U.S. House of Representatives: Committee on Energy and Commerce, RepublicansPrepared Witness Testimony: Cassou, Frank A.

Subcommittee on Telecommunications and the Internet
December 11, 2001
3:00 PM
2123 Rayburn House Office Building

Mr. Frank A. Cassou
Executive Vice-President and General Counsel
NextWave Telecom Inc.
3 Skyline Drive, 3rd Floor
Hawthorne, NY, 10532

INTRODUCTION

Thank you, Mr. Chairman; Members of the Committee. My name is Frank Cassou. I am the Executive Vice President and General Counsel of NextWave Telecom Inc. I joined NextWave in February 1996, and have played an active role since then in the Company's attempts to acquire, pay for, and build out broadband PCS licenses.

I would like to begin by thanking this Committee for the oversight it has devoted to C block issues. The Committee as a whole, and many of its Members individually, have spent considerable time and energy in recent years to provide NextWave and other C block companies an opportunity to voice our concerns and tell our side of the story. You have held hearings, advocated legislative solutions, and exerted strong leadership on C block policy matters with your colleagues and with the FCC. NextWave has been treated very fairly here, and we are sincerely grateful.

I come before you today to report that after years of conflict, there is a proposed consensual resolution of the primary legal controversy that has clouded NextWave's bankruptcy reorganization. The proposed settlement will end long-running litigation, generate $10 billion in payments to taxpayers, allow consumers to access radio spectrum that has been tied up in the litigation, and provide the foundation from which the NextWave can complete its bankruptcy proceedings and emerge reorganized and able to proceed with its remaining business.

NextWave was formed in 1995 by a group of experienced telecommunications executives, including the former President of the wireless business at QUALCOMM, Inc., to participate as a designated entity in the auctions and implement an innovative business plan as a nationwide "carrier's carrier," providing wireless services on a wholesale basis at far lower rates than anything available at that time. At the conclusion of the C Block auctions in May and July 1996, NextWave was designated the high bidder for 63 licenses and timely made its $474 million down payment on such C Block licenses. NextWave then executed promissory notes for the remaining amounts due to purchase its C Block licenses.^[1]

NextWave was granted spectrum licenses by the FCC in 1997, after a thorough investigation of our qualifications. At that time, the FCC's Wireless Telecommunications Bureau certified unequivocally that NextWave was in compliance with all of the Commission's "Designated Entity" requirements. The Company has remained in compliance ever since. By virtue of our Chapter 11 filing in 1998, NextWave's fundamental corporate structure and ownership have been in a state of suspended animation. Nothing has occurred since the original license grant that would cause us to fall out of compliance. Moreover, NextWave's current foreign ownership is de minimus; well below the 25 percent threshold established in the Communications Act.

NextWave moved quickly to implement its business plan and raised more than $600 million to finance its down payments to the FCC and the initial build-out of its network. By early 1997, NextWave had hired over 600 employees and contractors, and had opened 22 offices across the country. NextWave also secured more than $2 billion in financing commitments from major vendors for deployment of network equipment. Within months, NextWave had ninety percent of the microwave links needed to launch service, had acquired seven switch sites, designed more than 1300 cell sites, signed more than 300 site leases, and negotiated an additional 900 leases. NextWave expected to begin commercial service in four markets by late 1997, and had completed network engineering designs for 22 of its major markets, including New York, Los Angeles, Chicago, and Boston. NextWave had also obtained airtime purchase commitments for in excess of 35 billion minutes of use.

Unfortunately, spectrum markets declined dramatically during 1997, primarily due to the availability of additional spectrum that was made available through auction, at the very time NextWave was attempting to raise capital and launch service.

Despite its efforts to remain solvent, NextWave was forced to curtail its operations, laying off more than 500 employees and contractors. By this time, NextWave owed (in addition to its FCC obligations) more than $400 million to creditors, and faced attachment proceedings and other litigation across the country. To preserve assets for the benefit of creditors, to sustain the company as an ongoing venture and to fulfill our fiduciary duties, NextWave was forced to seek bankruptcy protection. We did so only after exploring every alternative. The decision to initiate Chapter 11 proceedings was approved by our Board of Directors, including our outside directors, Allan E. Puckett, the former Chairman and CEO of Hughes Aircraft Company, and William H. Webster, the former Director of the CIA and FBI.

On June 8, 1998, NextWave filed for relief under Chapter 11 of the Bankruptcy Code. Pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code, the NextWave have operated their businesses and managed their properties as debtors-in-possession.

Following extended litigation in the Bankruptcy Court and the Second Circuit, NextWave prepared to emerge from bankruptcy and. Aided by improved market conditions, and with the aid of the breathing space the Bankruptcy Code provides, NextWave submitted a plan of reorganization in December 1999. That plan would have cured all alleged defaults in installment payments to the FCC, permitted NextWave to meet all FCC obligations going forward, and paid all creditors in full, including interest and late fees. Indeed, NextWave went further and offered to make an immediate cash payment to the FCC of $4.3 billion - thereby paying for the licenses seven years earlier than required. 244 B.R. at 262. The plan was set for confirmation on January 21, 2000. Had that plan been confirmed, NextWave would have been a bankruptcy success story, having paid its creditors in full while retaining sufficient capital to realize its goal of building out its nationwide network.

As a result of FCC actions, however, that plan was never confirmed. On January 12, 2000, the FCC issued a Public Notice declaring that the NextWave' C and F Block licenses were cancelled retroactively to January 1999 due to a failure to make postpetition installment payments while NextWave reorganized its business. In response to the Public Notice, NextWave pursued two parallel courses with respect to the Public Notice: (i) in the Bankruptcy Court and, on appeal, in the Second Circuit; and (ii) in the Court of Appeals for the District of Columbia Circuit (the "D.C. Circuit").

In response to an Order to Show Cause filed by the NextWave seeking to void the Public Notice, the Bankruptcy Court found that the attempted cancellation of the C and F Block licenses was ineffective due to, inter alia, certain provisions of the Bankruptcy Code and it termed the FCC's purported cancellation "shocking" and "offensive to due process." Subsequently, however, in response to a petition for writ of mandamus filed by the FCC, the Second Circuit found that bankruptcy courts lack jurisdiction to review regulatory actions such as the Public Notice. Specifically, the Second Circuit opined that "[e]ven if the bankruptcy court is right on the merits of its arguments against revocation," that court simply "lacked jurisdiction to declare the Public Notice null and void on any ground: that the Public Notice violated the automatic stay, that the right to cure obviates any default, or that the government was estopped." In re FCC, 217 F.3d 125, 139 (2nd Cir. 2000). The Second Circuit emphasized that "NextWave remains free to pursue its challenge to the FCC's regulatory acts" in the D.C. Circuit, id. at 140, and refrained from commenting "on the prospects" of any such appeal. Id. at 129.

On February 11, 2000, NextWave filed a petition for reconsideration of the Public Notice with the FCC. On September 6, 2000, the Commission denied the reconsideration petition, and, shortly thereafter, scheduled NextWave's licenses for reauction on December 12, 2000 (such reauction referred to hereinafter as "Auction 35"). NextWave vigorously opposed the FCC's actions seeking unsuccessfully to stay the reauction until after the D.C. Circuit had ruled on the merits of its claims.

Following the D.C. Circuit's denial of the stay, NextWave pursued an appeal of the FCC's cancellation in the D.C. Circuit. In that appeal, the NextWave asserted, as it had before the Bankruptcy Court, that cancellation of the C and F Block licenses violated several provisions of the Bankruptcy Code, including §§ 362, 525, 1123 and 1124, as well as established principles of due process and fair notice.

On June 22, 2001, the D.C. Circuit issued a ruling on the NextWave' appeal, reversing the FCC's purported cancellation and holding that cancellation of NextWave's C and F Block licenses violated Section 525(a) of the Bankruptcy Code (the "D.C. Circuit Opinion"). Section 525(a) provides, in relevant part, that a "governmental unit may not . . . revoke . . . a license ... to . . . a bankrupt . . . solely because such bankrupt . . . has not paid a debt that is dischargeable . . . under this title." The D.C. Circuit reversed the Commission's purported cancellation concluding that the FCC had violated the Bankruptcy Code when it revoked NextWave's licenses solely because NextWave had not paid a dischargeable debt.. The Court stated: "Applying the fundamental principle that federal agencies must obey all federal laws, not just those they administer, we conclude that the Commission violated the provision of the Bankruptcy Code that prohibits governmental entities from revoking debtors' licenses solely for failure to pay debts dischargeable in bankruptcy." The D.C. Circuit made clear that the FCC had effectively sought a "regulatory purpose" exception to that prohibition, but that Congress had not created such an exception. 254 F.3d at 151.

On August 6, 2001, the FCC filed a motion asking the D.C. Circuit to stay the issuance of the mandate pending the Commission's filing a petition for a writ of certiorari in the United States Supreme Court. On August 23, 2001, the D.C. Circuit denied the Stay Motion, noting that "the FCC has not demonstrated that the petition would present a substantial question" warranting Supreme Court review.

On August 30, 2001, the D.C. Circuit issued its mandate, thereby formally concluding the proceedings before it. On August 31, 2001, the FCC issued a Public Notice announcing that it had returned the NextWave' licenses to active status.

Shortly after the D.C. Circuit opinion, NextWave filed a second plan of reorganization. As did the first plan, this second plan provided for payment in full of all creditors, including the FCC. The plan contained financing commitment of approximately $5 billion to find the build-out and commercial launch of a nationwide wireless 3G network.

On October 19, 2001, the FCC filed a petition for writ of certiorari with the United States Supreme Court requesting review of the D.C. Circuit Opinion. Certain of the high bidders in Auction 35 also filed certiorari petitions with the Supreme Court. Given the proposed settlement agreement, NextWave requested and received a sixty day extension of the time within which to respond to such petitions. It is contemplated under the settlement agreement that the petitions for certiorari will be withdrawn at the time the FCC receives the C Block and F Block licenses.

As indicated above, following the issuance of the Public Notice, the FCC scheduled and held Auction 35 which, while it included certain other licenses, was primarily a reauction of NextWave's C and F Block licenses. The 30 MgHz C Block licenses held by NextWave were divided into three 10 MgHz licenses and bidders for certain of those 10 MgHz licenses were not limited to designated entities. Further, Auction 35 was specifically held subject to resolution of the litigation with NextWave over the C Block and F Block licenses. Even taking into account these factors, however, the results of Auction 35 indicated that the market value of spectrum had significantly increased during 1999-2001. The aggregate bids for NextWave's licenses were $15.85 billion. Alaska Native Wireless ("ANW"), Verizon Wireless ("Verizon"), Salmon PCS ("Salmon"), and VoiceStream Wireless ("VoiceStream") were responsible for over $13.72 billion of such bids.

NextWave's goal has always been to be a nationwide provider of wholesale wireless telecommunication services. After being declared the high bidder in the C Block auctions, raised $600 million and secured more than $2 billion in financing commitments in an effort to create a nationwide wireless network. Throughout the bankruptcy cases, NextWave has continued to work toward this goal and on several occasions has sought to confirm a plan of reorganization providing significant present and/or future value to its creditors and equity interest holders - many of whom invested money or services in NextWave in 1996 or 1997. In December 1999, NextWave proposed a plan that would fully cure and reinstate the FCC's claims and pay other creditors amounts owed as of the bankruptcy filing, while permitting NextWave to complete, the build-out of a nationwide wireless network within 12 to 18 months. That Plan was, however, subsequently abandoned when the FCC announced the cancellation of NextWave's licenses. Notwithstanding the disruptions to the reorganization process throughout the course of the bankruptcy proceedings, NextWave has proceeded to the extent possible with the build-out of the network. For example, network architecture and preliminary radio frequency designs are completed for the top 40 markets. In June 2001, NextWave obtained court approval for debtor-in-possession financing sufficient to achieve initial build-out of all of its markets with a full commercial build in the D and E markets. This build-out has continued with the signing of vendor contracts and the purchase and installation of base stations and switches in certain markets. Following the DC Circuit Opinion, NextWave filed a new plan of reorganization, this time backed by financing commitments of approximately $5 billion, to pay in full all creditors, including the FCC, to fund the build-out and commercial launch of a nationwide wireless 3G network.

Despite these efforts and the commitment to its original business plan, the Company concluded that its obligations to its shareholders and creditors required it to enter into the Agreement that is currently before this Committee and Congress as a whole. The Settlement Agreement contemplates, in sum, that the litigation and the regulatory disputes between the FCC and NextWave will be fully and finally resolved. As a result, NextWave's C Block and F Block licenses, which have been subject to the cloud of litigation, and NextWave's D Block and E Block licenses, which have been caught up in the delays caused by the dispute with the FCC would be put immediately to productive use. The following is a brief overview of the transactions and procedures encompassed in the Settlement Agreement.

Even if the settlement agreement is approved by Congress, NextWave will continue its efforts to create a wireless company, albeit on a reduced scale. NextWave remains on schedule to launch commercial service in the markets covered by its D Block and E Block licenses - which were paid for in full and are not the subject of this litigation -- during 2002 and plans to continue operations with these licenses even if the C and F Block licenses are referred to the government.

These benefits are particularly appealing to the Government and the Auction 35 participants in light of the alternatives. As a result of the D.C. Circuit proceeding, NextWave currently holds the C Block and F Block licenses and the likelihood that the Supreme Court will act to reverse the D.C. Circuit decision is small. Even in the unlikely event of the grant of certiorari by the Supreme Court and a subsequent ruling against NextWave, the litigation would not be ended. The proceedings would then return to the D.C. Circuit for consideration and review of NextWave's remaining claims, including due process and fair notice claims. Even if the Government and the Auction 35 participants were ultimately successful, the spectrum would be tied up until at least the end of 2003, if not later.

This is a rare case in which the resolution, while not the outcome any party would unilaterally select, is one that benefits all parties. The FCC and the government will receive at least $10 billion, more than twice the amount NextWave bid on the licenses at the original auction. In contrast, as matters now stand, NextWave's obligation to the FCC in the upcoming year will be to pay approximately $850 million, and its total obligation to the FCC for the licenses will amount to only approximately $5 billion. The settlement thus provides the United States with $10 billion in 2002 - ten times what it would otherwise receive in that year from NextWave. The Auction 35 Participants will receive the C Block and F Block licenses and will put them to immediate use. This will enable these carriers, some of whom are currently or might in the future suffer from spectrum capacity constraints, to provide critical wireless services to consumers and may expedite the provision of third generation wireless technology.

The settlement also benefits NextWave. While NextWave will be foregoing the opportunity to fulfill the vision for which it has struggled so long - that of becoming the first nationwide carriers' carrier providing third generation services on a wholesale basis - its creditors will receive payment in full and its shareholders will realize a return on their equity investments. In addition, NextWave will be able to complete the commercial launch of service in the markets covered by the D Block and E Block licenses (primarily Detroit, Michigan and Madison, Wisconsin). In addition, NextWave will be spared the expense and delay that could result from further court and regulatory litigation.

It is critical to realize, however, that these benefits come at a substantial loss. Although the Company will be able to move forward and build out a network in the five markets where it will continue to hold licenses, the scale of its immediate future operations will be much smaller than would have been possible had NextWave retained all the licenses it currently holds. Moreover, the decision to settle has imposed real and substantial lost opportunities for the Company.

Loss of past opportunity. In January 2000, NextWave proposed a plan of reorganization that would have allowed it to emerge from bankruptcy and would have paid the FCC in full for NextWave's license obligations. The FCC, however, rejected NextWave's proposal and tried to cancel NextWave's licenses. The D.C. Circuit ruled in June 2001 that the FCC's actions were unlawful. Had the FCC's unlawful action not been prevented from executing its plan in January 2000, NextWave would be a fully operational wireless carrier by now, providing service across the country. By way of comparison, another wireless carrier, VoiceStream, which has a national footprint comparable to that of NextWave, was sold for $29 billion after a little over two years of operation. That is an opportunity that has already been taken from NextWave.

Loss of the present value of the spectrum. As a result of the D.C. Circuit's ruling in June 2001, and its subsequent decision denying the FCC a stay, the spectrum licenses that are the subject of this settlement have been returned to NextWave, and NextWave is in full possession of them and able to use them. The FCC's reauction of those licenses established their market value at $15.85 billion. NextWave's present obligation to the FCC for those licenses is approximately $5 billion payable over the next several years.

Loss of future opportunity. After the D.C. Circuit ruled in June 2001 that NextWave rightfully holds the licenses, the Company again assembled a new plan of reorganization, and arranged for financing, that would allow it to emerge from bankruptcy, build out its nationwide wireless network, and become operational. Based on the value the market has placed on the spectrum alone, it is likely that NextWave would become a company of significant value in the very near future.

This Settlement Agreement is the result of arm's length bargaining. The parties have been involved in an ongoing legal battle for years with which the Committee is familiar. Over the past several years, the parties have attempted on various occasions to discuss settlement alternatives. The Settlement Agreement itself has taken months to negotiate given the complexity of the issues involved. The negotiations were arms length and have resulted in an Agreement where each party benefits, but also has had to abandon achieving its particular view of the appropriate outcome of litigation - the true description of a compromise. We thus respectfully ask Congress to approve this Settlement Agreement and enact the necessary implementing legislation.

^[1] In subsequent auctions, NextWave was the high bidder for 27 F Block licenses and made timely down payments on those licenses of approximately $25 million.

^[2] Capitalized terms utilized herein without definition are intended to be defined as set forth in the Settlement Agreement.

The Settlement Between the U.S. Government and Nextwave, Inc. to Resolve Disputed Spectrum Licenses

INTRODUCTION