UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1998
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
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
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.
<PAGE>
INDEX
EAST/WEST COMMUNICATIONS, INC.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheet
- March 31, 1998
- December 31, 1997 (Audited)
Statement of Operations
- Three months ending March 31, 1998 and 1997
- July 26, 1996 (Inception) to March 31, 1998
Statements of Cash Flows
- Three months ending March 31, 1998 and 1997
- July 26, 1996 (Inception) to March 31, 1998
Item 2 Management Discussion and Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
Exhibit 27
SIGNATURES
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------------------------------
(Unaudited) (A)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 246,880 $ 254,427
Deposit with FCC -- --
------------ ------------
Total current assets 246,880 254,427
PCS Licenses 18,957,721 18,957,721
Capitalized costs 1,447,443 1,240,434
============ ============
Total assets $ 20,652,044 $ 20,452,582
============ ============
Liabilities and shareholder's equity (deficit)
Current liabilities:
Accrued liabilities $ 860,013 $ 654,853
Long-term debt:
Loan from FCC 15,166,177 15,166,177
Deferred income taxes 500,000 500,000
Redeemable preferred stock, $1000 par value; 5% cumulative
dividends, 15,000 shares authorized, 7,800 issued and
outstanding (liquidation value - $7,800,000)
3,536,930 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 177 177
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 the development stage (4,361,076) (4,207,935)
----------- ------------
Total shareholder's equity (deficit) accumulated during the
development stage 588,924 742,065
============ ============
Total liabilities and shareholder's equity (deficit) $ 20,652,044 $ 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 accompanying notes.
2
<PAGE>
East/West Communications, Inc.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Statements of Operations
<TABLE>
<CAPTION>
JULY 26, 1996
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31. MARCH 31,
1998 1997 1998
--------------------------------------------------------
<S> <C> <C> <C>
Interest expense including commitment fees -- $ (743,054) $(3,566,062)
Deferred income tax expense -- -- (500,000)
Other expenses (8,464) -- (96,815)
Investment income 2,766 -- 3,510
----------- ----------- -----------
Net loss (5,698) (743,054) (4,159,367)
Dividend requirement on preferred stock (147,443) -- (201,709)
=========== =========== ===========
Loss applicable to common shares $ (153,141) $ (743,054) $ 4,361,076
=========== =========== ===========
Basic and diluted loss per share:
Net loss $ (.04)
===========
Number of shares used in computation 3,551,499
===========
Net loss allocated to general partner (1%) $ (7,431)
===========
Net loss allocated to limited partner (99%) $ (735,623)
===========
</TABLE>
See accompanying notes.
3
<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
THREE MONTHS ENDED (INCEPTION) TO
MARCH 31, MARCH 31,
1998 1997 1998
-----------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (5,678) $ (743,054) $ (4,159,367)
Adjustments to reconcile net loss to net cash used
in operating activities:
Deferred income taxes -- -- 500,000
Changes in operating assets and liabilities:
Accrued liabilities (1,849) -- 59,071
Interest accrued, including commitment fees -- 743,054 3,566,063
------------ ------------ ------------
Net cash used in operating activities (7,457) -- (34,233)
Investing activities
(Deposits with) refunds from the FCC -- 10,104,228 (1,895,772)
Purchase of PCS licenses -- -- (1,895,772)
Other -- -- (11,617)
------------ ------------ ------------
Net cash (used in) provided by investing activities -- 10,104,228 (3,803,161)
Financing activities
Proceeds from the issuance of loans from the Limited Partner
-- -- 13,738,502
Repayment of loans from the Limited Partner -- (10,104,228) (10,104,228)
Capital contributions -- -- 450,000
------------ ------------ ------------
Net cash provided by (used in) financing activities -- (10,104,228) 4,084,274
Net change in cash and cash equivalents (7,457) -- 246,880
Cash and cash equivalents at beginning of period 254,427 -- --
============ ============ ============
Cash and cash equivalents at end of period $ 246,880 $ -- $ 246,880
============ ============ ============
</TABLE>
See accompanying notes.
4
<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.
5
<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.
6
<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 $1,104,273 at
March 31, 1998. Total interest charges amounted to $207,009, $173,054 and
$2,024,287, respectively, for the three months ended March 31, 1998 and 1997 and
for the period from July 26, 1996 (inception) to March 31, 1998.
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 March 31,
1998 give effect to the issuance of the common stock of the Company as if the
issuance occurred on January 1, 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 March 31, 1998, deferred 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).
7
<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 at March 31, 1998 and December 31, 1997 consists of:
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
===========
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.
8
<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 through March 31, 1998. 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
$801,000) to be made in eight quarterly installments beginning in July 31, 1998
in addition to regular interest payments. Also on that date, accrued interest
from March 31, 1998 to July 31, 1998 of $318,000 will be due.
There were no cash payments for interest for the periods ended March 31, 1998
and 1997.
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.
9
<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.
8. YEAR 2000 (UNAUDITED)
The Company believes its information systems are in compliance with year 2000
information technology requirements.
10
<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.
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
11
<PAGE>
(inception) to March 31, 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 $100,000 each beginning on July 31,
1998, also on that date, accrued interest from the date the interest suspension
ended, March 31, 1998, until July 31, 1998 is due. Accordingly, during the
remainder of 1998, the Registrant will be required to make regularly scheduled
interest payment of approximately $396,000, suspended interest payments of
$220,000 and an accrued interest payment of $320,000, or total payments of
$829,000. Interest payment for 1999 are projected to be $907,000. The Company
will have to raise funds in order to make these cash commitments and others both
through the end of 1999 and beyond, 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-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
12
<PAGE>
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.
13
<PAGE>
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.
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
14
<PAGE>
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 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
15
<PAGE>
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 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.
16
<PAGE>
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(3) Exhibits
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information purposes only and not
filed.
(B) REPORTS ON FORM 8-K
None
17
<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 20th day of May, 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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 246,880
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 246,880
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,652,044
<CURRENT-LIABILITIES> 860,013
<BONDS> 15,166,177
3,536,930
0
<COMMON> 355
<OTHER-SE> 588,569
<TOTAL-LIABILITY-AND-EQUITY> 20,652,044
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,464
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,698)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,698)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,698)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
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