UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
-------------------------------------------------
/ / TRANSACTION 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
350 STUYVESANT AVENUE, NEW YORK, NEW YORK 10580
- ----------------------------------------- -----
(Address of principle executive offices) (Zip Code)
(914) 921-6300
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports 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.(X) Yes( ) No
As of October 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
INDEX
-----
PAGE
----
Accountants' Compilation Report 1
Balance Sheets 2
Statements of Operations 3
Statements of Cash Flows 4
Notes to Financial Statements 5-12
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
BALANCE SHEETS
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED: 09/30/98 12/31/97
----------------------------------
(Unaudited) (A)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 198,102 $ 254,427
Deposit with FCC 0 0
----------------------------------
Total current assets 198,102 254,427
PCS Licenses 18,957,721 18,957,721
Capitalized costs 1,970,000 1,240,434
----------------------------------
Total assets $ 21,125,823 $ 20,452,582
==================================
============
LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities:
Accrued liabilities $ 1,343,026 $ 654,853
Long-term debt:
Loan from FCC 15,166,177 15,166,177
Deferred income taxes 500,000 500,000
Redeemable preferred stock, $1,000 par value; 5% cumulative dividends, 16,000
shares authorized, 7,800 issued and
outstanding (liquidation value - $7,800,000) 3,864,198 3,389,487
Shareholder's equity:
Common stock, Class A, $.0001 par value, 3,600,000 shares
authorized, 1,772,198 shares issued and outstanding 177 177
Common stock, Class B, $.0001 par value, 16,000,000 shares
authorized, 1,779,301 shares issued and outstanding 178 178
Additional paid-in capital 4,949,645 4,949,645
Shareholder's deficit accumulated during development stage (4,697,578) (4,207,935
Total shareholder's equity accumulated during the
development stage 252,422 742,065
----------------------------------
Total liabilities and shareholder's equity $ 21,125,823 $ 20,452,582
==================================
</TABLE>
(A) The Balance Sheet at December 31, 1997 has been derived from the Audited
Financial Statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Accountants' Compilation Report and accompanying notes.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 1 JANUARY 1 JULY 26, 1996
TO SEPT 30, TO SEPT 30, (INCEPTION) TO
1998 1997 SEPT 30, 1998
--------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Investment income 8,266 0 9,010
Interest expense including commitment fees 0 (1,720,076) (3,566,062)
Deferred income tax expense 0 0 (500,000)
Other expenses (23,198) (27,430) (111,549)
-------------------------------------------------------
Net loss (14,932) (1,747,506) (4,168,601)
Dividend requirement on preferred stock (474,711) 0 (528,977)
-------------------------------------------------------
Loss applicable to common shares (489,643) (1,747,506) (4,697,578)
=======================================================
Basic and diluted loss per share:
Net loss (0.138)
================
Number of shares used in computation 3,551,499
================
Net loss allocated to general partner (1%) (17,475)
================
Net loss allocated to limited partner (99%) (1,730,031)
================
</TABLE>
See Accountants' Compilation Report and accompanying notes.
<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
JANUARY 1 JANUARY 1 (INCEPTION) TO
TO SEPT 30, TO SEPT 30, SEPT 30,
1998 1997 1998
------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (14,932) $ (1,747,506) $ (4,168,601)
Adjustments to reconcile net income to net
cash used by operating activities:
Deferred income taxes 500,000
Changes in operating assets and
liabilities:
Increase (decrease) in accrued expenses (41,393) 0 19,526
Increase in accrued interest 1,720,076 3,566,064
------------------------------------------------------
Net Cash Provided (Used) by Operating Activities (56,325) (27,430) (83,011)
Cash Flows from Investing Activities:
Deposits with FCC 10,104,228 (1,895,772)
Purchase of PCS licenses (1,895,772) (1,895,772)
Other (15,300) (11,617)
------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 0 8,193,156 (3,803,161)
Cash Flows from Financing Activities:
Proceeds from the issuance of loans from the 0
Limited Partner 1,938,502 13,738,502
Repayment of loans from the Limited Partner (10,104,228) (10,104,228)
Capital contributions 0 0 450,000
------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 0 (8,165,726) 4,084,274
Increase (Decrease) in Cash (56,325) 0 198,102
Cash, beginning of period 254,427 0 0
------------------------------------------------------
Cash, end of period $ 198,102 $ 0 $ 198,102
======================================================
</TABLE>
See Accountants' Compilation Report and accompanying notes.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 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 FCS 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 DESCRIPTION OF BUSINESS (CON'T):
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 5). 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.
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
classification 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 the 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 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.
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 amounting to $1,969,770 will be amortized
over the remaining life of the respective loan when the Company
commences operations. The capitalized costs included $1,626,831 of
capitalized interest and late fee penalty of $20,600 at September 30,
1998. Total interest charges amounted to $729,567, $221,845 and
$2,546,843 respectively, for the nine months ended September 30, 1998
and 1997 and for the period from July 26, 1996 (inception) to
September 30, 1998.
The PCS licenses will be amortized over a period, consistent with the
industry standard, not to exceed 40 years, which will begin when
operations commence.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 CAPITALIZED COSTS (CON'T):
Pursuant to FCC regulations, license holders are required to commence
providing service to one-third or the population within the license
area within five 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, and there is no change in
the number of shares at September 30, 1998.
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,
and at September 30, 1998 defined tax liabilities represent the tax
effect of taxable temporary differences (pertaining to capitalized
costs) which existed at the date the Partnership converted to a
C-Corporation.
NOTE 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).
NOTE 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 3 PARTNERSHIP AGREEMENT (CON'T):
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 all 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.
NOTE 4 LONG TERM DEBT:
Long term debt as of September 30, 1998 and December 31, 1997
consists of :
PCC 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
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.
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
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 4 LONG TERM DEBT (CON'T):
(1997 and 1998) and quarterly payments of principle 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 through March 31,
1998. On March 24, 1998, the FCC indicated that such interest
payments will be resumed not earlier that 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 $805,490) to be
made in eight quarterly installments of $100,686 beginning in July
1998, plus regular interest payments for the period of March 31, 1998
to July 31, 1998, of $311,324. Payment was made on October 28, 1998,
within the 90-day non-delinquency period, in the amount of $432,611
comprising accrued interest of $412,010 and a 5% penalty of $20,600.
There was no cash payments for interest for the periods ended
September 30, 1998 and December 31, 1997.
Aggregate principle 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.
NOTE 5 COMMON STOCK :
The Company has two classes or 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
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 5 COMMON STOCK (CON'T):
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 shares 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.
NOTE 6 REDEEMABLE PREFERRED STOCK :
The Company is authorized to issue 16,000 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 five (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.
NOTE 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 8 YEAR 2000 (UNAUDITED):
The Company believes its information systems are in compliance with
year 2000 information technology requirements.
NOTE 9 SUBSEQUENT EVENTS:
Management has elected to defer payment of interest due on loan to
payable to FCC due on October 31, 1998 in the amount of $337,658.
Payments issued within 90 days of due date will be subject to a 5%
penalty and 15% penalty if paid within 90 to 180 days of due date.
On October 22, 1998, the Board of Directors of the Company authorized
the Company to borrow up to $300,000 from certain directors of the
Company. The loans are evidenced by promissory notes (the "Notes") in
the amount of $150,000 each to Mario J. Gabelli and T. Gibbs Kane,
Jr., which bear interest at a rate of 5.00% per year, and which
become due and payable on the earlier of I) October 22, 1999 or ii)
upon the receipt of proceeds from an offering of rights (the "Rights
Offering") to purchase shares of Class A Common Stock, sufficient to
pay the full amount of principal and interest then owed on the Notes.
The Company plans to offer rights in connection with such Rights
Offering to existing shareholders of the Company's Class A Common
Stock during late 1998 or early 1999.
<PAGE>
Item 2. 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
originally agreed to 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 31, 1998, at which time the
Company will be required to make 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
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 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.
<PAGE>
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 $588,924.
During the period from July 26, 1996 (inception) to September 30, 1998, 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
payment in-kind dividends at 5% per annum and is redeemable at par value plus
including accrued dividends on November 1, 2009 or earlier upon certain
circumstances.
In April 1997, the FCC suspended interest payments on the government
financing through March 31, 1998. 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 of $100,686 each beginning on July 31,
1998, also on that date, the accrued interest of $311,324 from the date the
interest suspension ended, March 31, 1998, until July 31, 1998. Payment was made
on October 28, 1998, within the 90-day non-delinquency period, in the amount of
$432,611 comprising accrued interest of $412,010 and a 5% penalty of $20,600.
Accordingly, during the remainder of 1998, the Registrant will be required to
issue an additional interest payment of $236,972 plus suspended interest of
$100,686. Total interest payments required for year 1998 amounts to $770,269.
Interest payments for 1999, are projected to be $944,810 plus quarterly
suspended interest of $402,744 for the year.
Management has elected to defer payment of interest due on loan to
payable to FCC due on October 31, 1998 in the amount of $337,658. Payments
issued within 90 days of due date will be subject to a 5% penalty and 15%
penalty if paid within 90 to 180 days of due date.
On October 22, 1998, the Board of Directors of the Company
authorized the Company to borrow up to $300,000 from certain directors of the
Company. The loans are evidenced by promissory notes (the "Notes") in the amount
of $150,000 each to Mario J. Gabelli and T. Gibbs Kane, Jr., which bear interest
at a rate of 5.00% per year, and which become due and payable on the earlier of
I) October 22, 1999 or ii) upon the receipt of proceeds from an offering of
rights (the "Rights Offering") to purchase shares of Class A Common Stock,
sufficient to pay the full amount of principal and interest then owed on the
Notes. The Company plans to offer rights in connection with such Rights Offering
to existing shareholders of the Company's Class A Common Stock during late 1998
or early 1999.
<PAGE>
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-QSB 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 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
<PAGE>
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 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.
<PAGE>
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
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
years from the date of grant and two-thirds within ten years. The Company has
not begun 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed 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)
Dated: November 13, 1998
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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