NORTHEAST DIGITAL NE (GSMI) - Description of business

Company Description
BUSINESS OF THE COMPANY AND ITS SUBSIDIARIESNORTHEAST DIGITAL NETWORKS, INC, formerly known as Electronics Communications Corp., is a Delaware corporation formed in 1984 (the "Company"). The Company principally carries on its business through two wholly owned subsidiaries, Personal Communications Networks, Inc. ("PCN") and Threshold Communications, Inc. ("TCI").PCN was formed in 1995 for the purpose of bidding in the C-Block FCC auction for the personal communications spectrum as a predicate to becoming a wireless telecommunications carrier. PCN successfully bid for six 30 MHz broadband licenses in three basic trading areas ("BTAs"), Vermont, Maine and New York, with overlap of coverage into New Hampshire and Pennsylvania (the "PCN Markets"). PCN paid an average of $17.80 per "POP," for over 1.5 million "POPs." This compares favorably to the average auction price of $39.88 per "POP." In June 1998, PCN elected the Disaggregation Option offered by the Federal Communication Commission (the "FCC"), thus returning 15MHz of spectrum in each of its BTAs and reducing its per POP cost to approximately $8.90. The PCN Markets were selected for their regional footprint in the highly-valued northeast corridor, the ability of such markets to be "linked" for contiguous coverage, their strategic positioning and value to adjacent PCS networks.It is the Company's intention and strategy with respect to PCN to finance and build a wireless telecommunications network, and to provide wireless residential and business telephone service. The Company has decided to utilize the GSM technology as the platform for PCN and in April 1998, joined the GSM Mou. The Company is currently in negotiations with PCS infrastructure and equipment vendors who will supply GSM equipment.In 1996, the Company acquired fifty-one (51%) percent ownership in TCI, which, in turn, owns General Communications and Electronics, Inc ("GCE") and 56.667% of General Towers of America, Inc. ("GTA"). In January 1998, the Company acquired the remaining 49% of TCI. GCE had been a reseller of paging airtime for more than 25 years and supported approximately 7,500 active subscribers (primarily corporate rather than individual retail customers). Upon the construction of a 900 MHz satellite-based Flex paging network manufactured by Glenayre put into service in May 1997, TCI became a full-service paging carrier.In May 1997 pursuant to a mutually agreed Settlement and Separation Agreement, TZD severed its relationship with Bell Atlantic Nynex Mobile. As a result, the Company no longer solicits cellular telephone activations and TZD's operations have been discontinued.In addition, due to a deteriorating and shrinking market for the distribution of consumer electronic products based upon increased competition by large retailers such as Circuit City, P.C. Richards and others serving in a dual capacity as both a distributor and a retailer, the Company discontinued its FTD operations effective October 1997.DEVELOPMENTS SINCE THE BEGINNING OF THE LAST FISCAL YEAROn August 18, 1997, the Company filed a current report on Form 8-K reporting a change as of August 11, 1997 in its independent accountants from the firm of Stetz, Belgiovine CPAs, P.C. to Wiss & Company, LLP, CPAs and reporting a change in its fiscal year-end from December 31 to March 31. As a result, this report relates to the Company's most recently completed fiscal year, the twelve month period ended March 31, 1998.At April 1, 1997 in addition to its PCN and TCI businesses, the Company was engaged through its Trade Zone Distributors, Inc. ("TZD") subsidiary in soliciting cellular telephone activations for Bell Atlantic Nynex Mobile and through its Free Trade Zone Distributors, Inc. ("FTD") subsidiary in the distribution of consumer electronic products including cellular telephones, fax machines and copiers.The Company's Board of Directors authorized a one-for-twelve reverse stock split of its Common Stock and an increase in the par value of its Common Stock from $.05 to $.60 per share effective July 31, 1997. The change in par value and the reverse stock split was ratified by stockholders at the May 28, 1998 special meeting in lieu of annual meeting of stockholders. (See Item 4.) The Company's outstanding Class A Warrants were appropriately adjusted. Unless otherwise indicated, all share and per share information contained in this annual report gives effect to the one-for-twelve reverse split of the Company's Common Stock and the Common Stock exercise purchase prices for the Company's Class A Warrants, Class B Warrants and stock options have been adjusted throughout this annual report by multiplying the actual prices and/or exercise prices for periods prior to July 31, 1997 by twelve. No assurance can be given that the actual prices for the Common Stock during such pre-split periods would have approximated such adjusted prices if the one-for-twelve stock split had been effectuated at such times.On October 8, 1997, the Company's three principal officers, William S. Taylor, Les Winder and Mr. Taylor's mother, Brenda Taylor, resigned as officers and directors of the Company and its subsidiaries. A fourth director, Ira Tabankin also resigned. (A fifth director, Robert DePalo resigned in March 1998.) At October 8, 1997, Joseph A. Rosio was elected chairman of the board, president and chief executive officer of the Company and John Cassella was elected a director. Christopher J. Garcia was elected a director of the Company as well as treasurer, secretary and chief financial officer in the first quarter of calendar 1998. As a result of these changes in management, the current directors of the Company are Mr. Rosio, Mr. Cassella, Mr. Garcia and Mal Gurian (who has served as a director since 1995) and the current executive officers of the Company are Messrs. Rosio and Garcia.See Notes 6 and 7 of the Notes to the Company's Consolidated Financial Statements as to various private placements by the Company of debt and equity securities during the fiscal year ended March 31, 1998 for working capital purposes. Also see this Item 1 and Note 20 of the Notes to the Company's Consolidated Financial Statements as to the Company's election on June 8, 1998 of the Disaggregation Option offered by the Federal Communications Commission ("FCC") with respect to the Company's PCS licenses thereby reducing the debt incurred for the licenses from $23,806,980 to $11,903,490.At the Company's Special Meeting in lieu of Annual Meeting of Stockholders held on May 28, 1998, stockholders approved the change of the Company's name from "Electronics Communications Corp." to "Northeast Digital Networks, Inc." See Item 4.PERSONAL COMMUNICATIONS NETWORKSTRATEGYPCN's strategy for its PCS service business is to become the leading regional provider of wireless services in its markets. PCN will build out its licenses first in Vermont and Maine, then Elmira Corning, New York, focusing initially on the most densely populated portions of these areas and on major commuting corridors.INDUSTRY BACKGROUNDSince 1983, the demand for wireless telecommunications services has grown dramatically as cellular, paging and other emerging wireless communications services have become widely available and increasingly affordable. This growth in wireless services has been driven by technological advances and changes in both telecommunications regulations and consumer preferences. Mobile cellular telephone service has been one of the fastest growing market segments within the telecommunications industry. According to cellular industry analysts' estimates, the number of cellular, PCS, and ESMR users in the U.S. grew from 340,000 at the end of 1985 to approximately 56 million by the end of 1997. According to such estimates, there are now over 200 mobile wireless cellular users worldwide. Most industry analysts forecast that U.S. penetration rates for mobile wireless service will be significantly greater than 50% by 2005.PERSONAL COMMUNICATIONS SERVICES (PCS)PCS is defined by the FCC as "a family of mobile and portable radio communications services for individuals and businesses that may be integrated with a variety of competing networks." PCS is widely identified as the next generation of wirelessvoice and data communications. PCS is designed to offer customers a broad range of individualized digital wireless communications services including landline telephone-quality voice communication for mobile, office, or home use, as well as advanced features such as paging, e-mail and text messaging and news services. PCS offers subscribers two basic services: (i) mobile service; and (ii) fixed wireless replacement of local telephone services. With mobile service, a subscriber carries a single, lightweight, long-battery-life telephone that will accommodate any incoming or outgoing call almost anywhere in the country.PCS differs from existing cellular and SMR in three basic ways: frequency, spectrum and geographic division. PCS networks operates in a higher-frequency bank (1850-1990 MHz) compared to the cellular and SMR frequency (800-900 MHz). The higher frequency band for PCS networks requires a greater number of total cell sites to cover the same geographic area as existing cellular networks. However, depending on the technology utilized, PCS service is ultimately less expensive in certain geographic areas because of the lower cost and improved capacity of the infrastructure equipment relative to cellular networks. In addition, PCS is designed to provide improved voice quality and privacy. PCS is comprised of 30 MHz and 10 MHz spectrum blocks, or combinations thereof, versus 25 MHz spectrum blocks for cellular networks. As a result of the improved capacity of the infrastructure and comparatively large allocation of spectrum, PCS has more capacity for new wireless services such as data and video transmission.Currently, cellular communication is the closest comparable service to PCS available. Although analog cellular is the most widely deployed two-way wireless service available in the U.S. today, it has 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. Digital systems such as PCS, on the other hand, convert voice or data signals into a stream of digits and typically use voice compression and other techniques to allow a single radio channel to carry multiple simultaneous signal transmissions. Digital technologies offer new services, improved system flexibility, greater efficiency and increased capacity. Data transmission, call forwarding, call waiting and paging capability are among the enhanced services provided by PCS.In order to gain early market penetration and compensate for initially limited network footprints, PCS operators typically have been aggressive in terms of pricing their service. This pricing strategy reflects the abundance of network capacity provided by their recently commercialized digital networks. Moreover, PCS providers have attracted subscribers by not requiring subscribers to sign minimum service contracts and offering lower per minute incoming rates. PCS providers have also aggressively promoted the differentiating characteristics between digital and analog service including security, call quality and other enhanced features.PCS TECHNOLOGYAlthough there are as many as seven versions of digital PCS technologies competing for the domestic market, only three are commonly considered to be viable alternatives for fully mobile communication services. The three technologies include GSM, Code Division Multiple Access ("CDMA"), and U.S. Time Division Multiple Access ("TDMA"). GSM and TDMA are both "time division-based" standards but are incompatible with each other and CDMA.GSM facilitates PCN's plan to rapidly build out its PCS systems. GSM is the leading digital wireless technology in the world, with approximately 230 networks being built or operating in over 110 countries, including all of western Europe. According to industry estimates, GSM networks served approximately 70 million subscribers worldwide as of November 1997, and are adding 2.5 million subscribers per month. In November 1997, the U.S. crossed the one million GSM subscribers mark. American Personal Communications, Inc. introduced the first GSM network in the U.S. in the Baltimore/Washington, D.C. MTA in November 1995. In addition to the Baltimore/Washington, D.C., New York and eastern Pennsylvania markets, GSM systems have been introduced in over 500 cities located throughout the United States. An important benefit associated with GSM technology is its use of an open system architecture that will allow operators to purchase network equipment from a variety of vendors that share standard interfaces for operation. This open architecture provides PCS operators with significant purchasing leverage with vendors and flexibility in provisioning of features, products and services.One competing standard, IS-95 CDMA, is a CDMA standard proposed as an upgrade for existing U.S. analog cellular service to digital service. Qualcomm is the primary proponent of IS-95 CDMA for PCS service. IS-95 has also received support from Motorola, Lucent Technologies and Northern Telecom. IS-95's PCS service supporters include Sprint PCS and the Bell Atlantic Mobile, US West and AirTouch Communications Inc. consortium, PCS PrimeCo, L.P., both of which have deployed a modified version of this technology at 1.9 GHz.The other main competing standard, IS-54 TDMA, is the TDMA standard that several cellular carriers are implementing as they upgrade to digital service. Primary network suppliers are Lucent Technologies, Ericsson and Hughes. AT&T Wireless,SBC Communications, Inc. ("SBC") and parts of Bell south's cellular network are the primary 800 MHz service supporters. AT&T Wireless and SBC have deployed systems based on IS-54 at 1.9 GHz (the upgraded version at both frequencies is known as IS-136 TDMA). IS-54/IS-136 TDMA, like PCS 1900, faces no major technological hurdles in upbanding to 1.9 GHz PCS. Upbanded IS-54-9S-136 TDMA equipment was launched at 1.9 GHz during 1997 in ten cities by AT&T Wireless.SERVICE BUSINESSPCN's PCS business will provide mobile and fixed communications service in its markets. PCN's wireless service will provide private, secure and enhanced voice, high-speed data, paging services and other capabilities for both the office environment and outdoor mobile coverage with basic features including voice mail, call forwarding and call waiting, and enhanced features such as voice-activated dialing, news and weather reports and stock market quotes.PCN will utilize GSM technology, the most widely used wireless protocol in the world. As of November 1997, there were approximately 70 million subscribers, growing at 2.5 million per month, in over 110 countries worldwide. In the U.S., extensive roaming arrangements under the GSM Alliance have been signed with operators whose licenses, along with PCN, cover 90% of U.S. POPs.PCS MARKETSPCN has PCS licenses to provide wireless communications services in areas covering approximately 1.5 million non-overlapping POPs. PCN's licenses include C Block licenses for the following BTA's: Vermont-Burlington with approximately 369,000 POPS/Rutland-Bennington with approximately 98,000 POPs; Maine-Bangor with approximately 317,000 POPs/Lewiston-Auburn with approximately 222,000 POPs, Waterville-Augusta with approximately 166,000 POPs and Elmira-Corning-Hornell, NY with approximately 315,000 POPs.PCN's individual markets cover large contiguous areas in the Northeast United States with attractive demographic characteristics including growing populations, favorable commuting patterns, high household incomes and heavily frequented tourist areas.MARKETING STRATEGYPCN's marketing objective is to stimulate demand for PCS voice and data services and attract subscribers by providing superior service and reliability at attractive prices. PCN plans to generate demand by introducing a better alternative to cellular service. PCN intends to concentrate its PCS marketing efforts on the following key customer segments: (i) high-mobility customers using or considering cellular telephones who would benefit from fewer dropped or blocked calls; and (ii) low-mobility customers attracted to PCS as a more convenient alternative to their landline telephones, particularly those who have multiple telephone lines to their home or business.PCN believes it can offer competitively priced services that emphasizes voice clarity, reliability and a low probability of blocked calls, encryption, international calling and roaming, internet e-mail, and information services. PCN includes certain basic features including call waiting, call forwarding, caller I.D., voice mail and paging, and enhanced features such as voice-activated dialing, news and weather reports and stock market quotes as part of its product offerings. PCN will provide true encryption services which improves call security and should encourage users to make confidential professional and personal calls that they would be unwilling to make on cellular telephones. In addition, the convenience of a single telephone number for mobile, home and office use available to the customer throughout the PCN service area and with the use of easy-to-use, menu-driven subscriber functions should enhance the usage of PCN's services. PCN will also offer an attractive prepaid calling plan and plans to establish a significant subscriber base among budget-conscious businesses, individuals, students, and individuals who have bad credit or no credit history.PCN's strategy is to pursue multiple distribution channels through which to market its services, generally on a non-exclusive basis. PCN will sell telephones like any other off-the-shelf product through highly focused retail centers as well as on the internet. The service can be activated over the air in minutes by customers after purchasing the telephone, unlike traditional cellular sales. PCN's telephones will also be available by calling a toll free phone number in PCN's planned call center in Burlington, Vermont to have a PCS phone mailed at no delivery charge.PCS COMPETITIONThe success of PCN PCS business will depend upon its ability to compete with two existing cellular operators and potential future wireless communications providers. For example, Bell Atlantic Mobile ("Bell Atlantic") and Rural Cellular Corporation ("Rural") currently provide cellular services in PCN's license territories.The BTAs owned by PCN are located in the following Major Trading Area ("MTAs"), with ownership as indicated below. A BLOCK TECHNOLOGY B BLOCK TECHNOLOGY C BLOCK TECHNOLOGY BTA MTA LICENSEE PLATFORM LICENSEE PLATFORM LICENSEE PLATFORM --- --- -------- -------- -------- -------- -------- -------- Burlington New York Omnipoint GSM Sprint CDMA PCN GSM Rutland New York Omnipoint GSM Sprint CDMA PCN GSM Bangor Boston AT&T TDMA Sprint CDMA PCN GSM Lewiston Boston AT&T TDMA Sprint CDMA PCN GSM Waterville Boston AT&T TDMA Sprint CDMA PCN GSM Elmira New York Omnipoint GSM Sprint CDMA PCN GSM There are also three competitors that hold 10 MHz of spectrum in each of PCN's BTA's (D, E and F block). AT&T and Sprint are the two largest license owners in the United States. Sprint owns 30 MTAs with a total population of over 150 million and AT&T owns 21 MTAs with a total population of over 107 million. The massive size of the investment and financing requirement in these wireless licenses has been the driving force behind the AT&T divestiture. Sprint partnered with several cable companies to share the investment required. Both companies are concentrating their investment and efforts in the major MTA market centers.PCN's primary competitors within the territories will be AT&T, Sprint and Omnipoint. These providers have selected incompatible technologies with each other and only Omnipoint has selected a technology compatible with PCN. AT&T has selected IS-136 TDMA and Sprint has selected CDMA. Omnipoint has selected GSM. PCN is currently discussing license agreements and roaming development with Omnipoint. However there can be no assurances that Omnipoint will enter into any licensing and/or roaming agreements with PCN. The two companies' technology is compatible and Omnipoint owns several territories adjacent to those held by PCN. All of PCN's main competitors have substantially greater financial, technical and other resources than the Company.PCN's competitive stance is to be the FIRST TO MARKET with aggressive marketing and pricing. The massive deployments in the rest of the nation by the major licensees offers PCN an estimated three-year window of opportunity before these competitors will enter the markets targeted by PCN. PCN believes that Enhanced Specialized Mobile Radio ("ESMR") will have a limited competitive impact against PCS largely because technical limitations and limited bandwidth have caused the ESMR operators to target primarily vertical market niches such as dispatch services. In the future, PCS could potentially compete more directly with landline telephone service providers and other technologies including mobile satellite systems.REGULATORY ENVIRONMENTThe FCC regulates the licensing, construction, operation and acquisition of wireless telecommunications systems in the U.S. pursuant to the Communications Act of 1934, as amended (the "Communications Act"), and the rules, regulations and policies promulgated by the FCC thereunder. Under the Communications Act, the FCC is authorized, among other things, to allocate, grant, rescind and deny licenses for PCS frequencies, establish regulations governing the interconnection of PCS systems with wireline and other wireless carriers, grant or deny license renewals and applications for transfer of control or assignment of PCS licenses, establish other regulations governing the operations of PCS and other telecommunications carriers and impose fines and forfeitures for any violations of FCC regulations.PCS LICENSINGThe FCC established PCS service areas in the U.S. based upon Rand McNally's market definition of 51 MTAs comprised of 493 smaller BTAs. In June 1994, the FCC finalized the allocation of the 1.85 to 1.99 GHz bands for broadband PCS services. The Commission distinguished the licenses along four dimensions, including (i) the amount of RF spectrum - 30 MHz versus 10 MHz, (ii) the size of geographic area-MTA versus BTA, (iii) the eligibility to hold the license and participate in the specific auction for each type of license, and (iv) the timing of the auctions regarding each of the above categories.The FCC decided that two 30 MHz licenses, designated as Blocks A and B, would be allocated geographically by MTAs (these include the Block A licenses granted to the Pioneers in their respective MTAs). The 30 MHz MTA auction ended in March 1995, and the FCC granted those licenses in June 1995. Four licenses designated as Blocks C, D, E and F wereallocated by BTAs. The C and F Block licenses were allocated 30 MHz and 10 MHz of spectrum, respectively and reserved for "Entrepreneurs." Eligibility to bid for and hold licenses in the C and F Blocks was limited to entities that together with their affiliates and certain investors, had gross revenues of less than $125 million in each of the two years preceding the auction and total assets of less than $500 million. Eligible bidders in the Entrepreneurs' Band were given certain bidding credits and successful bidders were given favorable installment payment terms. The most favorable bidding credits and installment payment options were available only to C Block applicants that qualified as ses, and to F Block applicants that qualified as very small businesses. Generally, a s is an entity that has average annual gross revenues of not more than $40 million for the preceding three relevant years while a very s is an entity that has average annual gross revenues of not more than $15 million for the preceding three relevant years.In determining whether a C or F Block applicant met the financial caps for qualification as an Entrepreneur, a s or a very s, the FCC examined, individually and cumulatively, the assets and revenues of the applicant, its affiliates, investors with more than 25% or 49.9% (depending on which of the two control group equity structures is used) of the applicant's fully-diluted equity or voting stock and its control group members. Applicants seeking to qualify as an Entrepreneur, a s or a very small business, had to be controlled by a control group made up principally of individuals or entities who met the financial qualifications applicable to Entrepreneurs. Only certain non-qualifying investors could be in the control group, such as members of the entity's management team or qualifying institutional investors. The control group had to hold at least 25% or 50.1% (depending on which control group equity structure is used) of the applicant's total equity during the first three years and 50.1% of the applicant's voting stock for the initial term of the license.Over time, C and F Block licensees (as well as their affiliates and investors) may exceed the gross revenue caps through equity investment by non-attributable investors, debt financing, revenue from operations, business development and expanded service. Furthermore, after three years from the date of the license grant, the qualifying members of the control group will be required to hold only 10% or 20% of the total equity (depending on which control group equity structure is used). The control group must retain at least 50.1% of the ownership of voting stock, however, for the duration of the initial 10 year license term, and the control group must exercise de facto as well as de jure control over PCN. The FCC has stated that it will conduct audits to ensure compliance with Entrepreneurs' Band regulations.The Entrepreneurs' Band auction for the C Block licenses ended in May 1996. The auction for the D, E and F Block licenses ended on January 14, 1997. The remaining 20 MHz of the 140 MHz of PCS spectrum 1910-1930 MHz available was allocated for unlicensed PCS applications such as wireless PBX adjuncts, LANs and home cordless telephones. All PCS licensees will be granted for a 10-year period, at the end of which they must be renewed. Licenses may be revoked at any time for cause.In September 1997, the FCC issued a Report and Order which changed the payment terms available to Entrepreneurs' Band licensees and offered various options for reducing the licensees' debt by returning all or portions of their spectrum. On March 24, 1998, the FCC issued its Reconsideration Order which modified these option.The FCC intends to re-auction the returned portions of an Entrepreneurs' spectrum in the future, although no timetable has been set. PCN chose the Disaggregation Option in each of its BTAs. See Note 20 in the accompanying financial statements for a discussion of the Disaggregation Option. As a result of PCN's election of the Disaggregation Option, the FCC will re-auction the returned spectrum in the future thereby allowing a potential competitor to enter each of PCN's BTAs. Again, no timetable has been set for the re-auction of PCN's returned spectrum. PCN's competitive stance is to be first to market.PCN and other networks share spectrum partially occupied by private and common carrier fixed microwave users. Many of these microwave incumbents provide services that may interfere with or receive interference from the operation of PCS networks and, as a result, may have to be relocated by PCN. In an effort to balance the competing interests of existing microwave users and newly authorized PCS licensees, the FCC adopted a transition plan to relocate such microwave operators to other spectrum blocks. Whenever PCN displaces a microwave incumbent, PCN must pay at least the microwave incumbent's relocation expenses, and may be required to take actions necessary to put the microwave incumbent's new facility into operation. PCN may also be required to reimburse other entities for the relocation by such entities of microwave incumbents that PCN would have displaced. PCN continues to make it a goal to implement a frequency plan that will minimize to the extent possible the number of existing microwave users that need to be relocated.CONDITIONS ON LICENSESBUILD-OUT REQUIREMENTSThe FCC has mandated that recipients of PCS licenses adhere to five year and ten year build-out requirements. Violations of these regulations could result in license revocations, forfeitures or fines. Under the build-out requirements, all 30 MHz PCS licenses (such as C Block licenses) must construct facilities that offer coverage to at least one-third of the population in their service area within five years form the date of initial license grants. Service must be provided to two-thirds of the population within ten years. Licenses, which fail to meet the coverage requirements, may be subject to forfeiture.The Entrepreneurs' Band licensees are prohibited from voluntarily assigning or transferring control of their licenses for five years after grant date except to assignees or transferees that satisfy the financial criteria established for the entrepreneurs' Band. Any transfers or assignments during the 10-year initial license term are subject to unjust enrichment penalties including the forfeiture of any bidding credits and the acceleration of any installment payment plans if the assignee or transferee does not qualify for the same benefits. In addition, licensees must maintain their Entrepreneurs' Band eligibility for five years from the date of initial license grant. In that regard, however, increased gross revenues, increased total assets from non-attributable equity investments, debt financing, and revenue from operations, business development or expanded service are not considered by the FCC. In addition, to maintain all of the benefits of its "Designated Entity Status," PCN's control group and qualifying investors must retain certain minimum stock ownership and voting stock of PCN and meet certain other criteria. The FCC has announced that it may conduct audits to ensure compliance with all license conditions.CITIZENSHIP REQUIREMENTSPrior to the implementation of the World Trade Organization ("WTO") in early 1998, no more than 20% of any subsidiary of PCN that holds an FCC license could be owned directly by non-U.S. citizens or their representatives; and the FCC has no discretion to depart from that limit. On November 25, 1997, the FCC issued a Report and Order implementing the new rules that will take effect after the WTO effective date. In general, the U.S. has allowed companies from all countries that are signatories of the WTO (and are in compliance) to indirectly own up to 100% of U.S. Telecommunications companies. Any such foreign investments are still potentially subject to a review by the FCC, but the presumption is that investments made by WTO members' companies will be approved. PCN has no knowledge of any present foreign ownership in violation of the Communications Act.TELECOMMUNICATIONS ACT OF 1996The Telecom Act of 1996 (the "Telecom Act") is the first comprehensive legislation changing telecommunications regulation in over 60 years. In general, its goal is to remove the statutory, regulatory and court-ordered barriers that historically prohibited new entrants into many segments of the telecommunications industry. The primary goal of the Telecom Act is to allow LECs, long distance carriers, cable companies, broadcasters and others to compete directly. The Telecom Act attempts to create opportunities for competition with the local loop, while allowing monopoly LECs eventually to enter the long distance market. It requires the BOCs and other incumbent LECs to permit competitors to interconnect with their local loop networks through unbundled network elements, resale and collocation. The passage of the Telecom Act will affect the business of PCN because of the likely creation of more opportunities to compete in both the local exchange and long distance markets for the same or similar types of services that PCN plans to offer as well as the specific treatment of commercial mobile radio service operators such as PCN. However, PCN cannot predict the exact nature and extent of this competition. On August 1, 1996, the FCC adopted rules implementing the interconnection provisions of the Telecom Act that provide for unbundled interconnection at the incumbent LEC's long run incremental costs plus a reasonable share of forward-looking joint and common costs ("total element long run incremental cost") and for resale of incumbent LEC retail services at substantial discounts off of retail rates (with a default range of 17-25%). On October 15, 1996, the U.S. Court of Appeals for the Eighth Circuit issued a stay of FCC's interconnection and resale pricing rules pending final determination of the challenges brought against FCC's August 1 interconnection Order. In November 1996, the stay was partially lifted with respect to rules governing interconnection between LEC and wireless carriers. The Court of Appeals in 1997 ruled against the FCC with respect to wireline interconnection issues, but upheld the FCC on wireless interconnection and the FCC is evaluating its options on how to proceed. In addition, the FCC has adopted rules regarding telephone number portability pursuant to which subscribers will be able to migrate their landline and cellular telephone numbers to a PCS carrier, or from a PCS carrier to another service provider. The FCC is also conducting or planning to conduct a number of rulemaking proceedings, including proceedings anticipated to establish rules expected to result in an overhaul of the access charges paid by long distance carriers to LECs and the funding mechanisms for universal service which may require PCS licensees such as PCN to pay charges to support universal services, as well as "calling party pays" issues.THRESHHOLD COMMUNICATIONS, INC.STRATEGYTCI's strategy for its paging service business is to become a leading local provider of numeric and alphanumeric paging services. TCI will market its services directly to customers in the New York, New Jersey area through highly focused retail locations and inbound telemarketing.INDUSTRY BACKGROUNDPaging has evolved from the simple beeper with local coverage to a multi-faceted mobile communications service offering regional and nationwide coverage. Some of paging's unique advantages include ease of use, low cost for basic service, small size, light weight, and long battery life. These advantages have largely insulated the paging industry from the competition of other wireless media and contributed to its phenomenal growth. Paging now reaches an estimated 34 million paging subscribers and industry experts expect double-digit subscriber growth for the foreseeable future. Enabled by technological advances and new frequency allocations, paging companies are deploying modern networks that allow the use of higher-speed messaging technology, increased transmission capacity, and enhanced two-way data and voice-messaging capabilities (often referred to as narrowband personal communications services, or NPCS). Paging will be characterized by continued industry consolidation, increased usage by non-business users, expanded nationwide capabilities, continued price competition among paging companies, and competition from digital cellular, broadband PCS, and mobile satellite services.The paging industry dates back to 1949, arising from the need for remote notification of waiting messages where intercom or telephone communications were not a viable option. Historically, the paging industry has been highly fragmented, consisting of many small operators serving primarily business customers. In recent years, the industry has undergone considerable consolidation and now attracts significant numbers of non-business users.At present, there are four basic types of paging services - tone only, tone-voice, digital display, and alphanumeric with additional narrowband personal communications services (NPCS), such as newly available two-way paging, expected to be commonplace soon. Tone-only pagers emit a tone alerting the recipient to call in for messages. Tone-voice pagers emit a tone to signal an incoming message and then play a short voice message dictated by the caller. Each of these two services has steadily declined in market share - tone-only because of service limitations and tone-voice because of phaseout by operators due to its inefficient use of spectrum. The third type of service, digital display, or numeric paging, represents the lion's share of the market. This service enables the caller, using a standard touch-tone keypad, to enter a phone number, which is then displayed on recipient's pager. The fourth type of service is alphanumeric, introduced in the late 1980s. These pagers enable full-text messages to be entered by a dispatcher or directly from a computer and then displayed on the subscriber's unit. Alphanumeric pagers currently account for about 12 percent of the market and are growing fast. Narrowband PCS applications, introduced recently, include acknowledgement paging, which enables receipt of a message to be confirmed, and two-way test, which enables the recipient to send an alphanumeric response to the sender.According to industry estimates, more than 42 million paging units are currently in service. The average annual subscriber growth rate for the industry has been approximately 30 percent for the past four years. This dramatic growth is linked to declining prices for units and service, greater awareness and use by the general public, and carriers' enhanced distribution in the consumer marketplace. Consumers have come to value the convenience of paging for staying in touch with friends and relatives. In fact, over half of new paging services are now purchased for personal rather than business use.Paging companies use several distribution channels to attract customers, including direct sales, third-party resellers, private-brand strategic partnerships, and retail stores. For instance, new points of distribution are opening up in grocery stores, discount stores, and other shopping locations. In addition, marketing partnerships between paging companies and retailers or producers (e.g. MobileMedia - PepsiCo) are becoming more common.Each month, a portion of a company's existing customers leaves for a variety of reasons, including failure to pay, dissatisfaction with service, and switching to a competing provider. Typical monthly disconnect, or churn, rates over the past few years have been in the range of 2-4 percent, based on the number of existing subscribers.Paging revenues, including fees collected for rental units, have increased by some 20 percent over the past four years and now amount to almost $4 billion per year. Revenue growth has been less than subscriber growth because of drops in service prices. Revenues for paging, including narrowband personal communications services (NPCS), are projected to increase by about 10 percent annually through the end of the decade. Approximately 80 percent of current revenues are associated with digital display pagers, with alphanumeric accounting for most of the remainder. Alphanumeric is the fastest growing paging service segment, while tone-only and tone-voice services have each decreased to below 5 percent of revenues.Narrowband PCS is introducing new capabilities and is widely expected to grow in popularity, perhaps accounting for as much as 10 percent of overall paging industry revenues by the year 2000.Paging service rates usually include a fixed monthly fee (typically $10-40, depending on local or nationwide service and whether the pager is rented or owned), which includes a certain allotment of free incoming pages (or characters for alphanumeric service). Excess usage rates are typically $.10-.25 per page (or $.02-.04 per character for alphanumeric). Approximately 90 percent of a company's average revenue per unit (ARPU) is attributable to fixed fees. An additional source of revenue is the sale of the pagers themselves - over half of all pagers in service are customer owned. However, companies generally break even on sales of pagers, which for competitive reasons are sold at or below cost.Monthly service ARPUs (i.e. not including equipment rental) have declined during the last five years from a typical level of $13 to about $9. Despite this downward trend, total revenues are rising because of increasing demand. In addition, occasional increases in ARPU can be expected due to a higher mix of regional and nationwide services; a higher mix of advanced services such as two-way and voice messaging; and increased direct and retail acquisition of subscribers, which generally carry a higher ARPU.TECHNOLOGYThe basic architecture of a paging system consists of a paging terminal and a tower-based radio transmitter. The terminal receives and encodes messages from the sender and relays them to the transmitter, which broadcasts the messages on a specific radio frequency to individual pagers tuned to that frequency. Messages intended for a particular pager are input by the sender via phone or computer into the paging system. Traditional one-way paging channels are 24 kHz wide. To make two-way services possible, paging networks are undergoing a "cellularization," whereby receiver sites are deployed so that low-power pagers have back-channel response capabilities.Major pager manufacturers for the U.S. market include Motorola, NEC, and Panasonic. The major paging terminal manufacturers are Glenayre/BBL, Motorola/Unipage, and Zetron.To a great extent, technological developments in paging are being accelerated by the availability of two-way national and regional licenses (through the narrowband PCS auctions) and the ongoing consolidation of the industry. Narrowband PCS licenses are divided into categories of 50/50 paired, 50/12.5 paired, and 50 unpaired. The first two of these license categories are for two-way service and entitle the operator to build a system with 50 kHz for the forward link and either 50 kHz or 12.5 kHz for the return link. The return links, depending on the amount of frequency available, can be used for data transfer, message acknowledgement, or location purposes. The third category of license, unpaired, provided 50 kHz for one-way services. The spectrum bands and licenses available in narrowband PCS provide the basis for services (such as two-way, alphanumeric, and voice messaging) which are the next evolutionary step from traditional paging.Companies are increasingly deploying modern digital transmission networks, which allow the use of high-speed messaging technology and increase system reliability and capacity. Many modern networks are based on the Motorola-developed FLEX family of protocols as well as the PACT system, which stands for personal air communications technology, developed by AT&T. Both technologies allow for high-speed, two-way messaging and can accommodate a range of applications, such as voice messaging, location monitoring, and acknowledgements. Potential uses include alarm monitoring, news and weather updates on demand, vehicle dispatch, vehicle tracking, vending machine monitoring, and utility meter reporting.PAGING MARKETSTCI operates a 900 MHz satellite-based FLEX paging network manufactured by Glenayre that includes 34 FCC-approved paging antenna sites, 33 of which are operational. TCI holds two paging licenses in the 900 MHz band. One, for frequency 929.0875 MHz, covers the greater New York area, while the other, for frequency 929.2625 MHz covers southern New Jersey.MARKETING STRATEGYTCI's marketing objective is to attract subscribers by providing superior local paging services at attractive price. TCI intends to concentrate its paging marketing efforts on offering pager services directly to consumers and businesses as opposed to resellers of TCI's paging airtime. This will be done through a corporate sales force, highly focused retail locations and inbound telemarketing that will result from print ads, radio and cable television advertising. This strategy will cut out the "middle man" or reseller and allow TCI to offer low cost paging services directly to the end user who requires only local service.COMPETITIONThe major paging operators that operate in TCI's license areas include Pageing Network, Inc. (PageNet), MobileMedia, AirTouch, Arch Communications, PageMart, Metrocall, and Mtel. Each firm provides paging services in most of the United States and is experiencing annual subscriber growth rates in excess of 50 percent. These growth rates are higher than the industry average because of acquisitions as well as internal growth. Taken together, these firms account for about half of all U.S. paging subscribers. TCI also competes with smaller paging service providers and regional telephone companies such as Bell Atlantic that provide paging services. Many of these companies have substantially greater financial, technical and other resources than the Company.REGULATIONPaging falls under the regulatory auspices of the FCC. Frequencies widely available for paging include the 150 MHz, 450 MHz and 900 MHz bands. Prior to the 1990s, licenses for a specific frequency were granted largely on a site-by-site basis, which partially explains the large number of paging firms and fragmented structure of the industry. Licenses were granted by application or, in the case of competing applications for the same location and frequency, by lottery. In response to frequency congestion and to simplify the provision of nationwide services, the FCC allowed new spectrum allocations in the 1980s and designated three frequencies in the 931 MHz range for the exclusive use of nationwide paging.In the early 1990s, the FCC allocated 2 MHz of spectrum for narrowband PCS in the 901-902, 030-931, and 940-941 bandwidths, defining it as "a family of mobile services including advanced voice paging, data messaging, acknowledgement paging, and both one-way and two-way messaging." Narrowband PCS licenses were to be granted by auction on a nationwide, regional, major trading area (MTA) and basic trading area (BTA) basis. Under this scheme, any given geographical location is to be covered by some two-dozen licenses comprising nationwide, regional, MTA or BTA coverage, as well as a mix of one- and two-way services. Holders of nationwide, regional and MTA licenses are required to provide service to at least 37.5 percent of the population within 5 years and 75 percent of the population within 10 years. In mid-1994, the FCC concluded the first round of narrowband PCS auctions, allocating 10 national licenses and nearly 600 licenses for single-city or regional services. The final narrowband PCS auctions, for over 1,000 one- and two-way licenses, took place in 1996.The FCC grants both exclusive and non-exclusive licenses to transmit on certain frequencies in specified geographic areas. Radio Common Carrier ("RCC") licenses are generally exclusive, while Private Carrier Paging ("PCP") licenses are generally non-exclusive, i.e. shared among ten or more licensees. The Company holds PCP licenses.The Company, through subsidiaries, has developed a common-channel regional PCP 900 MHz system for the New York/New Jersey Metropolitan Area. The Company holds FCC 900 MHz paging licenses on two channels. The FCC required the Company to place its system in operation within eight months after being granted licenses, and the Company has complied with this requirement.The FCC regulates mobile radio service under its public interest mandate expressed in the Communications Act of 1934, as amended. Among its principal regulatory duties in the mobile radio area is the allocation of spectrum for various kinds of services such as SMR/ESMR, PCS, PCP, common carrier paging, and conventional two-way mobile. The FCC has the exclusive authority to decide whether non-governmental applicants for radio licenses are basically qualified to hold licenses to utilize that spectrum. Thus the Commission issues authorizations for the construction and operation of one-way and two-mobile systems, and renews licenses for these facilities. Additionally, whenever entities holding radio authorizations want to effect major changes in ownership and control, the prior consent of the FCC must be obtained.EMPLOYEESAs of July 1998, the Company and its subsidiaries had a total of 11 employees, including 4 in the paging subsidiary, TCI, 1 in the PCN subsidiary, and the remaining 6 employees employed by the Company. PCN's future success will depend in significant part on its ability to attract and retain key technical, sales and senior management personnel. Competition for such personnel is intense and there can be no assurance that PCN can attract and retain key managerial, sales and technical employees. PCN's employees are not represented by a labor union. PCN has not experienced any work stoppages and considers its relations with its employees to be good.