UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
/ X / Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________to________
Commission file number: 333-41007
EAST/WEST COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3964837
(State of incorporation) (I.R.S. Employer identification number)
350 STUYVESANT AVENUE, RYE, NEW YORK 10580
(Address of principal executive offices)
Registrant's telephone number, including area code: (914) 921-6300
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X / No / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/
The Issuer's revenues for the fiscal year ended December 31, 1997 were $0.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (consisting only of Class A Common Stock) was approximately
$1,090,000, as of April 1, 1998. Solely for the purposes of this calculation,
shares held by directors and officers of the Registrant have been excluded. Such
exclusion should not be deemed a determination by the Registrant that such
individuals are, in fact, "affiliates" of the Registrant.
As of April 1, 1998 there were 1,772,198 shares of the Registrant's Class A
Common Stock outstanding and 1,779,301 shares of the Registrant's Class B Common
Stock outstanding.
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PART I
ITEM 1. BUSINESS
The Company was incorporated in Delaware in August, 1997, as a successor to Aer
Force Communications B, L.P., a partnership which was formed in 1996 by a
subsidiary of Lynch Corporation ("Lynch") and an FCC- qualified small business
to acquire F-Block PCS licenses in an FCC auction. In December, 1997,
shareholders of Lynch received 39.9% of the then outstanding Common Stock of the
Company through pro-rata dividend of one share of Class A Common Stock for each
one share of Lynch common stock (the "Spin Off"). The Company holds five 10
megahertz personal communications services ("PCS") licenses to serve a
population of approximately 21 million, including two of the top ten markets,
Los Angeles and Washington D.C., plus Sarasota, Florida, Reno, Nevada and Santa
Barbara, California. The total cost of these licenses was approximately $19
million, after a 25% bidding credit provided by the Federal Communications
Commission ("FCC"). 80% of the cost of the licenses (or $15.2 million) was
financed over ten years by the U.S. government (the "Government Financing"),
with only payments of interest during the first two years initially with
interest payments due starting in part on July 28, 1997 and in part on September
27, 1997. Interest payments have been suspended until July 1998 at which time
the Company will be required to commence interest payments.
The Company believes that its PCS licenses have substantial potential.
However, the Company has not yet adopted a business plan or determined how to
finance its operations because of uncertainties relating to PCS, which makes
evaluation difficult, including without limitation the newness of PCS,
financing, affiliation and technology issues and the financial problems of
certain C-Block licensees. Therefore, the Company has not yet determined whether
to develop its PCS licenses on its own, joint venture its licenses with other
PCS or wireless telephone licenses holders or operators or others, or sell some
or all of its licenses. The Company expects to continually evaluate these
factors and to adopt a plan or plans once the financing, regulatory and market
aspects of PCS are less uncertain.
The demand for wireless communications services in the United States
has grown dramatically during the last five years. The number of cellular
subscribers has grown from 5.3 million at December 31, 1990 to 44.0 million at
December 31, 1996, representing a compound annual growth rate of 42%. Over the
same time period, the wireless telephone penetration rate has grown from
approximately 3% to approximately 17%, and is forecasted by Kagan Associates to
reach approximately 47% by 2006.
The Company's address is 350 Stuyvesant Avenue, Rye, New York 10580.
Its telephone number is (914) 921-6300.
LICENSES
The Company has five 10 megahertz F-Block PCS licenses as follows:
<TABLE>
<CAPTION>
Population Cost (after 25%
BTA No. BTA Name 1996 POPS Growth Rates (1) Bidding Credit)
- --------------- --------------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
262 Los Angeles, CA 15,513,588 1.07% $4,473,750
461 Washington, D.C. 4,476,304 1.48% $8,835,000
408 Sarasota-Bradenton, FL 554,056 1.28% $1,653,000
372 Reno, NV 465,782 3.10% $1,787,250
406 Santa Barbara-Santa Maria, CA 385,573 0.71% $2,208,721
</TABLE>
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(1) Average compounded annual growth rates in populations between 1990
through 1996, based upon the 1990 U.S. Census and the Population
Estimate Program, U.S. Bureau of the Census, Release date March 20,
1997.
SPIN OFF
The Company has two classes of Common Stock authorized: the Class A
Common Stock and the Class B Common Stock. The 1,417,048 shares of Class A
Common Stock were distributed in the Spin Off representing 39.9% of the
outstanding Common Stock through a dividend of one share of Class A Common Stock
for each share of Lynch Common Stock, payable on December 5, 1997, to
shareholders of record on December 4, 1997 (the "Spin Off"). In addition,
355,150 shares of Class A Common Stock were transferred by Lynch to Gabelli
Funds, Inc. ("GFI") in satisfaction of the interest which GFI had in the
partnership interest of Lynch's subsidiary in the Company's predecessor. Lynch
currently owns all of the issued and outstanding shares of Preferred Stock of
the Company, represented by 7,800 shares with a par and liquidation value of
$1,000 per share.
Collectively, the shares of Class A Common Stock represent not more
than 49.9% of the Company's voting interest, with each share of Class A Common
Stock issued and outstanding having one vote per share (subject to downward
adjustment if necessary to comply with the 49.9% maximum class vote) on all
matters except the election of directors or as otherwise provided by law. The
holders of the Class A Common Stock as a class are entitled to elect members to
the Company's Board of Directors (the "Class A Directors") who collectively
represent two of the five votes of the Company's Board of Directors. At the
present time, the holders of the Class A Common Stock will elect two Class A
Directors who will have one vote each.
Collectively, the shares of Class B Common Stock represent at least
50.1% of the Company's voting interest, with each share of Class A Common Stock
issued and outstanding having 5 votes per share (subject to upward adjustment,
if necessary, to comply with the 50.1% minimum class vote), on all matters
except the election of directors or as otherwise provided by law. With respect
to the election of directors, the Class B Common Stock, voting together as a
class, may elect up to three members of the Company's Board of Directors (the
"Class B Directors"). The Class B Directors shall collectively have three full
votes on each matter submitted to a vote of the Board of Directors.
The Class B Common Stock cannot be transferred, sold or otherwise
disposed of to any third party, directly or indirectly, except (i) to family
members, or by will or by operation of the laws of descent and devise (in which
case the transferees will continue to be bound by these restrictions), (ii) such
number of shares which does not exceed 10% of the Class B Common Stock
outstanding as of the spin off, or (iii) pursuant to a transaction or series of
transactions on terms and conditions which are substantially identical in the
opinion of the Company's counsel to the terms and conditions made available to
all holders of the Class A Common Stock, including form, type and amount of
consideration per share, the availability of such consideration and the timing
of payment. To the extent it deems necessary, such counsel may rely on the
opinion of a nationally recognized investment banking firm in evaluating the
terms of any securities or other consideration being offered.
The Company has outstanding 7,800 shares of Preferred Stock, par value
$1,000 per share. The Preferred Stock (i) is entitled to preferred dividends at
an annual rate of 5 shares of additional Preferred Stock for each one hundred
shares of Preferred Stock outstanding, (ii) has no voting rights except as
provided by law, and (iii) is entitled to be redeemed at $1,000 per share (plus
accrued and unpaid dividends) on the earlier of (i) December 1, 2009, (ii) upon
a change of control of the Class A or Class B Common Stock or (iii) upon the
sale of one or more PCS licenses for cash or a non-cash sale which is
subsequently converted into or redeemed for cash in an amount proportional to
that number of persons covered by the sale of such licenses for cash, or that
portion of a non-cash sale subsequently converted into or redeemed for cash,
compared to the total persons covered by the Company's five initial PCS
licenses, in each case based on the 1996 or most recent subsequent estimate by
the United States Bureau of Census. Therefore, the number of shares redeemed
shall be computed by dividing (i) the number of persons covered by the sale by
(ii) the total number of persons covered by the five initial PCS licenses owned
by the Corporation.
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The Company has no current plan to list or register the Class A Common
Stock on any national securities exchange or on the NASDAQ market. Accordingly,
there can be no assurance that a trading market will continue for the Class A
Common Stock, and the ability to buy or sell shares of Class A Common Stock may
continue to be limited.
POTENTIAL FUTURE ARRANGEMENTS WITH RIVGAM
Rivgam Communicators, LLC ("Rivgam"), is an entity indirectly owned by
GFI, of which Mario J. Gabelli is the Chairman and Chief Executive Officer and
the principal shareholder. Rivgam holds 10 MHz D - and E-Block PCS Licenses
including a license serving Washington, DC where the Company also holds F-Block
PCS licenses. Rivgam did not qualify for or receive bidding credits or U.S.
government financing. Rivgam also holds 10 MHz D - or E-Block licenses in
Baltimore, Maryland, Philadelphia, Pennsylvania, Buffalo, New York, Atlantic
City, New Jersey and Las Cruces, New Mexico.
Rivgam's controlling shareholder GFI and Mr. Gabelli are substantial
holders of the Company's Class A Common Stock. In addition, Mr. Gabelli and his
son are directors of the Company. For various reasons, including possibly more
favorable terms or requirements for raising capital, it may be necessary or
advisable for the Company to enter into joint venture and/or working or other
arrangements (collectively "Arrangements") with holders of additional 10 MHz
licenses. Rivgam would be a logical party with which to enter into such
arrangements, which may cover BTAs other than where there is an overlap. The
ability of the Company to enter into any arrangements with Rivgam may be limited
by law or FCC regulations, and there can be no assurance that the Company will
be able to enter into such arrangements on terms which are favorable to it or at
all.
ITEM 2. PROPERTIES
The Company has no properties except for as described above.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings which are currently pending or, to the
Company's knowledge, contemplated against the Company or to which it is a party,
except for a United States Department of Justice investigation to determine
whether there has been bid rigging and market allocation for license auctions by
the FCC for PCS. The Company, together with various other bidders in the PCS
auctions, has received a civil investigative demand ("CID") requesting documents
and information relating to bidding, and in May 1997, the Company complied with
the CID. The Company does not know what further action, if any, the Justice
Department or the FCC may take.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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(A) MARKET INFORMATION
The Company's Class A Common Stock is not traded on any national securities
exchange or on the NASDAQ market, but is traded on the over-the-counter market
("OTC"). The high and low bids for the Company in the first quarter of 1998 (the
first quarter in which the Class A Common stock was traded) were as follows:
HIGH LOW
---- ---
1 1/4 1/2
The Company's Class B Common Stock is not traded on any national securities
exchange or on the NASDAQ market.
(B) HOLDERS
At April 1, 1998, the records of the Company's transfer agent indicated that
there were 996 holders of record of the Company's Class A Common Stock.
At April 1, 1998, all of the Company's Class B Common Stock was held by Aer
Force Communications, Inc. ("AFC") all of whose capital stock is owned by
Victoria Kane.
(C) DIVIDENDS
The Company has never declared or paid any cash dividends on its Common Stock,
and does not expect to pay cash dividends on either class of its Common Stock in
the foreseeable future. To the extent the Company obtains financing in the
future, such funding sources may prohibit the payment of dividends. The Company
currently intends to retain its earnings, if any, for use in its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company is a development stage company with no significant results
of operations to date. The Company holds five 10 megahertz personal
communications services ("PCS") licenses to serve a population of approximately
21 million, including two of the top ten markets, Los Angeles and Washington
D.C., plus Sarasota, Florida, Reno, Nevada and Santa Barbara, California. The
total cost of these licenses was approximately $19 million, after a 25% bidding
credit provided by the Federal Communications Commission ("FCC"). 80% of the
cost of the licenses (or $15.2 million) was financed over ten years by the U.S.
government (the "Government Financing"), with only payments of interest during
the first two years after award of the licenses.
The Company believes that its PCS licenses have substantial potential.
However, the Company has not yet adopted a business plan or determined how to
finance its operations because of uncertainties relating to PCS, which makes
evaluation difficult, including without limitation the newness of PCS,
financing, affiliation and technology issues and the financial problems of
certain C-Block licensees. Therefore, Company has not yet determined whether to
develop its PCS licenses on its own, joint venture its licenses with other PCS
or wireless telephone licenses holders or operators or others, or sell some or
all of its licenses. The Company expects to continually evaluate these factors
and to adopt a plan or plans once the financing, regulatory and market aspects
of PCS are less uncertain.The Company's principal expense to date has been
interest (including commitment fees) plus minor administrative expenses.
Unless the Company sells its PCS business or joint ventures its PCS licenses
with an entity that has the capacity to provide substantial funds, the Company
will need to raise substantial capital to fund its installment payments to the
U.S. Government and the build out of its PCS licenses. Under the Government
Financing, the Company has to make payments of approximately $948,000 in each of
the first two years after award of the licenses, and $2,424,000 in each of years
three through ten. The interest payments have been suspended, however, until
July, 1998 at which time the Company will be required to make the suspended
interest payments in eight quarterly installments, in addition to regular
interest payments. The Company does not have a reliable estimate of the cost to
build out its PCS licenses but it is likely to be substantial.
The Company will have to raise funds shortly in order to make interest
payments on the Government Financing and for working capital and general
corporate purposes. The report of the Company's independent auditors
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with respect to the financial statements of the Company as of and for the year
ended December 31, 1997, the period from July 26, 1996 (inception) to December
31, 1996, the six months ended June 30, 1997 and the period from July 26, 1996
(inception) to December 31, 1997 contains a paragraph as to the Company's
ability to continue as a going concern. Among the factors cited by the auditors
as raising substantial doubt as to the Company's ability to continue as a going
concern is that, with respect to the periods covered, the Company has incurred
losses since inception and has not yet adopted a business plan or determined how
to finance its operations and will need to obtain capital in order to fund its
interest payment obligations and for working capital and general corporate
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The principal amount of debt (excluding accrued interest) on December 31, 1997
was $15,166,177, compared to shareholders equity of $742,065. During the period
from July 26, 1996 (inception) to December 31, 1997, the Company had no revenues
or operating profits and cannot predict when it may have any revenues or
operating profits.
The debt of the Company to the Limited Partner (including accrued
interest and commitment fees) was $7,835,221 at December 4, 1997. Of that amount
$4,500,000 was contributed as equity to the partnership and the remaining
$3,335,221 was converted into 7,800 shares of $1,000 par value redeemable
preferred stock of the Registrant. The redeemable preferred stock accrues as
payment in-kind dividends at 5% per annum and is redeemable at par value plus
accrued dividends on November 1, 2009 or earlier upon certain circumstances.
In April 1997, the FCC suspended interest payments on the government
financing. On March 24, 1998, the FCC indicated that such interest will be
resumed not earlier than 90 days subsequent to the publication in the Federal
Register of the Order on Reconsideration. Such publication was made on April 8,
1998 requiring cumulative suspended interest payments to be made in eight
quarterly installments beginning at least 90 days thereafter, in addition to
scheduled principal and interest payments of $947,886, interest only, per year
in each of the first two years after the award license and $2,423,517, interest
and principal amortization, per year beginning in 1999 for years three through
ten after the award of the license. In addition, once the payment of the
suspended interest resumes the Company will be required to make additional
interest payments of approximately $480,000 per year. The Company will have to
raise funds in order to make these cash commitments and there is no assurance it
will be able to do so.
YEAR 2000 COMPLIANCE
The Company believes its information systems are in compliance with year 2000
information technology requirements.
SEASONALITY
The Company believes that its operations are not significantly effected by
seasonality.
RISK FACTORS: FORWARD LOOKING STATEMENTS
The management discussion and analysis and the information provided
elsewhere in this Form 10-KSB contain forward looking statements regarding the
Company's future plans, objectives and expected performance. Those statements
are based on assumptions that the Company believes are reasonable, but are
subject to a wide range of risks and uncertainties, and a number of factors
could cause the Company's actual results to differ materially from those
expressed in the forward looking statements referred to above.
Government Regulation
The spectrum licensing, construction, operation, sale and
interconnection arrangements of wireless communications networks are regulated
to varying degrees by state regulatory agencies, the FCC, Congress, the courts
and other governmental bodies. There can be no assurance that any of these
governmental bodies having jurisdiction over the Company will not adopt or
change regulations or take other actions that would adversely affect
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the Company's business, financial condition or results of operations. Although
the FCC has issued rules regarding the F-Block Auction and numerous other
matters, not all of them have been subject to FCC or judicial interpretation.
Accordingly, for certain matters (such as the structure of its Board of
Directors and management), the Company is relying on public and private informal
interpretation of the rules from the staff of the FCC. The FCC is not bound by
such informal interpretation of FCC staff and there can be no assurance that the
FCC or the courts will agree with the staff's interpretation. Many of these
rules also require ongoing compliance that the Company may not be able to
satisfy despite diligent efforts. A failure to comply with FCC rules could
subject the Company to serious penalties and have a material adverse effect upon
the Company's business, results of operations and financial condition. In
addition, although the Company's PCS licenses are renewable after the expiration
of their 10-year terms, there can be no assurance that the Company's licenses
will be renewed.
The Telecommunications Act of 1996 (the "1996 Act") mandates
significant changes in existing regulation of the telecommunications industry
that are intended by Congress to promote competitive development of new service
offerings, to expand public availability of telecommunications services and to
streamline regulation of the industry. Included in these mandates are
requirements that local exchange carriers ("LECs") must: (i) permit other
competitive carriers, which may include PCS licensees, to interconnect to their
networks; (ii) establish reciprocal compensation agreements with competitive
carriers to terminate traffic on each other's networks and (iii) offer resale of
their telecommunications services. In addition, incumbent LECs are required to
offer interconnection and access to unbundled network elements at cost-based
rates (plus a reasonable profit), as well as significant resale discounts. The
implementation of these mandates by the FCC and state authorities potentially
involves numerous changes in established rules and policies that could adversely
affect the Company's business, financial condition and results of operations.
In March 1997, CAI Wireless Systems, Inc. (and certain subsidiaries)
("CAI") filed petitions to deny various D, E and F-Block PCS licenses, including
the Company's license for Washington, D.C., because it feared that PCS
operations might cause interference with petitioners' wireless cable services.
In June 1997 the FCC dismissed all of those petitions on the grounds that CAI
failed to establish standing because it failed to allege specific facts
supported by affidavit demonstrating that applicants would cause CAI
interference if their applications were granted. It is possible that CAI, or
others similarly situated, might attempt to raise this issue at a later date.
The FCC has proceedings in process that could open up other frequency
bands for wireless telecommunications and PCS-like services. There can be no
assurance that these proceedings will not adversely affect the Company and the
Company's ability to offer a full range of PCS services.
Personal Communications Services ("PCS")
Victoria G. Kane, a director of the Company and the sole shareholder of
the Class B Common Stock, is the majority stockholder of Fortunet Wireless
Communications Corporation, which is the General Partner and 50.1% equity owner
in Fortunet Communications, L.P. ("Fortunet"). Fortunet is the successor to five
partnerships that won 30 megahertz personal communications services licenses in
the FCC's C-Block auction (restricted to small businesses and certain other
qualifying bidders), which concluded in 1996. Fortunet won 31 licenses in 17
states covering a population of approximately 7 million people. The licenses had
an aggregate purchase price of $216 million after a 25% bidding credit.
F-BLOCK LICENSE REQUIREMENTS
When the FCC allocated spectrum to public auction for PCS, it
designated the F-Block as an "Entrepreneurs' Block." FCC rules require F-Block
applicants and licensees (collectively, "Entrepreneurs") to meet various
qualifications.
The FCC has determined that Entrepreneurs that qualify as a Very Small
Business and win PCS licenses are eligible to receive a loan from the U.S.
Government for 80% of the dollar amount of their winning bids in the
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F-Block Auction (a "F-Block Loan"). The Government Financing provided to the
Company is F-Block Loans. In order to ensure continued compliance with the FCC
rules, the FCC has announced its intention to conduct random audits during the
initial 10-year PCS license terms. There can be no assurance that the Company
will continue to satisfy any of the F-Block license requirements, and the
failure to do so would have a material adverse effect on the Company.
Entrepreneurs Requirements. In order to hold a F-Block license, an
entity must have: (i) less than $125 million in gross revenues (the
"Entrepreneurs Revenues Limit") for the two years preceding the auction and (ii)
less than $500 million in total assets (excluding the value of C-Block licenses)
(the "Entrepreneurs Asset Limit" and, together with the Entrepreneurs Revenues
Limit, the "Entrepreneurs Requirements"). To qualify for the F-Block Auction, an
entity had to have met the Entrepreneurs Revenues Limit for each of the two
years prior to the auction and the Entrepreneurs Asset Limit at the time it
filed its application to qualify for the F-Block Auction on FCC Form 175 (the
"Short Form"). For at least five years after obtaining an F-Block license, a
licensee must continue to meet the Entrepreneurs Requirements, which are
modified for such five-year period to exclude certain assets and revenues from
being counted toward the Entrepreneurs Asset Limit and the Entrepreneurs
Revenues Limit, respectively. Additional amounts are excluded if the licensee
maintains an organizational structure that satisfies the Control Group
Requirements described below. In calculating a licensee's gross revenues for
purposes of the Entrepreneurs Requirements, the FCC includes the gross revenues
of the licensee's affiliates, those persons or entities that hold interests in
the licensee, and the affiliates of such persons or entities.
By claiming status as an Entrepreneur, the Company qualified for the
F-Block Auction. If the FCC were to determine that the Company did not satisfy
the Entrepreneurs Requirements at the time it participated in the F- Block
Auction or that the Company fails to meet the ongoing Entrepreneurs
Requirements, the FCC could revoke the Company's PCS licenses, fine the Company
or take other enforcement actions, including imposing the Unjust Enrichment
Penalties described below. Although the Company believes it has met the
Entrepreneurs Requirements, there can be no assurance that it will continue to
meet such requirements or that, if it fails to continue to meet such
requirements, the FCC will not take action against the Company, which could
include revocation of its PCS licenses.
Very Small Business Requirements. An entity that meets the
Entrepreneurs Requirements may also apply to receive certain preferential
financing terms if it meets certain requirements to qualify as a Small Business
or a Very Small Business (the "Small Business Requirements" or "Very Small
Business Requirements"). The preferential financing terms for Very Small
Businesses, include a 25% bidding credit (the "Bidding Credit") and the ability
to make quarterly interest-only payments on its F-Block Loan for the first two
years of the license term. To meet the Very Small Business Requirements, a
licensee must have had annual average gross revenues of not more than $15
million for the three calendar years preceding the date it filed its Short Form.
In calculating a licensee's gross revenues for purposes of the Very Small
Business Requirements, the FCC includes the gross revenues of the licensee's
affiliates, those persons or entities that hold interests in the licensee, and
the affiliates of such persons or entities.
By claiming status as a Very Small Business, the Company qualified for
the 25% Bidding Credit and the most favorable installment payment terms. If the
FCC were to determine that the Company does not qualify as a Very Small
Business, the Company could, at a minimum, be forced to give up any benefits for
which it was not eligible. Further, the FCC could revoke the Company's PCS
licenses, fine the Company or take other enforcement actions, including imposing
the Unjust Enrichment Penalties. Although the Company has structured itself to
meet the Very Small Business Requirements, there can be no assurance that it
will remain in compliance with these requirements or that, if it fails to
continue to meet such requirements, the FCC will not take action against the
Company, which could include revocation of its PCS licenses.
Control Group Requirements. If an F-Block licensee maintains an
organizational structure in which at least 25% of its total equity on a fully
diluted basis is held by a control group (the "Control Group") that meets
certain requirements (the "Control Group Requirements"), the FCC excludes
certain assets and revenues from such licensee's
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total revenues and assets, thereby making it easier for the licensee to meet the
Entrepreneurs Requirements and the Very Small Business Requirements. The Control
Group Requirements mandate that the Control Group, among other things, have both
actual and legal control of the licensee. Further, the FCC permits licensees to
qualify under the Control Group Requirements pursuant to an alternative
structural option (the "Qualifying Investor Option"), in which: (i) an
established group of investors meeting certain financial qualifications (the
"Qualifying Investors") that own at least 15% of the equity interest on a fully
diluted basis and 50.1% of the voting power in the F-Block licensee and (ii)
additional members ("Additional Control Group Members") that hold at least 10%,
on a fully diluted basis, of the equity interest in the F-Block licensee.
Additional Control Group Members must be either: (a) the same Qualifying
Investors of the Control Group, (b) members of the licensee's management or (c)
non-controlling institutional investors, including venture capital firms. To
take advantage of the FCC's Qualifying Investor Option, a F-Block licensee must
have met the Qualifying Investor Option requirements at the time it filed its
Short Form and must continue to meet the Qualifying Investor Option requirements
for three years following the License Grant Date. Commencing the fourth year of
the license term, the FCC rules (i) eliminate the requirement that the
Additional Control Group Members meet certain qualifications and (ii) allow the
licensee to reduce the minimum required equity interest held by the Control
Group's Qualifying Investors from 15% to 10%.
In order to meet the Control Group Requirements, the Company's
Certificate of Incorporation provides that the Company's Class B Common Stock,
as a class, must constitute 50.1% of the voting power of the Company. There can
be no assurance that the Company will remain in compliance with the Control
Group Requirements or, if it fails to continue to meet such requirements, that
the FCC will not take action against the Company, which could include revocation
of its PCS licenses. Although the Company has taken these and other steps to
meet the Control Group Requirements, there can be no assurance that the Company
has or will continue to meet the Control Group Requirements, and the failure to
meet such requirements would have a material adverse effect on the Company.
Asset and Revenue Calculation. In determining whether an entity
qualifies as an Entrepreneur and/or as a Very Small Business, the FCC counts the
gross revenues and assets of the entity's "financial affiliates" toward the
entity's total gross revenues and total assets. Financial affiliation can arise
from common investments, familial or spousal relationships, contractual
relationships, voting trusts, joint venture agreements, stock ownership, stock
options, convertible debentures and agreements to merge. Affiliates of
noncontrolling investors with ownership interests that do not exceed the
applicable FCC nonattributable investor ownership thresholds are not attributed
to F-Block licensees for purposes of determining whether such licensees
financially qualify for the applicable F-Block Auction preferences. The
Entrepreneurs Requirements and the Very Small Business Requirements provide
that, to qualify as a nonattributable investor, an entity may not own more than
25% of the Company's total equity on a fully diluted basis. There can be no
assurance that the Company will not exceed these passive investor limits or
otherwise violate the Entrepreneur Requirements and/or the Very Small Business
Requirements.
In addition, if an entity makes bona fide loans to a F-Block licensee,
the assets and revenues of the creditor would not be attributed to the licensee
unless the creditor is otherwise deemed an affiliate of the licensee, or the
loan (including the redeemable Preferred Stock) is treated by the FCC as an
equity investment and such treatment would cause the creditor/investor to exceed
the applicable ownership interest thresholds (for purposes of both the financial
affiliation and foreign ownership rules). Although the FCC permits a
creditor/investor to use standard terms to protect its investment in F-Block
licensees, such as covenants, rights of first refusal and super-majority voting
rights on specified extraordinary issues, the FCC has stated that it will be
guided, but not bound, by criteria used by the Internal Revenue Service to
determine whether a debt investment is bona fide debt. The FCC's application of
its financial affiliation rules is largely untested and there can be no
assurance that the FCC or the courts will not treat certain of the company's
lenders or investors as financial affiliates of the Company.
Transfer Restrictions. In addition, the FCC prohibits F-Block licensees
from assigning or transferring control of any of their F-Block licenses for a
period of at least five years from the License Grant Date to any entity that
fails to satisfy the Entrepreneurs Requirements during such period. After the
fifth year, all transfers and
-9-
<PAGE>
assignments remain subject to the Unjust Enrichment Penalties. The effect of
this prohibition will likely deter or delay unsolicited changes in control of
the Company.
The Company (i) believes that it has structured itself to satisfy the
Entrepreneurs Requirements, (ii) intends to diligently pursue and maintain its
qualification as a Very Small Business and (iii) has structured the Class A and
Class B Common Stock in a manner intended to ensure compliance with the
applicable FCC Rules. The Company has relied on representations of its investors
to determine its compliance with the FCC's rules applicable to F-Block
licensees. There can be no assurance, however, that the Company's investors or
the Company itself will continue to satisfy these requirements during the term
of any PCS license granted to the Company or that the Company will be able to
successfully implement divestiture or other mechanisms included in the Company's
Certificate of Incorporation which are designed to ensure compliance with FCC
rules. Any non-compliance with FCC rules could subject the Company to serious
penalties, including revocation of its PCS licenses.
FCC rules impose build-out requirements that require PCS licensees to
provide adequate service to at least one-third of the population in the licensed
area within five years from the date of grant and two-thirds within ten years.
The Company has not began any build out of its licenses. There are also
substantial restrictions on the transfer of control of C and F Block PCS
licenses.
There are many risks relating to PCS communications including without
limitation, the high cost of PCS licenses, the fact that it involves start-up
businesses, raising the substantial funds required to pay for the licenses and
the buildout, determining the best way to develop the licenses and which
technology to utilize, the small size and limited resources the Company compared
to other potential competitors, existing and changing regulatory requirements,
additional auctions of wireless telecommunications spectrum and actually
building out and operating new businesses profitably in a highly competitive
environment (including already established cellular telephone operators and five
new PCS licensees). There can be no assurance that any licenses granted to the
Company can be successfully sold or financed or developed.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-10-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as
of April 1, 1998 are as follows:
NAME AGE POSITION*
- ---- --- --------
Victoria G. Kane(1) 49 Class B Director and Chairman
T. Gibbs Kane, Jr.(1) 50 Class B Director
Mario J. Gabelli(2) 55 Class A Director
Marc J. Gabelli(2)(3) 30 Class A Director
Robert E. Dolan 46 Assistant Secretary
- ----------------------
* Each of the Class B Directors shall have one and one-half votes and each of
the Class A Directors shall have one vote.
(1) T. Gibbs Kane, Jr. and Victoria G. Kane are husband and wife.
(2) Mario J. Gabelli and Marc J. Gabelli are father and son.
(3) Marc J. Gabelli resigned as a director of the Company as of April 15, 1998.
VICTORIA G. KANE, Entrepreneur and investor. Owner and instructor of
dance studio (from 1986 to 1996).
T. GIBBS KANE, JR., President, Sound Shore Management (since 1978), a
registered investment advisor; Director, Sound Shore Fund (since 1985), a mutual
fund.
MARIO J. GABELLI, Chairman and Chief Executive Officer of Lynch (since
1986); Chairman and Chief Executive Officer of Gabelli Funds, Inc., (since
1980), an investment adviser and holding company for subsidiaries engaged in
various aspects of the securities business (including GAMCO Investors, Inc. of
which he is Chief Executive Officer); Director/Trustee and/or officer of Gabelli
International Growth Fund, Inc. (since 1995), Gabelli Capital Series Funds, Inc.
(since 1994), Gabelli Global Multimedia Trust Inc. (since 1994), Gabelli Gold
Fund, Inc. (since 1994), The Gabelli Global Series Funds, Inc. (since 1993),
Gabelli Investor Funds, Inc. (since 1993), Gabelli Equity Series Funds, Inc.
(since 1991), The Gabelli Value Fund Inc. (since 1989), The Gabelli Convertible
Securities Fund, Inc. (since 1989), The Gabelli Equity Trust Inc. (since 1986),
The Gabelli Money Market Funds (since 1992), The Gabelli Growth Fund (since
1987) and The Gabelli Asset Fund (since 1986); Governor of The American Stock
Exchange (since 1995).
MARC J. GABELLI, Portfolio Manager of GAMCO Investors, Inc. (since
1993), an investment advisor; Vice President of Research of Gabelli & Company,
Inc. (since 1993), a broker-dealer; Managing Director of Gabelli Funds, Inc.
(since 1996), an investment adviser and holding company for subsidiaries engaged
in various aspects of the securities business; President of Gemini Management
Limited (since 1995), an advisor to an offshore investment company; Portfolio
Manager of The Gabelli Global Interactive Couch Potato Fund (since 1993), an
investment company. Previously employed at Lehman Brothers in equity research
and arbitrage (1989-1993). Mr. Gabelli resigned as a director of the Company as
of April 15, 1998.
ROBERT E. DOLAN, Chief Financial Officer of Lynch (since February 1992)
and Controller (since May 1990).
-11-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company is not compensating its directors at the present time,
although it may do so in the future. The Company does indemnify directors
pursuant to Delaware law and may reimburse them for certain out-of-pocket costs
in connection with serving as directors.
EXECUTIVE COMPENSATION
The Company has no employees and has paid no employee or executive
compensation, although it may do so in the future.
-12-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
<TABLE>
<CAPTION>
As of March 1, 1998
---------------------------------------------------------------------------------------------------------
Class A Beneficially Class B Beneficially Owned Total Beneficially Owned
Owned
------------------------------- -------------------------------- ---------------------------------
Shares Percent Shares Percent Shares Percent
-------------- -------------- ---------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
AFC(1) -- -- 1,779,301 100% 1,779,301 50.1%
Victoria G. Kane (1) -- -- 1,779,301 100% 1,779,301 50.1%
T. Gibbs Kane, Jr. (1) -- -- 1,779,301 100% 1,779,301 50.1%
Gabelli Funds, Inc.(2) 355,150 20.0% -- -- 355,150 10.0%
Mario J. Gabelli (3) 682,576 38.5% -- -- 682,576 19.2%
Marc J. Gabelli -- -- -- -- -- --
Robert E. Dolan (4) 235 -- -- -- 235 --
All Directors and 682,811 38.5% 1,779,301 100% 2,462,112 69.3%
Executive Officers as a
Group (5 in total)
</TABLE>
(1) Victoria G. Kane is the sole shareholder of AFC and therefore shares
owned by AFC are set forth in this table as owned by Victoria G. Kane.
T. Gibbs Kane, Jr. is the husband of Victoria G. Kane, and therefore
shares owned by Victoria G. Kane are also set forth as owned by T.
Gibbs Kane, Jr. T. Gibbs Kane, Jr. disclaims ownership of the shares.
The address of AFC, Victoria G. Kane and T. Gibbs Kane, Jr. is 350
Stuyvesant Avenue, Rye, New York 10580.
(2) Mario J. Gabelli is the Chairman and Chief Executive Officer, and the
principal stockholder of Gabelli Funds, Inc.
(3) Includes 255,426 shares owned directly by Mr. Gabelli (including 3,512
shares held for the benefit of Mr. Gabelli in the Lynch 401(k) Savings
Plan), 355,150 shares held by GFI, 2,000 shares owned by a charitable
foundation of which Mr. Gabelli is a trustee and 70,000 shares owned by
a limited partnership in which Mr. Gabelli is the general partner and
has a 20% interest. Mr. Gabelli disclaims the ownership of the shares
owned by the foundation, by GFI to the extent of the minority interest
in GFI held by third parties, and by the partnership except for his 20%
interest therein. The address of GFI and Mr. Gabelli is 555 Theodore
Fremd Avenue, Corporate Center at Rye, Rye, NY 10580.
(4) Includes 35 shares registered in the name of Mr. Dolan's children with
respect to which Mr. Dolan has voting and investment power.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
AFC and Lynch PCS Corporation F ("LPCS"), a subsidiary of Lynch, formed
a limited partnership, Aer Force Communications B, L.P. (the "Partnership") in
July 1996 for the purpose of bidding for PCS licenses in the F-Block Auction.
AFC, the general partner, contributed $100,200 to the Partnership for a 50.1%
equity interest and LPCS, the limited partner, contributed $99,800 to the
Partnership for a 49.9% equity interest. LPCS also
-13-
<PAGE>
loaned the Partnership an additional $11.8 million, primarily for down-payments
and to service instalment payments on PCS licenses won in the auction.
On August 13, 1997, the Company was incorporated and on December 4,
1997, the Company succeeded to the rights and obligations of the Partnership. At
that time, AFC received 1,779,301 shares of Class B Common Stock of the Company
and LPCS received 1,772,198 shares of Class A Common Stock of the Company.
Concurrently with the Spin Off, LPCS transferred 1,417,048 shares of Class A
Common Stock to Lynch shareholders and 355,150 shares of Class A Common Stock to
GFI in satisfaction of LPCS's obligation to share a profits interest in LPCS's
partnership interest.
As a part of the reorganization creating the Company, AFC and LPCS
contributed an additional $125,250 and $124,750, respectively, as equity to the
Company. A portion ($4.5 million) of the Company's existing indebtedness to
LPCS, including accrued interest and commitment fees (totalling $7.8 million at
December 1, 1997) was contributed to the Partnership as a contribution to
capital; and the remaining portion was converted into $7.8 million of redeemable
Preferred Stock and the obligation of LPCS to make additional loans to the
Company terminated.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Information
See index to Financial Statements on Page F-1
(2) Financial Statement Schedules
Supplemental schedules are omitted because they are not
required, inapplicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits *
3.1 Articles of Incorporation of East/West
Communications, Inc. (Exhibit 3.1 to Registrant's
Form S-1 filed November 25, 1997).
3.2 By-Laws of East/West Communications, Inc. (Exhibit
3.2 to Registrant's Form S-1 filed November 25,
1997).
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information purposes only and not
filed.
_______________
* - Except as noted, all exhibits have been previously filed.
(B) REPORTS ON FORM 8-K
None
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed this
14th day of April, 1998 on its behalf by the undersigned, thereunto duly
authorized.
EAST/WEST COMMUNICATIONS, INC.
By: /S/ Victoria Kane
-----------------------------------------
Victoria Kane
Chairman of the Board
(Chief Executive Officer and Chief
Financial Officer)
POWER OF ATTORNEY
East/West Communications, Inc. and each of the undersigned do hereby
appoint Victoria Kane, its or his true and lawful attorney to execute on behalf
of East/West Communications, Inc. and the undersigned any and all amendments to
this Annual Report on Form 10-KSB and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission; each of such attorneys shall have the power to act hereunder with or
without the other.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Victoria Kane Chairman of the Board April 14, 1998
- ------------------------ and Director
Victoria Kane
/s/ T. Gibbs Kane, Jr.
- ------------------------ Director April 14, 1998
T. Gibbs Kane, Jr.
- ------------------------ Director April , 1998
Mario J. Gabelli
-15-
<PAGE>
Audited Financial Statements
East/West Communications, Inc.
(A Development Stage Enterprise,
formerly Aer Force Communications B, L.P.)
For the year ending December 31, 1997,
the period from July 26, 1996 (inception)
to December 31, 1996,
and the period from July 26, 1996 (inception)
to December 31, 1997
with Report of Independent Auditors
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
CONTENTS
Report of Independent Auditors.............................................F-2
Audited Financial Statements
Balance Sheets at December 31, 1997 and December 31, 1996..................F-3
Statements of Operations for the Year Ended December 31, 1997,
the Period from July 26, 1996 (Inception) to December 31, 1996, and the
Period from July 26, 1996 (Inception) to December 31, 1997..............F-4
Statements of Changes in Shareholder's Equity (Deficit) for
the Period from July 26, 1996 (Inception) to December 31, 1997..........F-5
Statements of Cash Flows for the Year Ended December 31, 1997,
the Period from July 26, 1996 (Inception) to December 31, 1996, and the
Period from July 26, 1996 (Inception) to December 31, 1997..............F-6
Notes to Financial Statements..............................................F-7
F-1
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
East/West Communications, Inc.
We have audited the accompanying balance sheets of East/West Communications,
Inc. (the "Company") a development stage enterprise, formerly Aer Force
Communications B, L.P., as of December 31, 1997 and 1996, and the related
statements of operations, changes in shareholder's equity (deficit), and cash
flows for the year ended December 31, 1997, the period from July 26, 1996
(inception) to December 31, 1996, and for the period from July 26, 1996
(inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and 1996, and the results of its operations and its cash flows for the year
ended December 31, 1997, the period from July 26, 1996 (inception) to December
31, 1996, and the period from July 26, 1996 (inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming East/West
Communications, Inc. will continue as a going concern. As more fully described
in Note 1, the Company has incurred losses since inception and has not yet
adopted a business plan or determined how to finance its operations and will
need to obtain capital in order to fund its interest payment obligations and for
working capital and general corporate purposes. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Stamford, Connecticut
April 14, 1998
F-2
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
==============================
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 254,427 $ --
Deposit with FCC -- 12,000,000
------------ ------------
Total current assets 254,427 12,000,000
PCS Licenses 18,957,721 --
Capitalized costs 1,240,434 --
============ ============
Total assets $ 20,452,852 $ 12,000,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accrued liabilities $ 654,853 $ --
Due to Limited Partner -- 1,578,500
Long-term debt:
Loan from Limited Partner -- 11,800,000
Loan from FCC 15,166,177 --
Deferred income taxes 500,000 --
Redeemable preferred stock, $1000 par value; 5% cumulative dividends,
15,000 shares authorized, 7,800 issued and outstanding (liquidation
value - $7,800,000) 3,389,487 --
Shareholder's equity (deficit):
Common stock, Class A, $.0001 par value, 3,600,000 shares authorized,
1,772,198 shares issued and outstanding 177 --
Common stock, Class B, $.0001 par value, 16,000,000 shares authorized,
1,779,301 shares issued and outstanding 178 --
Additional paid-in capital 4,949,645 --
Shareholder's deficit accumulated during the development stage (4,207,935) --
General Partner's equity accumulated during the development stage -- 84,415
Limited Partner's deficit accumulated during the development stage -- (1,462,915)
------------ ------------
Total shareholder's equity (deficit) accumulated during the development
stage 742,065 (1,378,500)
------------ ------------
Total liabilities and shareholder's equity (deficit) $ 20,452,852 $ 12,000,000
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Statements of Operations
<TABLE>
<CAPTION>
JULY 26, 1996 JULY 26, 1996
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
======================================================================
<S> <C> <C> <C>
Interest expense including commitment fees $(1,987,562) $(1,578,500) $(3,566,062)
Deferred income tax expense (500,000) - (500,000)
Other expenses (87,607) - (87,607)
-------------------------------------------------------------------
Net loss (2,575,169) (1,578,500) (4,153,669)
Dividend requirement on preferred stock (54,266) - (54,266)
-------------------------------------------------------------------
Loss applicable to common shares $(2,629,435) $(1,578,500) $(4,207,935)
===================================================================
Basic and diluted loss per share:
Net loss $(.74)
===============
Number of shares used in computation 3,551,499
===============
Net loss allocated to general partner (1%) $ (15,785)
=============
Net loss allocated to limited partner (99%) $(1,562,715)
=============
</TABLE>
See accompanying notes.
F-4
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Statements of Changes in Shareholder's Equity/(Deficit)
For the period from July 26, 1996 (inception) to December 31, 1997
<TABLE>
<CAPTION>
Limited Total
Additional General Partmers Shareholder's
Common Paid in Accumulated Partner's Equity Equity
Stock Capital Deficit Equity (Deficit (Deficit)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 26, 1996 (inception) $ - $ - $ - $ - $ $ -
Capital contributions - - - 100,200 99,800 200,000
Net loss - - - (15,785) (1,562,715) (1,578,500)
---------------------------------------------------------------------------------------
Balance at December 31, 1996 - - - 84,415 (1,462,915) (1,378,500)
Capital contributions - - - 125,250 4,624,750 4,750,000
Issuance of 3,551,499 shares of
Common Stock, $.0001 par value
(1,772,198-Class
A; 1,779,301-Class B) 355 4,949,645 (1,578,500) $ (209,665) (3,161,835) -
Net loss - - (2,575,169) - - $(2,575,169)
Preferred dividends - - (54,266) - - (54,266)
---------------------------------------------------------------------------------------
Balance at December 31, 1997 $355 $4,949,645 $(4,207,935) $ - $ - $ 742,065
=======================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Statements of Cash Flows
<TABLE>
<CAPTION>
JULY 26, 1996 JULY 26, 1996
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997
-------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(2,575,169) $ (1,578,500) $(4,153,669)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income taxes 500,000 - 500,000
Changes in operating assets and liabilities:
Accrued liabilities 60,920 - 60,920
Interest accrued, including commitment fees 1,987,563 1,578,500 3,566,063
-------------------------------------------------------------------
Net cash used in operating activities (26,686) - (26,686)
INVESTING ACTIVITIES
(Deposits with) refunds from the FCC 10,104,228 (12,000,000) (1,895,772)
Purchase of PCS licenses (1,895,772) - (1,895,772)
Other (11,617) - (11,617)
-------------------------------------------------------------------
Net cash (used in) provided by investing activities 8,196,839 (12,000,000) (3,803,161)
FINANCING ACTIVITIES
Proceeds from the issuance of loans from the Limited
Partner
1,938,502 11,800,000 13,738,502
Repayment of loans from the Limited Partner (10,104,228) - (10,104,228)
Capital contributions 250,000 200,000 450,000
-------------------------------------------------------------------
Net cash provided by (used in) financing activities (7,915,726) 12,000,000 4,084,274
Net change in cash and cash equivalents 254,427 - 254,427
Cash and cash equivalents at beginning of period - - -
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 254,427 $ - $ 254,427
===================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
December 31, 1997
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
East/West Communications, Inc. ("the Company") was incorporated on August 13,
1997 to succeed to the rights and obligations of Aer Force Communications B,
L.P. ("the Partnership"). The Partnership was formed in July 1996 to bid for
personal communications services ("PCS") licenses in the Federal Communications
Commission's ("FCC") F-Block auction. PCS is a second generation digital
wireless service utilizing voice, video or data devices that allow people to
communicate at anytime and virtually anywhere. Over the past three years, the
FCC auctioned off PCS licenses, a total of 120 MHZ of spectrum, falling within
six separate frequency blocks labeled A through F. Frequency blocks C and F were
designated by the FCC as "entrepreneurial blocks." Certain qualifying small
businesses including the Partnership were afforded bidding credits in the
auctions as well as government financing of the licenses acquired. The
Partnership won five licenses in 1997 to provide personal communications
services over 10Mhz of spectrum to a population of approximately 21 million,
including Los Angeles and Washington, D.C. Aer Force Communications Inc. was the
General Partner of the Partnership with a 50.1% equity interest. Lynch PCS
Corporation F ("Lynch PCS F"), a wholly-owned subsidiary of Lynch Corporation
("Lynch"), a publicly held company, was the Limited Partner of the Partnership
with a 49.9% equity interest.
On December 4, 1997, the Company succeeded to the assets and liabilities of the
Partnership under a plan where the General Partner received 50.1% of the Common
Stock of the Company (in the form of 100% of the Company's Class B Common Stock)
and Lynch PCS F received 49.9% of the Common Stock of the Company (in the form
of 100% of the Company's Class A Common Stock). Just prior to the succession,
the Partners made cash contributions totaling $250,000 (in proportion to their
respective equity interests) to the Partnership and the Limited Partner
contributed $4.5 million of its outstanding loan to the Partnership's Capital.
Immediately thereafter, Lynch PCS F dividended 39.9% of the Common Stock of the
Company to Lynch which, in turn, dividended this interest to its shareholders.
In addition, Lynch PCS F transferred the remaining 10% of Common Stock of the
Company held by it to Gabelli Funds, Inc., an affiliate of the Chairman and CEO
of Lynch, in satisfaction of a previously incurred obligation. Also at that
time, Lynch PCS F converted the remaining principal amount of its loan to the
Partnership of $3,335,221 (after the capital contribution of $4,500,000) into a
redeemable preferred stock of the Company (see Note 6). Under the terms of this
conversion the Limited Partner's prior obligation to make further loans to the
Partnership was terminated.
BASIS OF PRESENTATION
The financial statements are prepared in conformity with generally accepted
accounting principles applicable to a development stage enterprise.
F-7
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
The Company's financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business and do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
and the amount and classifications of liabilities that may result from the
possible inability of the Company to continue as a going concern.
The Company believes that its PCS licenses have substantial potential. However,
the Company has not yet adopted a business plan or determined how to finance its
operations because of uncertainties relating to PCS. Therefore, the Company has
not yet determined whether to develop its PCS licenses on its own, to joint
venture its licenses with other PCS or wireless telephone licensees or
operators, or to sell some or all of its licenses. The Company expects to
continually evaluate these factors and adopt a business plan once the financing,
regulatory and market aspects of PCS are less uncertain.
The Company has incurred losses since inception and will need to obtain capital
in order to fund its interest payment obligations and for working capital and
general corporate purposes. There can be no assurance that the Company can raise
sufficient capital to fund its obligations and finance the construction of its
networks. Accordingly, the lack of funding creates substantial doubt about the
Company's ability to continue as a going concern.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents for which the carrying amount approximates fair value
include highly liquid investments with a maturity of three months or less at the
time of purchase.
ADMINISTRATIVE SERVICES
The Company and the Partnership has never had any paid employees. Lynch PCS F
provided the Partnership, at its request, with certain services in connection
with the Partnership's bidding for PCS licenses in the FCC auction in late 1996
through early 1997. Aside from that matter, neither the General Partner nor
Lynch PCS F provided the Partnership or the Company with a substantial amount of
services. Neither partner charged the Partnership or the Company for the
services provided, as such amounts are not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the carrying amounts of assets and liabilities and disclosures at the
date of the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED COSTS
Interest charges including commitment fees incurred prior to the granting of the
licenses have been expensed. Subsequent to the license grant dates, and until
operations commence, all interest charges and commitment fees on outstanding
loan balances will be capitalized. These costs will be amortized over the
remaining life of the respective loan when the Company commences operations.
Capitalized interest, included in capitalized costs, amounted to $897,267 at
December 31, 1997. Total interest charges amounted to $1,119,111, $698,166 and
$1,817,277, respectively, for the year ended December 31, 1997, the period from
July 26, 1996 (inception) to December 31, 1996, and for the period from July 26,
1996 (inception) to December 31, 1997.
The FCC licenses will be amortized over a period, consistent with the industry
standard, not to exceed 40 years, which will begin when operations commence.
Pursuant to FCC regulations, license holders are required to commence providing
service to one-third of the population within the license area within 5 years
from the date of award and two-thirds of the population within ten years from
the date of award.
LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share," which was adopted by the Company in 1997 upon the issuance of its
common stock. Basic loss per share is calculated by dividing net loss by the
weighted average number of Class A and Class B common shares outstanding during
the period. The basic and diluted loss per share for the year ended December 31,
1997 give effect to the issuance of the common stock of the Company as if the
issuance occurred on January 1, 1997.
INCOME TAXES
Prior to December 4, 1997, no provision for income taxes was made in the
financial statements as the partners were required to report their respective
share of income or loss on their respective income tax returns. Beginning
December 4, 1997, the Company accounts for income taxes pursuant to the
provisions of SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred taxes result from temporary differences in the recognition of revenues
and expenses for income tax and financial reporting purposes. At December 31,
1997, defined tax liabilities represent the tax effect of taxable temporary
differences (pertaining to capitalized costs) which existed at the date the
Partnership converted into a C-Corporation.
2. RELATED PARTIES
Due to Limited Partner represents amounts due for interest, including commitment
fees, on the loan outstanding which was to be repaid according to the terms of
the loan (See Note 4).
F-9
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements (continued)
3. PARTNERSHIP AGREEMENT
The Partnership was formed in July 1996 to bid for PCS licenses in the "F-Block"
auction. The General Partner originally contributed $100,200 to the Partnership
for a 50.1% equity interest and the Limited Partner contributed $99,800 to the
Partnership for a 49.9% equity interest.
Under the terms of the Partnership Agreement all deductions with respect to
interest expense and commitment fees were allocated 99% to the Limited Partner
and 1% to the General Partner. All profits of the Partnership were allocated 99%
to the Limited Partner and 1% to the General Partner until the aggregate amount
of all profits allocated to the Limited Partner and General Partner equal the
deductions with respect to interest expense and commitment fees. Subsequently,
all profits and losses were to be allocated to the Limited Partner and General
Partner in proportion to their respective interests, 49.9% and 50.1%,
respectively. On December 4, 1997, the Partnership was terminated.
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---------------------------------
<S> <C> <C>
Limited Partner loan at a fixed rate of 15% due in 2001 $11,800,000
FCC financing of PCS licenses awarded in the following markets and maturing in
2007:
Los Angeles, CA $ 3,579,000 -
Washington, D.C. 7,068,000 -
Sarasota, FL 1,322,400 -
Reno, NV 1,429,800 -
Santa Barbara, CA 1,766,977 -
---------------------------------
15,166,177 -
=================================
$15,166,177 $11,800,000
=================================
</TABLE>
In connection with the PCS "F-Block" auction, $12.0 million was deposited with
the FCC of which $11.8 million was borrowed from Lynch PCS F under a line of
credit which was due and payable in five years. The interest rate on the
outstanding borrowings under the line was fixed at 15%; additionally, a
commitment fee of 20% per annum was charged on the total line of credit. On
December 4, 1997, the balance of such loan was $7,835,221, including accrued
interest and commitment fees. On such date, $4.5 million was contributed to the
equity of the Partnership and the remaining balance of $3,335,221 was converted
into 7,800 shares of redeemable preferred stock (see Note 6). At that time, the
line of credit was terminated.
F-10
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
All of the FCC financing bears interest at 6.25% per annum. Quarterly interest
payments of $236,972 were required for the first two years of the license (1997
and 1998) and quarterly payments of principal and interest of $605,879 are
required over the remaining eight years of the license term. These loans are
secured by the licenses granted. In April 1997, the FCC suspended the interest
payments on the debt. On March 24, 1998, the FCC indicated that such interest
payments will be resumed not earlier than 90 days subsequent to publication in
the Federal Register of its "Order on Reconsideration of the Second Report and
Order." Such order was published on April 8, 1998, requiring the suspended
payments (aggregating approximately $1,000,000) to be made in eight quarterly
installments beginning in July 1998 in addition to regular interest payments.
There were no cash payments for interest for the periods ended December 31, 1997
and December 31, 1996.
Aggregate principal maturities of long-term debt for each of the next five years
are as follows: 1998--$0 million, 1999--$0.743 million, 2000--$1.558 million,
2001--$1.658 million and 2002 $1.764 million.
5. COMMON STOCK
The Company has two classes of Common Stock authorized: Class A Common Stock and
Class B Common Stock. The authorized capital stock of the Company consists of
3,600,000 shares of Class A Common Stock and 16,000,000 shares of Class B Common
Stock. The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, if any, then outstanding.
Collectively, the shares of Class A Common Stock represent not more than 49.9%
of the Company's voting interest, with each share of Class A Common Stock issued
and outstanding having one vote per share on all matters except the election of
directors or as otherwise provided by law. The holders of the Class A Common
Stock as a class will be entitled to elect members to the Company's Board of
Directors who collectively will represent two of the five votes of the Company's
Board of Directors.
Collectively, the shares of Class B Common Stock represent at least 50.1% of the
Company's voting interest, with each share of Class B Common Stock issued and
outstanding having 5 votes per share on all matters except the election of
directors or as otherwise provided by law. With respect to the election of
directors, the Class B Common Stock, voting together as a class, may elect up to
three members of the Company's Board of Directors.
F-11
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements (continued)
6. REDEEMABLE PREFERRED STOCK
The Company is authorized to issue 15,000 shares of Preferred Stock and at
December 31, 1997 has outstanding 7,800 shares of Preferred Stock, par value
$1,000 per share. The Preferred Stock (i) is entitled to preferred dividends at
an annual rate of 5 shares of additional Preferred Stock for each one hundred
shares of Preferred Stock outstanding, (ii) has no voting rights except as
provided by law, and (iii) is entitled to be redeemed at $1,000 per share (plus
accrued and unpaid dividends) on the earlier of (i) October 1, 2009, (ii) upon a
change of control of the Class A or Class B Common Stock or (iii) upon the sale
of one or more PCS licenses for cash or a non-cash sale under certain
circumstances. The difference between the book value of such shares (which
approximates fair value) and the redemption price is being amortized using the
effective interest method to November 1, 2009. Accrued dividends and accretion
on the preferred stock are included in the preferred stock accounts in the
balance sheet.
7. LEGAL MATTERS
The United States Department of Justice has initiated an investigation to
determine whether there has been bid rigging and market allocation for licenses
auctioned by the FCC for PCS. The Company, together with various other bidders
in the PCS auctions, has received a civil investigative demand ("CID")
requesting documents and information relating to bidding, and in May 1997, the
Company complied with the CID. The Company is not aware of what further action,
if any, the Justice Department or the FCC may take and cannot estimate its
exposure, if any, at this time.
F-12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 254,427
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 254,427
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,452,852
<CURRENT-LIABILITIES> 654,853
<BONDS> 15,166,177
3,389,487
0
<COMMON> 355
<OTHER-SE> 741,710
<TOTAL-LIABILITY-AND-EQUITY> 20,452,852
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 87,607
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,987,562
<INCOME-PRETAX> (2,075,169)
<INCOME-TAX> (500,000)
<INCOME-CONTINUING> (2,575,169)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,575,169)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
