditions.
Deregulation. The FCC is required to forebear from applying any
statutory or regulatory provision that is not necessary to keep
telecommunications rates and terms reasonable or to protect consumers. A state
may not apply a statutory or regulatory provision that the FCC decides to
forebear from applying. In addition, the FCC must review its telecommunications
regulations every two years and change any that are no longer necessary.
FCC INTERCONNECTION PROCEEDINGS
In August 1996 the FCC adopted rules to implement the interconnection
provisions of the 1996 Act. In its interconnection order, the FCC determined
that CMRS-to-CMRS interconnection may be accomplished indirectly through the
interconnection of each CMRS provider to an incumbent LEC's network. The FCC
determined that LECs are required to enter into reciprocal compensation
arrangements with all CMRS providers for the transport
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and termination of LEC- originated traffic. Additionally, the FCC established
default "proxy" rates for reciprocal compensation, interconnection and unbundled
network elements to be used unless or until a state develops rates for these
items based on the Total Element Long Run Incremental Cost ("TELRIC"). The proxy
rates for CMRS- to-LEC interconnection would result in significant savings when
compared with rates that CMRS providers, principally cellular carriers, have
been paying to LECs.
In July 1997 the U.S. Court of Appeals for the Eighth Circuit, acting
on consolidated petitions for review of the FCC's interconnection order, vacated
the rate-related portions of the order. The court found that the FCC is without
jurisdiction to establish pricing regulations regarding intrastate telephone
service. The FCC is entitled to appeal the decision.
The portions of the FCC's interconnection order that are not related to
pricing issues have gone into effect. In addition to the federal circuit court,
several parties have petitioned the FCC for reconsideration of its decision. It
is not possible to determine the final outcome of the court proceedings or the
petitions for reconsideration or the effect such outcome will have on CMRS
carriers, including the Company.
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
In an effort to balance the competing interests of existing microwave
users and newly authorized PCS licensees in the spectrum allocated for PCS use,
the FCC has adopted (i) a transition plan to relocate fixed microwave operators
that currently are operating in the PCS spectrum, and (ii) a cost sharing plan
so that if the relocation of an incumbent benefits more than one PCS licensee,
the benefiting PCS licensees will help defray the costs of the relocation. PCS
licensees will only be required to relocate fixed microwave incumbents if they
cannot share the same spectrum. The transition and cost sharing plans expire on
April 4, 2005, at which time remaining incumbents in the PCS spectrum will be
responsible for their costs to relocate to alternate spectrum locations.
Relocation generally involves a PCS operator compensating an incumbent
for costs associated with system modifications and new equipment required to
move to alternate, readily available spectrum. This transition plan allows most
microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period. For
public safety entities dedicating a majority of their system communications for
police, fire, or emergency medical service operations, the voluntary negotiation
period is three years. The FCC currently is considering whether to shorten the
voluntary negotiation period by one year. Parties unable to reach agreement
within these time periods may refer the matter to the FCC for resolution, but
the existing microwave user is permitted to continue its operations until final
FCC resolution of the matter.
The FCC's cost-sharing plan allows PCS licensees that relocate fixed
microwave links outside of their license areas to receive reimbursements from
later-entrant PCS licensees that benefit from the clearing of their spectrum. A
non-profit clearinghouse will be established to administer the FCC's cost-
sharing plan.
F-BLOCK LICENSE REQUIREMENTS
When the FCC allocated spectrum to PCS, it designated the F-Block as an
"Entrepreneurs' Block." FCC rules require F-Block Entrepreneurs to meet various
qualifications to hold F-Block licenses or to receive certain financing
preferences. Among these are: (i) the various structural requirements governing
equity investments, including the Entrepreneurs Requirements, Small Business
Requirements and Control Group Requirements, all of which apply specifically to
Entrepreneurs, and the Foreign Ownership Limitations, which apply to all
communications entities governed by the FCC; (ii) transfer restrictions
limiting, among other things, the sale of F-Block licenses; and (iii) other
ongoing requirements that mandate network build-out schedules and limit
cross-ownership of cellular and other wireless investments. The Company was the
winning bidder for 5 licenses in the F-Block Auction. The FCC also determined
that Entrepreneurs that qualify as a Very Small Business would be eligible to
receive a 25% bidding credit and a F-Block Loan from the federal government for
80% of the dollar amount of their winning bids in the F-Block Auction. The
Government Financing provided to the Company is F-
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Block Loans. See "Description of Certain Indebtedness." In order to ensure
continued compliance with the FCC rules, the FCC has announced its intention to
conduct random audits during the initial 10-year PCS license terms. There can be
no assurance that the Company will continue to satisfy any of the FCC's
qualifications or requirements, and the failure to do so would have a material
adverse effect on the Company. See "Risk Factors--F-Block License Requirements"
and "--Foreign Ownership Limitations."
Structural Requirements
Entrepreneurs Requirements. In order to hold a F-Block license, an
entity must: (i) meet the Entrepreneurs Revenues Limit by having less than $125
million in gross revenues and (ii) meet the Entrepreneurs Asset Limit by having
less than $500 million in total assets (excluding the value of C-Block
licenses). To qualify for the F-Block Auction, an entity had to have met the
Entrepreneurs Revenues Limit for each of the two years prior to the auction and
the Entrepreneurs Asset Limit at the time it filed its Short Form. For at least
five years after winning a F-Block license, a licensee must continue to meet the
Entrepreneurs Requirements, which are modified for such five-year period to
exclude certain assets and revenues from being counted toward the Entrepreneurs
Asset Limit and the Entrepreneurs Revenues Limit, respectively. Additional
amounts are excluded if the licensee maintains an organizational structure that
satisfies the Control Group Requirements described below. In calculating a
licensee's gross revenues for purposes of the Entrepreneurs Requirements, the
FCC includes the gross revenues of the licensee's affiliates, those persons or
entities that hold interests in the licensee and the affiliates of such persons
or entities.
By claiming status as an Entrepreneur, the Company qualified to enter
the F-Block Auction. If the FCC were to determine that the Company did not
satisfy the Entrepreneur Requirements at the time it participated in the F-Block
Auction or that the Company fails to meet the ongoing Entrepreneurs
Requirements, the FCC could revoke the Company's PCS licenses, fine the Company
or take other enforcement actions, including imposing the Unjust Enrichment
Penalties. Although the Company believes it has met the Entrepreneurs
Requirements, there can be no assurance that it will continue to meet such
requirements or that, if it fails to continue to meet such requirements, the FCC
will not take action against the Company, which could include revocation of its
PCS licenses. See "Risk Factors--F-Block License Requirements--Entrepreneurs
Requirements."
Small Business Requirements. An entity that meets the Entrepreneurs
Requirements may also receive certain preferential financing terms if it meets
the Small Business Requirements. These preferential financing terms include a
15% bidding credit for Small Businesses and a 25% Bidding Credit for Very Small
Businesses (such as the Company) and the ability to make quarterly interest-only
payments on its F-Block Loan for the first two years of the license term (for
Very Small Businesses). To meet the Small Business or Very Small Business
Requirements, a licensee must have had annual average gross revenues of not more
than $40 million or $15 million, respectively, for the three calendar years
preceding the date it filed its Short Form. In calculating a licensee's gross
revenues for purposes of the Small and Very Small Business Requirements, the FCC
includes the gross revenues of the licensee's affiliates, those persons or
entities that hold interests in the licensee, and the affiliates of such persons
or entities.
By claiming status as a Very Small Business, the Company qualified for
the Bidding Credit. If the FCC were to determine that the Company does not
qualify as a Very Small Business, the Company would, at a minimum, be forced to
repay the portion of the Bidding Credit to which it was not entitled. Further,
the FCC could revoke the Company's PCS licenses, fine the Company or take other
enforcement actions, including imposing the Unjust Enrichment Penalties.
Although the Company has structured itself to meet the Very Small Business
Requirements, there can be no assurance that it will remain in compliance with
these requirements or that, if it fails to continue to meet such requirements,
the FCC will not take action against the Company, which could include revocation
of its PCS licenses. See "Risk Factors--F-Block Requirements-- Very Small
Business Requirements."
Control Group Requirements. If a F-Block licensee meets the Control
Group Requirements, the FCC excludes certain assets and revenues from such
licensee's total revenues and assets, making it easier for the licensee
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to meet the Entrepreneurs Requirements and the Small Business Requirements. The
Control Group Requirements mandate that the Control Group, among other things,
have both actual and legal control of the licensee. Further, the FCC permits
licensees to qualify under the Control Group Requirements pursuant to the
Qualifying Investor Option if its Control Group is comprised of the following:
(i) Qualifying Investors that own at least 15% of the equity interest on a fully
diluted basis and 50.1% of the voting power in the F-Block licensee and (ii)
Additional Control Group Members that hold at least 10% of the equity interest
in the F-Block licensee. Additional Control Group Members must be either: (a)
the same Qualifying Investors in the Control Group, (b) members of the
licensee's management or (c) non-controlling institutional investors, including
venture capital firms. To take advantage of the FCC's Qualifying Investor
Option, a F-Block licensee must have met the Qualifying Investor Option
requirements at the time it filed its Short Form and must continue to meet the
Qualifying Investor Option requirements for three years following the License
Grant Date. Commencing the fourth year of the license term, the FCC rules (i)
eliminate the requirement that the Additional Control Group Members hold any of
the licensee's equity interest and (ii) allow the licensee to reduce the minimum
required equity interest held by the Control Group's Qualifying Investors from
15% to 10%.
In order to meet the Control Group Requirements, the Company's
Certificate of Incorporation provides that the Company's Class B Common Stock,
as a class, must constitute 50.1% of the voting power of the Company. See
"Description of Capital Stock." There can be no assurance that the Company will
remain in compliance with the Control Group Requirements or, if it fails to
continue to meet such requirements, that the FCC will not take action against
the Company, which could include revocation of its PCS licenses. Although the
Company has taken these and other steps to meet the Control Group Requirements,
there can be no assurance that the Company has or will continue to meet the
Control Group Requirements, and the failure to meet such requirements would have
a material adverse effect on the Company. See "Risk Factors--F-Block
Requirements--Control Group Requirements."
Asset and Revenue Calculation. In determining whether an entity
qualifies as an Entrepreneur and/or as a Small Business, the FCC counts the
gross revenues and assets of the entity's "financial affiliates" toward the
entity's total gross revenues and total assets. Financial affiliation can arise
from common investments, familial or spousal relationships, contractual
relationships, voting trusts, joint venture agreements, stock ownership, stock
options, convertible debentures and agreements to merge. Affiliates of
noncontrolling investors with ownership interests that do not exceed the
applicable FCC "passive" investor ownership thresholds are not attributed to
F-Block licensees for purposes of determining whether such licensees financially
qualify for the applicable F-Block Auction preferences. The Entrepreneurs
Requirements and the Very Small Business Requirements provide that, to qualify
as a passive investor, an entity may not own more than 25% of the Company's
total equity on a fully diluted basis, unless the Control Group owns at least
50.1% of the Company's total equity on a fully diluted basis. There can be no
assurance that the Company will not exceed these passive investor limits or
otherwise violate the Entrepreneur Requirements and/or the Small Business
Requirements.
In addition, if an entity makes bona fide loans to a F-Block licensee,
the assets and revenues of the creditor would not be attributed to the licensee
unless the creditor is otherwise deemed an affiliate of the licensee, or the
loan is treated by the FCC as an equity investment and such treatment would
cause the creditor/investor to exceed the applicable ownership interest
thresholds (for purposes of both the financial affiliation and foreign ownership
rules). Although the FCC permits a creditor/investor to use standard terms to
protect its investment in F-Block licensees, such as covenants, rights of first
refusal and super-majority voting rights on specified issues, the FCC has stated
that it will be guided but not bound by criteria used by the Internal Revenue
Service to determine whether a debt investment is bona fide debt. The FCC's
application of its financial affiliation rules is largely untested and there can
be no assurance that the FCC or the courts will not treat certain of the
Company's lenders or investors as financial affiliates of the Company.
Foreign Ownership Limitations. The Communications Act requires that
non-U.S. citizens, their representatives, foreign governments or corporations
otherwise subject to domination and control by non-U.S.
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citizens may not own of record or vote (i) more than 20% of the capital
contribution to a common carrier radio station directly, or (ii) more than 25%
of the capital contribution to the parent corporation of a common carrier radio
station licensee if the FCC determines such holding are not within the public
interest. Because the FCC classifies PCS as a common carrier offering, PCS
licensees are subject to the foreign ownership limits. Congress recently
eliminated restrictions on non-U.S. citizens serving as members on the board of
directors and officers of a common carrier radio licensee or its parent. The FCC
also recently adopted rules that, subject to a public interest finding by the
FCC, could allow additional indirect foreign ownership of CMRS companies to the
extent that the relevant foreign states extend reciprocal treatment to U.S.
investors. The Company's Long Form filed by the Company with the FCC after the
completion of the F-Block Auction indicates that the Company is in compliance
with the FCC foreign-ownership rules. However, if the foreign ownership of the
Company were to exceed 25% in the future, the FCC could revoke the Company's PCS
licenses or impose other penalties. Further, the Company's Certificate of
Incorporation enables the Company to redeem shares from holders of Common Stock
whose acquisition of such shares results in a violation of such limitation. The
restrictions on foreign ownership could adversely affect the Company's ability
to attract additional equity financing from entities that are, or are owned by,
non-U.S. entities. The recent World Trade Organization ("WTO") agreement on
basic telecommunications services could eliminate or loosen foreign ownership
limitation but could also increase the Company's competition. Under this
agreement, the United States and other members of the WTO committed themselves
to opening their telecommunications markets to competition and foreign ownership
and to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telephone companies, effective as early as
January 1, 1998. See "Risk Factors--Foreign Ownership Limitations."
Transfer Restrictions
License Transfer Restrictions. During the first five years after the
License Grant Date, transfer or assignment of a F-Block license is prohibited to
any entity that fails to satisfy the Entrepreneurs Requirements. If such a
transfer occurs to an entity that does not qualify for bidding credits, such a
sale would be subject to payment of the bidding credit and the licensee must
adjust its installment payments to the FCC to effect the bidding credits and
payment plan applicable to the new entity (e.g., an enterprise that is not a
Very Small Business). After five years, all such transfers and assignments of
the licenses remain subject to the Unjust Enrichment Penalties.
Unjust Enrichment. Any transfer during the full license term (10 years)
may require certain costs and reimbursements to the government of bidding
credits and/or outstanding principal and interest payments (the "Unjust
Enrichment Penalties"). In addition, if the Company wishes to make any change in
ownership structure during the initial license term involving the de facto and
de jure control of the Company, it must seek FCC approval and may be subject to
the same costs and reimbursement conditions indicated above.
F-Block Rules
The Company (i) believes that it has structured itself to satisfy the
Entrepreneurs Requirements, (ii) intends to diligently pursue and maintain its
qualification as a Very Small Business and (iii) has structured its securities,
including certain restrictions on ownership, in a matter intended to ensure
compliance with the applicable FCC Rules. The Company has relied on
representations of its investors to determine its compliance with the FCC's
rules applicable to F-Block licenses. There can be no assurance, however, that
the Company's investors or the Company itself will continue to satisfy these
requirements during the term of any PCS license granted to the Company or that
the Company will be able to successfully implement divestiture or other
mechanisms included in the Company's Certificate of Incorporation that are
designed to ensure compliance with FCC rules. Any non-compliance with FCC rules
could subject the Company to serious penalties, including revocation of its PCS
licenses. See "Risk Factors--F-Block License Requirements," "--Effect of Control
by Certain Stockholders," "--Substantial Debt Obligations to the U.S.
Government" "--Foreign Ownership Limitations" and "Legislation and Government
Regulation."
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Other Ongoing Requirements
Build-Out Requirements. The FCC has mandated that recipients of PCS
licenses adhere to a five year build-out requirement. Under the five year
build-out requirement, all 10 MHz PCS licensees (such as F-Block licensees) must
construct facilities to offer adequate service to at least one-quarter of the
population in their service area within five years from the date of initial
license grants or make a showing of substantial service in its licensed areas
within five years of the initial license grants. Service must be provided to
two-thirds of the population within 10 years. Violation of this regulation could
result in license revocations or forfeitures or fines.
Additional Requirements. As a F-Block licensee, the Company will be
subject to certain restrictions that limit, among other things, the number of
PCS licenses it may hold as well as certain cross-ownership restrictions
pertaining to cellular and other wireless investments.
Penalties for Payment Default. In the event that the Company were to
become unable to meet its obligations under the Government Financing, the FCC
could in such instances reclaim some or possibly all of the Company's PCS
licenses, reauction them, and subject the Company to a penalty comprised of the
difference between the price at which it acquired its license and the amount of
the winning bid at reauction, plus an additional penalty of three percent of the
lesser of the subsequent winning bid and the defaulting bidders bid amount. See
"Risk Factors--Government Regulation" and "--Substantial Debt Obligations to the
U.S. Government."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company effective as of the
Spin-Off, and their ages as of September 1, 1997 are as follows:
NAME AGE POSITION*
- ---- --- ---------
Victoria G. Kane(1) 49 Class B Director and Chairman
T. Gibbs Kane, Jr.(1) 50 Class B Director
Mario J. Gabelli(2) 54 Class A Director
Marc J. Gabelli(2) 29 Class A Director
Robert E. Dolan 45 Assistant Secretary
----------------------
* Each of the Class B Directors shall have one and one-half
votes and each of the Class A Directors shall have one vote.
See "Description of Capital Stock -- Common Stock -- Voting
Rights."
(1) T. Gibbs Kane and Victoria G. Kane are husband and wife.
(2) Mario J. Gabelli and Marc J. Gabelli are father and son.
VICTORIA G. KANE, Entrepreneur and investor. Owner and instructor of
dance studio (from 1986 to 1996).
T. GIBBS KANE, JR., President, Sound Shore Management (since 1978), a
registered investment advisor; Director, Sound Shore Fund (since 1985), a mutual
fund.
MARIO J. GABELLI, Chairman and Chief Executive Officer of Lynch (since
1986); Chairman and Chief Executive Officer of Gabelli Funds, Inc., (since
1980), an investment adviser and holding company for subsidiaries engaged in
various aspects of the securities business (including GAMCO Investors, Inc. of
which he is Chief Executive Officer); Director/Trustee and/or officer of The
Treasurer's Fund (Since 1997), Gabelli International Growth Fund, Inc. (since
1995), Gabelli Capital Series Funds, Inc. (since 1994), Gabelli Global
Multimedia Trust Inc. (since 1994), Gabelli Gold Fund, Inc. (since 1994), The
Gabelli Global Series Funds, Inc. (since 1993), Gabelli Investor Funds, Inc.
(since 1993), Gabelli Equity Series Funds, Inc. (since 1991), The Gabelli Value
Fund Inc. (since 1989), The Gabelli Convertible Securities Fund, Inc. (since
1989), The Gabelli Equity Trust Inc. (since 1986), The Gabelli Money Market
Funds (since 1992), The Gabelli Growth Fund (since 1987) and The Gabelli Asset
Fund (since 1986).
MARC J. GABELLI, Portfolio Manager of GAMCO Investors, Inc. (since
1993), an investment advisor; Vice President of Research of Gabelli & Company,
Inc. (since 1993), a broker-dealer; Managing Director of Gabelli Funds, Inc.
(since 1996), an investment adviser and holding company for subsidiaries engaged
in various aspects of the securities business; President of Gabelli Asset
Management Company International Advisory Services, Ltd. (since 1995), an
advisor to an offshore investment company; Portfolio Manager of The Gabelli
Global Interactive Couch Potato Fund (since 1993), an investment company.
Previously employed at Lehman Brothers in equity research and arbitrage
(1989-1993).
ROBERT E. DOLAN, Chief Financial Officer of Lynch (since February 1992)
and Controller (since May 1990); Corporate Controller of Plessey North America
Corporation, formerly the United States subsidiary of a United Kingdom defense
electronics/telecommunications company (1984-1989).
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COMPENSATION OF DIRECTORS
The Company is not compensating its directors at the present time,
although it may do so in the future. The Company does indemnify directors
pursuant to Delaware law and may reimburse them for certain out-of-pocket costs
in connection with serving as directors.
EXECUTIVE COMPENSATION
The Company has no employees and has paid no employee or executive
compensation, although it may do so in the future.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("Delaware
Law"), the Company has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act. The Company's Certificate of Incorporation provides
that directors and officers of the Company shall be indemnified to the fullest
extent of Delaware law.
The Delaware Law provides that a corporation may limit the liability of
each director to the corporation or its stockholders for monetary damages except
for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction which the director derives an improper
personal benefit. The Certificate of Incorporation provides for the elimination
and limitation of the personal liability of directors of the Company for
monetary damages to the fullest extent permitted by Delaware Law. In addition,
the Certificate of Incorporation provides that if Delaware Law is amended to
authorize the further elimination or limitation of the liability of a director,
then the liability of the directors shall be eliminated or limited to the
fullest extent permitted by Delaware Law, as so amended. The effect of this
provision is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or recision in the
event of a breach of a director's duty of care. The Company's Certificate of
Incorporation also provides that the Company shall, to the full extent permitted
by Delaware Law, as amended from time to time, indemnify and advance expenses to
each of its currently acting and former directors, officers, employees and
agents.
The Company has no directors and officers liability insurance at this
time.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted.
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CERTAIN TRANSACTIONS
AFC and Lynch PCS Corporation F ("LPCS"), a subsidiary of Lynch, formed
a limited partnership, Aer Force Communications B, L.P. (the "Partnership") in
July 1996 for the purpose of bidding for PCS licenses in the F-Block Auction.
AFC, the general partner, contributed $100,200 to the Partnership for a 50.1%
equity interest and LPCS, the limited partner, contributed $99,800 to the
Partnership for a 49.9% equity interest. LPCS also agreed to loan the
Partnership an additional $11.4 million, primarily for down-payments and to
service instalment payments on PCS licenses won in the auction.
On August 13, 1997, the Company was incorporated and on __________,
1997, the Company succeeded to the rights and obligations of the Partnership.
AFC received 1,779,301 shares of Class B Common Stock of the Company and LPCS
received 1,772,198 shares of Class A Common Stock of the Company. Concurrently
with the Spin Off, LPCS will transfer 1,417,048 shares of Class A Common Stock
to Lynch shareholders and 355,150 shares of Class A Common Stock to GFI in
satisfaction of LPCS's obligation to share a profits interest in LPCS's
partnership interest.
As a part of the reorganization creating the Company, AFC and LPCS
contributed an additional $125,250 and $124,750, respectively, as equity to the
Company. The Company's existing indebtedness to LPCS ($7.3 million at September
30, 1997) will be converted into $7.3 million of redeemable Preferred Stock and
the obligation of LPCS to make additional loans to the Company will terminate.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock effective as of the Spin Off by (i) each
person who is known by the Company to own beneficially more than five percent of
the Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Officers and (iv) all current executive officers and directors as a
group.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Class A Beneficially Class B Beneficially Owned Total Beneficially Owned
Owned
-------------------------------- ------------------------------- ----------------------------------
Shares Percent Shares Percent Shares Percent
----------- -------------- ------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
AFC(1) -- -- 1,779,301 100% 1,779,301 50.1%
Victoria G. Kane (1) -- -- 1,779,301 100% 1,779,301 50.1%
T. Gibbs Kane, Jr. (1) -- -- 1,779,301 100% 1,779,301 50.1%
Gabelli Funds, Inc.(2) 355,150 20.0% -- -- 355,150 10.0%
Mario J. Gabelli (3) 682,576 38.5% -- -- 682,576 19.2%
Marc J. Gabelli -- -- -- -- -- --
Robert E. Dolan (4) 235 -- -- -- 235 --
All Directors and 682,811 38.5% 1,779,301 100% 2,462,112 69.3%
Executive Officers as a
Group (5 in total)
</TABLE>
(1) Victoria G. Kane is the sole shareholder of AFC and therefore shares
owned by AFC are set forth in this table as owned by Victoria G. Kane.
T. Gibbs Kane is the husband of Victoria G. Kane, and therefore shares
owned by Victoria G. Kane are also set forth as owned by T. Gibbs Kane.
T Gibbs Kane disclaims ownership of the shares. The address of AFC,
Victoria G. Kane and T. Gibbs Kane is c/o Olshan Grundman Frome &
Rosenzweig LLP.
(2) Mario J. Gabelli is the Chairman and Chief Executive Officer, and the
principal stockholder of Gabelli Funds, Inc.
(3) Includes 255,426 shares owned directly by Mr. Gabelli (including 3,512
shares held for the benefit of Mr. Gabelli in the Lynch 401(k) Savings
Plan), 355,150 shares held by GFI, 2,000 shares owned by a charitable
foundation of which Mr. Gabelli is a trustee and 70,000 shares owned by
a limited partnership in which Mr. Gabelli is the general partner and
has a 20% interest. Mr. Gabelli disclaims the ownership of the shares
owned by the foundation, by GFI to the extent of the minority interest
in GFI held by third parties, and by the partnership except for his 20%
interest therein. The address of GFI and Mr. Gabelli is 555 Theodore
Fremd Avenue, Corporate Center at Rye, Rye, NY 10580.
(4) Includes 35 shares registered in the name of Mr. Dolan's children with
respect to which Mr. Dolan has voting and investment power.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 19,600,000 shares of Common Stock,
$.0001 par value, and 15,000 shares of undesignated Preferred Stock, $1,000 par
value. The following description of the Company's capital stock does not purport
to be complete and is subject to and qualified in its entirety by the Company's
Certificate of Incorporation and Bylaws, and by the provisions of applicable
Delaware law.
COMMON STOCK
The Company has two classes of Common Stock authorized: Class A Common
Stock and Class B Common Stock. The authorized capital stock of the Company
consists of 3,600,000 shares of Class A Common Stock and 16,000,000 shares of
Class B Common Stock. There are 1,772,198 shares of Class A Common Stock
outstanding and held by Lynch. Concurrently with the Spin Off, 355,150 shares
will be transferred to GFI and 1,417,048 shares will be transferred to
shareholders of Lynch. There are 1,779,301 shares of Class B Common Stock
outstanding and held by AFC. The holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, if any, then outstanding.
Voting Rights
Collectively, the shares of Class A Common Stock represent not more
than 49.9% of the Company's voting interest, with each share of Class A Common
Stock issued and outstanding having one vote per share (subject to downward
adjustment if necessary to comply with the 49.9% maximum class vote) on all
matters except the election of directors or as otherwise provided by law. The
holders of the Class A Common Stock as a class will be entitled to elect members
to the Company's Board of Directors (the "Class A Directors") who collectively
will represent two of the five votes of the Company's Board of Directors. At the
present time, the holders of the Class A Common Stock will elect two Class A
Directors who will have one vote each.
Collectively, the shares of Class B Common Stock represent at least
50.1% of the Company's voting interest, with each share of Class A Common Stock
issued and outstanding having 5 votes per share (subject to upward adjustment,
if necessary, to comply with the 50.1% minimum class vote), on all matters
except the election of directors or as otherwise provided by law. With respect
to the election of directors, the Class B Common Stock, voting together as a
class, may elect up to three members of the Company's Board of Directors (the
"Class B Directors"). The Class B Directors shall collectively have three full
votes on each matter submitted to a vote of the Board of Directors.
Redemption By the Company
If a holder of Class A Common Stock acquires additional shares of Class
A Common Stock or otherwise is attributed with ownership of such shares that
would cause the Company to violate the Entrepreneurs Requirements or the Foreign
Ownership Restrictions (collectively, "FCC Violations"), the Company, at its
option, may redeem that number of such shares necessary to eliminate the FCC
Violation at a redemption price equal to (i) 75% of the fair market value of
such shares where such holder caused the FCC Violation or (ii) 100% of the fair
market value where the FCC Violation was caused by no fault of the holder.
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<PAGE>
Transfer Restriction
The Class B Common Stock cannot be transferred, sold or otherwise
disposed of to any third party, directly or indirectly, except (i) to family
members, or by will or by operation of the laws of descent and devise (in which
case the transferees will continue to be bound by these restrictions), (ii) such
number of shares which does not exceed 10% of the Class B Common Stock
outstanding as of the Spin Off, or (iii) pursuant to a transaction or series of
transactions on terms and conditions which are substantially identical in the
opinion of the Company's counsel to the terms and conditions made available to
all holders of the Class A Common Stock, including form, type and amount of
consideration per share, the availability of such consideration and the timing
of payment. To the extent it deems necessary, such counsel may rely on the
opinion of a nationally recognized investment banking firm in evaluating the
terms of any securities or other consideration being offered.
PREFERRED STOCK
The Company has outstanding 7,300 shares of Preferred Stock, par value
$1,000 per share. The Preferred Stock (i) is entitled to preferred dividends at
an annual rate of 5 shares of additional Preferred Stock for each one hundred
shares of Preferred Stock outstanding, (ii) has no voting rights except as
provided by law, and (iii) is entitled to be redeemed at $1,000 per share (plus
accrued and unpaid dividends) on the earlier of (i) October 1, 2009, (ii) upon a
change of control of the Class A or Class B Common Stock or (iii) upon the sale
of one or more PCS licenses for cash or a non-cash sale which is subsequently
converted into or redeemed for cash in an amount proportional to that number of
persons covered by the sale of such licenses for cash, or that portion of a
non-cash sale subsequently converted into or redeemed for cash, compared to the
total persons covered by the Company's five initial PCS licenses, in each case
based on the 1996 or most recent subsequent estimate by the United States Bureau
of Census. Therefore, the number of shares redeemed shall be computed by
dividing (i) the number of persons covered by the sale by (ii) the total number
of persons covered by the five initial PCS licenses owned by the Corporation.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS,
DELAWARE LAW AND CONTROL GROUP REQUIREMENTS
Certificate of Incorporation and Bylaws
Several provisions of the Company's Certificate of Incorporation and
Bylaws could deter or delay unsolicited changes in control of the Company.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
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<PAGE>
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Control Group Requirements
In order to meet the Control Group Requirements, the Company's
Certificate of Incorporation provides that the Company's Class B Common Stock,
as a class, must constitute 50.1% of the voting power of the Company. The
structure that the Company has adopted to ensure compliance with the Control
Group Requirements will likely deter and delay unsolicited changes in control of
the Company. See "Risk Factors--Government Regulation--Control Group
Requirements" and "--Effect of Control by Certain Stockholders."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock is
ChaseMellon Shareholder Services.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Government Financing
The Company is the obligor on installment payments to be made for the
F-Block PCS licenses held the Company. The aggregate debt obligation of the
Company to the U.S. Government pursuant to the Government Financing is
approximately $15.2 million. The Company will be required to make interest
expense payments based on an interest rate of 6.25%. The Company will be
required to make quarterly payments of interest only for the first two years of
the license and quarterly payments of interest and principal over the remaining
eight years of the license term. In the event that the Company (or any of its
affiliates) becomes unable to meet its obligations under the Government
Financing, is involved in certain bankruptcy or insolvency proceedings or
otherwise violates regulations applicable to holders of FCC licenses, the FCC
could take a variety of actions, including requiring immediate repayment of
amounts due under the Government Financing, repayment of certain bidding
credits, revoking the Company's PCS licenses and fining the Company an amount
equal to the difference between the price at which the Company acquired the
licenses and the amount of the winning bid at their reauction, plus an
additional penalty of three percent of the lesser of the subsequent winning bid
and the Company's bid amount. There can be no assurance that the Company will be
able to meet their obligations under the Government Financing or that in the
event of a failure to meet such obligations, the FCC will not require immediate
repayment of amounts due under the Government Financing or revoke the Company's
PCS licenses. In either such event the Company may be unable to meet their
obligations to other creditors.
In connection with serving as the obligor on the payments to be made
for the F-Block PCS license it holds, the Company has or must execute notes to
the United States Treasury Department documenting its payment obligations and a
security agreement creating a first priority security interest in favor of the
FCC in the license (and the proceeds of any sale thereof) in the event of a
default. The security agreement permits the Company to grant a subordinated
security interest in the license to a third party.
FEDERAL INCOME TAX CONSEQUENCES
The distribution by Lynch to its holders of common stock of the Class A
Common Stock of the Company will be characterized as a dividend taxable as
ordinary income to the extent of Lynch's current or accumulated earnings and
profits. Although the value of the stock distributed as a dividend in the Spin
Off will be taxable to the recipient, the Company believes that the taxable
amount will be fairly small. To the extent that all or part of a distribution to
a holder exceeds such holder's allocable share of Lynch's current or accumulated
earnings and profits, such amount will first be treated as a return of capital
that will reduce the holder's adjusted tax basis in his shares of Lynch common
stock and then to the extent that the distribution exceeds such basis, such
excess will be taxed as a capital gain (mid-term capital gain or long-term
capital gain, depending upon whether the holder's holding period for such common
stock has been more than one year or more than 18 months, respectively). Any tax
liability to the Company as a result of the Spin Off is also expected to be
small.
A corporate holder will generally be entitled to a 70%
dividends-received deduction with respect to distributions that are treated as
dividends on shares of Lynch common stock that the corporate holder has held for
at least 46 days during the 90-day period that begins 45 days before the stock
becomes ex-dividend. A taxpayer's holding period for this purpose is reduced by
periods during which the taxpayer's risk of loss with respect to the shares is
considered diminished by reason of the existence of certain options, contracts
to sell or other similar transactions. Also, the dividends-received deduction
may be reduced or eliminated if a corporation has indebtedness "directly
attributable to its investment" in portfolio stock.
A corporate holder is required to reduce its basis (but not below zero)
in stock by the non-taxed portion (generally the portion eligible for the
dividends-received deduction described above) of an "extraordinary dividend"
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<PAGE>
as defined in Section 1059 of the Internal Revenue Code, if the holder has not
held such stock subject to a risk of loss for more than two years before Lynch
declared, announced, or agreed to, the amount or payment of such dividend,
whichever is earliest. If any part of the non-taxed portion of an extraordinary
dividend has not been applied to reduce the basis as a result of the limitation
on reducing basis below zero, such part will be treated as gain from the sale or
exchange of stock.
In addition, for purposes of computing its alternative minimum tax
liability, a corporate holder may, in general, be required to include in its
alternative minimum taxable income a portion of any dividends-received deduction
allowed in computing regular taxable income.
The foregoing does not purport to be a complete analysis of all the
potential tax effects of the distribution of the Class A Common Stock of the
Company, and is limited to United States federal income tax matters. The
discussion is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, and Internal Revenue Service rulings and judicial decisions now in
effect, all of which are subject to change at any time, possibly with
retroactive effect, by legislative, judicial or administrative action. In
addition, the tax consequences to a particular holder (including life insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities, foreign corporations and nonresident alien individuals) may be
affected by matters not discussed herein.
BECAUSE THE FEDERAL INCOME TAX CONSEQUENCES DISCUSSED HEREIN DEPEND
UPON EACH HOLDER'S PARTICULAR TAX STATUS, AND DEPEND FURTHER UPON FEDERAL TAX
LAWS, REGULATIONS, RULINGS AND DECISIONS WHICH ARE SUBJECT TO CHANGE (WHICH
CHANGES MAY BE RETROACTIVE IN EFFECT), PROSPECTIVE INVESTORS SHOULD CONSULT
THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF THE
DISTRIBUTION, INCLUDING, BUT NOT LIMITED TO, THE APPLICATION AND EFFECT OF ANY
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, AS WELL AS THE CONSEQUENCES OF ANY
RECENT, PENDING OR PROPOSED CHANGES IN THE APPLICABLE LAWS.
EXPERTS
The financial statements of Aer Force Communications B, L.P. at June
30, 1997 and December 31, 1996, for the period from July 26, 1996 (inception) to
December 31, 1996, the six months ended June 30, 1997 and the period from July
26, 1996 (inception) to June 30, 1997 appearing in this Information Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon (which contains an explanatory paragraph with respect to
Aer Force Communications B, L.P.'s ability to continue as a going concern)
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The validity of the shares of Class A Common Stock distributed on the
Spin Off will be passed upon for the Company by Olshan Grundman Frome &
Rosenzweig LLP, New York, New York.
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GLOSSARY
1996 Act................... Telecommunications Act of 1996.
BTA........................ Basic Trading Area, as set forth in the Rand
McNally Commercial Atlas & Marketing Guide (123d
ed. 1992).
F-Block Auction............ The FCC Auction of 493 10 MHz BTA licenses,
restricted to entities meeting certain financial
and other criteria.
Cellular................... The domestic public cellular radio
telecommunications service authorized by the FCC
in the 824-893 MHz band, in which each of two
licenses per market employs 25 MHz of spectrum to
provide service to the public. Cellular systems
are based on multiple base stations, or "cells,"
that permit efficient frequency reuse and on
software that permits the system to hand mobile
calls from cell to cell as subscribers move
through the cellular service area.
CDMA....................... Code Division Multiple Access. One of the three
leading PCS and digital cellular technology
platforms.
CLEC....................... Competitive Local Exchange Carrier.
CMRS....................... Commercial Mobile Radio Service. A provider of
mobile telecommunications services that provides
communications services (1) to the public (2) for
profit, that are (3) interconnected to the public
switched telephone network. The FCC has adopted
rules to regulate all similarly situated CMRS
providers under similar regulations.
Common Carriers............ Companies which own or operate transmission
facilities and offer telecommunication services to
the general public on a non-discriminatory basis.
CTIA....................... The Cellular Telecommunications Industry
Association. A trade association in North America
comprised primarily of cellular and PCS telephone
service providers and some mobile satellite
service providers.
Digital.................... A method of storing, processing and transmitting
information through the use of distinct electronic
or optical pulses that represent the binary digits
0 and 1. Digital transmission/switching
technologies employ a sequence of discrete,
distinct pulses to represent information, as
opposed to the continuously variable analog
signal. Digital PCS networks will utilize digital
transmission.
ESMR....................... Enhanced Specialized Mobile Radio Service, an SMR
service that contemplates expanded digital
telephony service offerings to the public in
general rather than local dispatch services to
specialized business subscribers.
FCC........................ The Federal Communications Commission.
GHz........................ Gigahertz. A unit of frequency equal to one
billion cycles (or hertz) per second.
GSM........................ Groupe Speciale Mobile. One of the three leading
PCS and digital cellular technology platforms,
currently widely deployed in Europe.
-45-
<PAGE>
Handsets................... Portable, fixed, mobile, wireless or transportable
devices used for the reception and transmission of
voice communications.
IVDS....................... Interactive video and data service.
IXC........................ Interexchange Carrier.
LATA....................... Local Access and Transport Areas.
LEC........................ Local Exchange Carrier.
LMDS....................... Local Multipoint Distribution Service.
MHz........................ Megahertz. A unit of frequency equal to one
million cycles (or hertz) per second.
MSS........................ Mobile Satellite Service.
MTA........................ Major Trading Area, as set forth in the Rand
McNally Commercial Atlas & Marketing Guide (123d
ed. 1992).
PCS........................ Personal Communications Services.
POPs....................... Persons in the U.S. population based upon the
Population Estimate Program, and Bureau of Census,
Release Date March 20, 1997 unless stated
otherwise.
PSAP....................... Public Safety Answering Point.
RBOC....................... Regional Bell Operating Company.
RF......................... Radio Frequency.
SMR........................ Specialized Mobile Radio, a two-way mobile radio
telephone system used traditionally mostly for
local dispatch services.
TDMA....................... Time Division Multiple Access. One of the three
leading PCS and digital cellular technology
platforms.
WCS........................ Wireless Communications Services.
-46-
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Index to Financial Statements
CONTENTS
Report of Independent Auditors...............................................F-2
Audited Financial Statements
Balance Sheets at December 31, 1996 and June 30, 1997........................F-3
Statements of Operations for the Period from July 26, 1996 (Inception) to
December 31, 1996, the Six Months Ended June 30, 1997 and the Period
from July 26, 1996 (Inception) to June 30, 1997...........................F-4
Statements of Changes in Partners' Equity/(Deficit) for the Period from
July 26, 1996 (Inception) to December 31, 1996 and the Six Months
ended June 30, 1997.......................................................F-5
Statements of Cash Flows for the Period from July 26, 1996 (Inception) to
December 31, 1996, the Six Months Ended June 30, 1997 and the Period
from July 26, 1996 (Inception) to June 30, 1997...........................F-6
Notes to Financial Statements................................................F-7
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Partners
Aer Force Communications B, L.P.
We have audited the accompanying balance sheets of Aer Force Communications B,
L.P. (the "Partnership") a development stage enterprise, as of December 31, 1996
and June 30, 1997, and the related statements of operations, partners'
equity/(deficit), and cash flows for the period from July 26, 1996 (inception)
to December 31, 1996, the six months ended June 30, 1997 and for the period from
July 26, 1996 (inception) to June 30, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aer Force Communications B,
L.P. at December 31, 1996 and June 30, 1997, and the results of its operations
and its cash flows for the period from July 26, 1996 (inception) to December 31,
1996, the six months ended June 30, 1997 and the period from July 26, 1996
(inception) to June 30, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming Aer Force
Communications B, L.P. will continue as a going concern. As more fully described
in Note 1, the Partnership has incurred losses since inception and has not yet
adopted a business plan or determined how to finance its operations and will
need to obtain capital in the near future in order to fund its interest payment
obligations and for working capital and general corporate purposes. These
conditions raise substantial doubt about the Partnership's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Stamford, Connecticut
August 26, 1997
F-2
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------------------------------
<S> <C> <C>
ASSETS
Deposit with FCC $12,000,000 $ -
PCS Licenses - 18,957,721
Capitalized costs - 226,210
-------------------------------------
Total assets $12,000,000 $19,183,931
=====================================
LIABILITIES AND PARTNERS' EQUITY/(DEFICIT)
Accrued liabilities $ - $ 926,230
-------------------------------------
Total current liabilities - 926,230
Long-term accrued liabilities - 96,490
Due to Limited Partner 1,578,500 2,977,648
Long-term debt:
Loan from Limited Partner 11,800,000 2,708,044
Loan from FCC - 15,166,177
General Partner's equity accumulated during the development stage 84,415 71,293
Limited Partner's deficit accumulated during the development stage (1,462,915) (2,761,951)
-------------------------------------
Total partners' deficit accumulated during the development stage (1,378,500) (2,690,658)
-------------------------------------
Total liabilities and partners' deficit $12,000,000 $19,183,931
=====================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
JULY 26, 1996
(INCEPTION) TO SIX MONTHS JULY 26, 1996
DECEMBER 31, ENDED (INCEPTION) TO
1996 JUNE 30, 1997 JUNE 30, 1997
------------------------------------------------------------
<S> <C> <C> <C>
Interest expense including commitment fees $(1,578,500) $(1,312,158) $(2,890,658)
------------------------------------------------------------
Net loss $(1,578,500) $(1,312,158) $(2,890,658)
============================================================
Net loss allocated to general partner (1%) $ (15,785) $ (13,122) $ (28,907)
============================================================
Net loss allocated to limited partner (99%) $(1,562,715) $(1,299,036) $(2,861,751)
============================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Statements of Changes in Partners' Equity/(Deficit)
FOR THE PERIOD FROM JULY 26, 1996
(INCEPTION) TO DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
PARTNERS'
EQUITY/
(DEFICIT)
-------------------
Capital contributions $ 200,000
Net loss (1,578,500)
-------------------
Balance at December 31, 1996 (1,378,500)
Net loss (1,312,158)
-------------------
BALANCE AT JUNE 30, 1997 $(2,690,658)
===================
See accompanying notes.
F-5
<PAGE>
xx
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
JULY 26, 1996
(INCEPTION) TO SIX MONTHS JULY 26, 1996
DECEMBER 31, ENDED (INCEPTION) TO
1996 JUNE 30, 1997 JUNE 30, 1997
------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,578,500) $ (1,312,158) $ (2,890,658)
Interest accrued, including commitment fees 1,578,500 1,312,158 2,890,658
------------------------------------------------------------
Net cash provided by operating activities - - -
INVESTING ACTIVITIES
(Deposits with) refunds from the FCC (12,000,000) 10,104,228 (1,895,772)
Purchase of PCS licenses - (1,012,272) (1,012,272)
------------------------------------------------------------
Net cash (used in) provided by investing activities (12,000,000) 9,091,956 (2,908,044)
FINANCING ACTIVITIES
Proceeds from the issuance of loans from the Limited Partner 11,800,000 1,012,272 12,812,272
Repayment of loans from the Limited Partner - (10,104,228) (10,104,228)
Capital contributions 200,000 - 200,000
------------------------------------------------------------
Net cash provided by (used in) financing activities 12,000,000 (9,091,956) 2,908,044
Net change in cash - - -
Cash at beginning of period - - -
------------------------------------------------------------
Cash at end of period $ - $ - $ -
============================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise
Notes to Financial Statements
December 31, 1996 and June 30, 1997
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Aer Force Communications B, L.P. ("the Partnership") was formed in July 1996 to
bid for personal communications services ("PCS") licenses in the Federal
Communications Commission's ("FCC") F-Block auction. PCS is a second generation
digital wireless service utilizing voice, video or data devices that allow
people to communicate at anytime and virtually anywhere. Over the past three
years, the FCC auctioned off PCS licenses, a total of 120 MHZ of spectrum,
falling within six separate frequency blocks labeled A through F. Frequency
blocks C and F were designated by the FCC as "entrepreneurial blocks." Certain
qualifying small businesses including the Partnership were afforded bidding
credits in the auctions as well as government financing of the licenses
acquired. The Partnership won five licenses in 1997 to provide personal
communications services over 10Mhz of spectrum to a population of approximately
21 million, including Los Angeles and Washington, D.C. Aer Force Communications
Inc. is the General Partner of the Partnership with a 50.1% equity interest.
Lynch PCS Corporation F, a wholly-owned subsidiary of Lynch Corporation
("Lynch"), a publicly held company, is the Limited Partner of the Partnership
with a 49.9% equity interest.
BASIS OF PRESENTATION
The financial statements are prepared in conformity with generally accepted
accounting principals applicable to a development stage enterprise.
The Partnership's financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business and do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets and the amount and classifications of liabilities that may result from
the possible inability of the Partnership to continue as a going concern.
The Partnership believes that its PCS licenses have substantial potential.
However, it has not yet determined whether to develop its PCS licenses on its
own, joint venture its licenses with other PCS or wireless telephone licensees
or operators, or sell some or all of its licenses. As a result, the Partnership
has not yet adopted a business plan or determined how to finance its operations.
The Partnership has incurred losses since inception and will need to obtain
capital in the near future in order to fund its interest payment obligations and
for working capital and general corporate purposes. The Partnership has
determined to convert from a limited partnership to a corporation (the
"Corporation") before the spin-off described in Note 6. The Corporation is
considering, among other things, a rights offering pursuant to which holders of
Class A and Class B Common Stock would be entitled to acquire additional shares.
The terms of such an offering have not been determined. There can be no
assurance that such a rights offering will occur or that the Corporation can
raise sufficient capital to fund its obligations and finance the construction of
its networks, either through a rights offering or otherwise. Accordingly, the
lack of funding creates substantial doubt about the Partnership's ability to
continue as a going concern.
F-7
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
ADMINISTRATIVE SERVICES
The Partnership has no employees. The Limited Partner provided the Partnership,
at its request, with certain services in connection with the Partnership's
bidding for PCS licenses in the FCC auction in late 1996 through early 1997.
Aside from that matter, neither the General Partner nor the Limited Partner
provided the Partnership with a substantial amount of services. Neither partner
charged the Partnership for the services provided, as such amounts are not
significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the carrying amounts of assets and liabilities and disclosures at the
date of the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
CAPITALIZED COSTS
Interest charges including commitment fees incurred prior to the granting of the
licenses have been expensed. Subsequent to the license grant date, and until
operations commence, all interest charges and commitment fees on outstanding
loan balances will be capitalized. These costs will be amortized over the
remaining life of the respective loan when the Partnership commences operations.
Capitalized interest, included in capitalized costs, amounted to $133,793. Total
interest charges amounted to $355,638 and $1,053,804, respectively, for the six
months ended June 30, 1997 and for the period from July 26, 1996 (inception) to
June 30, 1997.
The FCC licenses will be amortized over a period, consistent with the industry
standard, not to exceed 40 years, which will begin when operations commence.
INCOME TAXES
The results of operations of the Partnership are included in the taxable income
or loss of the individual partners and, accordingly, no tax provision has been
recorded.
2. RELATED PARTIES
Due to Limited Partner represents amounts due for interest, including commitment
fees, on the loan outstanding which will be repaid according to the terms of the
loan.
3. PARTNERSHIP AGREEMENT
The Partnership was formed in July 1996 to bid for PCS licenses in the "F-Block"
auction. The General Partner contributed $100,200 to the Partnership for a 50.1%
equity interest and the Limited Partner contributed $99,800 to the Partnership
for a 49.9% equity interest.
F-8
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Notes to Financial Statements (continued)
3. PARTNERSHIP AGREEMENT (CONTINUED)
Under the terms of the Partnership Agreement all items of deduction with respect
to interest expense and commitment fees are allocated 99% to the Limited Partner
and 1% to the General Partner. All profits of the Partnership are allocated 99%
to the Limited Partner and 1% to the General Partner until the aggregate amount
of all profits allocated to the Limited Partner and General Partner equal the
items of deduction with respect to interest expense and commitment fees.
Subsequently, all profits and losses will be allocated to the Limited Partner
and General Partner in proportion to their respective interests, 49.9% and
50.1%, respectively.
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------------------------------
<S> <C> <C>
The Limited Partner loan at a fixed rate of 15% due in 2001 $11,800,000 $ 2,708,044
FCC financing of PCS licenses awarded in the following
markets and mature in 2007:
Los Angeles, CA - 3,579,000
Washington, D.C. - 7,068,000
Sarasota, FL - 1,322,400
Reno, NV - 1,429,800
Santa Barbara, CA - 1,766,977
------------------------------------
- 15,166,177
------------------------------------
$11,800,000 $17,874,221
====================================
</TABLE>
In connection with the PCS "F-Block" auction, $12.0 million was deposited with
the FCC of which $11.8 million was borrowed from the Limited Partner under a
line of credit which is due and payable in five years. The interest rate on the
outstanding borrowings under the line is fixed at 15%; additionally, a
commitment fee of 20% per annum is being charged on the total line of credit
which is $11.4 million at June 30, 1997. The amounts due to the Limited Partner,
including accrued interest and commitment fees, at December 31, 1996 and June
30, 1997 are $13.4 million and $5.7 million, respectively. In January 1997,
$10.1 million of this loan was repaid to the Limited Partner with the deposit
returned by the FCC.
Under a recapitalization of the Partnership that is currently being considered,
the total amount due to the Limited Partner would be converted to newly created
5% Redeemable Preferred Stock. This Preferred Stock including accumulated
dividends would be mandatorily redeemable on October 1, 2009 (See Note 6).
F-9
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Notes to Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
All of the FCC financing bears interest at 6.25% per annum. Quarterly interest
payments of $236,972 are required for the first two years of the license and
quarterly payments of principal and interest of $605,879 are required over the
remaining eight years of the license term. These loans are secured by the
licenses granted. On March 31, 1997, the FCC suspended the interest payments on
the debt while it determines whether to grant any relief to license holders
regarding the installment payment terms. It is expected that the FCC will make
its determination before the end of 1997.
There were no cash payments for interest for the periods ended December 31, 1996
and June 30, 1997.
Aggregate principal maturities of long-term debt for each of the next five years
are as follows: 1997--$0 million, 1998--$0 million, 1999--$0.743 million,
2000--$1.558 million and 2001--$1.658 million.
5. LEGAL MATTERS
The United States Department of Justice has initiated an investigation to
determine whether there has been bid rigging and market allocation for licenses
auctioned by the FCC for PCS. The Partnership, together with various other
bidders in the PCS auctions, has received a civil investigative demand ("CID")
requesting documents and information relating to bidding, and in June 1997, the
Partnership complied with the CID. The Partnership has not been contacted by the
Justice Department since that date and is not aware of what further action, if
any, the Justice Department may take. The Partners do not believe the outcome of
this matter will have a significant impact on the financial condition or results
of operations of the Partnership.
6. SUBSEQUENT EVENTS
The Partnership has determined to convert from a limited partnership to a
corporation (the "Corporation") before the contemplated spin-off under which the
General Partner would receive 50.1% of the common stock of the Corporation and
the Limited Partner, would receive 49.9% of the Common Stock of the Corporation.
It is also contemplated that the partners would make an additional capital
contribution to the Partnership of $250,000 in the aggregate and that the
indebtedness (including accrued interest and commitment fees) owed by the
Corporation to the Limited Partner ($5.7 million at June 30, 1997) would be
converted into an equivalent principal amount of redeemable Preferred Stock of
the Corporation and the Limited Partner's obligation to make further loans to
the Partnership would terminate. The Preferred Stock is entitled to preferred
dividends at an annual rate of 5 shares of additional Preferred Stock for each
one hundred shares of Preferred Stock outstanding, has no voting rights except
as provided by law, and is entitled to be redeemed at $1,000 per share plus
accrued and unpaid dividends, on October 1, 2009, or earlier upon certain
circumstances. The Partnership has been informed by the Limited Partner that a
portion of the common stock of the Corporation to be received by it is expected
to be spun-off to the shareholders of its parent company.
F-10
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise)
Notes to Financial Statements (continued)
6. SUBSEQUENT EVENTS (CONTINUED)
The following unaudited financial information gives effect, to the transaction
described above, on a pro forma basis, as if the transaction occurred on June
30, 1997.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AS OF JUNE 30, 1997 (PRO
(ACTUAL) FORMA)
--------------------------- ---------------------------
<S> <C> <C>
Balance sheet data:
Total assets $19,183,931 $19,433,931
Accrued interest/commitment fees due to Limited Partner 2,977,648 -
Loan from FCC 15,166,177 15,166,177
Loan from Limited Partner 2,708,044 -
Redeemable preferred stock - 5,685,692
Partners' contributions 200,000 -
Common stock - 355
Additional paid-in-capital - 449,645
Accumulated losses (2,890,658) (2,890,658)
--------------------------- ---------------------------
Total (deficit) (2,690,658) (2,440,658)
</TABLE>
F-11
CERTIFICATE OF INCORPORATION
OF ARF COMMUNICATIONS B, INC.
A DELAWARE CORPORATION
ARTICLE I.
The name of this corporation is ARF Communications B, Inc. (sometimes referred
to herein as the "Corporation").
ARTICLE II.
The address of the registered office of this Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III.
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV.
A. CLASSES OF STOCK. This Corporation is authorized to issue three
classes of stock to be designated, respectively, "Class A Common Stock," "Class
B Common Stock" and "Preferred Stock." The total number of shares which the
Corporation is authorized to issue is Nineteen Million, Six Hundred and Fifteen
Thousand (19,615,000) shares. Sixteen Million (16,000,000) shares shall be Class
A Common Stock, par value $0.0001, Three Million Six Hundred Thousand
(3,600,000) shares shall be Class B Common Stock, par value $0.0001, and Fifteen
Thousand (15,000) shares shall be Preferred Stock, par value $1,000.
B. RIGHTS OF COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, including without limitation the Preferred Stock, the holders of the
Class A and Class B Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, and on a pari passu basis, such dividends as may be declared
from time to time by the Board of Directors.
<PAGE>
2. LIQUIDATION PREFERENCE. Subject to the prior rights of
holders of all classes of stock at the time outstanding having liquidation
preferences, including without limitation the Preferred Stock, in the event of
any liquidation, dissolution or winding up of this Corporation, either voluntary
or involuntary, the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the holders of the Class A
and Class B Common Stock in proportion to the amount of such stock owned by each
such holder.
3. CONVERSION. The Class B Common Stock may be converted as
follows ("Conversion Rights):
(a) RIGHT TO CONVERT. (i) Subject to paragraph (3)(a)(ii)
below, each share of Class A Common Stock shall automatically be converted into
one share of Class B Common Stock on the earlier of (i) July 1, 2007, or (ii)
fourteen days after such date as the "Control Group", as defined from time to
time by the Federal Communications Commission ("FCC"), shall no longer be
required to "control", as defined from time to time by the FCC, the Corporation
in order for the Corporation to maintain the benefits received by the
Corporation with respect to personal communications services licenses issued by
the FCC to the Corporation or (iii) such earlier date as may be determined by
the Board of Directors.
(ii) Any conversion of Class B Common Stock into Class A
Common Stock pursuant to this Section 3 shall not be permitted to the extent
that such conversion would cause (A) the Control Group, as defined from time to
time by the FCC, of the Corporation to hold less than 25% of the Corporation's
Common Stock equity and less than 50.1% of the Corporation's total voting stock,
or (C) the Qualifying Investors, as defined from time to time by the FCC, of the
Corporation to hold less than 15% of the Corporation's total Common Stock equity
during the first three years of the initial FCC license term(s) and less than
10% during the remaining seven (7) years and less than 50.1% of the total voting
stock through the FCC license term(s), unless the FCC materially amends the
above requirements (collectively, such requirements shall be referred to as the
"Entrepreneurs' Requirements") and in such instance such conversion by the
Control Group and Qualifying Investors shall be governed accordingly. If any
conversion contemplated in this paragraph 3(a) requires FCC authorization or
approval, such conversion shall not be effective until such authorization or
approval has been obtained.
-2-
<PAGE>
(b) MECHANICS OF CONVERSION. Before any holder of shares of
Class B Common Stock shall be entitled to convert the same into shares of Class
A Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of this Corporation, and shall give
written notice by mail, postage prepaid, to this Corporation at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of Class A
Common Stock are to be issued. This Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of shares of Class B
Common Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Class A Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Class B Common Stock to be converted, and the person
or persons entitled to receive the shares of Class A Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Class A Common Stock as of such date.
(c) NOTICES OF RECORD DATE. In the event of any taking by this
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend and any dividend on the shares of Preferred
Stock) or other distribution, and right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, this Corporation shall mail to each holder of Class
A and B Common Stock, at least 20 days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(d) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This
Corporation shall be at all times reserve and keep available out of its
authorized but unissued shares of Class A Common Stock solely for the purpose of
effecting the conversion of the shares of the Class B Common Stock such number
of its shares of Class B Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Class B Common Stock;
and if at any time the number of authorized but unissued shares of Class A
Common Stock shall not be sufficient to effect the conversion
-3-
<PAGE>
of all then outstanding shares of the Class B Common Stock, this Corporation
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Class A Common Stock
to such number of shares as shall be sufficient for such purposes.
4. VOTING RIGHTS. The holders of the Corporation's stock shall
have voting rights and, pursuant to Section 141 of the General Corporation Law,
a member of the Board of Directors of the Corporation may have more or less than
one vote per director as follows:
(a) CLASS A COMMON. The holders of the Class A Common Stock,
as a class, shall have the right to (i) vote no more than 49.9% of the Company's
voting interests on all matters and (ii) elect that number of members of the
Board of Directors as are from time to time set forth in the Corporation's
bylaws (the "Class A Board Designees"). The Class A Board Designees shall
collectively have two (2) votes on each matter submitted to a vote of the Board
of Directors. Subject to the foregoing, the holder of each share of Class A
Common Stock shall have the right to one vote, and shall be entitled to notice
of any shareholders' meeting in accordance with the bylaws of this Corporation,
and shall be entitled to vote upon such matters and in such manner as may be
provided by law.
(b) CLASS B COMMON. The holders of Class B Common Stock, as a
class, shall have the right to (i) vote at least 50.1% of the Corporation's
voting interests on all matters and (ii) elect up to three members of the Board
of Directors (the "Class B Board Designees"). The Class B Board Designees shall
collectively have three (3) votes on each matter submitted to a vote of the
Board of Directors. Subject to the foregoing, the holder of each share of Class
B Common Stock shall have the right to five votes, and shall be entitled to
notice of any shareholders' meeting in accordance with the bylaws of this
Corporation, and shall be entitled to vote upon such matters and in such manner
as may be provided by law.
5. REDEMPTION OF COMMON STOCK. (a) If, at any time, a holder
of shares of Class A Common Stock acquires additional shares of Class A Common
Stock, or is otherwise attributed with ownership of such shares, that would
cause the Corporation to violate any Entrepreneurs' Requirement (as defined in
subsection 3(a)(ii) of this Article) or any requirement of the FCC regarding
foreign ownership ("Foreign Ownership Requirement", collectively with the
Entrepreneurs'
-4-
<PAGE>
Requirement (the "FCC Violations"), then this Corporation may, at the option of
the board of directors, redeem such sufficient number of shares of Class A
Common Stock to eliminate the FCC Violation by paying in cash therefor a sum
equal to the Redemption Price; provided that in the event there is a violation
of the Foreign Ownership Requirement caused by a holder of Class A Common Stock,
the Corporation shall first redeem the stock of the foreign stockholder which
most recently purchased its first shares of the stock of the Corporation at the
Redemption Price set forth in subsection (i) below and then if necessary shall
redeem at the Redemption Price set forth in subsection (ii) below the stock of
other foreign stockholder which most recently purchased its first shares of the
stock of the Corporation. The Redemption Price shall equal such price as
mutually determined by such stockholders and the Corporation, or, if no
agreement can be reached, shall equal either (i) seventy-five percent (75%) of
the fair market value of the Class A Common Stock where such holder caused the
FCC Violation, or (ii) one hundred percent (100%) of the fair market value where
the FCC Violation was caused by no fault of the holder; provided that the
determination of whether such party caused the FCC Violation shall be made, in
good faith, by the Board of Directors. The fair market value of such shares of
Class B Common Stock described in the preceding sentences shall be determined as
follows:
(i) If the Class A Common Stock is traded on a national
securities exchange or through the Nasdaq National Market the value shall be
deemed to be the average of the closing prices of the securities on such
exchange over the thirty-day period ending ten (10) days prior to the closing;
(ii) If traded over-the-counter, the value shall be deemed to
be the average of the closing bid or sale prices (whichever is applicable) over
the thirty-day period ending ten (10) days prior to the closing; and
(iii) If there is no active public market, the value shall be
the fair market value thereof, as determined in good faith by the Board of
Directors.
(a) At least five (5) but no more than thirty (30) days prior
to a Redemption Date, written notice shall be mailed, first class postage
prepaid, to each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of the shares of Class A Common
Stock to be redeemed, at the address last shown on the
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records of this Corporation for such holder, notifying such holder of the
redemption to be effected, specifying the number of shares to be redeemed from
such holder, the Redemption Date, the Redemption Price, the place at which
payment may be obtained and calling upon such holder to surrender to this
Corporation, in the manner and at the place designated, his, her or its
certificate or certificates representing the shares to be redeemed (the
"Redemption Notice"). Except as provided in subsection (5)(c) on or after the
Redemption Date, each holder of shares of Class A Common Stock to be redeemed
shall surrender to this Corporation the certificate or certificates representing
such shares, in the manner and at the place designated in the Redemption Notice,
and thereupon the Redemption Price of such shares shall be payable to the order
of the person whose name appears on such certificate or certificates as the
owner thereof and each surrendered certificate shall be canceled. In the event
less than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(b) From and after the Redemption Date, unless there shall
have been a default in payment of the Redemption Price, all rights of the
holders of shares of Class (A) Common Stock designated for redemption in the
Redemption Notice as holders of such shares of Class A Common Stock (except the
right to receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of this Corporation or
be deemed to be outstanding for any purpose whatsoever. If the funds of the
Corporation legally available for redemption of shares of Class A Common Stock
on any Redemption Date are insufficient to the total number of shares of Class A
Common Stock to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of such shares
ratably among the holders of such shares to be redeemed upon their holdings of
Class A Common Stock. The shares of Class A Common Stock not redeemed shall
remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Class A Common Stock, such
funds will immediately be used to redeem the balance of the shares which the
Corporation has become obliged to redeem on an Redemption Date but which it has
not redeemed.
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6. TRANSFER RESTRICTION ON CLASS B COMMON STOCK
The Class B Common Stock cannot be, directly or
indirectly, transferred, sold or otherwise disposed of to any third party,
except (i) to an immediate family member, or by will or by operation of the laws
of descent and devise (in any case the transferee(s) will continue to be bound
by these restrictions), (ii) such number of shares which does not exceed 10% of
the Class B Common Stock outstanding as of the date of the distribution of Class
A Shares (the "Spin Off"), or (iii) pursuant to a transaction or series of
transactions on terms and conditions which are substantially identical in the
opinion of the Company's counsel to the terms and conditions made available to
all holders of the Class A Common Stock, including the form, type and amount of
consideration per share, the availability of such consideration and the timing
of payment (a "Change of Control"). To the extent it deems necessary, such
counsel may rely on the opinion of a nationally recognized investment banking
firm in evaluating the terms of any securities or other issuance of additional
consideration being offered. An indirect transfer shall include any transfer,
sale, other disposition or issuance of any additional shares of the sole holder
of the Class B Common Stock of the Corporation as of the Spin Off or any merger,
sale of assets, consolidation, recapitalization or other corporation transaction
affecting such holders.
C. RIGHTS OF PREFERRED STOCK
1. DIVIDENDS. The holders of Preferred Stock shall be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available for payment of dividends thereon, preferential dividends at an annual
rate of five (5) shares of Preferred Stock for each one hundred (100) shares of
Preferred Stock owned at the close of the immediately preceding calendar year.
The dividends payable on the Preferred Stock shall be cumulative and shall be
payable in arrears semi-annually on the first days of January and July of each
year commencing January 1, 1998, computed from the date of issuance of the
Preferred Stock. Dividends on the Preferred Stock shall accrue continuously from
day to day, whether or not earned or declared and shall be payable before any
dividends on any shares of Common Stock shall be declared, paid or set apart for
payment. So long as accrued dividends on the Preferred Stock are not fully paid,
no distribution with respect to a dividend, dissolution, liquidation or
otherwise shall be declared or paid upon, or set apart for payment on, shares of
Class A or Class B Common Stock.
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2. LIQUIDATION. In the event of any liquidation, dissolution
or winding up of the affairs of this Corporation, whether voluntary or
involuntary, each share of Preferred Stock shall be entitled to be paid from the
available assets of the Corporation an amount of $1,000 per share, plus an
amount equal to the amount of all accrued but unpaid dividends (whether or not
declared) on such share to the date of distribution before any sum shall be paid
to or any assets distributed among the holders of Class A or Class B Common
Stock now or hereafter outstanding. In the event the available assets of the
Corporation are not sufficient to pay in full the holders of the Preferred Stock
the respective amounts to which they are entitled, then each share of Preferred
Stock shall share ratably in the assets available for distribution to them.
After payment in full to the holders of the shares of the Preferred Stock of the
aforesaid amounts to which they are entitled, no holder thereof by virtue of
such holding shall have any right or claim to any of the remaining assets of the
Corporation, and such remaining assets shall be distributed thereafter to the
holders of Common Stock.
3. REDEMPTION BY CORPORATION.
(a) OPTIONAL. The Corporation shall have the right to acquire
or redeem, if funds are lawfully available therefor, at any time or from time to
time, all or any of the issued and outstanding Preferred Stock, on a date set by
the Board of Directors, at a price per share of $1,000, plus the per share
amount of all accrued but unpaid dividends on the Preferred Stock are to be
redeemed, the shares to be so redeemed shall be allocated pro rata among the
holders of the Preferred Stock in proportion to their ownership thereof.
(b) MANDATORY REDEMPTION. All of the issued and outstanding
shares of Preferred Stock, shall be redeemed, and payment therefore made, by the
Corporation on the earlier of (i) October 1, 2009 or (ii) upon a Change of
Control of the Class A Common Stock or the Class B Common Stock. In addition,
the Preferred Stock shall be redeemed under the following circumstances: upon
the closing of the sale of one or more personal communications service licenses
or a portion of a license for cash, or a non-cash sale which is subsequently
converted into or redeemed for cash, the Corporation shall redeem such
proportion of the issued and outstanding shares of Preferred Stock equal to that
proportion of persons, covered by the sale of such licenses for cash, or that
portion of a non-cash sale subsequently converted into or redeemed for cash,
compared to the total number of persons covered by the
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Company's five initial PCS licenses, in each case based on the 1996 or most
recent subsequent estimate by the United States Bureau of Census. Therefore, the
number of shares redeemed shall be computed by dividing (i) the number of
persons covered by the cash sale or conversion or redemption into cash by (ii)
the total number of persons covered by the five initial personal communications
licenses owned by the Corporation. The redemption price per share shall be
$1,000 plus the per share amount of all accrued but unpaid dividends on the
Preferred Stock (whether or not declared) to the date of redemption. When funds
are not legally available to redeem all of the Preferred Stock to be redeemed,
the Corporation shall redeem that number of shares for which funds are legally
available in proportion to the aggregate redemption price for all of the
Preferred Stock to be redeemed. The Corporation shall be required to redeem the
remaining shares of Preferred Stock surrendered for redemption at such time or
times thereafter as funds for redemption become legally available and prior to
the subsequent redemption of any other shares of Preferred Stock. If less than
all of the shares of the Preferred Stock are to be redeemed, the shares to be
redeemed shall be allocated pro rata among the holders of the Preferred Stock in
proportion to their ownership thereof.
4. STATUS OF REACQUIRED SHARES.
Shares of Preferred Stock redeemed, or purchased or otherwise
acquired by the Corporation and canceled, shall have the status of authorized
and unissued shares of Preferred Stock.
5. VOTING RIGHTS.
Except as otherwise provided by the Delaware General
Corporation Law, each holder of record of a share of Preferred Stock shall not
be entitled to vote on any matter submitted to a vote or consent of the
shareholders of the Corporation.
6. NO PREEMPTIVE OR CONVERSION RIGHTS.
The holders of the Preferred Stock shall have no pre-emptive
or conversion rights.
D. NOTICE PROVISIONS.
1. NOTICES. Any notice required by the provisions of this
Article IV to be given to the holders of shares of Class A Common Stock, Class B
Common Stock or Preferred Stock
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shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
this Corporation.
ARTICLE V.
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, amend and rescind any or
all of the provisions of the Bylaws of the Corporation. The stockholders of the
Corporation may alter, amend and rescind any or all of the Bylaws of the
Corporation only with the affirmative vote of the holders of a majority of the
shares of the Class A Common Stock and a majority of the shares of the Class B
Common Stock.
ARTICLE VI.
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of directors or
by the stockholders.
ARTICLE VII.
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE VIII.
Meetings of stockholders may be held within or without the state of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
board of Directors or in the Bylaws of the Corporation.
ARTICLE IX.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty
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to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived any improper personal benefit. If
the Delaware General Corporation Law is hereafter amended to authorize, with the
approval of a Corporation's stockholders, further reductions in the liability of
the Corporation's directors for breach of fiduciary duty, then a director of the
Corporation shall not be liable for any such breach to the fullest extent
permitted by the Delaware General Corporation Law as so amended. Any repeal or
modification of the foregoing provisions of this Article IX by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
ARTICLE X.
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
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BYLAWS
OF
ARF COMMUNICATIONS B, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be at the principal
office of The Corporation Trust Company in the City of Wilmington, County of New
Castle, State of Delaware, or at such other place as shall be determined by the
Board.
Section 2. ARF Communications B, Inc. ("the Corporation") may
also have offices at such other places both within and without the State of
Delaware as the Board of Directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election
of directors shall be held at such time and place either within or without the
State of Delaware as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with
the year 1998, shall be held at such date and time as shall be designated from
time to time by the Board of Directors and stated in the notice of the meeting,
at which they shall elect by a plurality vote a board of directors, and transact
such other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten
<PAGE>
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the president and shall be called
by the president or secretary at the request in writing of a majority of the
Board of Directors, of all of the directors designated by the holders of shares
of Class A Common Stock or at the request in writing of stockholders owning a
majority in amount of the entire capital stock of the Corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Section 6. Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be given not fewer than ten (10) nor more than sixty
(60) days before the date of the meeting, to each stockholder entitled to vote
at such meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for
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more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation the holder of each share of Class A Common Stock shall at every
meeting of the stockholders be entitled to one vote, and the holder of each
share of Class B Common Stock shall at every meeting of the stockholders be
entitled to five votes, in person or by proxy for each share of the capital
stock having voting power held by such stockholder, but no proxy shall be voted
on after three years from its date, unless the proxy provides for a longer
period.
Section 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special meeting
of stockholders of the Corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the
whole board shall be five unless otherwise determined by resolution of the Board
of Directors or by the stockholders at the annual meeting of the stockholders,
except as provided in Section 2 of this Article, and each director elected shall
hold office until his successor is elected and qualified.
Directors need not be stockholders.
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Section 2. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no directors in office, then an
election of directors may be held in the manner provided by statute. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority of the whole board (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten (10)
percent of the total number of the shares at the time outstanding having the
right to vote for such directors, summarily order an election to be held to fill
any such vacancies or newly created directorships, or to replace the directors
chosen by the directors then in office.
Section 3. The business of the Corporation shall be managed by
or under the direction of its board of directors which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
Section 4. In accordance with the certificate of
incorporation, there shall be up to three Class B Board Designees (as defined in
the certificate of incorporation) collectively entitled to three (3) votes on
all matters presented to a vote of the Board of Directors, and there shall be
any number of Class A Board Designees, (as defined in the certificate of
incorporation) collectively entitled to two (2) votes on all matters presented
to a vote of the Board of Directors. Accordingly, each Class A and each Class B
Board Designee may have more or less than one (1) vote in accordance with
Section 141 of the Delaware General Corporation Law.
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 6. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first
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meeting of the newly elected Board of Directors, or in the event such meeting is
not held at the time and place so fixed by the stockholders, the meeting may be
held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the Board of Directors, or as shall
be specified in a written waiver signed by all of the directors.
Section 7. Regular meetings of the Board of Directors may be
held without notice at such time and at such place as shall from time to time be
determined by the board.
Section 8. Special meetings of the board may be called by the
president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally or by telegram; special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of two directors unless the board consists of only one
director, in which case special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of the sole
director.
Section 9. At all meetings of the board a majority of the
voting power of all directors shall constitute a quorum for the transaction of
business and the act of a majority of the voting power of the directors present
at any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute or by the
certificate of incorporation. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 10. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 11. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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COMMITTEES OF THE BOARD OF DIRECTORS
Section 12. The Board of Directors may, by resolution passed
by a majority of the Board of Directors, including at least one Class A Board
Designee, designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member.
Any such committee, to the extent provided in the resolution
of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the certificate of incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
bylaws of the Corporation; and, unless the resolution or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Such
committee or committees shall have such name or names as may be determined from
time to time by resolution adopted by the Board of Directors.
Section 13. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
Corporation in any other
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capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 15. Unless otherwise restricted by the certificate of
incorporation or these bylaws, any director may be removed, with or without
cause, only by the holders of a majority of shares entitled to vote at an
election of directors of the class of stock which elected such director of the
class of stock which elected such director.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or
of the certificate of incorporation or of these bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under
the provisions of the statutes or of the certificate of incorporation or of
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation shall be chosen by
the Board of Directors and shall include a Chairman of the Board and assistant
secretary and may include such additional officers as may from time to time be
authorized by these bylaws. The Board of Directors may elect from among its
members a Chairman of the Board and a Vice Chairman of the Board. The Board of
Directors may also choose a president, one or more vice-presidents, a treasurer,
assistant secretaries and assistant treasurers. Any number of offices may be
held by the same person, unless the certificate of incorporation or these bylaws
otherwise provide.
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Section 2. The Board of Directors, at its first meeting after
each annual meeting of stockholders, shall choose a president, treasurer and
secretary and may include such additional officers as may from time to time be
authorized by these bylaws.
Section 3. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
Section 5. The officers of the Corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at
all meetings of the Board of Directors and of the stockholders at which he shall
be present. He shall have and may exercise such powers as are, from time to
time, assigned to him by the Board and as may be provided by law. If there is no
President, the Chairman of the Board shall exercise the powers of the President.
If there is a President, the President shall report to the Chairman of the Board
Section 7. In the absence of the Chairman of the Board, the
Vice Chairman of the Board, if any, shall preside at all meetings of the Board
of Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer
of the Corporation; and in the absence of the Chairman and Vice Chairman of the
Board he shall preside at all meetings of the stockholders and the Board of
Directors; subject to the Chairman of the Board he shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors and/or the Chairman of the Board are
carried into effect.
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<PAGE>
Section 9. He shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
Section 10. In the absence of the president or in the event of
his inability or refusal to act, the vice-president, if any, (or in the event
there be more than one vice-president, the vice-presidents in the order
designated by the directors, or in the absence of any designation, then in the
order of their election) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 11. The secretary shall attend all meetings of the
Board of Directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or president, under whose supervision he shall be. He shall have
custody of the corporate seal of the Corporation and he, or an assistant
secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such assistant secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature.
Section 12. The assistant secretary, or if there be more than
one, the assistant secretaries in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and
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<PAGE>
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
Corporation.
Section 15. If required by the Board of Directors, he shall
give the Corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
Section 16. The assistant treasurer, or if there shall be more
than one, the assistant treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by
the Chairman or Vice-Chairman of the Board of Directors, or the president or a
vice-president, and by the treasurer or an assistant treasurer, or the secretary
or an assistant secretary of the Corporation, certifying the number of shares
owned by him in the Corporation.
Certificates may be issued for partly-paid shares and in such
case upon the face or back of the certificates issued to represent any such
partly paid shares, the total amount of the consideration to be paid therefor,
and the amount paid thereon shall be specified.
If the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the
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<PAGE>
powers, designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualification,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock; provided
that, except as otherwise provided in section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the Corporation shall issue to
represent such class or series of stock, a statement that the Corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Unless otherwise restricted by the certificates of
incorporation or these bylaws, upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate
-11-
<PAGE>
to the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of the
State of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the
Corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Section 2. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, deem
proper as a reserve or reserves
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<PAGE>
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for such other purposes as the
directors shall think conducive to the interest of the Corporation, and the
directors may modify or abolish any such reserve in the manner in which it was
created.
CHECKS
Section 3. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the Corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
INDEMNIFICATION
Section 6. The Corporation shall, to the fullest extent
authorized under the laws of the State of Delaware, as those laws may be amended
and supplemented from time to time, indemnify any director made, or threatened
to be made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
Corporation or a predecessor corporation or, at the Corporation's request, a
director or officer of another Corporation; provided, however, that the
Corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the Corporation. The indemnification provided for in this Section 6
shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled under any bylaw, agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such office, (ii)
continue as to a person who has ceased to be a director, and (iii) inure to the
benefit of the heirs, executors and administrators of such a person. The
Corporation's obligation to provide indemnification under this Section 6 shall
be offset to the extent of any other source of indemnification or any otherwise
applicable insurance
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<PAGE>
coverage under a policy maintained by the Corporation or any other person.
Expenses incurred by a director of the Corporation in
defending a civil or criminal action, suit or proceeding by reason of the fact
that he is or was a director of the Corporation (or was serving at the
Corporation's request as a director or officer of another corporation) shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding the foregoing, the
Corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the Corporation and approved
by a majority of the Board of Directors of the Corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the Corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the Corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to
be a contract between the Corporation and each director who serves in such
capacity at any time while this bylaw is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter brought based in whole or in part
upon any such state of facts.
The Board of Directors in its discretion shall have power on
behalf of the Corporation to indemnify any person, other than a director, made a
party to any action, suit or proceeding by reason of the fact that he, his
testator or intestate, is or was an officer or employee of the Corporation.
To assure indemnification under this Section 6 of all
directors, officers and employees who are determined by the Corporation or
otherwise to be or to have been "fiduciaries" of any employee benefit plan of
the Corporation which may exist from time to time, Section 145 of the General
Corporation Law of Delaware shall, for the purposes of this Section 6, be
interpreted as follows: an "other enterprise" shall be deemed to include such an
employee benefit plan, including without limitation, any plan of the Corporation
which is governed by the Act of Congress entitled "Employee Retirement Income
Security Act of 1974," as amended from time to time; the Corporation shall be
deemed to have requested a person to serve an employee benefit plan where the
performance by such person of his duties to the
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<PAGE>
Corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed "fines."
QUALIFYING INVESTORS AND FCC REQUIREMENTS
Section 7. In order that the Corporation may determine the
stockholders that are eligible to be Qualifying Investors of the Corporation (as
such term may be defined by the Federal Communications Commission ("FCC") from
time to time and as identified in the Corporation's applications and filings
with the FCC), the officers of the Corporation shall obtain from each Qualifying
Investor such investor's consent to be treated by the Corporation as a
Qualifying Investor, which consent shall identify those securities of the
Corporation that such Qualifying Investor deems to be subject to the Qualifying
Investors transfer restrictions adopted by the Corporation and which consent may
not be subsequently amended by the Qualifying Investor without consent of the
Corporation.
ARTICLE VIII
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or
new bylaws may be adopted by the stockholders as provided in the certificate of
incorporation or by the Board of Directors, when such power is conferred upon
the Board of Directors by the certificate of incorporation at any regular
meeting of the stockholders or of the Board of Directors or at any special
meeting of the stockholders or of the Board of Directors if notice of such
alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal bylaws is
conferred upon the Board of Directors by the certificate of incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws as provided in the certificate of incorporation.
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EXPENSE AGREEMENT DATED AS OF JULY 31, 1996, AMONG AER FORCE COMMUNICATIONS B,
L.P., A DELAWARE LIMITED PARTNERSHIP (THE "PARTNERSHIP"), AER FORCE
COMMUNICATIONS INC., A NEW YORK CORPORATION (THE "GENERAL PARTNER"), AND LYNCH
PCS CORPORATION F, A DELAWARE CORPORATION (THE "INITIAL LIMITED PARTNER").
Whereas the Partnership, the General Partner and the Initial Limited
partner want to set forth their agreement with respect to the organizational and
initial operating expenses of the Partnership. Capitalized terms used herein but
not otherwise defined shall have the meanings specified in the Partnership
Agreement as in effect on the date hereof.
1. ORGANIZATIONAL EXPENSES. If the Partnership is granted any PCS
Licenses pursuant to the F-Block Auction, reasonable out-of-pocket expenses
incurred in connection with the organization of the Partnership, the bidding on
PCS Licenses (including Licenses not won) and the grant of the PCS Licenses (a)
by the General Partner shall be deemed to be loans to the Partnership by the
General Partner (up to a maximum of $10,000) ("General Partner Loans") from the
date of grant of the PCS Licenses and shall have the same interest rate and
maturity as loans from the Initial Limited Partner to the Partnership pursuant
to the Loan Agreement expected to be entered into prior to the F-Block Auction
(the
<PAGE>
"Initial Limited Partner Loan Agreement"), and (b) by the Initial Limited
Partner shall deemed to be Supplemental Loans to the Partnership by the Initial
Limited Partner (up to a maximum of $37,500 not including amounts loaned
pursuant to the next succeeding sentence) pursuant to the Initial Limited
Partner Loan Agreement from the date of grant of the PCS Licenses. The expenses
of Latham & Watkins incurred by the Partnership in preparing and filing the Bid
Application shall be funded by loans to the Partnership by the Initial Limited
Partner which shall also be deemed to be such Supplemental Loans, which loans
shall be forgiven if the Partnership is not granted any PCS Licenses. As used in
this Agreement, "out-of-pocket expenses" shall not include any travel or
entertainment expenses of any party hereto or their affiliates.
2. INITIAL OPERATING EXPENSES. Reasonable out-of-pocket expenses for
the initial operations of the Partnership (through the date of the execution by
the Partnership of an Affiliation Agreement) incurred on behalf of the
Partnership by the General Partner shall also be deemed to be General Partner
Loans from the date paid (but not earlier than the date of grant of the PCS
Licenses); provided, however, that reasonable out-of-pocket expenses (if
approved by the Initial Limited Partner whose approval
<PAGE>
shall not be unreasonably withheld) for counsel fees to prepare an application
on behalf of the Partnership to bid in the F-Block Auction and for accounting,
tax return preparation, any taxes required to be paid by the Partnership, and
(if required by the FCC, the Initial Limited Partner or any loan agreement with
non-Affiliates) a formal audit shall be payable, upon demand, by the Partnership
from its funds or the proceeds of Supplemental Loans (subject to the terms and
limitations in the Initial Limited Partner Loan Agreement).
3. OTHER EXPENSES. Except as provided herein or in the Initial Limited
Partner Loan Agreement, or as otherwise hereafter agreed in writing signed by
each of the parties hereto, each of the General Partner (both for itself and the
Partnership) and the Initial Limited Partner shall bear its own expenses through
the date of execution by the Partnership of an Affiliation Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of date
first above written.
AER FORCE COMMUNICATIONS B, L.P. AER FORCE COMMUNICATIONS, INC.
By: AER FORCE COMMUNICATIONS INC. By:
its General Partner ----------------------------
Victoria Kan
President
By:
----------------------------
Victoria Kan LYNCH PCS CORPORATION F
President
By:
----------------------------
Robert E. Dolan
President
LIMITED PARTNERSHIP
AGREEMENT
OF
AER FORCE COMMUNICATIONS B, L.P.
dated as of
July 26, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS................................................................1
2.FORMATION OF LIMITED PARTNERSHIP............................................6
2.1 FORMATION.............................................................6
2.2 NAME..................................................................6
2.3 PURPOSE...............................................................6
2.4 TITLE TO PROPERTY.....................................................7
2.5 PRINCIPAL PLACE OF BUSINESS...........................................7
2.6 REGISTERED OFFICE AND REGISTERED AGENT................................7
3. TERM.......................................................................7
4. CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; ALLOCATIONS.......................8
4.1 CAPITAL CONTRIBUTIONS.................................................8
4.2 CAPITAL ACCOUNTS......................................................8
4.3 TIMING AND AMOUNT OF ALLOCATIONS OF PROFITS AND LOSSES................9
4.4 ALLOCATIONS..........................................................10
4.4 NO RIGHT OF WITHDRAWAL...............................................12
5. DISTRIBUTIONS.............................................................12
6. MANAGEMENT................................................................13
6.1 GENERAL..............................................................13
6.2 THE PARTNERSHIP COMMITTEE............................................13
6.3 (Reserved)
....................................................................18
6.4 C-BLOCK AUCTION PROCESS..............................................18
6.5 ROLE OF LIMITED PARTNERS.............................................18
6.6 LIABILITY OF GENERAL PARTNER.........................................18
6.7 LIMITED LIABILITY OF LIMITED PARTNERS................................19
6.8 OTHER ACTIVITIES OF PARTNERS.........................................19
6.9 PARTNERSHIP OFFICERS AND EMPLOYEES...................................19
6.10 EXPENSES AGREEMENT...................................................19
7.1 RESTRICTIONS ON TRANSFER OF INTEREST.................................20
7.2 TRANSFER OF INTERESTS BY LIMITED PARTNERS............................21
7.3 TRANSFER OF INTERESTS BY GENERAL PARTNER.............................21
7.4 CHANGE IN OWNERSHIP..................................................21
7.5 INVALID TRANSFERS VOID...............................................22
7.6 DOCUMENTATION........................................................22
7.7 LEGALITY.............................................................23
7.8 COSTS................................................................24
7.9 ADDITIONAL PARTNERS..................................................24
7.10 INTERESTS IN A PARTNER...............................................24
8. BOOKS OF ACCOUNT..........................................................24
8.1 GENERAL..............................................................24
8.2 FISCAL YEAR..........................................................25
9. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP............................25
9.1 EVENTS OF DISSOLUTION................................................25
9.2 DISTRIBUTION OF PARTNERSHIP ASSETS...................................26
9.3 RETURN OF CAPITAL CONTRIBUTIONS UPON TERMINATION AND DISSOLUTION OF
PARTNERSHIP..........................................................27
9.4 DISTRIBUTIONS OF PROPERTY............................................27
10. POWER OF ATTORNEY........................................................27
i
<PAGE>
PAGE
10.1 GENERAL..............................................................27
10.2 SURVIVAL OF POWER OF ATTORNEY........................................28
11. REPRESENTATIONS AND WARRANTIES OF GENERAL PARTNER........................28
11.1 ORGANIZATION.........................................................28
11.2 AUTHORIZATION........................................................28
11.3 NO CONFLICT..........................................................29
11.4 LITIGATION...........................................................29
11.5 OWNERSHIP AND CONTROL OF THE GENERAL PARTNER.........................29
11.6 GENERAL PARTNER CONTROL GROUP - U.S. CITIZEN.........................30
11.7 FINANCIAL QUALIFICATION OF THE GENERAL PARTNER.......................30
12. REPRESENTATIONS AND WARRANTIES OF LIMITED PARTNERS.......................30
12.1 ORGANIZATION.........................................................30
12.2 AUTHORIZATION........................................................30
12.3 NO CONFLICT..........................................................30
12.4 LITIGATION...........................................................31
12.5 INVESTMENT INTEREST; NATURE OF INVESTMENT............................31
13. INDEMNIFICATION..........................................................31
13.1 INDEMNIFICATION OF LIMITED PARTNERS BY THE GENERAL PARTNER...........31
13.2 INDEMNIFICATION OF PARTNERS BY THE LIMITED PARTNERS..................32
14. MISCELLANEOUS............................................................33
14.1 GOVERNING LAW........................................................33
14.2 BINDING EFFECT.......................................................33
14.3 AMENDMENT............................................................33
14.4 INTERPRETATION.......................................................33
14.5 COUNTERPARTS.........................................................34
ii
<PAGE>
LIMITED PARTNERSHIP AGREEMENT
OF
AER FORCE COMMUNICATIONS B, L.P.
This LIMITED PARTNERSHIP AGREEMENT (the "AGREEMENT") of AER
FORCE COMMUNICATIONS B, L.P. (the "PARTNERSHIP") is entered into as of July 26,
1996, by and between Aer Force Communications Inc., a New York corporation, as
general partner (the "GENERAL PARTNER"), and Lynch PCS Corporation F, a Delaware
corporation (the "INITIAL LIMITED PARTNER", the Initial Limited Partner and any
Persons hereafter admitted to the Partnership from time to time as limited
partners in accordance with the terms hereof being referred to as the "LIMITED
PARTNERS"), for the purpose of forming a limited partnership under the Delaware
Revised Uniform Limited Partnership Act (the "PARTNERSHIP LAW"). The General
Partner and the Limited Partners are herein collectively referred to as the
"PARTNERS."
Whereas the General Partner intends to form a Limited Partnership to
acquire PCS Licenses pursuant to the F-Block Auction; and
Whereas the Initial Limited Partner is willing to invest in the
Partnership only for the purposes of the Partnership acquiring and operating PCS
Licenses in the F-Block Auction.
1. DEFINITIONS. The following terms, as used herein, shall
have the following meanings:
"ADDITIONAL CAPITAL CONTRIBUTIONS" shall have the meaning
specified in Section 4.2 hereof.
"ADDITIONAL PARTNERS" shall have the meaning specified
in Section 7.9 hereof.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" shall mean, with respect to
any Partner, the deficit balance, if any, in such Partner's Capital Account as
of the end of the relevant fiscal year, after giving effect to the following
adjustments:
(i) Decrease such deficit by any amounts which such
Partner is obligated to restore pursuant to this Agreement or
is deemed to be obligated to restore to the Partnership
pursuant to Regulations Section 1.704- 1(b)(2)(ii)(c) or the
penultimate sentence of each of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and
(ii) Increase such deficit by such Partner's share of
the items described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), (5) and (6).
"AFFILIATE," with respect to any specified Person,
shall mean any Person that (i) directly or indirectly, Controls,
<PAGE>
or has the power to Control, such specified Person, (ii) is directly or
indirectly, Controlled by such specified Person, (iii) is directly or indirectly
Controlled by any other Person that Controls such specified Person, (iv) has any
"identity of interest" with such specified Persons, within the meaning of
Section 24.720(l) of the FCC Rules or (v) is otherwise deemed to be an Affiliate
of such Person within the meaning of Section 24.720(1) of the FCC Rules.
"AFFILIATION AGREEMENT" shall mean any agreement between the
Partnership and any Person providing for the affiliation or collaboration
between the Partnership and such Person with respect to the development or
provision of any PCS Service or the construction or development of any PCS
System.
"ASSIGNEE" shall have the meaning specified in Section 7.1
hereof.
"BTA" shall mean a Basic Trading Area as defined in Section
24.202 of the FCC Rules.
"CAPITAL ACCOUNT" shall have the meaning specified in Section
4.2 hereof.
"CERTIFICATE" shall have the meaning specified in Section 2.1
hereof.
"CODE" shall have the meaning specified in Section 4.2 hereof.
"COMMUNICATIONS ACT" shall mean the Communications Act of
1934, as amended from time to time.
"CONTROL" of any specified Person shall mean the power or
right, directly or indirectly, to direct the management and/or business affairs
of such specified Person, whether through the ownership of voting securities, or
other similar ownership interests, of any specified Person, the power to
designate members of the board of directors or similar governing body of such
specified Person, the exercise or existence of contractual rights or business
relationships, the occupancy of director, officer or key employee positions, the
combination of any of the foregoing factors or otherwise. For the purposes
hereof, every business concern is considered to have one or more Parties who
directly or indirectly "Control" or have the power to "Control" such business
concern, and "Control" may be either affirmative or negative.
"EXPENSES AGREEMENT" shall mean the Expenses Agreement dated
as of the date hereof among the Partnership, the General Partner and the Initial
Limited Partner.
"F-BLOCK AUCTION" shall mean the auction to be conducted by
the FCC in respect of PCS Licenses for the operation of PCS Systems utilizing
the 10 MHz, block F broadband frequencies.
2
<PAGE>
"FCC" shall mean the Federal Communications Commission.
"FCC RULES" means the rules, regulations, and published
policies of the FCC, as the same may be amended, modified or supplemented from
time to time.
"GENERAL PARTNER CONTROL GROUP" shall mean the persons listed
on Schedule C hereto (i) who collectively own all (except as set forth on
Schedule C) of the stock of the General Partner as set forth on Schedule C, (ii)
who are the only directors and the only officers of the General Partner as set
forth on Schedule C, and (iii) who Control the General Partner.
"GROSS REVENUES" of any Person for any period shall mean all
income received by such Person or its predecessor in interest for such period,
whether earned or passive, before any deductions are made for the cost of doing
business (E.G., cost of goods sold).
"INITIAL CAPITAL CONTRIBUTION" shall have the meaning
specified in Section 4.1 hereof.
"INITIAL LIMITED PARTNER LOAN AGREEMENT" shall mean that
certain Loan Agreement expected to be entered into prior to the C-Block Auction
by and between the Initial Limited Partner (as Lender) and the Partnership (as
Borrower).
"MAJORITY VOTE" shall mean at least the 51% affirmative vote
of the Partnership Committee.
"NONRECOURSE DEDUCTIONS" shall have the meaning set forth in
Regulations Section 1.704-2(b)(1).
"PARTNER MINIMUM GAIN" shall mean gain attributable to Partner
Nonrecourse Debt determined in accordance with Regulations Section 1.704-2(i).
"PARTNER NONRECOURSE DEBT" shall have the meaning set forth in
Regulations Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEDUCTION" shall have the meaning set
forth in Regulations Section 1.704-2(i)(2).
"PARTNERSHIP BUSINESS" shall have the meaning specified
in Section 2.3 hereof.
"PARTNERSHIP COMMITTEE" shall have the meaning
specified in Section 6.2 hereof.
"PARTNERSHIP MINIMUM GAIN" shall have the meaning set forth in
Regulations Section 1.704-2(b)(2).
"PCS LICENSES" shall mean the licenses, permits and
authorizations issued by the FCC for the operation of PCS Systems utilizing the
frequencies subject to the F-Block Auction.
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"PCS SERVICE" shall mean the provision of any commercial
mobile radio service by a PCS System, including the resale of such service.
"PCS SYSTEMS" shall mean radio communications systems
authorized under the FCC Rules for broadband personal communications services
designated as Subpart E of Part 24 of the FCC Rules, including the network,
marketing, distribution, sales, customer interface and operations functions
relating thereto, or any business or enterprise which resells PCS Services.
"PERCENTAGE INTEREST" of each Partner shall mean the
percentage set forth opposite such Partner's name on SCHEDULE A attached hereto.
"PERSON" shall mean any individual, partnership, corporation,
joint venture, trust, estate, association, foundation, fund, governmental unit
or other entity.
"PROFITS" or "LOSSES" for each fiscal year of the Partnership
shall mean the taxable income or loss, respectively, of the Partnership for such
fiscal year determined in accordance with Section 703(a) of the Code (including
for this purpose all items of income, gain, loss or deduction required to be
separately stated pursuant to Section 703(a)(1) of the Code), adjusted as
required by the Regulations under Section 704(b) of the Code (including, without
limitation, adjustments (i) to include tax-exempt income, (ii) to include
expenditures described in Section 705(a)(2)(B) of the Code or items treated as
such expenditures pursuant to Section 1.704-1(b)(2)(iv)(I) of the Regulations,
(iii) to reflect revaluations of Partnership property described in Section
4.2(c) hereof and (iv) to exclude items of income, gain, loss or deduction
specially allocated pursuant to Sections 4.4(a)(1) and 4.4(b). In the event of a
revaluation of Partnership property described in Section 4.2(c) hereof,
"Profits" and "Losses" of the Partnership shall be adjusted in accordance with
Regulations Section 1.704- 1(b)(2)(iv)(G).
"REGULATIONS" shall have the meaning specified in Section 4.2
hereof.
"REGULATORY ALLOCATIONS" shall have the meaning specified in
Section 4.4. hereof.
"RELATED PARTY TRANSACTION" shall mean any transaction or
agreement between the Partnership and any Partner or any Affiliate of, or the
holder of any equity interest in, any Partner.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended from time to time.
"SECRETARY" shall have the meaning specified in Section 2.1
hereof.
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"SUBSTITUTED LIMITED PARTNER" shall have the meaning specified
in Section 7.1 hereof.
"SUPERMAJORITY VOTE" shall mean the affirmative vote of all
members of the Partnership Committee.
"TARGETED BTAS" shall have the meaning specified in Section
2.3 hereof.
"TRANSFER" shall have the meaning specified in Section 7.1
hereof.
2. FORMATION OF LIMITED PARTNERSHIP
2.1 FORMATION. The Partnership has been formed under the
Partnership Law, and a Certificate of Limited Partnership (the "CERTIFICATE") to
such effect was filed on behalf of the Partnership in the Office of the
Secretary of State of the State of Delaware (the "SECRETARY") on the date
hereof. The Partners hereby agree to operate the Partnership pursuant to the
terms of this Agreement.
2.2 NAME. The name of the partnership is "AER FORCE
COMMUNICATIONS B, L.P."
2.3 PURPOSE. The purpose of the Partnership is to (i)
participate in the F-Block Auction, (ii) acquire in the F-Block Auction, hold
title to, and maintain PCS Licenses and any other licenses, authorizations and
permits necessary for the operation of PCS Systems pursuant to PCS Licenses,
(iii) design, construct and develop PCS Systems for which the Partnership
obtains PCS Licenses in the F-Block Auction, (iv) acquire, own, lease, operate,
manage and maintain such PCS Systems, (v) provide such services as may from time
to time be offered utilizing the frequencies allocated by the FCC for such PCS
Systems, (vi) make and prosecute applications for, and renewals of, such PCS
Licenses and any other licenses, authorizations and permits necessary for the
operation of such PCS Systems and (vii) as the licensee of such PCS Systems,
otherwise engage in the business of providing PCS Services (the "PARTNERSHIP
BUSINESS"). In order to carry out such purpose, the Partnership is authorized
to:
(i) acquire, own, lease, transfer, sell or dispose of
property necessary or useful for the design, construction,
maintenance, operation, development and management of such PCS
Systems and the provision of PCS Services;
(ii) borrow or raise money, issue evidences of
indebtedness and obtain, renew and dispose of letters of
credit;
(iii) lend money;
(iv) enter into, execute, deliver and perform
contracts and agreements;
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(v) bring and defend actions at law or in equity;
(vi) purchase, cancel or otherwise retire or dispose
of the interest of any Partner in the Partnership in
accordance with the terms hereof;
(vii) engage personnel, officers, employees, agents,
independent contractors, advisors, attorneys and consultants;
(viii) do any and all other acts and things which may
be necessary or convenient to carry out the Partnership
Business as contemplated by this Agreement;
(ix) engage in any business other than the
Partnership Business as authorized by the Partnership
Committee in accordance with Section 6.2 hereof; and
(x) take any other action permissible under the
Partnership Law in connection with the Partnership Business or
any other business authorized by the Partnership Committee in
accordance with Section 6.2 hereof.
2.4 TITLE TO PROPERTY. No real or personal property of the
Partnership shall be deemed to be owned by the General Partner or any Limited
Partner individually, but shall be owned by, and title shall be vested solely
in, the Partnership.
2.5 PRINCIPAL PLACE OF BUSINESS. The Partnership shall
maintain an office and principal place of business at c/o Victoria Kane, 350
Stuyvesant Avenue, Rye, NY 10580 or at such other place or places as the General
Partner may, from time to time, decide.
2.6 REGISTERED OFFICE AND REGISTERED AGENT. The "Registered
Office" and the "Registered Agent" of the Partnership shall be as set forth in
the Certificate, or most recent amendment thereto, that has been filed with the
Secretary. The General Partner designates the Registered Agent as its personal
Registered Agent and attorney upon whom any process, notice or demand which
arises out of the conduct of the Partnership's affairs and which is required or
permitted by law to be served upon the General Partner may be served.
3. TERM
The Partnership term shall expire on December 31, 2044, unless
terminated earlier pursuant to Section 9.
4. CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNTS; ALLOCATIONS
4.1 CAPITAL CONTRIBUTIONS.
(a) The aggregate capital contribution made to the
Partnership by each Partner at any given time during the term
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of the Partnership shall be as set forth in the Partnership's books and records.
The initial capital contributions of the Partners are set forth on Schedule A
hereto (the "INITIAL CAPITAL CONTRIBUTIONS"). If the Initial Capital
Contribution of the General Partner shall exceed 1% of the cost (net of any
bidding credits) of all PCS Licenses granted to the Partnership pursuant to the
F-Block Auction, the Partnership shall promptly pay (i) such excess back to the
General Partner and (ii) a proportionate amount to the Initial Limited Partner
so that the ratio of the Percentage Interest of the General Partner to the
Percentage Interest of the Initial Limited Partner and the ratio of the amount
of Capital Contributions of the General Partner to the amount of the Capital
Contributions of the Initial Limited Partner continue to equal 50.1 to 49.9.
(b) From time to time the Partners shall make
capital contributions in addition to the Initial Capital Contributions (the
"ADDITIONAL CAPITAL CONTRIBUTIONS") in cash to the Partnership in such amounts
as are determined by the Partnership Committee in accordance with Section 6.2
hereof. If the Partnership Committee requires the Partners to make Additional
Capital Contributions, each Partner shall promptly make a capital contribution
in cash in an amount equal to (x) the total amount of Additional Capital
Contributions to be made by all Partners as determined by the Partnership
Committee in accordance with Section 6.2 hereof, MULTIPLIED BY, (y) such
Partner's Percentage Interest. No Additional Capital Contributions shall be
required to be made by the General Partner without the written consent of all
shareholders of the General Partner.
4.2 CAPITAL ACCOUNTS.
(a) There shall be established for each Partner on
the books of the Partnership a capital account (the "CAPITAL ACCOUNT")
reflecting the difference between (i) the sum of (w) such Partner's capital
contributions and (x) such Partner's share of Profits, minus (ii) the sum of (y)
such Partner's share of Losses, and (z) any distributions to such Partner.
(b) Notwithstanding any other provision in this
Section 4.2 or elsewhere in this Agreement, each Partner's Capital Account shall
be maintained and adjusted in accordance with the Internal Revenue Code of 1986,
as amended (the "CODE"), and the Treasury Regulations thereunder
("REGULATIONS"), including Regulations Sections 1.704-1(b) and 1.704-2. It is
intended that appropriate adjustments shall thereby be made to Capital Accounts
to give effect to any income, gain, loss or deduction (or items thereof) that is
allocated pursuant to this Agreement. Each Partner's Capital Account shall
include that of any predecessor holders of the Partnership interest of such
Partner. In the event that the General Partner shall determine that it is
prudent to modify the manner in which Capital Accounts, or any additions or
subtractions thereto (including, without limitation, adjustments relating to
liabilities that are secured by contributed or distributed property or that are
assumed by the Partnership or the Partners), are computed in
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order to comply with such Regulations, the General Partner shall be entitled to
make such modification, provided that it is not likely to have a material effect
on the amounts distributable to any Partner pursuant to Section 9.2 upon
dissolution of the Partnership. The General Partner shall also make (a) any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital reflected
on the Partnership's balance sheet, as computed for book purposes, in accordance
with Regulations Section 1.704-1(b)(2)(iv)(q), and (b) any appropriate
modifications in the event that unanticipated events might otherwise cause this
Agreement not to comply with Regulations Section 1.704-1(b) or Section 1.704-2.
(c) The General Partner may in its discretion
increase or decrease the Capital Accounts of the Partners to reflect a
revaluation of Partnership property on the Partnership's books and records, but
only in accordance with the rules set forth in Regulations Section
1.704-1(b)(2)(iv)(F). Following any such revaluation, the Partners' Capital
Accounts shall be adjusted in accordance with Regulations Section 1.704-1
(b)(2)(iv)(G) for allocations of depreciation, depletion, amortization, and gain
or loss as computed for book purposes with respect to such property.
4.3 TIMING AND AMOUNT OF ALLOCATIONS OF PROFITS AND
LOSSES. Profits and Losses of the Partnership shall be determined and allocated
with respect to each fiscal year of the Partnership as of the end of each such
year. Subject to the other provisions of this Agreement, an allocation to a
Partner of a share of Profits or Losses shall be treated as an allocation of the
same share of each item of income, gain, loss or deduction that is taken into
account in computing Profits or Losses.
4.4 ALLOCATIONS.
(a) Except as otherwise provided in this Section
4, all Profits and Losses of the Partnership shall be allocated
among the Partners as follows:
(1) All items of deduction in respect of
interest expense and commitment fees incurred by the Partnership pursuant to the
Initial Limited Partner Loan Agreement shall be allocated ninety-nine percent
(99%) to the Initial Limited Partner and one percent (1%) to the General
Partner.
(2) All Profits of the Partnership shall
be allocated ninety-nine percent (99%) to the Initial Limited Partner and one
percent (1%) to the General Partner until the aggregate amount of all Profits
allocated to the Initial Limited Partner and the General Partner pursuant to
this Section 4.4(a)(2) equal the aggregate amount of all items of deduction
allocated to the Initial Limited Partner and the General Partner pursuant to
Section 4.4 (a)(1).
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(3) Except as otherwise provided in Section
4.4(a)(1) and Section 4.4(a)(2), all Profits and Losses of the Partnership shall
be allocated to the Partners in proportion to their respective Percentage
Interests.
(b) Notwithstanding Sections 4.3 and 4.4.(a):
(1) If there is a net decrease in
Partnership Minimum Gain or Partner Minimum Gain during any fiscal year, the
Partners shall be allocated items of Partnership income and gain for such year
(and, if necessary, for subsequent years) in accordance with Regulations Section
1.704-2(f) or Section 1.704-2(i)(4), as applicable.
(2) Any Nonrecourse Deductions for any
fiscal year shall be allocated to the Partners in proportion to their respect
Percentage Interests. Any Partner Nonrecourse Deductions for any fiscal year
shall be specially allocated to the Partner(s) who bears the economic risk of
loss with respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable, in accordance with Regulations Section
1.704-2(i).
(3) Items of Partnership income and gain
shall be allocated to the Partners in accordance with the "qualified income
offset" requirements of Regulations Section 1.704-1(b)(2)(ii)(d).
(4) To the extent any allocation of losses
would cause or increase an Adjusted Capital Account Deficit as to any Partner,
such allocation of losses shall be reallocated among the other Partners in
proportion to their respective Percentage Interests, but in a manner that will
not produce an Adjusted Capital Account Deficit as to any other Partner.
(5) The allocations set forth in Sections
4.4(b)(1) through (4) above and Section 4.4(d) below (the "REGULATORY
ALLOCATIONS") are intended to comply with certain regulatory requirements,
including the requirements of Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding the provisions of Section 4.4(a), the Regulatory Allocations
shall be taken into account in allocating other items of income, gain, loss and
deduction among the Partners so that, to the extent possible, the net amount of
such allocations of other items and the Regulatory Allocations to each Partner
shall be equal to the net amount that would have been allocated to each such
Partner if the Regulatory Allocations had not occurred.
(c) For any fiscal year during which a Partner's
Partnership interest is assigned by such Partner (or by an assignee or successor
in interest to a Partner), the portion of the Profits or Losses of the
Partnership that is allocable in respect of such Partner's interest shall be
apportioned between the assignor and the assignee on any basis selected by the
General Partner, provided such basis is permitted by Section 706(d)(2) of the
Code.
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(d) Except as otherwise required by Section 4.4(b)(1)
through (4), but notwithstanding the other foregoing provisions of this Section
4, the General Partner's interest in each item of Partnership income, gain,
loss, deduction or credit shall equal at least one percent (1%) of each of those
items at all times during the existence of the Partnership.
(e) Tax Allocations
(1) Except as otherwise provided in this
Section 4.4(e), each item of income, gain, loss and deduction shall be allocated
for income tax purposes among the Partners in the same manner as its correlative
item of "book" income, gain, loss or deduction is allocated pursuant to Section
4.
(2) Notwithstanding the foregoing provisions
of this Section 4, income, gain, loss and deduction with respect to property
contributed to the Partnership by a Partner shall be allocated among the
Partners, pursuant to Regulations promulgated under Section 704(c) of the Code,
so as to take account of the variation, if any, between the adjusted basis of
such property to the Partnership and its value at the time of contribution. The
Partnership shall account for such variation under any method approved under
Section 704(c) of the Code and the applicable Regulations as chosen by the
General Partner. In the event the value of any Partnership asset is adjusted
pursuant to Section 4.2(c), subsequent allocations of income, gain, loss and
deduction with respect to such asset shall take account of the variation, if
any, between the adjusted basis of such asset for federal income tax purposes
and its value in the same manner as under Section 704(c) of the Code and the
applicable Regulations, consistent with the requirements of Regulations Section
1.704- 1(b)(2)(iv)(g), using any method approved under Section 704(c) of the
Code and the applicable Regulations, as chosen by the General Partner.
Allocations pursuant to this Section 4.4(e) are solely for purposes of federal,
state and local income taxes and shall not affect, or in any way be taken into
account in computing, any Partner's Capital Account or share of Profits, Losses,
other tax items or distributions pursuant to any provision of this Agreement.
4.4 NO RIGHT OF WITHDRAWAL. No Partner shall have the
right to withdraw or demand distribution of any portion of his capital
contributions or Capital Account, except in those cases where distributions are
required pursuant to this Agreement.
5. DISTRIBUTIONS
All distributions of Partnership assets to be made to the
Partners prior to and otherwise not in conjunction with the final liquidation of
the Partnership in accordance with Section 9 shall be made to the Partners only
at such times as the Partnership Committee shall determine in accordance with
Section 6.2 hereof and such distribution shall be made in proportion to each
Partner's Percentage Interest. The General Partner may withhold from any
distributions to the Partners the amount(s)
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required to satisfy the present and future cash needs of the Partnership, as
determined by the Partnership Committee. No right is given to any Partner to
demand and receive property other than cash. The Partnership Committee may
authorize the General Partner to make a distribution in kind to the Partners of
Partnership assets other than cash (including, without limitation, the
Partnership Business or any securities or assets received with respect thereto).
6. MANAGEMENT
6.1 GENERAL. Except for matters with respect to which
authority is granted to the Partnership Committee as set forth in Section 6.2
hereof, the General Partner shall manage the business and affairs of the
Partnership. The General Partner shall devote to the Partnership such time as
the General Partner deems necessary for the proper performance of its duties
under this Agreement. The General Partner and the officers of the Partnership,
acting at the direction of the Partnership Committee, shall act on behalf of the
Partnership on all matters relating to the Partnership Business.
6.2 THE PARTNERSHIP COMMITTEE.
(a) The Partnership shall establish a partnership
committee of the Partnership (the "PARTNERSHIP COMMITTEE"), which shall consist
of one individual appointed by the General Partner who shall have two votes on
all matters coming before the Partnership Committee and one individual appointed
by the Initial Limited Partner who shall have one vote on all matters coming
before the Partnership Committee. The General Partner and the Initial Limited
Partner may designate their appointees to the Partnership Committee, and may
designate individuals to replace such appointees, by giving written notice to
each Partner of such designation. The member of the Partnership Committee
appointed by the General Partner shall be the sole stockholder and the chief
executive officer of the General Partner, shall serve as Chairman of the
Partnership Committee. Each member of the Partnership Committee shall serve on
the Partnership Committee until his or her successor is appointed or until his
or her death, resignation or removal.
(b) The Partnership Committee shall hold regular
meetings (at least quarterly) at such time and place as shall be determined by
the Partnership Committee (or by the Chairman of the Partnership Committee) and
special meetings at such time and place as shall be determined by the General
Partner or the Initial Limited Partner. The Partnership Committee meetings may
be held in person or by telephonic conference call, and any action required or
permitted to be taken by the Partnership Committee may be taken without a
meeting by unanimous written consent of the members of the Partnership
Committee. Any member of the Partnership Committee may designate an alternate
(who meets the qualifications to be a member of the Partnership Committee) to
attend a meeting of the Partnership Committee and to exercise all functions of
such member of the Partnership
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Committee at such meeting by giving written notice to the Chairman of the
Partnership Committee. Written notice of each meeting of the Partnership
Committee shall be given to each member of the Partnership Committee at least
five (5) business days prior to such meeting; provided that members of the
Partnership Committee may waive such notice requirement. The members of the
Partnership Committee shall receive such reports and other information from the
General Partner and the officers of the Partnership as any member of the
Partnership Committee may request. Except with respect to actions requiring a
Supermajority Vote as specified in Section 6.2(d), any action required or
permitted to be taken by the Partnership Committee shall be taken by Majority
Vote.
(c) Notwithstanding the authority of the General
Partner to manage the business and affairs of the Partnership, the Partnership
Committee shall have full power and authority with respect to the following
matters:
(i) the conduct of any business by the
Partnership other than the Partnership Business;
(ii) the determination to request or accept
additional Capital Contributions by any Partner;
(iii) subject to the authority of the
General Partner to withhold its consent, in its sole and absolute discretion, to
the admission of any Substituted Limited Partner, the admission of any
Substituted Limited Partner in accordance with Section 7.1(b) hereof;
(iv) the admission of any Additional Partner
in accordance with Section 7.09 hereof;
(v) the merger, consolidation or combination
of the Partnership with any other Person or the sale of all or substantially all
of the Partnership's assets or properties;
(vi) the commencement of any voluntary case
or other proceeding seeking or consenting to (A) the liquidation, dissolution,
reorganization or other relief with respect to the Partnership or its assets,
liabilities or obligations under any bankruptcy, insolvency or other similar law
affecting the enforcement of creditors' rights generally, (B) the appointment of
a trustee, receiver, liquidator, custodian or similar official of the
Partnership or any substantial portion of its assets or (C) any assignment of
any material portion of the Partnership's assets for the benefit of its
creditors.
(vii) the adoption of any annual or other
business plan or budget of the Partnership or any amendment thereto;
(viii) unless otherwise described in an
approved business plan or budget for the year (or any approved amendment
thereto), (a) the acquisition, sale, lease, exchange,
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transfer, mortgage, pledge, license or disposition of assets or property by the
Partnership other than in the ordinary course of business,(b) any capital
expenditure, investment or capital contribution by the Partnership, or any
commitment by the Partnership to make any capital expenditure, investment or
capital contribution, (c) any loan to, indemnification of, or guarantee of the
obligation of, any Person by the partnership, or the forgiveness of any loan or
other liability of any Person to the Partnership involving obligations owing to
the partnership in an amount in excess of $50,000, and (d) any agreement,
contract or lease that is entered into other than in the ordinary course of
business or that involves the furnishing or receipt of consideration to or by
the Partnership with a value in excess of $100,000;
(ix) the incurrence by the Partnership of
indebtedness for borrowed money, or any refinancing, modification or extension
thereof;
(x) the distribution of any assets or
property of the Partnership to its Partners or the redemption, repurchase or
retirement for value of any interest of any Partner in the Partnership;
(xi) the appointment or removal of any
executive officer of the Partnership or any employee of the Partnership with a
base salary equal to or greater than $80,000;
(xii) the execution, delivery or performance
by the Partnership of (A) any Affiliation Agreement, and (B) any joint venture,
partnership or other similar agreement;
(xiii) any Related Party Transaction;
(xiv) review and approval of quarterly and
annual financial statements of the Partnership;
(xv) a determination to surrender or not to
seek renewal of any PCS License held by the Partnership or the agreement of the
Partnership to any material modification to any PCS License held by the
Partnership;
(xvi) the commencement of any action,
litigation, suit or proceeding (a "Proceeding") by, or the settlement of any
Proceeding instituted against, the Partnership involving a claim for damages in
excess of $50,000 or seeking any significant non-monetary relief; and
(xvii) any other action which, in the
General Partner's good faith opinion, would materially impact the performance,
financial condition or prospect of the Partnership or its business.
(d) Notwithstanding the authority of the General
Partner to manage the business and affairs of the Partnership,
the Partnership shall not take any of the following actions
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unless such action has been authorized by a Supermajority Vote of the members of
the Partnership Committee:
(i) the conduct by the Partnership of any
business other than the Partnership Business;
(ii) the determination to request or accept
Additional Capital Contributions by the Partners;
(iii) subject to the authority of the
General Partner to withhold its consent, in its sole and absolute discretion, to
the admission of any Substituted Limited Partner, the admission of any
Substituted Limited Partner in accordance with Section 7.1(b) hereof;
(iv) the admission of any Additional Partner
in accordance with Section 7.09 hereof;
(v) the merger, consolidation or combination
of the Partnership with any other Person or the sale of all or substantially all
of the Partnership's assets and properties;
(vi) the commencement of any voluntary case
or other proceeding seeking or consenting to (A) the liquidation, dissolution,
reorganization or other relief with respect to the Partnership or its assets,
liabilities or obligations under any bankruptcy, insolvency or other similar law
affecting the enforcement of creditors' rights generally, (B) the appointment of
a trustee, receiver, liquidator, custodian or similar official of the
Partnership or any substantial portion of its assets or (C) any assignment of
any material portion of the Partnership's assets for the benefit of its
creditors;
(vii) the incurrence by the Partnership of
indebtedness for borrowed money in excess of $100,000, or any refinancing,
modification or extension thereof by the Partnership; provided, however, that a
Supermajority Vote shall not be required to refinance, and simultaneously pay
off in full all amounts due under the Initial Limited Partner Loan Agreement, if
Lender declares the Loan to be due and payable prior to the Maturity Date other
than for a cause within the control of the General Partner or the General
Partner Control Group, the terms "Loan", "Lender" and "Maturity Date" being
defined in this proviso as in the Initial Limited Partner Loan Agreement.
(viii) any loan to, indemnification of, or
guarantee of the obligations of, any other Person involving obligations in
excess of $100,000, or the forgiveness of any loan or other liability of any
Person to the Partnership involving obligations owing to the Partnership in an
amount in excess of $100,000;
(ix) the distribution by the Partnership to
its Partners of any assets of the Partnership (i) otherwise than in cash or (ii)
in any fiscal year cash in excess of $10,000, or
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any redemption, repurchase or retirement for value of any interest of any
Partner in the Partnership;
(x) the execution, delivery or performance
by the Partnership of (A) any Affiliation Agreement,(B) any joint venture,
partnership or similar agreement, or (C) the acquisition, sale or lease of any
property involving a consideration in excess of $100,000;
(xi) any Related Party Transaction (whether
constituting one transaction or a series of related transactions) involving
consideration in excess of $10,000 individually or $50,000 in the aggregate for
all Related Party Transactions;
(xii) the payment by the Partnership to any
officer or employee of the Partnership of compensation in any year in an amount
in excess of $80,000;
(xiii) a determination to transfer,
surrender or not to seek renewal of any PCS License held by the Partnership or
the agreement of the Partnership to any material modification to any PCS License
held by the Partnership; and
(xiv) the settlement of any Action against
the Partnership involving a claim for damages in excess of $100,000 or any
significant non-monetary relief.
6.3 (Reserved)
6.4 F-BLOCK AUCTION PROCESS. During the F-Block Auction, the
General Partner (or his designee), on behalf of the Partnership, shall, with the
approval of all Partners, bid for PCS Licenses. The Partnership shall not submit
any bid for any PCS License without approval of all Partners. If for any reason
any of the benefits (including without limitation bidding credits and
installment payment terms) available to a small business as provided in the FCC
Rules as of date of this Agreement shall cease to be available to the
Partnership, the decision to continue in the F-Block Auction process or to
acquire any PCS Licenses won in the F Auction shall require the approval of all
Partners.
6.5 ROLE OF LIMITED PARTNERS. The Limited Partners shall have
no right to participate in the management of the business of the Partnership and
shall have no authority to act for or bind the Partnership.
6.6 LIABILITY OF GENERAL PARTNER. Neither the General Partner,
the Parent General Partner, nor any of their respective officers, directors,
employees, agents, shareholders, partners, Partnership Committee appointees, or
controlling persons, shall be liable, responsible or accountable to the
Partnership or any Limited Partner for any act or omission on behalf of the
Partnership performed or omitted by it in good faith and in a manner reasonably
believed by it to be within the scope of the authority granted to it by this
Agreement and in the best
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interests of the Partnership, provided that the General Partner was not guilty
of gross negligence, wilful misconduct or any other breach of its fiduciary duty
with respect to such acts or omissions. Any loss, damage or expense incurred by
the General Partner by reason of any act or omission so performed or omitted by
it (and not involving gross negligence, wilful misconduct or breach of fiduciary
duty) shall be paid by the Partnership to the extent assets are available, but
the Limited Partners shall not have any personal liability to the General
Partner or the Partnership on account of such loss or damage.
6.7 LIMITED LIABILITY OF LIMITED PARTNERS. Neither the Limited
Partner or its Partnership Committee appointee shall be liable for any losses,
debts, liabilities, contracts or other obligations of the Partnership except to
the extent required under Section 17-303 of the Partnership Law.
6.8 OTHER ACTIVITIES OF PARTNERS. Any Partner may engage
independently or with others in other business ventures of every nature and
description. Neither the Partnership nor any other Partners shall have any
rights or obligations in and to such independent ventures or the income or
profits derived therefrom. Notwithstanding the foregoing,(a) the General Partner
shall not engage in any independent business or activity if the General
Partner's participation in such business or activity would (i) materially impair
the General Partner's ability to perform its duties as general partner of the
Partnership or (ii) have a material adverse effect on the ability of the
Partnership to comply with applicable law (including, without limitation, the
Communications Act and the FCC Rules). It is expressly recognized that
Affiliates of the Partners are partners or investors in entities which were the
winning bidders on PCS licenses in the C-Block Auction, that Affiliates of the
Initial Limited Partner are members of an entity which intends to bid in the
D-Block and E-Block Auctions, and that those relationships could cause conflicts
of interests either with respect to bidding in the F-Block Auction, in the
development of any PCS Licenses won or otherwise. The Partners, on behalf of
themselves and any and all shareholders, partners, members and other investors
therein, hereby waive any rights which any of them may have with respect to any
such conflicts of interests, including without limitation any breaches of any
fiduciary or similar duties.
6.9 PARTNERSHIP OFFICERS AND EMPLOYEES. The General Partner
shall appoint (with the approval of the Partnership Committee by Majority Vote)
a President of the Partnership and such other officers of the Partnership as the
General Partner shall deem necessary or advisable to manage the day-to-day
business affairs of the Partnership. The General Partner may employ, on behalf
of the Partnership, such other persons, firms, corporations or consultants
(including employees and accountants and attorneys) as it deems advisable for
the conduct of the business of the Partnership, on such terms and for such
compensation as the General Partner may determine, which
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compensation shall be paid by the Partnership, subject to the necessity of
obtaining authorization of the Partnership Committee to the extent provided in
Section 6.2 and subject to the provisions of the Expenses Agreement.
6.10 EXPENSES AGREEMENT. Reference is made to the Expenses
Agreement which shall govern expenses incurred through the date of execution of
an Affiliation Agreement and shall supersede any contrary provision of this
Agreement.
7. TRANSFER OF PARTNERSHIP INTERESTS;
SUBSTITUTE AND ADDITIONAL LIMITED PARTNERS
7.1 RESTRICTIONS ON TRANSFER OF INTEREST.
(a) No Partner may assign, sell, transfer, pledge,
hypothecate or grant a security interest in, or otherwise dispose of (any such
transaction being referred to as a "Transfer"), all or any portion of its
interest in the Partnership except in compliance with this Article 7 and the
requirements of applicable law.
(b) (i) Notwithstanding any partner's compliance with
this Article 7, unless (A) the General Partner in its sole and absolute
discretion consents in writing to the admission of a permitted transferee as a
Substituted Limited Partner, as described below in Section 7.1(b)(ii) below, and
(B) the Partnership Committee authorizes the admission of a permitted transferee
as a Substituted Limited Partner by Supermajority Vote, such transferee shall be
considered an "ASSIGNEE" for purposes of this agreement. An Assignee shall be
entitled to all the rights of an assignee of a limited partnership interest
under the Partnership Law, including the right to receive distributions from the
partnership and the share of Profits, Losses, gain and loss attributable to the
partnership interest assigned to such transferee and the rights to transfer such
interest provided in this Article 7, but shall not be deemed to be a holder of
an interest in the Partnership for any other purpose under this Agreement, and
shall not be entitled to vote with respect to such interest on any matters
presented to the Limited Partners for approval or, if applicable, designate any
member of the Partnership Committee (such rights remaining with the transferor
Limited Partner). In the event any such Assignee desires to make a further
assignment of any such interest in the Partnership, such Assignee shall be
subject to all the provisions of this Article 7 to the same extent, and in the
same manner, as any Limited Partner desiring to make an assignment of its
interest in the Partnership.
(ii) The General Partner and the Partnership
Committee (by Supermajority Vote) shall each have the right to consent to the
admission of a permitted transferee of the interest of a Limited Partner
pursuant to Section 7.1(b)(i) as a Limited Partner (a "SUBSTITUTED LIMITED
PARTNER") pursuant to this Section 7.1(b)(ii), which consent may be granted or
withheld by the General Partner or the Partnership Committee in their sole
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and absolute discretion. A transferee who has been admitted as a Substituted
Limited Partner in accordance with this Section 7.1(b)(ii) shall have all the
rights and powers, and shall be subject to all the restrictions and liabilities,
of the applicable transferring Limited Partner under this Agreement.
7.2 TRANSFER OF INTERESTS BY LIMITED PARTNERS. Subject to
compliance with Sections 7.6 and 7.7 hereof, any Limited Partner may Transfer
all or any portion of its interest in the Partnership (subject to Section
7.1(b)),unless, with respect to any Transfer on or before the eleventh (11th)
anniversary of the date on which PCS Licenses are granted to the Partnership
pursuant to the C-Block Auction at any time that the General Partner holds less
than 50.1 percent (50.1%) of the aggregate Percentage Interests of all Partners
and Assignees, such Transfer would cause any Partner or Assignee (and any
Affiliates of such Partner of Assignee) other than the General Partner to hold
in excess of twenty-five percent (25%) of the aggregate Percentage Interests
held by all Partners and Assignees.
7.3 TRANSFER OF INTERESTS BY GENERAL PARTNER. The General
Partner may not Transfer any portion of the interest of the General Partner in
the Partnership without the unanimous written consent of all Partners.
7.4 CHANGE IN OWNERSHIP. For the purpose of this Article 7, a
"Change in Ownership" of a Partner shall be deemed to be a Transfer of the
interest of such Partner in the Partnership subject to the restrictions set
forth in this Article 7. A "Change in Ownership" shall be deemed to have
occurred with respect to the General Partner when (i) any Person other than
members of the General Partner Control Group shall become a director or officer
(including Chief Executive Officer) of the General Partner, (ii) any member of
the General Partner Control Group shall transfer any shares of stock of the
General Partner to any other Person (including another member of the General
Partner Control Group) or any member of the General Partner Control Group shall
cease to own at least the percentage of each class of stock of the General
Partner shown as owned by each member of the General Partner Control Group on
Schedule C hereto, or any Person shall own any securities or rights which may be
convertible into or exchangeable for, or which give any rights to purchase or
receive, any shares of any class of stock of the General Partner, (iii) the
General Partner Control Group shall cease to Control the General Partner or any
Person other than the General Partner Control Group shall Control the General
Partner, (iv) the General Partner merges or consolidates with any Person or (v)
the General Partner or any member of the General Partner Control Group takes any
action which would cause the representations and warranties of the General
Partner set forth in Sections 11.5 through 11.7 hereof to be untrue after the
taking of such action. A "Change of Ownership" of any Limited Partner shall be
deemed to have occurred upon the occurance of any event that would cause such
Limited Partner to constitute an Affiliate of any other Partner or Assignee.
Stock certificates
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of the General Partner and the Limited Partners shall bear a legend reflecting
the restrictions of this Section 7.4 and Article 7.
7.5 INVALID TRANSFERS VOID. Any purported Transfer of any
interest in the Partnership or any part thereof not in compliance with this
Article 7 shall be null and void and of no force and effect, and the
transferring Partner shall be liable to the other Partners and the Partnership
for all Costs arising from and relating to such noncomplying Transfer:
7.6 DOCUMENTATION. The Partnership shall not recognize for any
purpose any purported admission of a Partner unless and until the provisions of
this Article 7 shall have been satisfied or waived and there shall have been
delivered to the General Partner a dated notification of such Transfer:
(a) executed and acknowledged by both the Partner
effecting such Transfer and the Person to be admitted;
(b) including the notice address of and the written
acceptance by the Person to be admitted of all the terms and provisions
of this Agreement and an agreement by such Person to perform and
discharge timely all of the obligations and liabilities in respect of
the interest being obtained;
(c) setting forth the Capital Accounts of the Partner
effecting such Transfer and the Person to be admitted after such
admission (which together shall be no greater than the Capital Accounts
of the Partner affecting such Transfer prior thereto); and
(d) containing a representation and warranty that
such Transfer was made in accordance with all applicable laws and
regulations and a representation and warranty by the Person to be
admitted that the representations, warranties and agreements set forth
herein are true and correct and in force with respect to such Person.
Each such Transfer and admission shall be effective as of the first day of the
calendar month immediately succeeding the month in which the General Partner
shall receive such notification of Transfer and the other requirements of this
Article 7 shall have been met; PROVIDED, HOWEVER that if as a result of such
Transfer the General Partner would cease to be General Partner, his transferee
shall be deemed admitted as the General Partner immediately prior to such
cessation.
7.7 LEGALITY. Notwithstanding any provision of this Agreement
to the contrary, no Transfer of an interest in the Partnership or distributions
therefrom or admission of a Person to the Partnership shall be effective unless:
(a) either (i) the interest in the Partnership or
distributions therefrom subject to such Transfer or
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admission shall have been registered under the Securities Act, and any
applicable state securities laws or (ii) the Partnership shall have
received a favorable opinion of the Partnership's legal counsel or of
other legal counsel acceptable to the General Partner to the effect
that such Transfer or admission is exempt from registration under such
laws, and
(b) the Partnership shall have received a favorable
opinion of the Partnership's legal counsel or of other legal counsel
acceptable to the General Partner to the effect that such Transfer or
admission would not (i) when added to the total of all other Transfers
within the preceding 12 months, result in the Partnership's being
considered to have terminated for federal or state income tax purposes,
(ii) jeopardize the Partnership's classification as a partnership for
federal or state income tax purposes, or (iii) cause the Partnership to
become a "Publicly Traded Partnership," as such term is defined in
Sections 469(k)(2) or 7704(b) of the Code, (iv) subject the Partnership
to regulation under the Investment Company Act of 1940, the Investment
Advisers Act of 1940 or the Employee Retirement Income Security Act of
1974, each as amended from time to time, (v) jeopardize the
Partnership's ability to comply with the Communications Act and the FCC
Rules; (v) jeopardize the ability of the Partnership to comply with any
other applicable law, or (vi) violate any applicable law.
The Partnership Committee may waive any of the foregoing if the Partnership
Committee determines by Supermajority Vote, that such waiver would not result in
any material adverse consequences to the Partnership or any Limited Partner.
7.8 COSTS. All costs (including, without limitation, the
reasonable legal fees incurred in connection with the obtaining of the legal
opinions referred to in Section 7.7) incurred by the Partnership in connection
with any Transfer or admission of a Person to the Partnership (other than
admissions contemplated by Section 7.09) shall be borne and paid by the Partner
effecting such Transfer within 10 days after the receipt by such Partner of the
Partnership's invoice for the amount due.
7.9 ADDITIONAL PARTNERS. Additional Persons (other than a
transferee of an existing interest in the Partnership as to which Section 7.1
applies) may be admitted to the Partnership as Limited Partners (such Persons
being referred to as "ADDITIONAL PARTNERS") with the prior authorization of the
Partnership Committee by Supermajority Vote and additional contributions of
capital to the Partnership may be made at any time by existing Partners on such
terms and conditions as may be determined in good faith by the Partnership
Committee by Supermajority Vote at the time of such admission; PROVIDED HOWEVER,
that no such admission or issuance would affect the Partnership's ability to
comply with any applicable statutes or regulations (including, without
limitation, the Communications Act and the FCC Rules).
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7.10 INTERESTS IN A PARTNER. No Partner shall cause or permit
an interest, direct or indirect, in itself to be Disposed of such that, on
account of such Transfer, (i) the Partnership would be considered to have
terminated within the meaning of Section 708 of the Code, (ii) the Partnership
would cease to be classified as a partnership for federal income tax purposes,
or (iii) the Partnership's ability to comply with any applicable law (including,
without limitation, the Communications Act and the FCC Rules) would be affected
adversely.
8. BOOKS OF ACCOUNT
8.1 GENERAL. Full and accurate books of account in accordance
with generally accepted accounting principles, in which shall be entered each
and every transaction of the Partnership, shall be kept by the Partnership at
the office and principal place of business of the Partnership (or at such other
place as the General Partner shall advise the Limited Partners in writing), and
such books shall at all times be open to the inspection of the Partners. A
report prepared at the direction of the General Partner showing the financial
condition of the Partnership at the end of each fiscal year of the Partnership
and the results of its operations for the fiscal year shall be mailed to each
Limited Partner within 90 days after the end of the fiscal year. This report
shall set forth in detail the transactions effected by the Partnership during
the fiscal year. In addition, within 90 days after the end of each calendar
year, the General Partner shall cause to be sent to each person who was a
Partner or permitted assignee at any time during such calendar year such tax
information as shall be necessary for the preparation by such Partner or
permitted assignee of its Federal income tax return and other tax returns.
8.2 FISCAL YEAR. Except as otherwise required by the Code, the
fiscal year of the Partnership shall be the calendar year.
9. DISSOLUTION AND TERMINATION OF THE PARTNERSHIP
9.1 EVENTS OF DISSOLUTION. The Partnership shall be dissolved
and its affairs shall be wound up upon the occurrence of any of the following
events:
(i) the expiration of the term of the Partnership
specified in Section 3 hereof;
(ii) the unanimous written consent of all Partners to
the dissolution of the Partnership;
(iii) if, after conclusion of the C-Block Auction,
the Partnership shall not have been awarded any PCS License;
(iv) if the F-Block Auction has not commenced on or
before October 1, 1996;
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(v) if, at any time during the term of the
Partnership, (A) all PCS Licenses granted to the Partnership
are either transferred by the Partnership or revoked and (B)
the Partnership Committee shall not have authorized the
Partnership, by a Supermajority Vote, to conduct any business
other than the Partnership Business;
(vi) the entry of a decree of judicial dissolution of
the Partnership pursuant to Section 7-802 of the Partnership
Law;
(vii) the transfer, sale or distribution to the
Partners of all or substantially all of the assets of the
Partnership; or
(viii) the death, insanity, dissolution, retirement,
bankruptcy within the meaning of the Partnership Law), or
other event of withdrawal of the General Partner (within the
meaning of the Partnership Law) unless (A) within 90 days of
such event of withdrawal, remaining Partners owning (1) a
majority of the capital interests owned by all the remaining
partners and (2) a majority of the Percentage Interests owned
by all the remaining Partners (or such greater percentage in
interest as required by the Partnership Law) agree in writing
to continue the business of the Partnership and agree to the
appointment, effective as of the date of such event of
withdrawal, of one or more additional general partners to
carry on the business of the Partnership or (B) at the time of
the occurrence of such event of withdrawal, there is at least
one remaining General Partner of the Partnership and all
remaining General Partners agree to continue the business of
the Partnership.
Without the unanimous written consent of the Partners, each
Partner agrees not to withdraw as a Partner of the Partnership or take any
action that would otherwise result in an event of withdrawal (within the meaning
of the Partnership Law) of such Partners from the Partnership or result in the
dissolution of Partnership (other than pursuant to Section 10.(a)(i), through
(vi)).
9.2 DISTRIBUTION OF PARTNERSHIP ASSETS. Upon the dissolution
of the Partnership in accordance with Section 9.1, the General Partner shall act
as liquidator (unless there is no General Partner at such time, in which case
the Limited Partners shall select, by vote of a majority in Percentage Interest,
a person (which may include any Limited Partner) to act as liquidator) of the
Partnership's assets. After paying the Partnership's outstanding liabilities to
creditors in the order of priority as provided by law (or the provision of
adequate reserves therefor), the liquidator(s) shall distribute to each Partner
an amount equal to the positive balance in its Capital Account after taking into
account all Capital Account adjustments for the Partnership fiscal year during
which such liquidation occurs through the date of such liquidation. All
liquidating distributions shall be made in assets of the Partnership and/or
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in cash, as the Partnership Committee by Supermajority Vote shall determine in
its sole and absolute discretion. All liquidating distributions shall be made by
the end of the taxable year of the Partnership during which the liquidation of
the Partnership occurs (or, if later, within 90 days after the date of such
liquidation).
9.3 RETURN OF CAPITAL CONTRIBUTIONS UPON TERMINATION AND
DISSOLUTION OF PARTNERSHIP. Each Limited Partner agrees that the liability of
the Partnership and the General Partner to him for the return of his capital
contributions is limited to the Partnership's assets. In the event of an
insufficiency of Partnership assets to return to a Limited Partner the full
amount of his capital contributions, the Limited Partner hereby waives any and
all claims whatsoever which he might otherwise have against the General Partner
with respect to its personal assets. No Partner shall have an obligation to
contribute to the Partnership the deficit balance, if any, in such Partner's
Capital Account upon the dissolution of the Partnership.
9.4 DISTRIBUTIONS OF PROPERTY. Distributions of Partnership
assets other than cash pursuant to Section 4 or Section 9.2 shall be treated as
a distribution of cash equal to the gross fair market value of the property as
of the date of distribution, less any liabilities to which the property is
subject or which the distributee Partner assumes upon distribution. Upon any
distribution of assets other than cash pursuant to Section 4 or this Section
9.4, the Partners' Capital Accounts will be adjusted as provided in Section
4.2(c) if the Partnership Committee by Supermajority Vote reasonably determines
that such adjustment is necessary or appropriate to reflect the relative
economic interests of the Partners in the Partnership.
10. POWER OF ATTORNEY
10.1 GENERAL. Each of the Partners irrevocably constitutes and
appoints the General Partner (and each successor General Partner, if any) his
true and lawful attorney, in his name, place and stead, to make, execute,
acknowledge and/or file:
(a) a certificate of limited partnership under the
Partnership Law, and any required amendments thereto;
(b) all documents and instruments which may be deemed
necessary or desirable to effect the winding-up and
termination of the Partnership (including, but not limited to,
a certificate of cancellation of the Certificate and all
amendments thereto);
(c) any documents which may be required to effect
transfers of Partnership interests;
(d) any business certificate, fictitious name
certificate, amendment thereto or other instrument or document
of any kind necessary or, in the opinion of
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the General Partner, advisable to accomplish the purpose of
the Partnership or required by applicable federal, state or
local law,
it being expressly intended by each of the Partners that the foregoing power of
attorney is coupled with an interest.
10.2 SURVIVAL OF POWER OF ATTORNEY. The power of attorney set
forth in Section 10.1 shall survive any assignment or other transfer (voluntary
or involuntary) by a Limited Partner of the whole or any part of his interest in
the Partnership.
11. REPRESENTATIONS AND WARRANTIES OF GENERAL PARTNER. The General Partner
hereby represents and warrants to the Limited Partners as follows:
11.1 ORGANIZATION. The General Partner is a corporation duly
formed and validly existing and in good standing under the laws of the State of
New York, is duly qualified to transact business in all jurisdictions in which
the conduct of its business requires such qualification, and has full
partnership power and authority to conduct its business and to enter into and
perform its obligations under this Agreement. The General Partner has provided
to each Limited Partner true and correct copies of the certificate of
incorporation and by-laws of the General Partner as in effect on the date
hereof.
11.2 AUTHORIZATION. The execution, delivery and performance of
this Agreement by the General Partner has been duly authorized by all necessary
partnership action on the part of the General Partner. This Agreement has been
duly executed by the General Partner and delivered by the General Partner to
each Limited Partner and constitutes the legal, valid and binding obligation of
the General Partner, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other laws affecting
creditors' rights generally and the exercise of judicial discretion in
accordance with general equitable principles.
11.3 NO CONFLICT. The execution, delivery and performance of
this Agreement by the General Partner, and the compliance with the terms and
conditions hereof by the General Partner, does not, with or without the giving
of notice or the lapse of time or both, conflict with, breach the terms or
conditions of, constitute a default under, or violate the limited partnership
agreement of the General Partner, any agreement to which the General Partner is
a party, or any judgment, decree, order, law, rule or regulation applicable to
the General Partners.
11.4 LITIGATION. There is no judgment, award, order, writ,
injunction, arbitration decision or decree outstanding or any litigation,
proceeding, claim or investigation pending or, to the best knowledge of the
General Partner, threatened against the General Partner or any of its partners
which may adversely affect (i) the ability of the General Partner to enter into
and perform
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its obligations under this Agreement or (ii) the ability of the Partnership to
bid for, obtain, or hold any PCS License.
11.5 OWNERSHIP AND CONTROL OF THE GENERAL PARTNER. Members of
the General Partner Control Group are, and at all times during the term of the
Partnership will be, the sole directors and the sole officers (including Chief
Executive Officer) of the General Partner. The General Partner Control Group
Controls, and at all times during the term of the Partnership will Control, the
General Partner and no other Person has, or during the term of the Partnership
will have, the right to Control the General Partner. The General Partner Control
Group owns, and, except in the case of the death of a member of General Partner
Control Group, at all times during the term of the Partnership will own, at
least the percentage of each class of stock of the Partnership shown as owned by
the General Partner Control Group on Schedule C; and, except in the case of the
death of a member of General Partner Control Group, no member of the General
Partner Control Group shall transfer any shares of stock of the General Partner
to any other Person (including another member of the General Partner Control
Group). No Person owns, or during the term of the Partnership will own, any
securities or rights which may be convertible into or exchangeable for, or which
gives any rights to purchase or receive, any shares of any class of stock of the
General Partnership.
11.6 GENERAL PARTNER CONTROL GROUP - U.S. CITIZEN. Each member
of the General Partner Control Group is a citizen of the United States.
11.7 FINANCIAL QUALIFICATION OF THE GENERAL PARTNER. As of the
date hereof, the Total Assets of the General Partner and all Affiliates of the
General Partner, together with the Total Assets of the Partnership after giving
effect to all Capital Contributions made by the Partners as of the date hereof,
are less than $500,000,000. The average annual Gross Revenues of the General
Partner, together with the average annual Gross Revenues of all of its
Affiliates, for each of the preceding three fiscal years prior to January 1,
1994 (and each of the immediately preceding calendar years, if different) are
less than $40,000,000.
12. REPRESENTATIONS AND WARRANTIES OF LIMITED PARTNERS. Each Limited
Partner hereby represents and warrants to the General Partner and each other
Limited Partner as follows:
12.1 ORGANIZATION. Such Limited Partner has been duly formed
and is validly existing and in good standing under the laws of the jurisdiction
of formation, is duly qualified to transact business in all jurisdictions in
which the conduct of its business requires such qualification and has the
requisite power and authority to conduct its business and to enter into and
perform its obligations under this Agreement. Unless disclosed in writing to the
General Partner, such Limited Partner is not a non-resident alien for federal
income tax purposes.
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12.2 AUTHORIZATION. The execution, delivery and performance of
this Agreement by such Limited Partner has been duly authorized by all necessary
action on the part of such Limited Partner. This Agreement has been duly
executed and delivered by such Limited Partner and constitutes the legal, valid
and binding obligation of such Limited Partner, enforceable against such Limited
Partner in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency or other laws affecting creditors' rights
generally and the exercise of judicial discretion in accordance with general
equitable principles.
12.3 NO CONFLICT. The execution, delivery and performance of
this Agreement by such Limited Partner, and the compliance with the terms and
conditions hereof by such Limited Partner, does not, with or without the giving
of notice or the lapse of time or both, conflict with, breach the terms or
conditions of, constitute a default under, or violate the organizational
documents of such Limited Partner, any agreement to which such Limited Partner
is a party, or any judgment, decree, order, law, rule or regulation applicable
to such Limited Partner.
12.4 LITIGATION. There is no unsatisfied judgment, award,
order, writ, injunction, arbitration decision or decree outstanding or any
litigation, proceeding, claim or investigation pending or, to the best knowledge
of such Limited Partner, threatened against such Limited Partner which may
adversely affect the ability of such Limited Partner to enter into and perform
its obligations under this Agreement.
12.5 INVESTMENT INTEREST; NATURE OF INVESTMENT. Such Limited
Partner is acquiring its interest in the Partnership for its own account and not
with a view to, or for resale in connection with, any distribution thereof in
violation of the Securities Act or any applicable state securities laws. Such
Limited Partner is an "accredited investor" within the meaning of Regulation D
promulgated under the Securities Act and understands that interests in the
Partnership may not be transferred absent compliance with the registration
requirements of the Securities Act and applicable state securities laws or
pursuant to an exemption therefrom and otherwise in compliance with the terms of
this Agreement.
13. INDEMNIFICATION
13.1 INDEMNIFICATION OF LIMITED PARTNERS BY THE GENERAL
PARTNER. The General Partner hereby agrees to indemnify and hold harmless each
Limited Partner, its Affiliates, employees, successors and assigns from and
against and in respect of, and to reimburse them for, any and all losses, costs,
liabilities, claims, obligations and expenses, including, without limitation,
reasonable fees and disbursements of counsel (together "Losses"), incurred or
suffered by such Limited Partner and arising from (i) the breach of any
representation or warranty of the General Partners set forth herein, or (ii) any
breach, violation or
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failure to perform any agreement, covenant or obligation of the General Partner
set forth herein; provided, however, that the General Partner shall not be
obligated to provide such indemnity to the extent that such breach, violation or
failure to perform related to the management of the business and affairs of the
Partnership (other than as provided Sections 6.2 and 6.4 hereof) and either (a)
the General Partner was not guilty of gross negligence, wilful misconduct or any
other breach of its fiduciary duty, or (b) the funds available to the
Partnership to pay or reimburse the General Partner for the costs of the
performance of such agreement, covenant or obligation of the General Partner
were insufficient to pay or reimburse the General Partner for full amount of
such costs.
13.2 INDEMNIFICATION OF PARTNERS BY THE LIMITED PARTNERS. Each
Limited Partner, severally and not jointly, hereby agrees to indemnify and hold
harmless each other Partner; its Affiliates, employees, successors and assigns
from and against any and all Losses incurred or suffered by such Partner and
arising from (i)the breach by such Limited Partner of any representation or
warranty of such Limited Partner set forth herein, or(ii) any breach, violation
or failure to perform any covenant, agreement or obligation of such Limited
Partner set forth herein.
13.3 INDEMNIFICATION OF PARTNERS.
(a) The Partnership shall indemnify and hold
harmless any Partner, the General Partner Control Group, and their respective
directors, officers, employees, agents, shareholders, Partnership Committee
appointees, and Controlling Persons, from and against any and all Losses
incurred or suffered by reason of any act performed or omitted to be performed
by any partner, the General Partner Control Group, of any of their respective
directors, officers, employees, agents, shareholders, Partnership committee
appointees, or Controlling Persons in connection with the business or affairs of
the Partnership or by reason of the General partner's or a Limited Partner's
status as the general partner or a limited partner of the partnership or such
appointee's status as a member of the Partnership Committee, as the case may be,
including reasonable attorneys' fees in connection with the defense of any
action based on any such act or omission, which attorneys' fees shall be paid as
incurred, including all such liabilities under federal and state securities laws
(including the Securities Act of 1933, as amended) to the extent permitted by
law.
(b) Notwithstanding the provisions of clause (a)
of this Section (13.3), (i) the indemnification thereunder shall be limited to
the assets of the Partnership and any previous distributions to the Partners and
transferees of an interest of a Partner, and (ii) no such indemnification shall
be provided to the General Partner if the General Partner was guilty of gross
negligence, wilful misconduct or other breach of its fiduciary duty (or in the
case of a claim by a Limited Partner that the General Partner has breached its
obligations under Sections 6.2
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and 6.4 hereof) with respect to the act or omission giving rise to the Loss for
which indemnification is sought, as finally determined by a court of competent
jurisdiction. If the assets of the Partnership are not sufficient to satisfy any
indemnification pursuant to clause (a) of this Section 13.3, then each Partner
and each transferee of any interest of a Partner agrees to contribute funds to
the Partnership to fund such shortfall to the extent of the aggregate amount of
all previous distributions to it hereunder, pro rata in proportion to the
aggregate amounts of such previous distributions made to each.
14. MISCELLANEOUS
14.1 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, without regard
to any otherwise governing principles of conflicts of law.
14.2 BINDING EFFECT. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors, assigns, legal representatives, heirs and distributees. Nothing in
this Agreement, expressed or implied, is intended or shall be construed to give
any person other than the parties to this Agreement (or their respective
successors, assigns, legal representatives, heirs and distributees) any legal or
equitable right, remedy or claim under or in respect of any agreement or
provision contained herein, it being the intention of the parties hereto that
this Agreement is for the sole and exclusive benefit of such parties (or such
successors, assigns, legal representatives, heirs and distributees) and for the
benefit of no other person.
14.3 AMENDMENT. This Agreement may not be modified or amended
at any time except by a writing signed by the each Partner. The General Partner
may, without the consent of the Limited Partners, amend and supplement this
Agreement to reflect admissions and withdrawals of Partners made in accordance
with the provisions of this Agreement.
14.4 INTERPRETATION. The use of the neuter herein shall be
deemed to include the feminine and masculine genders. The use of either the
singular or the plural includes the other unless the context clearly requires
otherwise. The headings in this Agreement are for convenience of reference only,
and shall not limit or otherwise affect the meaning hereof.
14.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, and each such counterpart shall for all purposes be
deemed an original, and all such counterparts shall together constitute but one
and the same agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first set forth in this Agreement.
GENERAL PARTNER:
AER FORCE COMMUNICATIONS INC.
By:
--------------------------------------
Name: Victoria Kane
Title: President
INITIAL LIMITED PARTNER:
LYNCH PCS CORPORATION F
By:
--------------------------------------
Name: Robert E. Dolan
Title: President
29
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SCHEDULE A
Percentage Initial Capital
Interest Contribution
-------- ------------
GENERAL PARTNER
- ---------------
AER FORCE COMMUNICATIONS INC. 50.1% To be Agreed
LIMITED PARTNERS
- ----------------
LYNCH PCS CORPORATION G 49.9% To be Agreed
A-1
<PAGE>
SCHEDULE B
[Reserved]
A-2
<PAGE>
SCHEDULE C
General Partner
and/or Shares of Common Percentage of Stock Directorship
Control Group Stock of General of General Partner Offices of General
Members Partner Owned(1) Owned Partner Held
- ---------------- ---------------- -------------------- -----------------
Victoria Kane 100% Sole Director;
President, and
Secretary
T. Gibbs Kane, Jr., Victoria Kane's husband, is Treasurer and Assistant
Secretary of the General Partner.
Victoria Kane hereby agrees to be bound by the provisions of Sections 7.4 and
11.5 of the Partnership Agreement in so far as such Sections relate to such
member and the shares of stock of the General Partner owned by such member,
including without limitation voting obligations and transfer restrictions.
Victoria Kane
- --------
(1) The General Partner has only one class of stock authorized and outstanding -
Common Stock. There are no options, convertible securities or other rights
outstanding to acquire any stock of the general partner.
A-3
LOAN AGREEMENT
dated as of August 12, 1996
by and
between
AER FORCE COMMUNICATIONS B, L.P.,
as "Borrower,"
and
LYNCH PCS CORPORATION F,
as "Lender"
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
DEFINITIONS.................................................................1
SECTION 1.01. DEFINED TERMS................................................1
SECTION 1.02. INCORPORATION OF CERTAIN TERMS BY REFERENCE..................
ARTICLE II
THE LOAN....................................................................2
SECTION 2.01. THE INITIAL LOAN.............................................2
SECTION 2.03. PAYMENT OF PRINCIPAL.........................................5
SECTION 2.04. OPTIONAL PREPAYMENT..........................................5
SECTION 2.05. INTEREST RATE AND PAYMENT DATES..............................5
ARTICLE III
GENERAL PROVISIONS CONCERNING THE LOAN......................................6
SECTION 3.01. PAYMENTS.....................................................6
SECTION 3.02. PAYMENT ON NON-BUSINESS DAYS.................................6
SECTION 3.03. CONDITIONS; DOCUMENTATION....................................6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES..............................................6
SECTION 4.01. ORGANIZATION.................................................6
SECTION 4.02. AUTHORIZATION................................................7
SECTION 4.03. NO CONFLICT..................................................7
SECTION 4.04. LITIGATION...................................................7
SECTION 4.05. ACCURACY OF REPRESENTATIONS AND WARRANTIES; DISCLOSURE......7
ARTICLE V
AFFIRMATIVE COVENANTS.......................................................8
SECTION 5.01. PUNCTUAL PAYMENTS............................................8
SECTION 5.02. ACCOUNTING RECORDS...........................................8
SECTION 5.03. FINANCIAL STATEMENTS AND REPORTS.............................8
SECTION 5.04. COMPLIANCE...................................................9
SECTION 5.05. INSURANCE....................................................9
SECTION 5.06. FACILITIES...................................................9
SECTION 5.07. TAXES AND OTHER LIABILITIES..................................9
SECTION 5.08. NOTIFICATION.................................................9
SECTION 6.01. USE OF PROCEEDS.............................................10
SECTION 6.02. CONDUCT OF BUSINESS.........................................10
SECTION 6.04. ACQUISITION AND DISPOSITION OF ASSETS.......................10
SECTION 6.05. INCURRENCE OF INDEBTEDNESS..................................10
SECTION 6.06. CAPITAL EXPENDITURE; INVESTMENTS............................10
SECTION 6.07. LOANS; GUARANTEES...........................................10
SECTION 6.08. PARTNERSHIP DISTRIBUTIONS...................................10
SECTION 6.09. MATERIAL AGREEMENTS.........................................11
SECTION 6.10. RELATED PARTY TRANSACTION...................................11
ARTICLE VII
EVENTS OF DEFAULT..........................................................11
SECTION 7.01. EVENTS OF DEFAULT...........................................11
SECTION 7.02. ACCELERATION; REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT..13
ARTICLE VIIIMISCELLANEOUS.....................................................13
SECTION 8.01. COSTS, EXPENSES AND ATTORNEYS' FEES.........................13
SECTION 8.02. AMENDMENTS, ETC.............................................14
SECTION 8.03. NOTICES, ETC................................................14
SECTION 8.04. INDEMNIFICATION.............................................14
SECTION 8.05. NO WAIVER; REMEDIES.........................................14
SECTION 8.06. ASSIGNMENTS AND PARTICIPATION...............................15
SECTION 8.07. EFFECTIVENESS; BINDING EFFECT; GOVERNING LAW................15
SECTION 8.08. WAIVER OF JURY TRIAL........................................15
SECTION 8.09. CONSENT TO JURISDICTION; VENUE; AGENT FOR
SERVICE OF PROCESS........................................16
SECTION 8.10. ENTIRE AGREEMENT............................................16
SECTION 8.11. SEPARABILITY OF PROVISIONS..................................16
SECTION 8.12. EXECUTION IN COUNTERPARTS...................................16
SECTION 8.13. INDEPENDENCE OF COVENANTS...................................16
SECTION 8.14. SURVIVAL OF REPRESENTATIONS.................................16
<PAGE>
LOAN AGREEMENT
This Loan Agreement (this "Agreement") dated as of August 12, 1996 is
entered into by and between Aer Force Communications B, L.P., a Delaware limited
partnership ("Borrower"), and LYNCH PCS CORPORATION F, a Delaware corporation
("Lender").
RECITALS:
WHEREAS, Borrower desires Lender to extend a loan to Borrower in such
amount and on such terms as set forth herein to acquire PCS Licenses pursuant to
the F-Block Auction; and
WHEREAS, Lender is prepared to make such Loan upon the terms and
subject to the conditions set forth herein only for the purposes of the
Partnership acquiring and operating PCS Licenses in the F-Block.
AGREEMENT:
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINED TERMS . As used in this Agreement, the following
terms have the following meanings:
"APPLICABLE RATE": An interest rate, compounded annually, equal to 15%
per annum.
"BUSINESS DAY": A day other than a Saturday, Sunday or other day on
which commercial banks in New York are authorized or required by law to close.
"LOAN DOCUMENTS": This Agreement, the Note, and all other documents
executed in connection with this Agreement and/or the Loan.
"MATURITY DATE": The Fifth (5th) Anniversary of the date hereof.
"NOTE": The promissory note substantially in the form of EXHIBIT A
hereto to be executed by Borrower, payable to the order of Lender.
"PARTNERSHIP AGREEMENT": The Partnership Agreement of Borrower dated as
of July 26, 1996.
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"SUBSIDIARY": Any corporation of which fifty percent (50%) or more of
the issued and outstanding voting securities are, directly or indirectly, owned
by Borrower or any Subsidiary of Borrower or any other entity of which fifty
percent (50%) or more of the ownership interests are owned, directly or
indirectly, by Borrower or any Subsidiary of Borrower.
SECTION 1.02. INCORPORATION OF CERTAIN TERMS BY REFERENCE . Capitalized
terms used herein but not otherwise defined shall have the meanings specified in
the Partnership Agreement as in effect on the date hereof.
ARTICLE II
THE LOAN
SECTION 2.01. THE INITIAL LOAN .
(a) THE LOAN. Lender agrees, on the terms and conditions hereinafter
set forth, to make a loan (the "Initial Loan") to Borrower in the aggregate
principal amount of Eleven Million, Eight Hundred Thousand Dollars
($11,800,000). The Initial Loan shall be made immediately prior to the date that
the Borrower is required to make up-front deposits to the FCC for the F-Block
Auction and shall be used by Borrower for such purpose and for the purposes set
forth in Paragraph (b) of this Section 2.01.
(b) MANDATORY PREPAYMENT.
(1) If after the termination of the F-Block Auction, Borrower
has any funds, including Initial Capital Contributions as provided in the
Partnership Agreement, which are not being used, or reasonably held for use, to
fund the initial 10% down payment (due within 5 business days after release of
the F-Block Auction closing notice) for any PCS Licenses won by Borrower in the
F-Block Auction, Borrower shall, upon the written demand of Lender, immediately
prepay the Initial Loan in an amount equal to such unused proceeds.
(2) If the FCC shall not grant any PCS Licenses to Borrower in
respect of any PCS Licenses won in the F-Block Auction or if any PCS License
granted to Borrower pursuant to the F-Block Auction is either transferred or
revoked, Borrower shall, upon the demand of Lender, immediately prepay all
amounts owed by Borrower to Lender under the Loan Documents. If no PCS Licenses
are granted to Borrower, Borrower shall not have to pay any interest or
commitment fees, but only to pay the principal of the Loan.
(3) The net proceeds from the sale by the Partnership of any
assets shall be used to prepay promptly a portion of the Loan equal to said net
proceeds.
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(4) Any prepayment under (b)(1) and (b)(3) hereof shall be
applied to the payment of any accrued and unpaid principal before any
application to principal.
(c) SUPPLEMENTAL LOANS. Lender agrees, on the terms and conditions set
forth, to make loans ("Supplemental Loans") to Borrower from time to time in an
aggregate principal amount up to the amount prepaid by Borrower pursuant to
Section 2.01 (b)(1); provided, however, that the total of the Initial Loan and
Supplemental Loans shall not exceed 60% of the cost (net of any bidding credits)
of all PCS Licenses granted to Borrower pursuant to the F-Block Auction, in each
case reduced by any amounts deemed to be Supplemental Loans pursuant to the
second succeeding sentence. Supplemental Loans shall only be used for the
following purposes:
(i) to fund the remaining 10% down payment due after PCS Licenses
are granted;
(ii) to make installment interest and principal payments on any PCS
Licenses granted to Borrower pursuant to Section 24.716 of the
FCC Rules;
(iii) to make payments pursuant to the next to last sentence of
Section 1 and the proviso clause of Section 2 of the Expenses
Agreement (the "Expenses Agreement") dated as of July 26, 1996
among the Partnership, the General Partner and the Initial
Limited Partner; and
(iv) any other business purposes approved in writing by Lender;
Supplemental Loans shall also include (1) all reasonable out-of-pocket expenses
(including reasonable attorneys' fees) of the Initial Limited Partner pursuant
to Section 1(b) of the Expenses Agreement and (2) all reasonable costs and
expenses (including reasonable attorneys fees) (a) incurred by Lender in
connection with the negotiation and preparation of this Agreement and each of
the other Loan Documents and (b) incurred by Lender or the lender to Lender with
respect to the borrowing contemplated by the last sentence of Section 8.06;
provided, however, that the amounts deemed Supplemental Loans under this
sentence shall not exceed $37,500. Lender's obligation to make Supplemental
Loans (1) is conditional on Borrower being in full compliance with all the
representations, warranties and covenants of Borrower contained in the Loan
Documents, no Event of Default hereunder having occurred, and the FCC not having
threatened to revoke any PCS Licenses granted to Borrower in the F-Block Auction
and (2) shall terminate on the earlier of the maturity of the Loan (whether at
the Maturity Date, by acceleration or otherwise) or the payment in full of the
Loan. The term "Loan" shall include the Initial Loan, the Supplemental Loans,
interest (including compounded interest) and all other amounts payable to Lender
under the Loan Documents.
3
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(d) COMMITMENT FEES. Borrower shall pay to Lender a commitment fee of
20% per annum from the date of the Initial Loan on the total Eleven Million
Eight Hundred Thousand Dollars ($11,800,000) commitment to make Loans (including
any used portion); provided, however, that the total dollar amount of such
commitment shall not exceed 60% of the cost (net of any bidding credits) of all
PCS Licenses granted to Borrower pursuant to the C-Block Auction (in each case
reduced by any amounts deemed to be the Supplemental Loans pursuant to the third
sentence of Section 2.01(c)). The commitment fees shall be due and payable,
without interest, on the date when the commitment to make Supplemental Loans
shall terminate pursuant to clause (2) of the next to last sentence of Section
2.01(c). If the commitment fees are not paid when so due and payable, the
commitment fees shall be deemed to bear interest at twice the Applicable Rate
until the date of payment. The commitment fees shall cease to accrue on the
earlier of the Maturity Date or the payment in full of the Loan.
SECTION 2.02. THE NOTE. The Loan made by Lender pursuant hereto shall
be evidenced by the Note, representing the obligation of Borrower to pay the
aggregate unpaid principal amount of the Loan made by Lender, with interest
thereon as prescribed in Section 2.05.
SECTION 2.03. PAYMENT OF PRINCIPAL . The entire unpaid principal amount
of the Loan, together with all accrued and unpaid interest thereon, shall be due
and payable on the Maturity Date.
SECTION 2.04. OPTIONAL PREPAYMENT . Borrower may, at its option, prepay
the Loan, without premium except as provided in the Note, in whole or in part at
any time and from time to time; provided that Lender shall have received from
Borrower notice of any such prepayment at least five (5) Business Days prior to
the date of the proposed prepayment, in each case specifying the date and the
amount of prepayment. Partial payments hereunder shall be in an aggregate
principal amount of $50,000 or any integral multiple thereof. Any such
prepayments shall be applied to the payment of any accrued and unpaid interest
before any application to principal.
SECTION 2.05. INTEREST RATE AND PAYMENT DATES .
(a) INTEREST RATE AND PAYMENT. The Loan shall bear interest on the
unpaid principal amount thereof from the date made through maturity (whether at
the Maturity Date, by acceleration or otherwise) at the Applicable Rate. All
accrued and unpaid interest on the Loan shall be compounded annually and payable
on the Maturity Date. Interest on the Loan shall be computed on the basis of a
360-day year for the actual number of days elapsed. In computing interest on the
Loan, the date of the making of the Loan shall be included and the date of
payment of the Loan shall be excluded.
4
<PAGE>
(b) DEFAULT INTEREST. Upon the occurrence, and during the continuation
of, any Event of Default, the principal amount of the Loan and any interest
accrued and unpaid thereon shall bear interest at the Applicable Rate plus 3%
per annum.
SECTION 2.06. SECURITY, OTHER.
(a) SECURITY. All amounts payable pursuant to the Loan Documents shall
be secured to the extent permitted by law by a security interest in all the
assets of Borrower.
(b) NOT EXCEED MAXIMUM RATE. Notwithstanding the foregoing, neither
interest on the Loan nor commitment and other fees shall exceed the highest rate
permitted by applicable law.
ARTICLE III
GENERAL PROVISIONS CONCERNING THE LOAN
SECTION 3.01. PAYMENTS . Borrower shall make each payment of principal,
interest and fees hereunder and under the Note, without setoff or counterclaim,
not later than 11:00 a.m. New York City time, on the day when due, in lawful
money of the United States of America to Lender by wire transfer sent to an
account designated in writing from time to time by Lender, in immediately
available funds. Payments received after such time shall be deemed to have been
paid by Borrower on the next succeeding Business Day.
SECTION 3.02. PAYMENT ON NON-BUSINESS DAYS . If any payment to be made
hereunder or under the Note shall be stated to be due on a day which is not a
Business Day, such payment may be made on the next succeeding Business Day, and
with respect to payments of principal, interest thereon shall be payable at the
then applicable rate during such extension.
SECTION 3.03. CONDITIONS; DOCUMENTATION . As a condition to the making
of the Loan, Borrower will execute and deliver or cause to be executed and
delivered to Lender such documents, instruments and certificates as Lender may
reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
SECTION 4.01. ORGANIZATION . Borrower is a limited partnership duly
formed and validly existing and in good standing under the laws of the State of
Delaware, is duly qualified to transact business in all jurisdictions in which
the conduct of its business requires such qualification, and has full
partnership power and authority to conduct its business and to enter into and
perform its obligations under the Loan Documents.
5
<PAGE>
SECTION 4.02. AUTHORIZATION . The execution, delivery and performance
of the Loan Documents by Borrower has been duly authorized by all necessary
partnership action on the part of Borrower. Each Loan Document has been duly
executed by Borrower and delivered by Borrower to Lender and constitutes the
legal, valid and binding obligation of Borrower, enforceable in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency or other laws affecting creditors' rights generally and the exercise
of judicial discretion in accordance with general equitable principles.
SECTION 4.03. NO CONFLICT . The execution, delivery and performance of
each Loan Document by Borrower, and the compliance with the terms and conditions
hereof and thereof by Borrower, does not, with or without the giving of notice
or the lapse of time or both, conflict with, breach the terms or conditions of,
constitute a default under, or violate the (i) Partnership Agreement, (ii) any
agreement to which Borrower is a party, or (iii) any judgment, decree, order,
law, rule or regulation applicable to Borrower.
SECTION 4.04. LITIGATION . There is no unsatisfied judgment, award,
order, writ, injunction, arbitration decision or decree outstanding or any
litigation, proceeding, claim or investigation pending or, to the best knowledge
of Borrower, threatened against Borrower which may adversely affect the ability
of Borrower to enter into and perform its obligations under Loan Documents.
SECTION 4.05. ACCURACY OF REPRESENTATIONS AND WARRANTIES; DISCLOSURE .
The representations and warranties of the General Partner set forth in the
Partnership Agreement are true and correct in all material respects. No
representation or warranty of Borrower set forth in this Agreement, or any
certificate or written statement furnished by Borrower or Lender for use in
connection with the transactions contemplated hereby, and no representation or
warranty of the General Partner set forth in the Partnership Agreement, contains
any untrue statement of material fact or omits to state a material fact
necessary in order to make the statements contained herein or therein not
misleading.
ARTICLE V
AFFIRMATIVE COVENANTS
Borrower covenants that so long as any of the Loan or any obligation of
Borrower under the Loan Documents remains outstanding, and until payment in full
of all obligations of Borrower subject hereto, Borrower shall:
SECTION 5.01. PUNCTUAL PAYMENTS . Punctually pay the interest and
principal in respect of the Loan and all other obligations under any of the Loan
Documents at the times and place and in the manner specified in the Loan
Documents.
6
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SECTION 5.02. ACCOUNTING RECORDS . Maintain adequate books and records
in accordance with generally accepted accounting principles consistently applied
("GAAP"), and permit any representative of Lender, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the same,
and to inspect the properties of Borrower.
SECTION 5.03. FINANCIAL STATEMENTS AND REPORTS . Provide to Lender the
following, in form and detail satisfactory to Lender:
(a) not later than ninety (90) days after the end of each
fiscal year of Borrower, an audited balance sheet of Borrower as of the end of
such fiscal year, and the related audited statements of operations and cash
flows of Borrower for the twelve-month period ended on the last day of such
fiscal year, in each case, prepared in accordance with GAAP, together with an
auditor's report thereon prepared by a nationally recognized firm of certified
public accountants;
(b) not later than thirty (30) days after the end of each
fiscal quarter of Borrower, an unaudited balance sheet of Borrower as of the
last day of such fiscal quarter and the related unaudited statements of
operations and cash flows of Borrower for the three (3) month period ended on
the last day of such fiscal quarter, in each case, prepared in accordance with
GAAP (subject to normal year-end adjustments and the absence of footnotes);
(c) within five (5) days of receipt by members of the
Partnership Committee, any written report (including any Business Plan or any
amendment thereto) provided to the members of the Partnership Committee
concerning the business, assets, condition (financial or otherwise) or prospects
of the Borrower or its business; and
(d) from time to time such other information as Lender may
reasonably request.
SECTION 5.04. COMPLIANCE . Maintain all PCS Licenses and all other
licenses, permits, governmental approvals, rights, privileges and franchises
necessary for the conduct of Borrower's business; conduct its business in an
orderly and regular manner and in a manner consistent with the terms of the
Partnership Agreement; and comply with the provisions of the Partnership
Agreement and all laws, rules, regulations and orders of any governmental
authority applicable to Borrower or its business.
SECTION 5.05. INSURANCE . Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to
Borrower's, including but not limited to fire, extended coverage, public
liability, property damage and workers' compensation, carried with companies and
in amounts satisfactory to Lender, and deliver to Lender from time to time at
7
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Lender's request schedules setting forth all insurance then in effect.
SECTION 5.06. FACILITIES . Keep all Borrower's properties useful or
necessary to Borrower's business in good repair and condition, and from time to
time make necessary repairs, renewals and replacements thereto so that
Borrower's properties shall be fully and efficiently preserved and maintained.
SECTION 5.07. TAXES AND OTHER LIABILITIES . Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal and including federal and state income taxes, except such as Borrower
may in good faith contest or as to which a bona fide dispute may arise, provided
provision is made to the satisfaction of Lender for eventual payment thereof in
the event that it is found that the same is an obligation of Borrower.
SECTION 5.08. NOTIFICATION . Promptly give notice in writing to Lender
of (i) the occurrence of any Event of Default or any event reasonably likely to
result in the occurrence of an Event of Default, or (ii) any material adverse
change in the business, assets, condition (financial or otherwise) or prospects
of Borrower.
SECTION 5.09. SUPPLEMENTAL LOANS REPLACEMENT. At the request of Lender,
Borrower will use its best efforts to refinance the Loan.
ARTICLE VI
NEGATIVE COVENANTS
Borrower further covenants that so long as the Loan or any obligation
under the Loan Documents remains outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower will not without the prior
written consent of Lender:
SECTION 6.01. USE OF PROCEEDS . Use any of the proceeds of the Loan
except for the purposes stated in Section 2.01 hereof.
SECTION 6.02. CONDUCT OF BUSINESS . Conduct any business other than the
Partnership Business.
SECTION 6.03. MERGER; CONSOLIDATION, ETC.. Merge, consolidate or
combine with any other Person or sell all or substantially all of Borrower's
assets or properties.
SECTION 6.04. ACQUISITION AND DISPOSITION OF ASSETS . Acquire, sell,
lease, exchange, transfer, mortgage, pledge, license or dispose of assets in any
transaction or series of related transactions involving consideration of a value
in excess of $100,000 in any 12-month period or $300,000 in the aggregate.
8
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SECTION 6.05. INCURRENCE OF INDEBTEDNESS . Incur indebtedness for
borrowed money, or refinance, modify or extend any indebtedness of Borrower for
borrowed money.
SECTION 6.06. CAPITAL EXPENDITURE; INVESTMENTS . Make any capital
expenditure, investment or capital contribution, or any commitment to make any
capital expenditure, investment or capital contribution in an amount in excess
of $100,000 in any 12-month period or $300,000 in the aggregate.
SECTION 6.07. LOANS; GUARANTEES . Make any loan or guarantee any
indebtedness or liability of any other Person.
SECTION 6.08. PARTNERSHIP DISTRIBUTIONS . Distribute any assets or
property of Borrower to any Partner of Borrower or redeem, repurchase or
otherwise retire for value any partnership interest of any Partner of Borrower.
SECTION 6.09. MATERIAL AGREEMENTS . Enter into (i) any Affiliation
Agreement, (ii) any joint venture, partnership or other similar agreement or
(iii) any agreement, contract or lease that is entered into other than in the
ordinary course of business or that involves the furnishing or receipt of
consideration to or by Borrower with value in excess of $100,000 in any 12-month
period or $300,000 in the aggregate.
SECTION 6.10. RELATED PARTY TRANSACTION . Enter into any Related Party
Transaction.
SECTION 6.11. MODIFICATION OF PCS LICENSES. Surrender, not seek
renewal, or seek the transfer, of any PCS License held by Borrower or agree to
any material modification to any PCS License held by Borrower.
SECTION 6.12. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, any of its assets of any kind, now
owned or hereafter acquired.
SECTION 6.13. SUBSIDIARY. Create or acquire any interest in any
Subsidiary.
SECTION 6.14. CHANGE IN BENEFITS. Continue to Partici- pate in the
F-Block Auction process or acquire any PCS License awarded to Borrower pursuant
to the F-Block Auction, if for any reason any of the benefits (including without
limitation bidding credits and instalment payment terms) available to a small
business as provided in the FCC Rules as of the date hereof shall cease to be
available to the Borrower.
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ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.01. EVENTS OF DEFAULT . The occurrence of any of the
following events shall constitute an event of default hereunder (an "Event of
Default"):
(a) Borrower shall fail to pay any portion of the principal or interest
of the Loan or other amount payable hereunder or under the Note when due; or
(b) Any representation or warranty made by Borrower herein or in
connection with any other Loan Document, shall prove to have been incorrect in
any material respect when made; or
(c) Borrower shall default in any material respect in the timely
performance of or compliance with any term or condition contained in any Loan
Document, and such default shall not have been remedied or waived for twenty
(20) Business Days after such failure, or any Partner (other then Lender) shall
default in any material respect in the performance of or compliance with any
term or condition of the Partnership Agreement or the Expenses Agreement, and
such default shall not have been remedied within ten (10) Business Days of such
default; or
(d) Borrower shall (i) have an order for relief entered with respect to
it under any federal or state bankruptcy law or any similar law relating to the
enforcement of creditors rights generally (a "BANKRUPTCY LAW") (ii) not pay, or
admit in writing his inability to pay its debts generally as they become due,
(iii) make an assignment for the benefit of its creditors, (v) apply for, seek,
consent to, or acquiesce in, the appointment of a receiver, custodian,
conservator, trustee, examiner, liquidator or similar official for his or any
substantial part of his property, (vi) institute any proceeding seeking an order
for relief under any Bankruptcy Law or seeking to adjudicate it a bankrupt or
insolvent, or seeking dissolution, winding up, liquidation, reorganization,
arrangement, adjustment or composition of it or its debts under any law relating
to bankruptcy, insolvency or reorganization or relief of debtors or fail to file
an answer or other pleading denying the material allegations of any such
proceeding filed against it, (vii) take any action to authorize or effect any of
the foregoing actions, or (viii) fail to contest in good faith any appointment
or proceeding described in this Subsection 7.01(d); or
(e) A receiver, custodian, conservator, trustee, examiner, liquidator
or similar official shall be appointed for Borrower or any substantial part of
its property, or a proceeding described in Subsection 7.01(d)(v) shall be
instituted against Borrower and such appointment continues undischarged or such
proceeding continues undismissed or unstayed for a period of 60 consecutive
days;
(f) There shall have occurred an event of dissolution of the
Partnership within the meaning of Section 9.1 of the Partnership Agreement; or
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(g) The FCC shall have revoked, or has instituted proceedings to
revoke, any PCS Licenses granted to the Borrower in the F-Block Auction;
(h) The General Partner shall have Transferred any of its interest in
the Partnership; or
(i) There shall have occurred a Change of Ownership of the General
Partner within the meaning of Section 7.4 of the Partnership Agreement.
SECTION 7.02. ACCELERATION; REMEDIES UPON OCCURRENCE OF EVENT OF
DEFAULT . Upon the occurrence of any Event of Default described in clause (d),
(e), (f), (g), (h) or (i) of Section 7.01, the Loan (together with accrued
interest thereon) and all other amounts owing under this Agreement, the Note and
the other Loan Documents shall automatically become due and payable, and upon
the occurrence of any other Event of Default, Lender may, by notice to Borrower,
declare the Loan (together with accrued interest thereon) and all other amounts
owing under this Agreement and the other Loan Documents to be due and payable
forthwith, whereupon the same shall immediately become due and payable. Except
as expressly provided above in this Section, presentment, demand, protest and
all other notices of any kind are hereby expressly waived.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. COSTS, EXPENSES AND ATTORNEYS' FEES . Borrower shall pay
to Lender immediately upon demand the full amount of all reasonable costs and
expenses (including reasonable attorneys' fees) incurred by Lender in connection
with (a) the preparation of amendments and waivers to the Loan Documents, (b)
the enforcement of Lender's rights and/or the collection of any amounts which
become due to Lender under any of the Loan Documents, and (c) the prosecution or
defense of any action in any way related to any of the Loan Documents, including
without limitation any action for declaratory relief.
SECTION 8.02. AMENDMENTS, ETC . No amendment or waiver of any provision
of the Loan Documents nor consent to any departure by Borrower or Lender
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the other party, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
SECTION 8.03. NOTICES, ETC . Except as otherwise set forth in this
Agreement, all notices and other communications provided for hereunder shall be
in writing (including telegraphic, telex or facsimile communication) and mailed
or telegraphed or telexed or sent by facsimile or delivered, to Borrower or
Lender at their respective addresses set forth on the signature page hereof;
11
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or, as to any other Person, at such other address as shall be designated by such
Person in a written notice to the other parties. All such notices and
communications shall be effective when deposited in the mails, sent by telex or
sent by facsimile, respectively, except that notices and communications to
Lender pursuant to Article II or VII shall not be effective until received by
Lender.
SECTION 8.04. INDEMNIFICATION. Borrower agrees to indemnify and hold
harmless Lender and the Collateral Agent and their respective affiliates,
directors, officers, employees, agents and advisors (each, an "Indemnified
Party") from and against any and all claims, damages, losses, liabilities and
expenses (including without limitation reasonable fees and expenses of counsel)
that may be incurred by or asserted or awarded against any Indemnified Party, in
each case arising out of or in connection with or by reason of, the preparation
for a defense of, any investigation, litigation or proceeding arising out of,
related to or in connection with the Loan Documents, the proposed or actual use
of the proceeds therefrom or any of the other transactions contemplated hereby
or thereby, whether or not such investigation, litigation or proceeding is
brought by Borrower, creditors of Borrower, an Indemnified Party or any other
Person or an Indemnified Party is otherwise a party thereto, and whether or not
the transactions contemplated hereby or by any other Loan Document are
consummated, except to the extent such claim, damage, loss, liability or
expenses is found in a final, non-appealable judgment by a court of competent
jurisdiction to have resulted from such Indemnified Party's gross negligence or
willful misconduct.
SECTION 8.05. NO WAIVER; REMEDIES . No failure on the part of Lender or
Borrower to exercise, and no delay in exercising, any right under any of the
Loan Documents shall operate as a waiver thereof, nor shall any single or
partial exercise of any right under any of the Loan Documents preclude any other
or further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
SECTION 8.06. ASSIGNMENTS AND PARTICIPATION . Lender may sell, assign,
transfer, negotiate or grant participation to any other party in all or part of
the obligations of Borrower outstanding under the Loan Documents without
Borrower's prior written consent. Lender may, in connection with any actual or
proposed assignment or participation, disclose to the actual or proposed
assignee or participant, any information relating to Borrower. Lender intends to
borrow the funds necessary to make Loans to Borrower under this Loan Agreement
and may assign this Agreement and the Note as security for such borrowing.
SECTION 8.07. EFFECTIVENESS; BINDING EFFECT; GOVERNING LAW . This
Agreement and each other Loan Document shall be binding upon and inure to the
benefit of Borrower, Lender and their respective successors and assigns, except
that Borrower shall not
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have the right to assign his rights hereunder or any interest herein without the
prior written consent of Lender. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
DELAWARE WITHOUT GIVING EFFECT TO ITS CHOICE OF LAW DOCTRINE.
SECTION 8.08. WAIVER OF JURY TRIAL . BORROWER AND LENDER HEREBY AGREE
TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY DEALINGS BETWEEN
THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION AND THE
LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. THE SCOPE OF THIS WAIVER
IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN
ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING,
WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS. LENDER AND BORROWER EACH ACKNOWLEDGE THAT
THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT
EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT, AND THAT
EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS.
LENDER AND BORROWER FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER
DOCUMENTS OR AGREEMENTS RELATING TO THE LOAN.
SECTION 8.09. CONSENT TO JURISDICTION; VENUE; AGENT FOR SERVICE OF
PROCESS . All judicial proceedings brought against Borrower with respect to the
Loan Documents may be brought in any state or Federal court of competent
jurisdiction in the State of Delaware, and by execution and delivery of this
Agreement, Borrower accepts for itself and in connection with its properties,
generally and unconditionally, the nonexclusive jurisdiction of the aforesaid
courts, and irrevocably agrees to be bound by any judgment rendered thereby in
connection with the Loan Documents. Borrower irrevocably waives any right it may
have to assert the doctrine of FORUM NON CONVENIENS or to object to venue to the
extent any proceeding is brought in accordance with this Section 6.09.
SECTION 8.10. ENTIRE AGREEMENT . The Loan Documents embody the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings
between the parties hereto relating to the subject matter hereof.
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SECTION 8.11. SEPARABILITY OF PROVISIONS . In case any one or more of
the provisions contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
SECTION 8.12. EXECUTION IN COUNTERPARTS . This Agreement may be
executed in any number of counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
SECTION 8.13. INDEPENDENCE OF COVENANTS . All covenants hereunder shall
be given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of an Event of Default if such action is taken or
condition exists.
SECTION 8.14. SURVIVAL OF REPRESENTATIONS . All representations and
warranties of Borrower contained in any Loan Document shall survive delivery of
the Note and the making of the Loan herein contemplated.
SECTION 8.15. NON-RECOURSE TO GENERAL PARTNER. Lender shall have no
recourse against the Partnership Committee members, any Partner, any member of
the General Partner Control Group, nor any of their respective officers,
directors, employees, agents, shareholders, partners or controlling persons, nor
any of their respective assets (except to the extent such assets are also assets
of the Borrower), for the payment of any principal of or interest on the Loan,
commitment fees, or any other amount due under any Loan Document, or for the
breach of any representation, warranty, covenant or agreement (other than any
covenant or agreement set forth in Sections 6.2 and 6.4 of the Partnership
Agreement) under any Loan Document.
SECTION 8.16. RATIFICATION. If the Board of Directors of Lynch Corporation, an
Indiana corporation, shall not ratify the execution of the Loan Agreement dated
as of August 12, 1996, between it, as borrower, and _______________, as lender,
by August 26, 1996, Borrower shall, at the request of Lender, promptly withdraw
its application to participate in the F-Block Auction and, as soon as it has
received back its up-front deposit, promptly repay the Initial Loan. At that
time, this Agreement will terminate.
IN WITNESS OF THEIR AGREEMENT, the parties have executed this Agreement
as of the date first set forth above.
"LENDER"
LYNCH PCS CORPORATION F
By:
-----------------------------
Name: Robert E. Dolan
Title: President
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"BORROWER":
AER FORCE COMMUNICATIONS B, L.P.
By: AER FORCE COMMUNICATIONS CORPORATION,
its General Partner
By:
-----------------------------
Victoria Kane
Title: President
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$11,800,000 August 12, 1996
FOR VALUE RECEIVED, Aer Force Communications B, L.P., a Delaware
limited partnership ("Borrower"), promises to pay to Lynch PCS Corporation F
("Lender") or order, by wire transfer sent to an account designated in writing
to Borrower from time to time by the holder hereof (or in such other manner or
at such other place as the holder hereof shall notify Borrower in writing), the
principal amount of Eleven Million Eight Hundred Thousand Dollars ($11,800,000)
or so much thereof as may have been loaned or deemed loaned by Lender to
Borrower pursuant to the Loan Agreement, with interest from the date hereof on
the unpaid principal balance hereunder at the rate of interest set forth in that
certain Loan Agreement of even date herewith between Borrower and Lender (the
"Loan Agreement"), including, without limitation, default interest as set forth
in Section 2.04 of the Loan Agreement. (Capitalized terms used herein and not
otherwise defined shall have the meanings given to such terms in the Loan
Agreement). The principal amount under this Note, and all accrued and unpaid
interest thereon, shall be due and payable on the Maturity Date, unless the
Maturity Date is extended or otherwise modified pursuant to the Loan Agreement.
Each payment under this Note shall first be credited against accrued
and unpaid interest, and the remainder shall be credited against principal. This
Note may be prepaid in whole or in part at any time, after five (5) Business
Days written notice of Borrower's intention to make any such prepayment, which
notice shall specify the date and amount of such prepayment. Partial payment
hereunder shall be in an aggregate principal amount of Fifty Thousand Dollars
($50,000) or any integral multiple thereof. The written notice of Borrower to
make a prepayment hereunder shall create an obligation of Borrower to pay the
amount specified on the date specified in such notice. Any prepayment shall be
without penalty except that interest shall be paid to the date of payment on the
principal amount prepaid.
Principal and interest shall be payable in lawful money of the
United States of America.
Upon the occurrence of an Event of Default under the Loan Agreement
the holder hereof may, at its option, without notice to or demand upon Borrower
or any other party, except as otherwise provided in the Loan Agreement, declare
immediately due and payable the entire principal balance hereof together with
all accrued and unpaid interest hereon, plus any other amounts then owing
pursuant to this Note or the Loan Agreement, whereupon the same shall be
immediately due and payable. On each anniversary of the date of any default
hereunder and while such default is continuing, all
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interest which has become payable and is then delinquent shall, without curing
the default hereunder by reason of such delinquency, be added to the principal
amount due under this Note, and shall thereafter bear interest at the same rate
as is applicable to principal. In no event shall such interest or other amounts
be charged under this Note which would violate any applicable usury law.
If any default occurs in any payment due under this Note, Borrower
promises to pay all reasonable costs and expenses, including reasonable
attorneys' fees and expenses, incurred by each holder hereof in collecting or
attempting to collect the indebtedness under this Note, whether or not any
action or proceeding is commenced, and hereby waives the right to plead any and
all statutes of limitation as a defense to a demand hereunder to the full extent
permitted by law. None of the provisions hereof and none of the holders' rights
or remedies hereunder on account of any past or future defaults shall be deemed
to have been waived by the holders' acceptance of any past due installments or
by any indulgence granted by the holder to Borrower.
Borrower waives presentment, demand, protest and notice thereof or
of dishonor, and agree that they shall remain liable for all amounts due
hereunder notwithstanding any extension of time or change in the terms of
payment of this Note granted by any holder hereof, any change, alteration or
release of any property now or hereafter securing the payment hereof or any
delay or failure by the holder hereof to exercise any rights under this Note or
the Loan Agreement.
All amounts payable by Borrower pursuant to the Loan Documents shall
be secured by a security interest in all of the assets of Borrower. Lender's
recourse against any Partner of the Lender (and certain others) for the payment
of the principal of, interest on or other sums payable under this Note shall be
limited as set forth in Section 8.15 of the Loan Agreement.
Each Loan, or other credit extension made under this Note will be
evidenced by a written record made by Lender indicating the amount and date of
such transaction. Such records of Lender shall be deemed by Borrower and Lender
to be sufficient evidence of loans made, or credit extended under this Note.
This Note shall be governed by, and construed in accordance with,
the laws of the State of Delaware without giving effect to its choice of law
doctrine.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly
executed the day and year first above written.
AER FORCE COMMUNICATIONS B, L.P.
By: Aer Force Communications Corporation,
its General Partner
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By:
--------------------------
Name: Victoria Kane
Title: President
18
SECURITY AGREEMENT
(Broadband Personal Communications Service, F Block: Auction Event No. 11)
License No. _______
This SECURITY AGREEMENT DATED ________, 1997, ("AGREEMENT"), dated this __st day
of ____, by and between AER FORCE COMMUNICATIONS B, L.P., a Delaware Limited
Partnership ("DEBTOR"), and the FEDERAL COMMUNICATIONS COMMISSION, an
independent regulatory agency of the United States ("COMMISSION" OR "SECURED
PARTY").
WITNESSETH
WHEREAS, Debtor has submitted the highest accepted bid for license
number _______ in the Broadband Personal Communications Service F Block auction
(hereinafter the "LICENSE") conducted by the Commission to assign such licenses;
WHEREAS, the Commission has duly determined to grant the License to
Debtor, subject to the terms and conditions set forth in the orders and
regulations of the Commission applicable to such licenses, and the
Communications Act of 1934, as amended;
WHEREAS, Debtor wishes to pay its auction price for the License by
installments through an Installment Payment Plan as provided by 47 C.F.R. ss.ss.
1.2110, 24.716 (hereinafter the "Installment Payment Plan") and undertakes to
hold the License under the terms and conditions set forth in the Commission's
orders and regulations, as amended, applicable to such licenses, and the
Communications Act of 1934, as amended and the terms and conditions of this
Agreement;
WHEREAS, the Commission has agreed to permit the Debtor to make payment
of the auction price for the License through an Installment Payment Plan; and
WHEREAS, as an additional condition to such agreement, Debtor has
agreed to execute the Installment Payment Plan Note of even date ("NOTE") and
enter into this Agreement and make the pledge and assignment of collateral
contemplated herein.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
contained herein and for other good and valuable consideration, the receipt,
adequacy, and sufficiency of which is hereby acknowledged, and in order to
induce the Commission to permit Debtor to pay
<PAGE>
the auction price for the License through the Installment Payment Plan, Debtor
hereby agrees with the Commission as follows:
1. PLEDGE AND ASSIGNMENT OF COLLATERAL FOR OBLIGATIONS UNDER NOTE.
Debtor hereby pledges, assignees, hypothecates, delivers, and sets over to the
Commission and grants to the Commission a first lien on and continuing security
interest in all of the Debtor's rights and interest in License (if and to the
extent it is ever determined that such License may be subject to a security
interest), and all proceeds, profits and products of any sale of or other
disposition thereof (collectively, the "COLLATERAL"), all as collateral security
for the prompt and complete payment when due (whether in accordance with the
schedule of payments, at the stated maturity, by acceleration, or otherwise) of
the unpaid Principal Amount plus all unpaid interest accrued thereon, and such
other additional costs, expenses, late charges, administrative charges,
attorneys fees, and default payments assessable under the terms of the Note, the
License, or the then-applicable orders, rules or regulations of the Commission
(all collectively, the "OBLIGATIONS"). It is expressly understood by Debtor that
all of the terms of the Note apply to this Agreement and that reference herein
to "this Agreement" includes both the Security Agreement herein and the Note.
For purposes of interpreting capitalized terms used in this Agreement, such
terms, unless otherwise defined in this Agreement, shall have the meaning
ascribed to them in the Uniform Commercial Code (Official Text and Comments,
American Law Institute).
2. INTEREST OF COMMISSION. It is understood and acknowledged by
Debtor that pursuant to Section 301 of the Communications Act of 1934, as
amended, the Commission is charged with the regulatory mandate to maintain
control over all channels of radio transmission (the "SPECTRUM"), and to provide
licenses for the use of such radio channels, but now ownership thereof. Debtor
understands and acknowledges that it holds a mere conditional license to use the
Spectrum with no ownership interest in the License (or any underlying right to
use the Spectrum), with no power to assign the License without the prior
approval of the Commission pursuant to Section 310(d) of the Communications Act
of 1934, as amended, and with no ability to retain the license without full and
continuing compliance with all terms and conditions of the License including
without limitation full and timely payment of all Debtor's financial obligations
under the Commission's installment payment plan. Debtor further understands and
acknowledges that it is giving a security interest to the Commission in the
Collateral only to assist the Commission in protecting its ability to enforce
the Commission's regulations which condition holding the license on compliance
with then-applicable orders and regulations of the Commission, including, but
not limited to, full and timely payment of all payments under the Installment
Payment Plan. To that end, and not in derogation of or in substitution for any
of the Commission's regulatory authority over the License or the right of the
Commission to cancel such license, or to have such License terminate
automatically, by reason of Debtor's failure to comply on a continuing basis
with the conditions of the License, Debtor hereby acknowledges that the
Commission has a first security interest in the Collateral, and Debtor shall not
dispute such first security interest, or the Commission's rights as a secured
party hereunder, or any of the Commission's rights under the License or under
the then-applicable orders, rules and regulations of the Commission, in any
legal or equitable proceeding in which Debtor, or any assignee or
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trustee of the estate of Debtor in bankruptcy, is a party. Nothing set forth
herein shall preclude the Debtor from granting to other parties a subordinated
security interest limited to a subordinated interest in the proceeds, if any,
arising from a Commission-authorized assignment of transfer of the License to a
third party (hereinafter a "Subordinated Security Interest"), provided however
that any such Subordinated Security Interest shall be subordinated to and in no
way inconsistent with the Commission's rights under the License or the
Commission's first security interest in the Collateral, including but not
limited to the proceeds of any disposition of the License, and further provided
that said Subordinated Security Interest shall not survive if the License is
rescinded, canceled, or revoked by regulatory action of the Commission or
otherwise for violation of the terms and conditions of the License, including
but not limited to regulatory action upon a default or Event of Default under
this Agreement or other failure of condition or violation of the License or of
47 C.F.R. ss. 1.2110. The Debtor shall provide to the Commission upon request
the name and address of any party with a Subordinated Security Interest in the
proceeds of any disposition of the License, and a copy of any documents setting
forth such a Subordinated Security Interest and such other documents related to
such Subordinated Security Interest as the Commission shall request.
3. COMPLIANCE WITH COMMISSION ORDERS AND REGULATIONS. Nothing in
this Agreement shall be deemed to modify any then-applicable orders and
regulations of the Commission or of the License, and nothing in this Agreement
shall be deemed to release Debtor from compliance therewith.
4. REPRESENTATIONS AND WARRANTIES OF DEBTOR. Debtor represents and
warrants to the Commission as follows:
(a) It has full power, authority and legal right to execute,
deliver and perform this Agreement, the Note, and any other documents
delivered in connection with the Note, this Agreement and the
transactions contemplated therein, to make the debt transaction
evidenced by the Note, and to pledge the Collateral pursuant to this
Agreement.
(b) It is a dully organized Limited Partnership, existing in
good standing under the laws of Delaware and is duly qualified to do
business wherever necessary to carry on its present operations. Its
principal place of business and chief executive office are located at
Rye, New York.
(c) The representative of Debtor purporting to act on behalf
of Debtor in executing this Agreement, the Note, and any other
documents delivered in connection with the Note, this Agreement and the
transactions contemplated therein, is duly authorized by Debtor to take
all such acts and to execute all such documents.
(d) No security agreements have been executed and delivered,
and no financing statements have been filed in any jurisdiction,
granting or purporting to grant a security interest in the Collateral
that would give any other person any right or interest in the
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Collateral, or any portion thereof, except for a Subordinated Security
Interest, as defined herein, and that no person has a secured interest
that is or will be in any way inconsistent with the rights of the
Commission herein as the first secured party or the terms of this
Agreement.
(e) No consent of any other party and no consent, license,
approval or authorization of, exemption by, or registration or
declaration with, any governmental instrumentality, domestic or foreign
other than the Commission, is required to be obtained in connection
with the execution, delivery or performance of this Agreement, the Note
or any other document executed and delivered in connection with the
delivery of the Note or this Agreement.
(f) The execution, delivery and performance of this Agreement
and the Note does not and will not violate any provision of any
applicable law or regulation or any order, judgment, writ, award or
decree of any court, arbitrator, governmental instrumentality, domestic
or foreign, or of any indenture, contract, agreement or other
undertaking to which Debtor is a party or which purports to be binding
upon of Debtor or upon any of Debtor's assets, and will not result in
the creation or imposition of any lien, charge or encumbrance on or
security interest in any of the assets of Debtor, except as
contemplated by this Agreement.
(g) Debtor will not permit any financing statement to be filed
with respect to the Collateral or any portion thereof or interest
therein that would give any other person a right or any interest in the
Collateral, or any portion thereof, except that Debtor may permit a
third party to file a Subordinated Security Interest, as defined
herein, so long as said Subordinated Security Interest, is not in any
way inconsistent with the terms of this Agreement and the rights of the
Commission herein as the first secured party. Debtor will promptly
notify Secured Party of, and will defend the Collateral against, all
claims and demands, of all persons at any time claiming the same or any
interest therein that would give any other person a right or any
interest in the Collateral not subordinated to the rights of the
Commission herein as the first secured party, or that is in any way
inconsistent with the terms of this Agreement.
5. COVENANTS OF DEBTOR. Debtor hereby covenants and agrees as
follows:
(a) That it will defend the Commission's right, title and
security interest in and to the Collateral against the claims and
demands of all persons whomsoever.
(b) That it will execute all financing statements and other
instruments or documents related to the perfection of the Commission's
security interest, including but not limited to any renewal financing
statements or instruments as required to maintain the Commission's
security interest, or as otherwise reasonably requested by the
Commission, and to file and pay the cost of filing any such instruments
or documents as required under
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this paragraph in whichever public office deemed advisable by the
Commission.
(c) That it will not make any indenture, contract, agreement
or other undertaking to which Debtor is a party or which purports to be
binding upon Debtor, or upon any of Debtor's assets, that would result
in the creation or imposition of any lien, charge or encumbrance on or
security interest in any of the assets of Debtor that would give any
other person a right or any interest in the Collateral, or any portion
thereof, except for a Subordinated Security Interest, as defined
herein, provided further that such Subordinated Security Agreement
shall not be inconsistent with the terms of this Agreement and interest
of the Commission as the first secured party.
(d) That it will pay all costs and expenses, including
reasonable attorneys' fees, of the Commission incurred in connection
with the enforcement of this Agreement and any and all liability
incurred by the Commission resulting from any act or omission of Debtor
with respect to the Collateral and this Agreement.
(e) That it will execute, alone or with Secured Party, any
document, procure any document, and do all other acts and pay all
connected costs, in a timely and proper manner, which from the
character or use of the Collateral may be reasonably necessary to
protect the Collateral against the rights, claims or interests of third
persons, and will otherwise preserve the Collateral as security
hereunder. The specific undertakings required of Debtor in this
Agreement shall not be construed to exclude the aforementioned general
obligation.
6. POWER OF ATTORNEY. Debtor hereby irrevocably constitutes and
appoints the Commission and any officer or agent thereof, with full power of
substitution, as its true and lawful attorney-in-fact with full irrevocable
power and authority in the place and stead of Debtor and in the name of Debtor
or in its own name, from time to time in the Commission's discretion, for the
purpose of carrying out the terms of this Agreement and, to the extent permitted
by applicable law, to take any and all appropriate actions and to execute any
and all documents and instruments which may be necessary or desirable to
accomplish the purposes of this Agreement. Such appointment is a power coupled
with an interest until all Obligations have been paid in full by debtor.
7. EVENT OF DEFAULT. Debtor shall be in default under this Agreement
if an Event of Default (as defined in the Note) has occurred.
8. REMEDIES. If an Event of Default shall occur, the Commission
shall thereafter have the following rights and remedies (to the extent permitted
by applicable law) in addition to the rights and remedies relating to the Note,
all such remedies being cumulative, not exclusive, and enforceable
alternatively, successively or concurrently at such tim or times as Commission
deems expedient:
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(a) the License shall be automatically canceled pursuant to 47
C.F.R. ss.1.2110;
(b) all Obligations secured hereunder shall become immediately
due and payable without presentment, demand, protest, further notice,
or other requirements of any kind;
(c) the Commission may demand, sue for, and collect the
outstanding balance of the unpaid Obligations, and make any compromise,
or settlement the Commission deems suitable with respect to any
Collateral which may be held by it hereunder;
(d) Debtor hereby acknowledges the Commission's authority,
pursuant to the Communications Act of 1934, as amended, and the
Commission's orders and regulations then-applicable to such licenses,
to conduct another public auction or assign the License in the event
that the Commission rescinds, cancels, or revokes the License for any
default under this Agreement or any other violation of the terms and
conditions of the License. Debtor hereby waives all notices prior to
the conduct of said public auction or assignment by the Commission or
its agents. Debtor further acknowledges that in the event that the
Commission rescinds, cancels, or revokes the License for any default
under this Agreement or any other violation of the terms and conditions
of the License, Debtor has no right or interest in any moneys or
evidence of indebtedness given to the Commission by a subsequent
licensee of the Spectrum and that all such moneys or evidence of
indebtedness are, and shall remain, the full property of the federal
Treasury, pursuant to Section 309(j) of the Communications Act of 1934,
as amended, and then-applicable Commission orders and regulations.
(e) In addition to other remedies hereunder, Debtor shall
remain liable, and obligated to pay on demand, all costs of collection
and reasonable attorneys' fees and expenses incurred or paid by the
Commission in enforcing this Agreement including, without limitation,
all administrative fees and expenses of the Commission in attempting to
collect the Obligations or to enforce this Agreement, or the
prosecution or defense of any action or proceeding related to the
subject matter of this Agreement, and all payments assessed by the
Commission in the event of default as specified in Commission orders
and regulations applicable to such licenses.
(f) Debtor hereby acknowledges that the Commission has no
adequate remedy at law with respect to a breach of any covenant
contained in this Agreement and, as a consequence, agrees that each and
every covenant contained in this Agreement shall be specifically
enforceable against Debtor, and Debtor hereby waives and agrees not to
assert any defense against an action for specific performance of such
covenants.
(g) Secured Party may exercise any and all of the rights and
remedies conferred upon Secured Party by this Agreement, any other loan
documents, or by applicable law, either concurrently or in such order
as Secured Party may determine.
6
<PAGE>
(h) Secured Party may make such payments and do such acts as
Secured Party may deem necessary to protect is security interest in the
Collateral.
(i) The Commission may exercise any remedies of a Secured
Party under the Uniform Commercial Code (Official Text and Comments,
American Law Institute), or any other applicable law.
(j) Secured Party shall have the right to enforce one or more
remedies hereunder or under the Note, successively or concurrently, and
such action shall not operate to estop or prevent Secured party from
pursuing any further remedy which it may have.
9. SEVERABILITY. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent such prohibition or unenforceability, without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10. NO WAIVER; CUMULATIVE REMEDIES. None of the terms or provisions
of this Agreement may be waived, altered, modified or amended except by an
instrument in writing, duly executed by the Commission. The Commission shall not
by any act, delay, omission or otherwise be deemed to have waived any of its
rights or remedies under this Agreement, and no waiver shall be valid unless in
writing, signed by the Commission, and then only to the extent therein set
forth. A wavier by the Commission of any right or remedy under this Agreement on
any one occasion shall not be construed as a bar to any right or remedy which
the Commission would otherwise have on any future occasion. No failure to
exercise nor any delay in exercising on the part of the Commission, any right,
power or privilege under this Agreement shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power and privilege under
this Agreement preclude any other or further exercise thereof or the exercise of
any other right power or privilege. The rights and remedies provided in this
Agreement are cumulative and may be exercised singly or concurrently and are not
exclusive of any rights or remedies provided by law.
11. COMPLIANCE WITH OTHER APPLICABLE ORDERS AND REGULATIONS. Debtor
recognizes that its continued retention of the License, and rights to operate as
a Commission licensee thereunder, are conditioned upon compliance with all
Commission orders and regulations applicable to the License and the
Communications Act of 1934, as amended. Debtor further recognizes that full and
timely payment as set forth in the Note does not otherwise relieve it of its
obligations otherwise to comply with the then-applicable orders and regulations
of the Commission, and the Communications Act of 1934, as amended.
12. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with Communications Act of 1934, as amended, then-applicable
Commission orders and regulations, as amended, and federal law.
7
<PAGE>
13. SUCCESSORS, ASSIGNS, DESIGNATED AGENTS. Subject to the provisions
of Section 2 of this Agreement regarding the restriction upon Debtor's ability
to assign the License, this Agreement shall be binding upon Debtor, its
successors and assigns and shall inure to the benefit of the Commission, and its
successors and assigns. The Commission may designate agents other than the
Commission to act on its behalf with respect to any and all rights and remedies
of the Commission under this Agreement or the Note, and such designee shall have
all of the rights, powers and remedies available to the Commission within the
scope of its designation. Nothing herein, however, shall be construed as
granting Debtor any right to sell or assign the License.
14. SINGULAR AND PLURAL. Wherever used, the singular number shall
include the plural, the plural shall include the singular, and the use of any
gender shall be applicable to all genders.
15. FINANCING STATEMENTS. To the extent permitted by applicable law,
Debtor authorizes the Commission to sign and file financing statements at any
time with respect to any of the Collateral without the signature of Debtor.
Debtor will, however, at the same time and from time to time, execute such
financing statements, agreements and other instruments and perform such acts as
Commission may request in order to establish and maintain a validly perfected
first priority security interest in the Collateral. The Parties hereby agree
that the Secured Party may file a carbon, photographic or other reproduction of
this Agreement to serve as a financing statement, and the parties further agree
that such a carbon, photographic, or other reproduction of this Agreement shall
be sufficient as a financing statement in lieu of filing the original executed
document. All reasonable costs of filing and recording will be paid by Debtor.
16. INDEMNIFICATION. Debtor hereby agrees to defend, indemnify and
hold harmless Secured Party and its employees, officers and agents from and
against any and all liabilities, claims and obligations which may be incurred,
asserted or imposed upon them or any of them as a result of or in connection
with any use, operation, lease or consumption of any of the Collateral or as a
result of Secured Party's seeking to obtain performance of any of the
obligations due with respect to the Collateral.
17. NOTICES. All notices, requests and demands hereunder shall be in
writing and shall deemed to have been duly given, made or served on the earliest
of (i) three (3) business days after the date mailed if sent by first-class U.S.
mail, postage prepaid, (ii) actual delivery thereof if delivered by hand to the
party to be notified, (iii) receipt thereof if sent by express mail or other
overnight courier service, or (iv) transmission to the telecopier number listed
below for the party to be notified if sent within normal business hours or,
otherwise, on the next business day thereafter. In each as such notification
with respect to the Debtor and the Commission shall be addressed as set forth
below or as may be hereafter designed by the respective parties hereto.
8
<PAGE>
AS TO DEBTOR:
Aer Force Communications B, L.P.
350 Stuyvesant Avenue
Rye, New York 10580
Attn: Victoria Kane
AS TO THE COMMISSION:
U.S. Mail:
Federal Communications Commission
C/O United States Treasury Department
Financial Management Service
Attn.: Cecilia Crandall
P.O. Box 2451
Birmingham, AL 35201
Express mail or overnight courier service:
Federal Communications Commission
C/O United States Treasury Department
Financial Management Service
Attn.: Cecilia Crandall
190 Vulcan Road
Homewood, AL 35209
(205) 912-6322 (Telecopier number)
with copies to:
Federal Communications Commission
Office of the General Counsel
Attn.: PCS Note and Security Agreement
1919 M Street, N.W.
Room 614
Washington, D.C. 20554
Federal Communications Commission
Wireless Telecommunications Bureau
Auctions and Industry Analysis Division
Attn.: PCS Note and Security Agreement
2025 M Street, N.W.
Room 5322
Washington, D.C. 20554
[SIGNATURE PAGE FOLLOWS]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
DEBTOR:
AER FORCE COMMUNICATIONS B, L.P.
Date:_________ By: Aer Force Communications, Inc.
Its: General Partner
By:__________________________________,
Victoria Kane Its: President
Its: President
FEDERAL COMMUNICATIONS COMMISSION
Date:_________ By: ________________________
Its: Associate Managing Director for Operations (or
Designee)
10
INSTALLMENT PAYMENT PLAN NOTE
(Broadband Personal Communications Service, F Block: Auction Event no. 11)
US $____________
Washington, D.C.
Execution Date: __________, 1997
License NO.: _______ Effective Date: ________, 1997
FOR VALUE RECEIVED, the undersigned, AER FORCE COMMUNICATIONS B, L.P.,
a Delaware Limited Partnership ("MAKER"), promises to pay to the order of the
FEDERAL COMMUNICATIONS COMMISSION, an independent regulatory agency of the
United States ("PAYEE" or "COMMISSION"), the principal sum of $____________
DOLLARS ("PRINCIPAL AMOUNT"), together with accrued interest, computed at the
annual rate of ___________________ percent (____%) per annum ("ANNUAL RATE") on
the unpaid Principal Amount hereof, from the date of this Note until the date
the entire Principal Amount has been paid in full. This Note is executed on the
Execution Date set forth above but is intended for all purposes to be effective
as of ________, 1997.
Interest and principal shall be payable as set forth below and in
accordance with Schedule A attached hereto and made a part hereof;
Interest only, at the Annual Rate from the date hereof shall be due and
payable in equal consecutive quarterly installments of $_________, due on
_______, 1997 and every year on _______, __________, __________, and ________
thereafter through and including _________, 1999.
Commencing with the payment due on _______, 1999, Maker shall pay
principal and interest in equal quarterly installments of $_________, due on
_______, __________, __________, and ________ of every year hence through and
including __________, 2007.
The entire unpaid Principal Amount, together with accrued and unpaid
interest thereon, and all other remaining obligations of maker hereunder, if not
sooner paid, shall be due and payable on _______, 2007 ("MATURITY DATE").
All interest shall be computed on the basis of 360-day year for actual
days elapsed.
All payments to be made hereunder, of principal, interest, costs,
expenses, or other sums due hereunder, shall be made to the holder of this Note
in lawful money of the United States of America which at the time of payment
shall be legal tender for the payment of public and private
<PAGE>
debts, free and clear and without reduction by reason of any present or future
income, stamp or other taxes, levies, imposts, deductions, charges, compulsory
loans or withholdings whatsoever, including interest thereon or penalties with
respect thereto, if any imposed, assessed, levied or collected by any political
subdivision or taxing authority thereof or therein, on or in respect of this
Note or the obligations it evidences. All payments shall be made during normal
business hours at the Commission's designated lockbox location as set forth from
time to time in the Commission's then-applicable orders and regulations and/or
public notices.
This Note is secured by, and entitled to the benefits of, a Security
Agreement (the "SECURITY AGREEMENT") of even date between Maker and Payee. All
the terms, covenants, conditions and agreements contained in the Security
Agreement are hereby incorporated herein and made part of this Note to the same
extent and effect as if fully set forth herein. It is expressly understood by
Maker that all of the terms of the Security Agreement apply to this Note, and
that reference in the Security Agreement to "THIS AGREEMENT" includes both the
Security Agreement and this Note.
IT IS HEREBY EXPRESSLY AGREED THAT TIME IS OF THE ESSENCE FOR THE
PERFORMANCE OF EACH AND EVERY OF THE TERMS AND CONDITIONS UNDER THIS NOTE AND
THE SECURITY AGREEMENT.
A default under this Note ("EVENT OF DEFAULT") shall occur upon any or
all of the following:
a. Any non-payment by Maker of any Principal and/or Interest on
the due date as specified hereinabove if the Maker remains delinquent for more
than 90 days and
(1) Maker has not submitted a request, in writing, for
grace period or extension of payments, if any such
grace period or extension of payments is provided for
in the then-applicable orders and regulations of the
Commission; or
(2) Maker has submitted a request, in writing, for a
grace period or extension of payment, if any such
grace period or extension of payment is provided for
in the then-applicable orders and regulations of the
Commission, and following the expiration of the grant
of such grace period or extension or upon denial of
such a request for a grace period or extension, Maker
has not resumed payments of Principal and/or Interest
in accordance with the terms of this Note; or
b. An involuntary case is commenced against the Maker (or any of
Maker's Affiliates) and the petition shall not have been dismissed, stayed,
bonded or discharged within sixty (60)
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<PAGE>
days after commencement of the case; or a court having jurisdiction in the
premises shall enter a decree or order for relief in respect of the Maker (or
any of the Maker's Affiliates) in an involuntary case, under any applicable
bankruptcy, insolvency or other similar law now or hereinafter in effect, or any
other similar relief shall be granted under any applicable federal, state, local
or foreign law; or,
c. A decree or order of a court having jurisdiction in the
premises for the appointment of a receiver, liquidator, sequestrator, trustee,
custodian or other officer having similar powers over the Maker (or any of the
Maker's Affiliates) or over all or a substantial part of the property of the
Maker (or any of the Maker's Affiliates) shall be entered; or an interim
receiver, trustee or other custodian of the Maker (or any of the Maker's
Affiliates) or of all or a substantial part of the property of the Maker (or any
of the Maker's Affiliates) shall be appointed or a warrant of attachment,
execution, or similar process against any substantial part of the property of
the Maker (or any of the Maker's Affiliates) shall be issued and any such event
shall not be stayed, dismissed, bonded or discharged within sixty (60) days
after entry, appointment or issuance; or
d. The Maker (or any of the Maker's Affiliates) shall (1)
commence a voluntary case under any applicable bankruptcy, insolvency or other
similar law not or hereafter in effect, (2) consent to the entry of an order for
relief in an involuntary case, or to the conversion of an involuntary case to a
voluntary case, under any such law, (3) consent to the appointment of or taking
possession by a receiver, trustee or other custodian for all or a substantial
part of its property, (4) make any assignment for the benefit of creditors, or
(5) take any corporate action to authorize any of the foregoing; or
e. Any failure by Maker to comply with any other condition (as
set forth in the Security Agreement) for holding the above referenced License as
set forth in the License or in the Communications Act of 1934, as amended, or
then-applicable orders and regulations of the Commission, and such failure is
not cured within five (5) business days after notice of same from the Payee or
its designee; or
f. Any violation by Maker of any other covenant or term of this
Note or the Security Agreement, and such violation is not cured within five (5)
business days after notice of same from Payee or its designee.
As sued herein, "Affiliate" shall mean any individual or entity that:
(i) directly or indirectly controls or has the power to control the Maker, or
(ii) is directly or indirectly controlled by Maker, or (iii) is directly or
indirectly controlled by a third party or parties that also controls or has the
power to control the Maker. "Affiliate" shall not include, however, such persons
or entities as Payee shall agree, in writing, may be excluded form such
definition.
Upon any Event of Default under this Note, Payee may assess a late fee
and/or
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<PAGE>
administrative charge, plus the costs of collection, litigation, attorneys' fees
and default payment as specified in the then-applicable orders and regulations
of the Commission, as amended, and Maker acknowledges that it is liable and
herein expressly promises to pay on demand such additional costs, expenses, late
charges, administrative charges, attorneys fees, and default payment. The Maker
hereby acknowledges that a late fee of 5% (FIVE PERCENT) of the payment due
shall be added to each payment of moneys due under this Note that is not timely
paid under the terms of this Note.
Upon any Event of Default under this Note, the unpaid Principal Amount,
plus all unpaid interest accrued thereon, together with any late fee and/or
administrative charge, plus the costs of collection, litigation, attorneys'
fees, and default payment as specified in the then-applicable orders and
regulations of the Commission, as amended, shall become immediately due and
payable.
The Maker hereby acknowledges that the Commission has granted Maker the
above referenced License pursuant to the Communications of 1934, as amended,
conditioned upon full and timely payment of financial obligations under the
Commission's installment payment plan, as set forth in the then-applicable
orders and regulations of the Commission, as amended, addition to the rights and
remedies set forth in this Note and the Security Agreement and regardless of the
enforceability thereof, and that the sanctions and enforcement authority of the
Commission, including the cancellation of the License, shall remain applicable
in the event of a failure to comply with the terms and conditions of the
License. Maker further acknowledges the rights of the Payee under this Note and
the Security Agreement shall be in addition to, and in no respect in derogation
of or in substitution for the rights of the Commission under the License and
under the then-applicable orders and regulations of the Commission, and that
nothing in this Note or the Security Agreement shall limit the right of the
Commission to treat the License as a conditional license dependant on full and
complete compliance by the Maker at all times with all the terms and conditions
of the License, including full and timely payment of financial obligations under
the Commission's installment payment plan.
No delay or omission on the part of Payee in exercising any right under
this Note, the Security Agreement, the License, or any other instrument securing
this Note, shall operate as a waiver of such right or of any other right of
Payee, nor shall any waiver by Payee of any such right or rights on any one
occasion be deemed a bar to or waiver of the same right or rights on any future
occasion.
Maker is liable for all costs of collection of enforcement of the
Payee's rights under this Note, the Security Agreement, the License or under any
other instrument now or hereafter executed by the Maker in favor of Payee which
in any manner evidences, governs or secures this Note, including reasonable
attorneys' fees, whether suit is brought or not, and all such costs shall be
paid by the Maker on demand, and whether or not such collection or enforcement
occurs in
-4-
<PAGE>
any bankruptcy, reorganization, receivership or other proceedings involving
creditors' rights or involving a claim under this Note or any of the other
documents evidencing, governing or security the obligation of Maker to fully and
timely pay all obligations of Maker under the Commission's installment payment
plan.
Maker, all endorsers and guarantors hereof and any other party who pay
become liable for all or any part of the obligation evidenced hereby, waive
presentment for payment, notice or dishonor, protest and notice of protest,
notice of nonpayment and any and all lack of diligence or delays in collection
or enforcement of or with respect to this Note, the Security Agreement, or the
License.
Maker may prepay all or any of the Principal Amount without premium or
penalty upon ten (10) days' prior written notice to Payee, given in the manner
provided in the Security Agreement.
Partial prepayments shall not postpone or reduce regular payments to be
made hereunder. All such prepayments shall be applicable first to the payment of
late charges, if any, costs and expenses, and administrative penalties due
hereunder, then to accrued and unpaid interest, then to that portion of the
unpaid Principal Amount due on the Maturity Date and then, if applicable, to any
unpaid installments of principal in the inverse order of installment maturities.
The Payee may require that any partial prepayments be made on the dates
installments of principal and/or interest are due hereunder.
Anything to the contrary notwithstanding, Payee shall not charge, take
or receive, and Maker shall not be obligated to pay to Payee, any amounts
constituting interest on the Principal Amount in excess of the maximum rate
permitted by applicable law. If by reason of the acceleration of the unpaid
Principal Amount or otherwise, interest in excess of the highest legal contract
rate permitted by applicable law shall at any time be paid, any such excess
shall constitute and be treated as a payment of outstanding principal hereunder
and shall operate to reduce such outstanding Principal Amount.
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS NOTE, THE SECURITY
AGREEMENT, OR OTHER DOCUMENT EVIDENCING, GOVERNING OR SECURING THE OBLIGATIONS
EVIDENCED HEREBY (OTHER THAN ACTION BY THE COMMISSION PURSUANT TO THE LICENSE,
ITS RULES, OR REGULATIONS, WHICH SHALL BE BROUGHT BEFORE THE COMMISSION) SHALL
ONLY BE BROUGHT IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
COLUMBIA, AND, BY EXECUTION AND DELIVERY OF THIS NOTE AND SECURITY AGREEMENT,
THE MAKER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURT, THE
-5-
<PAGE>
PARTIES HERETO HEREBY IRREVOCABLY WAIVE ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, WHICH ANY OF THEM MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY SUCH ACTION OR PROCEEDINGS IN THE DISTRICT OF COLUMBIA.
THE MAKER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF THE
AFOREMENTIONED COURT IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF A COPY
THEREOF BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, TO THE
MAKER AT ITS ADDRESS PROVIDED IN THE SECURITY AGREEMENT. SUCH SERVICE SHALL BE
DEEMED TO HAVE OCCURRED ON THE THIRD DAY AFTER SUCH MAILING. NOTHING CONTAINED
HEREIN SHALL AFFECT THE RIGHT OF PAYEE TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE
MAKER IN ANY OTHER JURISDICTION.
EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, WILLINGLY, VOLUNTARILY,
UNCONDITIONALLY, IRREVOCABLY AND INTENTIONALLY FOREVER WAIVES ANY RIGHT IT MAY
HAVE TO TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS NOTE, THE SECURITY AGREEMENT, OR OTHER
DOCUMENTS EVIDENCING OR SECURING THE DEBT TRANSACTION EVIDENCED HEREBY, ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (VERBAL OR WRITTEN) OR ACTION
OF ANY PERSON OR ANY EXERCISE BY ANY PARTY OF ITS RESPECTIVE RIGHTS UNDER THIS
TRANSACTION, DOCUMENT OR ANY RELATED DOCUMENT OR IN ANY WAY RELATING TO THE
COLLATERAL (INCLUDING, WITHOUT LIMITATION, ANY ACTION TO RESCIND OR CANCEL THIS
TRANSACTION OR ANY CLAIMS OR DEFENSES ASSERTING THAT THIS TRANSACTION, IN WHOLE
OR IN PART, WAS FRAUDULENTLY INDUCED OR IS OTHERWISE VOID OR VOIDABLE). MAKER
REPRESENTS THAT NO ORAL OR WRITTEN STATEMENTS HAVE BEEN MADE BY ANY PARTY TO
EXCLUDE THIS SUBMISSION TO JURISDICTION AND WAIVER OF TRIAL BY JURY OR IN ANY
WAY TO MODIFY OR NULLIFY ITS STATED EFFECT. MAKER FURTHER REPRESENTS THAT IT HAS
BEEN REPRESENTED BY INDEPENDENT COUNSEL, SELECTED BY ITS OWN FREE WILL, IN
SIGNING THIS NOTE AND IN THE MAKING OF THIS WAIVER AND THAT IT HAS HAD THE
OPPORTUNITY TO DISCUSS THIS WAVIER WITH SUCH COUNSEL. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR PAYEE TO ENTER INTO THIS TRANSACTION AND THE VARIOUS
DOCUMENTS RELATED THERETO.
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<PAGE>
Maker acknowledges that this Note and Security Agreement (and any
attachments affixed thereto by the Payee with the permission and knowledge of
the Maker), along with the terms of the License and the then-current applicable
Commission orders and regulations and the Communications Act of 1934, as
amended, set forth the entire agreement, written and oral, of the parties
concerning the granting of the License and the conditions under which Maker is
entitled to hold the License, and all inconsistent prior statements,
understandings, notices, representations and agreements between the parties,
oral or written, are superseded by and merged in the License, the then-current
applicable Commission orders and regulations, this Note, the Security Agreement
or other documents evidencing, governing or security the obligations evidenced
hereby. Notwithstanding the foregoing, Maker's rights shall be subject to all
Commission rules and regulations with respect to representations made by the
Maker in connection with its application for the License or otherwise.
If any provisions or part of this Note and/or Security Agreement shall
for any reason be held or deemed to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Note and this Note shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein and
the remaining provisions of this Note shall remain in full force and effect. The
enforceability of the Note and/or the Security Agreement do not limit the
obligations of the Maker or the rights of the Commission under the
Communications Act of 1934, as amended, under the License, or under the
then-applicable orders and regulations of the Commission, as amended.
Any notice demand or request hereunder shall be given in the manner set
forth in the Security Agreement.
This Note shall be governed by and construed in accordance with the
Communications Act of 1934, as amended, the then-applicable orders and
regulations of the Commission, and federal law. Nothing in this Noes shall be
deemed to modify any then-applicable orders and regulations of the Commissions
or the conditions of the License, and nothing in this Note shall be deemed to
release the Maker from compliance therewith. This Note may not be changed,
modified, waived, terminated or discharged orally, but only by an agreement in
writing executed by the party against whom enforcement of any such change,
modification, waiver, termination, or discharge is sought.
Maker represents and warrants that any statements made by it in the
Security Agreement or this Note: (i) are true and accurate in all material
respects; and (ii) do not omit any material facts or information the absence of
which would make such statement misleading in the context of Payee's evaluation
of this Note, and acknowledges and agrees that Payee is entitled to and has
relied on such statements in agreeing to the Note.
-7-
<PAGE>
Payee shall have the right at any time to assign, endorse, pledge,
convey or otherwise transfer this Note and all of the other documents
evidencing, governing or security this Notes or the obligations of Maker with
respect to the License to any party. From and after the date of such assignment,
endorsement, pledge, conveyance or other transfer, such transferee shall be
entitled to exercise any and all rights and remedies of Payee hereunder, Maker
shall not assign, convey or otherwise transfer its rights and obligations
hereunder without the prior written consent of the Commission.
Date:__________________________ AER FORCE COMMUNICATIONS B., L.P.
[NAME OF MAKER]
By: Aer Force Communications Inc.
Its: General Partnership
By:______________________________
Victoria Kane
Its: President
-8-
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated August 26, 1997, with respect to the financial
statements of AerForce Communications B, L.P. included in the Information
Statement (Form 10) of ARF Force Communications B, Inc. for the registration of
shares of its class A Common Stock.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Stamford, Connecticut
September 3, 1997
