YOU ARE AT:Archived ArticlesFCC TO CHANGE C-BLOCK SCHEDULE: POCKET ADMITS STRUGGLE TO KEEP AFLOAT

FCC TO CHANGE C-BLOCK SCHEDULE: POCKET ADMITS STRUGGLE TO KEEP AFLOAT

WASHINGTON-The Federal Communications Commission is scheduled to release a public notice that will modify existing C-block personal communications services installment payment plan notes and security agreements by allowing one yearly payment instead of four quarterly payments. At press time, the document was expected to be released prior to today, the due date for many winners’ interest payments.

Some C-block winners already have missed their first installment payments, including Pocket Communications Inc., which still has not submitted its $21 million tab that was due at the commission Feb. 28. While the FCC does allow a 90-day grace period, with an additional 90 days if a company can prove hardship, such a decision by the second-largest C-block winner may not bode well for the search for new money in a marketplace fraught with doubt.

The FCC’s projected interest-payment reformation follows a March 13 petition co-signed by PCS attorneys Thomas Gutierrez (representing Alpine PCS Inc., Eldorado Communications LLC, KMTel LLC, Mercury PCS LLC and Miccom Associates), Philip Verveer (representing Indus Inc.), Leonard Kennedy (representing R&S PCS Inc.), William Richardson (representing DCR PCS Inc. [Pocket Communications]) and Michael Wack (NextWave Communications Inc.’s senior counsel and vice president of regulation). The petition asked for the payment change based on several issues, including pressures to shorten time-to-market network buildouts and the immediate cash needed to do so; and Wall Street’s investment hesitation, which has many IPOs, not just Pocket’s, in a holding pattern.

“A greater immediate capital allocation toward auction payments necessarily diminishes the resources available for infrastructure development and job creation,” the attorneys wrote. “Given the inherent volatility and seasonal nature of the capital markets, modification of the installment plan will provide small businesses with greater flexibility to time their fund-raising activities around favorable market conditions or when competition for funding is less congested. It also will give small businesses additional flexibility to take advantage of the benefits that are expected to arise out of the recent WTO agreement.”

There is precedent for such a move, in that the commission granted temporary relief from quarterly installment payments to interactive video and data services auction winners. In that decision, licensees have been allowed to make all of their quarterly payments at one time, at year’s end, and then the system returns to a quarterly-payment format. The PCS industry hopes that the FCC will allow it to continue payments on an annual basis.

Attorneys also met with Dan Phythyon, who soon will take over as chief of the Wireless Telecommunications Bureau, regarding financial difficulties facing C-block winners. Outgoing bureau chief Michele Farquhar has recused herself from this proceeding.

In addition to relieving some C-block financial woes, the FCC also is searching for methods to alleviate part of the auction burden it assigned to itself. Chairman Reed Hundt has proposed that his agency’s “creditor” function attached to the auctions be transferred to a more experienced financial body, such as the Treasury Department. In recent testimony before a House appropriations subcommittee, Hundt said, “Treasury could work out any relief that should be granted to an auction debtor, and make appropriate recommendations to the commission with respect to whether licenses should be retained, revoked or transferred. The Treasury Department’s assumption of these creditor responsibilities would be consistent with the fact that the auction funds are deposited in the U.S. Treasury, and the department would be in the best position to make decisions on payment terms.”

As for Pocket, its myriad financial problems will not be solved in the near future, even with a push back of interest payments. Independent sources last week tipped RCR that the C-block winner had been involved in financial negotiations with its three major investors-Siemens Stromberg Carlson, Ericsson Inc. and NortelNorthern Telecom Ltd.-for additional operational funding, and that those manufacturers were playing hardball regarding Pocket’s future. Company principal Dan Riker confirmed to RCR that such meetings had taken place within the last two weeks, and that Pocket negotiated for enough money to keep going “for a considerable time.” Riker added that there had been a “short-term agreement” with the vendors that would have run out today regarding Pocket’s FCC interest payment, but that the commission’s decision to restructure the payment schedule precluded his company from having to ask its investors for additional funds to pay the bill.

Riker also confirmed that network construction “for the most part” had been halted, but that Honolulu and Las Vegas would be finished quickly once new money was found.

“We’ve had difficulties raising outside capital while in our quiet period [following submission of its S-1 in August, 1996],” Riker said. “There are only three ways to raise more capital: increased offshore investments, but we can’t do that; more money from current investors; and money from qualified investment buyers like institutional investors.”

Pocket’s IPO has gone the same way as those of other recently filed wireless S-1s-nowhere. In light of that, Pocket recently gained permission from the Securities and Exchange Commission to float a private placement to institutional investors. Riker doesn’t see any correlation between his company’s default of its first installment payment (a problem that will disappear when the FCC changes the payment schedule) and the scrutiny under which a company must be examined by the SEC and the FCC to justify the financial risk of investing in a startup operation and of its being worthy of owning government licenses. In fact, Pocket management is looking for ways to “clear” the S-1 to cancel its IPO intent so that it can search for new money elsewhere.

“The market is suspect of wireless today,” Riker said. “It has put us in a bind financially.” Because typical institutional investors probably will stay away from the upcoming private placement, Riker is counting on “contrarians” to buy Pocket’s shares; such investors sniff out dark-horse candidates and commit for up to five years in waiting for the market’s attitude to change.

While Riker made no bones about holding back Pocket’s first interest check to the FCC, he did admit that another payment to an investor group had been missed, causing a default with a vendor. That situation was cleared up via a waiver and some hard negotiations, he said. As a result of those negotiations, Pocket’s creditors now have certain financial-approval rights over such things as selling a market and any “significant” expenditures.

Ericsson, Nortel and Stromberg each have holding companies that split Pocket’s markets roughly into thirds, allowing each a security interest in Pocket. While Riker called this arrangement “just a legal structure” and “paper corporations,” one vendor insider told RCR that the investors want to make sure they don’t lose any of the multimillions they’ve sunk into Pocket. They also want to make sure there is something to operate or to sell should Pocket hit bottom. Because Riker signed a confidentiality agreement following the recent negotiations, he could not divulge the intricacies of any failure trigger, but he did mention that bankruptcy certainly would be one.

Riker doesn’t believe any vendor-takeover scenario will occur, saying, “Our vendors can’t take over the company because they’re foreign entities, and it wouldn’t be worth it to sell the properties because their valuations are under the water.” Riker maintained that the three manufacturers have no interest in becoming operators-that their only concerns lay in selling GSM equipment and in establishing a GSM footprint.

In a related matter, one thorn in Pocket’s side continues to be National Telecom PCS Inc. and Paradise Com
munications Services Inc., which have been after Riker & Co. since Pocket won American Samoa away from NatTel in the C-block auctions. In an antitrust action filed last week at the U.S. District Court of the Southern District of New York, NatTel and principal Jack Robinson charged Pocket, Westinghouse Electric Corp., DCR PCS Inc. and CE Capital Consultants Inc. with “conspiracy to collude in a federal government auction and unlawfully divert to themselves and for their own benefit investment funds earmarked for the plaintiffs.” The defendants were cited for violation of the Sherman Act, breach of contract, tortious interference with contractual relations and fraud. NatTel seeks damages in excess of $1 billion.

This latest bullet fired from NatTel’s litigation arsenal is the first to land in the courts; petitions to the FCC regarding Pocket’s bidding strategies and financial partners filed by NatTel since last summer have not resulted in satisfaction for Robinson.

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