WASHINGTON-NextWave Personal Communications Inc. categorically denied it surpassed the federal rules regarding foreign ownership caps and outside control in a letter answering questions regarding its fitness to become a personal communications services licensee.
In an effort to clear up the award of the remaining C-block licenses, the Federal Communications Commission’s Commercial Wireless Division sent a laundry list of questions to NextWave Executive Vice President Janice Obuchowski and to Kevin Kelley, senior vice president of external affairs for Qualcomm Inc., whose company is a major NextWave investor. As of July 1, one petition to deny NextWave’s licenses had been filed, charging the company with exceeding the foreign-ownership cap by at least 10 points and of allowing Qualcomm too much control.
According to Wireless Telecommunications Bureau chief Michele Farquhar, Antigone Communications L.P. and PCS Devco Inc., the petitioners to deny, will have a chance to respond to NextWave’s submission. Once all the paperwork is received, the bureau will complete its investigation with an eye toward a decision by Christmas. Attorneys for Antigone and PCS Devco could not be reached for comment at press time.
Regarding the foreign-ownership question, to maintain its 25-percent control of the company, NextWave said it converted a substantial number of its Series A common stock to Series B common stock. It has chosen thus far not to allow foreign investors to convert their stock beyond a 23-percent level “to provide a margin for increase of foreign ownership to 25 percent should an initial public offering yield sufficient foreign investment to push up the foreign equity ownership.” Series A and Series B stockholders, many of which are foreign nationals, will be able to elect board members, with Series A holders having a one-member advantage.
In explaining how it calculated its 23-percent foreign ownership figure, disputed as being 35 percent by petitioners to deny, NextWave said it took “the total number of shares of issued Series A and Series B common stock held by foreigners (including use of a multiplier when the shareholder is a corporation with partial foreign ownership) and dividing that number by the total number of issued Series A and Series B common stock (domestic and foreign).” The product of that division was 22.9 percent. NextWave added that 35 percent of the total monies paid for both series of stock was handed over by foreigners, and that different prices were paid by different investors, thus leading to the 23 percent vs. 35 percent discrepancy. NextWave also said no new foreign investments have been accepted since July 16.
NextWave’s answers to the FCC’s financial-disclosure questions revealed a highly leveraged company with future buildout debt in the billions. According to NextWave’s response, three investors have converted their loans to the company into contingency equity or debt investments: Pohang Steel America Corp., PECO Energy Co. and Qualcomm.
Several of NextWave’s financial liabilities show loans that surpass the billion-dollar level, including a strategic supply agreement between NextWave and LG Information and Communications Ltd. for infrastructure financing up to $1.2 billion. Qualcomm will provide 100 percent financing of all infrastructure equipment it provides; Samsung will provide 200 percent financing of any equipment up to $1 billion. And NextWave owes the commission an aggregate principal amount of some $4.2 billion.
Despite what could be called staggering liabilities, the company believes enough financing will become available, upon licensing, to pay down debt. NextWave said it has raised enough private equity to make the $474 million down payment on its C-block licenses plus a $30 million earnest-money payment to play in the current D-, E- and F-block auction plus money to cover operating expenses through the first quarter of 1997. An IPO, pending for several months now, could provide millions in additional cash, and NextWave believes it will receive substantial funding from becoming a “carrier’s carrier” upon network buildout. The company said it has signed 15 contracts for 30 billion minutes of use on its proposed network.
NextWave pointed out that it has satisfied the five factors that determine whether certain debt investments are actual debt or are equity contributions in disguise. “NextWave has not attempted to merely re-label equity as debt but instead has entered into debt agreements with investors that reflect the lesser degree of risk (and absence of ownership rights) attendant with debt securities,” it wrote.
The FCC questioned how NextWave’s debt-to-equity ratio, which the company has set at 2: 3, also could be calculated at 15.6: 1 as demonstrated in NextWave’s registration statement on file with the Securities and Exchange Commission. In its opposition to the petition to deny filed last July, NextWave answered that in its Form 600, it compared the total dollar amount invested in the company that represented debt (including convertible and nonconvertible debt) and the total dollar amount that had been invested in equity securities (Class A and B stock). It did not include vendor financing because no funds from such contracts had been advanced at the time of the filing. It also did not include the $4.2 billion owed to the government for its C-block licenses, believing the cost “does not factor into a traditional debt-equity calculation for purposes of determining whether NextWave’s debt securities are actual disguised equity.” In its SEC filing, however, NextWave did have to factor in its government debt, anticipating its licenses would end up costing $3.8 billion after down payments were submitted, bringing the ratio back up to 15.6: 1.
Regarding the control issue, the company said Qualcomm, which is both a vendor and a major stockholder with ties to the board of directors, has played no role in the financial promotion of NextWave to other potential investors. While certain members of NextWave’s top management were Qualcomm employees at one time and have represented NextWave in financial discussions, other former Qualcomm employees who now work for NextWave have not.
One of the reasons the commission is questioning Qualcomm’s role so heavily concerns the deal the manufacturer struck with NextWave to turn Series C shares into Series B shares on a 1: 1 basis. NextWave explained that due to the nature of Qualcomm’s promise of 100 percent vendor financing at the time when the company had no one else on board, it granted Qualcomm that privilege because of the early risk it was taking. Qualcomm also invested $5 million for an equity share and provided a $25 million loan, part of which has been repaid in Series B stock.
In a more personal financial probe, the commission asked NextWave if any of its stockholders bought shares with borrowed cash and, if so, how did they finance the transaction. NextWave Telecom Inc., parent company of NextWave Personal Communications, paid cash for its shares, as did 28 other stockholders who paid more than $11 million for their Series A stake. Sixteen other stockholders signed promissory notes for an additional $2.5 million Series A shares; NextWave Chairman Allen Salmasi paid $6 million in cash for some 25 million shares plus signing a note for $1.3 million for an additional 5.3 million shares of Series A stock.
