File No. 0-23127
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------
AMENDMENT NO. 1 TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
EAST/WEST COMMUNICATIONS, INC.
(formerly ARF Communications B, Inc.)
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3964837
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
350 STUYVESANT AVENUE, RYE, NEW YORK 10580
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 921-6300
-----------------------------
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
------------------- ------------------------------
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock Class A
<PAGE>
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
- ----------- ------------------------------------------
<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
</TABLE>
-i-
<PAGE>
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
- ------------------ ---------------------------------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation
*3.2 By-laws
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)
</TABLE>
___________________
* Previously Filed with Form 10 dated September 24, 1997.
-ii-
<PAGE>
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: November 6, 1997
EAST/WEST COMMUNICATIONS, INC.
By:_________________________
Name: Victoria G. Kane
Title: President
-iii-
<PAGE>
LYNCH CORPORATION
Eight Sound Shore Drive
Greenwich, Connecticut 06830
(203) 629-3333
November 14, 1997
To Lynch Stockholders:
I am writing to advise you about a spin off of the stock of East/West
Communications, 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 December 4, 1997, you will
receive one share of Class A Common Stock of the Company. The distribution is
expected to be made on or about December 5, 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
<PAGE>
TABLE OF CONTENTS
PAGE
THE COMPANY.................................................................1
CAPITALIZATION..............................................................5
RISK FACTORS................................................................6
SELECTED FINANCIAL DATA....................................................18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................20
THE WIRELESS COMMUNICATIONS INDUSTRY.......................................22
LIMITATIONS OF CELLULAR TELEPHONE INDUSTRY.................................23
LEGISLATION AND GOVERNMENT REGULATION......................................27
MANAGEMENT.................................................................37
CERTAIN TRANSACTIONS.......................................................39
PRINCIPAL STOCKHOLDERS.....................................................40
DESCRIPTION OF CAPITAL STOCK...............................................41
DESCRIPTION OF CERTAIN INDEBTEDNESS........................................44
FEDERAL INCOME TAX CONSEQUENCES............................................44
EXPERTS ..................................................................45
GLOSSARY ..................................................................46
INDEX TO FINANCIAL STATEMENTS.............................................F-1
<PAGE>
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 East/West Communications, 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.
These sections do not apply to companies which are not subject to the reporting
requirements of the securities laws at the time those statements are made.
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, the Company has not yet adopted a business plan or determined how to
finance its operations because of uncertainties relating to PCS, which makes
evaluation difficult, including without limitation the newness of PCS,
financing, affiliation and technology issues and the financial problems of
certain C-Block licensees. Therefore, Company 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. The Company expects to continually evaluate these factors
and to adopt a plan or plans once the financing, regulatory and market aspects
of PCS are less uncertain. See "Risk Factors".
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 350 Stuyvesant Avenue, Rye, New York 10580.
Its telephone number is (914) 921-6300. This Information Statement is first
being mailed to Lynch stockholders on or about November 14, 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)
- --------------- --------------------------------- ------------------ ------------------ ------------------
<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
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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>
(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 December
5, 1997, to shareholders of record on December 4, 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. See "--Stock Ownership After the Spin
Off" for a chart which details those ownership interests.
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.
-2-
<PAGE>
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."
STOCK OWNERSHIP AFTER THE SPIN OFF
Immediately after the Spin Off, the Company will be owned as follows:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK TOTAL COMMON STOCK
------------------------- ------------------------- --------------------------------------
BENEFICIAL
OWNERSHIP VOTING
SHAREHOLDERS SHARES PERCENT SHARES PERCENT SHARES PERCENTAGE PERCENT
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aer Force
Communications, Inc. -- -- 1,779,301 100% 1,779,301 50.1% 83.4%
Gabelli Funds, Inc.* 355,150 20.0% -- -- 355,150 10.0% 3.3%
Lynch Shareholders+ 1,417,048 80.0% -- -- 1,417,048 39.9% 13.3%
</TABLE>
- ------------------
* Due to his 23.1% ownership of Lynch common stock, Mr. Gabelli, the Chairman
and Chief Executive Officer of GFI and Lynch Corporation, will also receive
327,087 shares of Class A Common Stock (18.5% of the Class A Common Stock,
9.2% of the total common stock and 3.1% of the voting rights) as a result of
the Spin Off. See footnote 3 to the table under "Principal Shareholders."
+ Lynch Corporation (or a subsidiary) will own 7,700 shares of a
non-convertible redeemable preferred stock.
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.
In April, 1997, the FCC suspended F-Block interest payments on the
Government Financing until further notice. The FCC has recently stated that
F-Block interest payments will resume beginning March 31, 1998. If they had not
been suspended, the Company's first three quarterly interest payments of (i)
approximately $126,534 (on $8.1 million of F-Block debt at 6.25% for all
licenses except Washington, DC) would have been due on each of July 28, 1997,
October 28, 1997, and January 28, 1998 (approximately $380,000 total) and (ii)
approximately $110,438 on the Washington DC license (based upon a $7.1 million
principal amount at an interest rate of 6.25%) would have been due on each of
September 27, 1997, December 27, 1997 and March 27, 1998 (approximately $331,000
total). One-eighth (1/8) of the suspended interest will be due on March 31, 1998
(approximately $89,000) and one eighth of the suspended interest would be
payable on each of the next seven installment payment dates succeeding March 31,
1998, of each license.
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
-3-
<PAGE>
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."
-4-
<PAGE>
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) 7,700,000
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)
----------
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 or a subsidiary. 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."
-5-
<PAGE>
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."
-6-
<PAGE>
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. In April, 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 FCC recently stated that F-Block interest payments would resume beginning
March 31, 1998,when one-eighth (1/8) of suspended payments will be due, with the
remaining seven-eighths being payable over the next seven installment payment
dates succeeding March 31, 1998, for each license. 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 (plus
approximately $356,000 per year of suspended interest payable in 1998 and 1999),
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 in the near future 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.
-7-
<PAGE>
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 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."
-8-
<PAGE>
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 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."
-9-
<PAGE>
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, 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.
-10-
<PAGE>
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. In September,
1997, the FCC gave C-Block licensees the right to turn back to the FCC 15 MHz of
their 30 MHz of spectrum for a reduction of debt. Any such spectrum returned
would be reauctioned. Other PCS licensees in the Company's license areas include
Cox Enterprises, American Personal Communications, Pacific Telesis, Nextwave,
AT&T, Inc., Rivgam Communicators 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
-11-
<PAGE>
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."
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 FCC has consented to the transfer of the PCS licenses from Aer
Force Communications B, L.P. to the Company. The 30-day period to appeal that
consent has not expired; however, the Company believes that if an appeal is
brought, it would not be successful.
-12-
<PAGE>
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. 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.
-13-
<PAGE>
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 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
-14-
<PAGE>
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.
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
-15-
<PAGE>
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 "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
-16-
<PAGE>
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.
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 recently added new guidelines and methods for
evaluating the environmental effects of RF emissions from FCC-regulated
transmitters, including wireless antennas and handsets. The revised guidelines
and methods generally are more stringent than those previously in effect. The
FCC also incorporated into its rules provisions of the Telecommunications Act
that preempted state or local government regulation of personal wireless
services facilities based on RF environmental effects, to the extent such
facilities comply with the FCC's views concerning such RF emissions. 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 does not know what further action, if
any, the Justice Department or the FCC 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.
-17-
<PAGE>
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)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
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)
<S> <C> <C> <C>
BALANCE SHEET DATA
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.
-18-
<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.
-19-
<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. These sections do not apply to companies which are not subject to the
reporting requirements of the securities law at the time those statements are
made. 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 "The Company - Proceeds of
the Spin Off and Future Funding Requirements," "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).
-20-
<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 of the licenses (plus approximately $355,000 per
year of previously suspended interest payments) 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."
-21-
<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
-22-
<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 September, 1997, the FCC gave C-Block licensees the right to turn
back to the FCC 15 MHz of their 30 MHz of spectrum for a reduction of debt. Any
such spectrum returned would be reauctioned. 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
-23-
<PAGE>
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.
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
-24-
<PAGE>
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 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. In September, 1997, the FCC gave C-Block licensees the right
to turn back to the FCC 15 MHz of their 30 MHz of spectrum for a reduction of
debt. Any such spectrum returned would be reauctioned. 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
-25-
<PAGE>
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.
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-Galloway 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."
-26-
<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
-27-
<PAGE>
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
-28-
<PAGE>
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
-29-
<PAGE>
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
-30-
<PAGE>
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
-31-
<PAGE>
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-
-32-
<PAGE>
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
-33-
<PAGE>
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. citizens may not own of
record or vote (i) more than 20% of the capital contribution to a common carrier
radio
-34-
<PAGE>
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."
-35-
<PAGE>
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."
-36-
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, 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).
-37-
<PAGE>
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.
-38-
<PAGE>
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 prior to the
effective date of the Spin Off, the Company will succeed to the rights and
obligations of the Partnership. At that time, AFC will receive 1,779,301 shares
of Class B Common Stock of the Company and LPCS will receive 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 will
contribute an additional $125,250 and $124,750, respectively, as equity to the
Company. The Company's existing indebtedness to LPCS ($7.7 million at November
14, 1997) will be converted into $7.7 million of redeemable Preferred Stock and
the obligation of LPCS to make additional loans to the Company will terminate.
-39-
<PAGE>
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 350 Stuyvesant Avenue, Rye, New
York 10580.
(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.
-40-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 19,600,000 shares of Common Stock,
$.0001 par value, and 16,000 shares of 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.
-41-
<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 7,700 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) November 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.
-42-
<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.
-43-
<PAGE>
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"
-44-
<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.
-45-
<PAGE>
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.
-46-
<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.
-47-
<PAGE>
Audited Financial Statements
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
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
with Report of Independent Auditors
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
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 and a predecessor to
East/West Communications, Inc., 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, except for Note 4 as to
which the date is September 25, 1997
F-2
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, PRO FORMA
1996 1997 1997, NOTE 6
------------------------------------------------
------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ - $ - $ 250,000
Deposit with FCC 12,000,000 - -
PCS Licenses - 18,957,721 18,957,721
Capitalized costs - 226,210 226,210
================================================
Total assets $12,000,000 $19,183,931 $19,433,931
================================================
LIABILITIES AND PARTNERS' EQUITY/(DEFICIT)
Accrued liabilities $ - $ 926,230 $ 926,230
------------------------------------------------
Total current liabilities - 926,230 926,230
Long-term accrued liabilities - 96,490 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 15,166,177
Redeemable preferred stock - - 5,685,692
Common stock - - 355
Additional paid-in capital - - 449,645
Accumulated deficit - - (2,890,658)
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'/stockholders' deficit accumulated during
the development stage
(1,378,500) (2,690,658) -
================================================
Total liabilities and partners'/stockholders' deficit $12,000,000 $19,183,931 $19,433,931
================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
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 and
A Predecessor to East/West Communications, Inc.)
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>
Aer Force Communications B, L.P.
(A Development Stage Enterprise and
A Predecessor to East/West Communications, Inc.)
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 and
A Predecessor to East/West Communications, Inc.)
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. East/West Communications,
Inc. was incorporated on August 13, 1997 and will succeed to the rights and
obligations of the Partnership. 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, the Partnership has not yet adopted a business plan or determined how
to finance its operations because of uncertainties relating to PCS. Therefore,
the Partnership 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. The Partnership
expects to continually evaluate these factors and adopt a business plan once the
financing, regulatory and market aspects of PCS are less uncertain.
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. There can be no
assurance that the Corporation can raise sufficient capital to fund its
obligations and finance the construction of its networks. 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 and
A Predecessor to East/West Communications, Inc.)
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 and
A Predecessor to East/West Communications, Inc.)
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 November 1, 2009 (See Note 6).
F-9
<PAGE>
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. In April 1997, the FCC suspended the interest payments on the
debt. On September 25, 1997, the FCC indicated that such interest payments will
be resumed beginning March 31, 1998 with the suspended payments being made in
eight installments in addition to regular interest payments.
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 is not aware of what further
action, if any, the Justice Department or the FCC may take and can not estimate
its exposure, if any, at this time.
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 November 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
CERTIFICATE OF INCORPORATION
OF EAST/WEST COMMUNICATIONS, INC.
A DELAWARE CORPORATION
ARTICLE I.
The name of this corporation is East/West Communications, 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 Sixteen
Thousand (19,616,000) 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 Sixteen
Thousand (16,000) 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
<PAGE>
available therefor, and on a pari passu basis, such dividends as may be declared
from time to time by the Board of Directors.
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 B Common Stock shall automatically be converted into
one share of Class A 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,
-2-
<PAGE>
such conversion shall not be effective until such authorization or approval has
been obtained.
(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
-3-
<PAGE>
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 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
-4-
<PAGE>
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' 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
-5-
<PAGE>
(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 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
-6-
<PAGE>
obliged to redeem on an Redemption Date but which it has not redeemed.
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. 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 equity interests in the sole holder of the Class
B Common Stock of the Corporation as of the Spin Off, or any merger, sale of
stock or assets, consolidation, recapitalization or other corporate transaction
directly or indirectly affecting such sole holder.
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 by the
issuance of additional shares of Preferred Stock at an annual rate of five (5)
shares of Preferred Stock for each one hundred (100) shares of Preferred Stock
owned by such holder immediately prior to the record date of such dividend. 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 November 14, 1997. 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
-7-
<PAGE>
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.
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) November 1, 2009 or (ii) upon a Change of
Control of the Class A Common Stock or the Class B Common Stock. A "Change of
Control" shall arise in the event of (A) in the case of the Class A Shares, a
transaction under Article IV, Section B.6 clause (iii), or (B) in the case of
the Class B Shares, a transfer, sale or other disposition which does not comply
with Article IV, Section B.6. In addition, the Preferred Stock
-8-
<PAGE>
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 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.
-9-
<PAGE>
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 shall be deemed given if deposited in the United
States mail, postage prepaid, and addressed to each holder of record at his
+ddress 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
-10-
<PAGE>
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 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.
-11-
November 6, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: East/West Communications, Inc. (formerly ARF
Communications B, Inc.)
FORM 10 (FILE NO. 0-23127)
--------------------------------------------
Gentlemen:
We have acted as counsel to East/West Communications, Inc., a
Delaware corporation and formerly ARF Communications B, Inc. (the "Company"), in
connection with its filing of a registration statement on Form 10, as amended
(the "Registration Statement"), relating to shares of its Class A Common Stock,
$.0001 par value (the "Shares").
In our capacity as counsel to the Company, we have examined
the Company's Certificate of Incorporation and By-Laws, each as amended to date,
corporate proceeedings of the Company and such other documents as we have
considered appropriate for purposes of this opinion.
With respect to factual matters, we have relied upon
statements and certificates of officers of the Company. We have also reviewed
such other matters of law and examined and relied upon such other documents,
records and certificates as we have deemed relevant. In all such examinations we
have assumed conformity with the original documents of all documents submitted
to us as conformed or photostatic copies, the authenticity of all documents
submitted to us as originals and the genuineness of all signatures on all
documents submitted to us. Finally, we have
<PAGE>
Securities and Exchange Commission
November 6, 1997
Page 2
assumed the occurrence of the precedential actions which are described in the
Registration Statement (including the merger of the Partnership and the Company)
which are necessary to effect the Spin Off, some of which remain to be
completed.
On the basis of the foregoing, we are of the opinion that the
Shares have been validly authorized and, when distributed as contemplated
by the Registration Statement, be legally issued, fully paid and non-assessable.
We are members of the Bar of the State of New York. This
Opinion is limited to the effects of the laws of the State of New York, the
General Corporation Law of the State of Delaware and the federal laws of the
United States of America.
Capitalized terms not otherwise defined in this letter shall
have the meanings ascribed to them in the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference made to us under the caption
"Experts" in the prospectus constituting part of the Registration Statement.
Very truly yours,
OLSHAN GRUNDMAN FROME & ROSENZWEIG LLP
Exhibit 23.1
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, except to Note 4 as to which the date
is September 25, 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 its class A Common Stock
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
November 6, 1997
