******************************************************** NOTICE ******************************************************** This document was converted from WordPerfect or Word to ASCII Text format. Content from the original version of the document such as headers, footers, footnotes, endnotes, graphics, and page numbers will not show up in this text version. All text attributes such as bold, italic, underlining, etc. from the original document will not show up in this text version. Features of the original document layout such as columns, tables, line and letter spacing, pagination, and margins will not be preserved in the text version. If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 ) In re ) ) ) KaStar 73 Acquisition, LLC, and KaStar 109.2 ) File Nos. Acquisition, LLC, Applications for Consent to ) SAT-T/C-19990629-00071 Transfer of Control ) SAT-T/C-19990629-00072 ) ) ) MEMORANDUM OPINION AND ORDER Adopted: December 17, 1999 Released: December 17, 1999 By the Chief, International Bureau: I. Introduction 1. By this Order, we grant KaStar 73 Acquisition, LLC, ("KaStar 73") and KaStar 109.2 Acquisition, LLC ("KaStar 109.2"), authority to transfer control of their licenses from Televerde Communications, L.P. ("Televerde") to the shareholders of KaSTAR Satellite Communications Corporation ("KaSTAR"). We find that grant of these applications will facilitate rapid deployment and competition in the provision of advanced broadband services using the KaSTAR satellite system. II. Background 2. KaSTAR, through its wholly owned subsidiaries, KaStar 73 and KaStar 109.2, holds licenses to implement two of a new generation of fixed-satellite service ("FSS") systems in the Ka- band. These systems will provide a variety of broadband interactive digital services around the world. At the time it received its space station authorizations in May 1997, Televerde held 93 percent of the issued and outstanding stock of KaSTAR. Subsequently, several additional investors obtained an interest in KaSTAR. Specifically, Kleiner, Perkins, Caufield & Byers ("KPCB"), through a nominee, KPCB Holdings, acquired voting shares from KaSTAR and Televerde. In addition, DirectCom Networks, Inc., ("DirectCom") a debt holder, converted its debt instruments into stock. As a result, Televerde presently holds a 48.886 percent interest in voting stock, and proxies to vote 1.193 percent of shares held by two other stockholders, for a total controlling interest of 50.079 percent. Televerde also has the right to appoint three of five members of its board of directors. The other shareholders with 10 percent or more outstanding voting stock are KPCB Holdings with 20.821 percent and DirectCom with a 20.468 percent interest. 3. On June 29, 1999, KaStar 73 and KaStar 109.2 applied for authority to transfer control of their licenses from Televerde to the shareholders of KaSTAR. As set forth in the applications, KPCB Holdings seeks to acquire additional stock in KaSTAR that would increase its holdings to 21.73 percent. Televerde, in turn, would have a 48.33 percent interest, with the proxies expiring upon consummation of the transaction. DirectCom's share would be 20.23 percent. As a result, Televerde's controlling interest will be transferred to the shareholders of KaSTAR. In support of the applications, KaStar 73 and KaStar 109.2 state that the transfer will enable KaSTAR to become a well-financed competitor in the fixed- satellite market, furthering the Commission's efforts to promote competition generally and new entrants in particular. Subsequent to consummation of the proposed transaction, the applications note that Televerde will liquidate itself and distribute its shares to its principals, David Drucker ("Drucker"), who is Chairman of KaSTAR, and Walter Segaloff. Drucker then intends to sell 2 percent of his interests to DirectCom, which would increase its holdings to 22.98 percent. 4. Pegasus Development Corporation ("Pegasus"), an applicant in the second Ka-band processing round, filed a petition to deny or defer KaSTAR's applications. According to Pegasus, the applications fail to provide enough information to determine whether the transaction complies with the Commission's anti-trafficking rules, and therefore they should be dismissed or denied. In addition, Pegasus asserts that KaSTAR's licensed orbital locations should be attributed to DirectCom, also an applicant in the second Ka-band processing round. Both KaSTAR and DirectCom filed responses to the Petition, to which Pegasus filed a reply. 5. KaSTAR then amended its pending applications. The amendment states that on October 19, 1999, KaSTAR issued convertible debt to its present shareholders, Televerde, KPCB Holdings, and DirectCom. Liberty KaSTAR Corporation ("Liberty KaSTAR"), a subsidiary of Liberty Media Corporation, was also issued convertible debt. According to KaSTAR, the debt issued in this transaction does not include any voting rights and cannot be converted to equity until the underlying transfer of control applications are granted. Thereafter, if and when the transfer of control is granted, the investors will convert the debt to KaSTAR stock and make a further investment to acquire additional stock from KaSTAR. As part of this transaction, KaSTAR's board of directors will increase to seven members. Mr. Drucker, however, will remain Chairman of KaSTAR, and Televerde will have the right to nominate two board members. The amendment also states that all of the proceeds from the convertible debt will go to KaSTAR for the continuing development of its satellite system. According to KaSTAR, this investment will enable it to expedite its acquisition of a satellite and launch services. After the proposed transactions, the resulting holdings of KaSTAR will be: Televerde, 35.25 percent; KPCB Holdings, 20.44 percent; DirectCom, 19.10 percent; and Liberty, 18.76 percent. 6. On October 25, 1999, in response to the staff's request, KaSTAR submitted additional information regarding Mr. Drucker's plans regarding the sale of his stock to DirectCom. As noted, KaSTAR's initial application indicates that Mr. Drucker intended to sell an additional two percent of his holdings after the initial transfer of controlling interest to the KaSTAR shareholders. According to KaSTAR, Mr. Drucker will receive $1 per share or $2 million for this transaction, which is greater than Mr. Drucker's initial investment but "less than the value at which KaSTAR is currently selling its shares." KaSTAR also notes that Mr. Drucker intends to sell an additional 1 percent or 1 million shares, for $1 million to certain principals of Daniels and Associates, an investment banking firm providing services to KaSTAR. Other than these transactions, KaSTAR states that Mr. Drucker has "no present intention" of selling any further shares of KaSTAR before the launch of KaSTAR's first satellite. Pegasus filed oppositions to both the amended application and KaSTAR's supplemental filing. IIIII. Discussion 7. Legal Standard. Our review of the proposed transaction requires a finding that grant of the applications will serve the public interest, convenience and necessity. To make this finding we must weigh any potential public interest harms against any potential public interest benefits, considering competitive effects and other public interest factors such as rapid delivery of service to the public. In addition to these competitive effects, we address the issues raised by Pegasus in our public interest determination. 8. Effect on Competition. KaSTAR's satellite system will provide broadband services such as electronic messaging and mailboxes, database access, multimedia bridging, software distribution and voice communications. Upon approval of the proposed transactions, AT&T will acquire an indirect minority ownership in KaSTAR through its ownership of Liberty Media, which in turn has an ownership interest in DirectCom and Liberty KaSTAR. AT&T is the largest U.S. provider of interstate telephone service and the largest U.S. provider of international messaging telephone service. The Commission recently approved AT&T's acquisition of Tele-Communications, Inc., the largest U.S. cable company. Nevertheless, for the reasons discussed below, we are not, at this time, concerned about AT&T's minority interest in KaSTAR. 9. In providing broadband services, KaSTAR will be competing with numerous other licensees in the Ka-band, such as Hughes Communications Galaxy, Inc., Visionstar, Inc., and GE American Communications, Inc. Such services are also provided in the C and Ku-band, and will be provided in the future by licensees in the V-band. In addition, KaSTAR will be competing with terrestrial suppliers who provide broadband services using fiber optic cable. Therefore, we do not expect any possible adverse competitive effects from these transactions. 10. Trafficking. Pegasus, an applicant in the second Ka-band processing round, asserts that the applications do not provide sufficient information to determine compliance with Section 25.145(d) of the Commission's rules, which prohibits trafficking of bare licenses. Specifically, Pegasus states that while KaSTAR acknowledges that equity interests have changed since it was awarded its license, it does not adequately explain these changes. Pegasus also states that the applications fail to indicate the consideration to be paid to KaSTAR or Televerde. Pegasus is concerned that the original shareholders of KaSTAR have realized a substantial gain based on its unbuilt license, but that KaSTAR has failed to disclose information necessary to determine whether it constitutes trafficking. In addition, Pegasus asserts in general, that a "number" of Ka-band licenses are in "danger of lapsing," providing an incentive for licensees to transfer their licenses. Pegasus also states that the Ka-band locations with the greatest service potential were licensed in the first processing round, including KaSTAR's assignment at 109.2 W.L., and therefore, "purchasing" these locations is a more practical option than participating in the Commission's application process. Consequently, Pegasus asserts that the Commission's enforcement of its anti-trafficking rules is critical. 11. KaSTAR responds that the Commission's anti-trafficking policy is designed to prevent speculation by requiring applicants to have a bona fide intent to construct communications facilities, and is not "intended to prevent the infusion of capital by either debt or equity financing." In addition, the Commission's milestone requirements and no-trafficking rule for Ka-band licenses reduce the likelihood of applicants filing for speculative purposes. KaSTAR notes that it, along with Televerde, has consistently demonstrated its intent to design, construct, launch and operate a state-of-the-art satellite system. KaSTAR also states that its license is not in danger of lapsing and that grant of its applications will ensure that a valuable public resource will be put to productive use in the most expeditious manner. Contrary to Pegasus's assertions regarding its equity ownership, KaSTAR states that the proposed transactions are designed to raise capital for the company. The corresponding effect is that Televerde's interest is diluted from 48.33 percent to 35.25 percent, an "unavoidable result" of attracting the investment necessary to fund a satellite system. 12. Trafficking is defined as "speculation, barter or trade in licenses." In the Ka-band Service Rules Order, the Commission stated it would prohibit any "Ka-band licensee from selling a bare license for profit." The Commission's anti-trafficking rule was designed to discourage speculators and prevent the unjust enrichment of those who do not implement their proposed systems. It was not intended, as KaSTAR notes, to prevent capital investments. We are aware of the enormous capital required to construct, launch, and operate a satellite system. In this case, we find that the proposed ownership changes serve a legitimate business purpose of securing the financing necessary to facilitate the implementation of KaSTAR's Ka-band system. Further, KaStar states that all of the proceeds from transactions described in the amended application will go directly to KaSTAR to provide funds for the acquisition and launch of a satellite. The record also reflects KaSTAR's and Televerde's commitment to developing the KaSTAR system. Televerde will continue to hold the largest percentage of stock, and Mr. Drucker will continue to serve as Chairman. While we note that subsequent to the transfer of control Mr. Drucker will sell KaSTAR stock for a greater amount per share than his initial per share investment, the amount of stock at issue is only three percent. Further, once the transfer is approved, Televerde will be investing more than $2.5 million in KaSTAR, at share prices greater than those received by Mr. Drucker for his sale to DirectCom and Daniels & Associates. Consequently, we find that no trafficking is involved in the proposed transactions. In addition, the transactions will improve the likelihood that KaSTAR will become a robust competitor in the satellite communications market, which we believe will further the overall public interest by increasing competitive alternatives for broadband satellite services. 13. Nonetheless, we remain concerned that after the transfer of control, Mr. Drucker may sell his remaining interest in KaSTAR before the launch of KaSTAR's first satellite. Although transfers of non-majority shares generally do not require Commission approval, a subsequent sale of all of Mr. Drucker's remaining shares, either at once or in stages, could constitute trafficking and would contravene the Commission's policy of discouraging parties from speculating in Ka-band licenses. Further, it would be unfair to second round applicants complying with our rules if first round licensees were permitted to sell their licenses to second round applicants. Therefore, we condition this grant to require KaSTAR to notify the Commission, in writing, of any further transactions involving the sale of KaSTAR shares from either Televerde, Mr. Drucker or Walter Segaloff prior to the launch of their first satellite, no later than 30 days after the transaction. 14. Attribution. In the event the Commission does not find trafficking, Pegasus requests that KaSTAR's licensed first round orbital locations be attributed to DirectCom, an applicant in the second processing round. Pegasus makes this request based on DirectCom's 19.10 percent interest in KaSTAR after the proposed transactions. Accordingly, Pegasus asserts that KaStar and DirectCom should be treated as affiliates for purposes of establishing priority for new entrants among second-round applicants for full-CONUS orbital locations. 15. In response, KaStar states first, that DirectCom's interest will decrease as a result of the proposed transaction, and second, this issue has been raised and fully briefed in the second Ka-band processing round. DirectCom also notes that this matter has been raised in the second processing round and is irrelevant to this proceeding. 16. We find that this proceeding is not the proper forum to resolve Pegasus's claim that KaSTAR's licensed orbital locations should be attributed to DirectCom, nor is it necessary to resolve this issue to authorize the transfer of control. Although the Ka-band service rules limit the number of orbit locations that may be initially assigned to licensees, this rule was waived in the first processing round. The issue regarding attributable interests for the purposes of applying this rule has been fully briefed in the second processing round and the outcome may affect more than one applicant. It would be premature to resolve the issue before addressing the second round orbit location assignments and associated service rules. These applications are granted without prejudice to any action that the Commission may take with respect to the second Ka-band processing round. IV. Conclusion 17. The Ka-band satellite market has the potential to stimulate significant economic growth in the United States and abroad. The applicants have clearly articulated a defined and legitimate business purpose for this transaction, which is to create a strong and viable a corporate structure by strengthening KaStar's financial and business resources. This transaction will, in turn, enhance KaSTAR's ability to bring new and improved satellite services to U.S. consumers. Therefore, we find that grant of the transfer of control applications, as conditioned herein, will serve the public interest. V. Ordering Clauses 18. Accordingly, pursuant to Section 0.261 of the Commission's rules, 47 C.F.R.  0.261, IT IS ORDERED, that the application to transfer control filed by KaStar 109.2 Acquisition, LLC, as amended, File No. SAT-T/C-19990629-00071 IS GRANTED. IT IS FURTHER ORDERED, that the application to transfer control filed by KaStar 73 Acquisition, LLC, as amended, File No. SAT-T/C- 19990629-00072, IS GRANTED. 19. IT IS FURTHER ORDERED, that the Petition to Deny or Defer of Pegasus Development Corporation filed August 23, 1999, is DENIED. 20. IT IS FURTHER ORDERED, that these transactions shall be completed within 60 days from the date of this Order. Within 30 days of consummation, the Applicants shall notify the Commission in writing of the date of consummation and the file numbers of the applications involved in the transaction. 47 C.F.R.  25.119(f). 21. IT IS FURTHER ORDERED, that KaSTAR must notify the Commission, in writing, of any further transactions involving the sale of KaSTAR shares from either Televerde, Mr. Drucker or Walter Segaloff prior to the launch of its first satellite, no later than 30 days after the transaction. FEDERAL COMMUNICATIONS COMMISSION Donald Abelson Chief, International Bureau