UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 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: 0-23127
EAST/WEST COMMUNICATIONS, INC.
(Name of Small Business Issuer 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, including zip code)
(914) 921-6300
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: CLASS A COMMON
STOCK, PAR VALUE $.0001
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /X/ No/ /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/
The Issuer's revenues for the fiscal year ended December 31, 1998 were $0.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $2,238,863 as of March 30, 1999. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination by the Registrant that such individuals are, in fact, "affiliates"
of the Registrant.
As of March 30, 1999 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.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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PART I
ITEM 1. BUSINESS
THE COMPANY
East/West Communications, Inc. 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, California 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.
80% of the cost of the licenses (or $15.2 million) was financed over ten years
by the Federal Communications Commission ("FCC"), with only payments of interest
during the first two years. Currently, principal payments are scheduled to begin
on July 31, 1999.
We believe that there are significant growth opportunities in the
wireless telecommunications industry and that our PCS licenses have substantial
potential. According to the Cellular Telecommunications Industry Association,
there are 60.8 million wireless telephone subscribers in the United States,
representing an overall wireless penetration rate of 22.4% and a subscriber
growth rate of 24.9% from June 30, 1997. Paul Kagan Associates, Inc., a leading
telecommunications consultant, estimates that the number of cellular and PCS
wireless service subscribers will reach 98.4 million by 2001. We believe that a
significant portion of the predicted growth in the consumer market for wireless
telecommunications will result from anticipated declines in costs of service,
increased functional versatility, and increased awareness of the productivity,
convenience and privacy benefits associated with the services provided by PCS
providers, which are the first direct wireless competitors of cellular providers
to offer all-digital mobile networks. We also believe that the rapid growth of
notebook computers and personal digital assistants, combined with emerging
software applications for delivery of electronic mail, fax and database
searching, will contribute to the growing demand for wireless service.
We have not yet adopted a business plan or determined how to finance
our operations, due in part to uncertainties relating to PCS, which makes
evaluation difficult, including the newness of PCS, financing, affiliation and
technology issues and the financial problems of certain C-Block licensees. We
have not yet determined whether to develop our PCS licenses on our own, joint
venture our licenses with other PCS or wireless telephone licenses holders or
operators or others, or sell some or all of our licenses. We expect to
continually review these factors and to adopt a plan once the financing,
regulatory and market aspects of PCS are less uncertain. East/West stock
involves a substantial degree of risk. See "Risk Factors."
Our address is 350 Stuyvesant Avenue, Rye, New York 10580. Our
telephone number is (914) 921-6300.
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RISK FACTORS
EAST/WEST IS A DEVELOPMENT STAGE COMPANY WITH HISTORICAL AND EXPECTED FUTURE
OPERATING LOSSES AND CANNOT OFFER ASSURANCE OF FUTURE PROFITABLITY.
We are at an early stage of our development and have no operating
history. We have incurred cumulative net losses through December 31, 1998 of
$4,238,185. These losses arose primarily from interest expense on loans for
organizational and start-up activities and acquisition of PCS licenses in the
F-Block Auction and operating expenses. We are subject to all of the risks
typically associated with a start-up entity. The report of our independent
auditors with respect to our financial statements as of December 31, 1998 and
1997, for the years ended December 31, 1998 and 1997 and the period from July
26, 1996 (inception) to December 31, 1998 contains a paragraph indicating that
substantial doubt exists as to our ability to continue as a going concern.
PCS networks have an extremely limited operating history in the United
States and we cannot assure you that operation of these networks will become
profitable. There is also uncertainty as to the extent of customer demand for
PCS networks. We have not had any revenue from operations to date and do not
know when, if ever, we may have positive cash flow. Unless we raise additional
funds, we cannot meet our interest obligations on our government debt. We will
have to raise funds in the near future in the form of debt or equity financing
in order to continue to make interest or principal payments on our current debt
and for working capital and general corporate purposes. We cannot assure you
that we can raise sufficient funds. In addition, if we were to raise funds
through equity financing, it could cause substantial dilution to the net book
value of our common stock.
EAST/WEST HAS SUBSTANTIAL DEBT OBLIGATIONS TO THE FCC THAT IT MAY NOT BE ABLE TO
REPAY.
Our leverage is substantial in relation to our equity. As of December
31, 1998, our total indebtedness was $15.5 million which is owed to the FCC and
certain of our directors; we have $7.8 million of preferred stock subject to
mandatory redemption under certain circumstances; and our stockholders' equity
was approximately $23,000. We are required to make interest payments to the FCC
on April 29, 1999 in the amount of $388,307 and on May 1, 1999 in the amount of
354,541. Under FCC rules, scheduled payments may be delayed for up to 90 days
upon payment of a 5% penalty and for 90-180 days upon payment of a 15% penalty.
The April 29, 1999 payment may not be further delayed and the May 1, 1999
payment may only be delayed for an additional 90 days. If these payments are not
timely made we will forfeit our licenses.
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We have executed notes to the FCC documenting our installment payment
obligations and a security agreement creating a first priority security interest
in favor of the FCC in the PCS licenses (and the proceeds of any sale thereof)
in the event of our default. We are required to make interest payments based on
a 6.25% annual interest rate and to pay interest only quarterly for the first
two years of the license and to pay interest and principal quarterly over the
remaining eight years. In the event that we are unable to repay our debt, or we
(or any of our affiliates) are involved in certain insolvency or bankruptcy
proceedings, or otherwise violate regulations applicable to holders of FCC
licenses, the FCC could take a variety of actions, including requiring immediate
repayment of amounts due, repayment of certain bidding credits, revoking our PCS
licenses and fining us an amount equal to the difference between the price at
which we acquired the licenses and the amount of the winning bids at their
reauction, plus an additional penalty of three percent of the lesser of the
subsequent winning bid and our bid amount. We also may not be able to meet our
obligations to other creditors.
EAST/WEST MAY NEED TO INCUR MORE DEBT IN THE FUTURE.
If we determine to develop and build out the licenses, substantial
additional funds will be required. Any borrowings from third parties are likely
to contain various restrictions which may significantly limit or prohibit future
actions and would allow a lender to accelerate the maturity of such indebtedness
upon a default. We cannot assure you that our PCS networks can be completed or
that, once completed, we will generate sufficient cash flow from operating
activities to repay our debt and provide working capital. Any failure or delay
in repaying current or future debt, could have a material adverse effect on our
business, results of operations and financial condition.
In addition, we have an obligation to redeem our preferred stock on
the earlier of (i) December 1, 2009, (ii) upon a change of control of our Class
A common stock or Class B common stock or (iii) upon the sale of one or more PCS
licenses directly or indirectly for cash in an amount proportional to that
number of persons covered by the sale of such licenses compared to the total
persons covered by our five initial PCS licenses, in each case based on the 1996
or most recent subsequent estimate by the United States Bureau of Census.
Our ability to obtain any additional necessary financing or
refinancing will depend on, among other things, our financial condition, any
restrictions governing our debt and other factors, including market conditions,
that are beyond our control. We cannot assure you any such financing could be
obtained on favorable terms, or at all. In the absence of such financing, we
could be forced to sell assets in order to make up for any shortfall in the
payments due
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on our indebtedness under circumstances that might not be favorable to realizing
the highest price for such assets. A substantial portion of our assets consist
of intangible assets, principally PCS licenses granted by the FCC, the value of
which will depend upon a variety of factors. Such licenses may only be
transferred to other entities that meet the FCC requirements for F-Block license
holders during the first five years of the initial license term, which may
significantly impact our ability to realize the value of such licenses. Further,
transfers to entities not meeting such requirements in years six through ten of
the initial license term will subject us to substantial unjust enrichment
penalties. We cannot assure you that our assets could be sold, or sold quickly
enough, or for a sufficient amount, to enable us to meet our obligations.
EAST/WEST HAS NOT YET DECIDED HOW BEST TO UTILIZE ITS PCS LICENSES, AND THERE
EXIST INHERENT RISKS IF EAST/WEST CHOOSES TO SELL, JOINT VENTURE OR OTHERWISE
BUILD OUT ITS LICENSES.
We have not yet determined what to do with our PCS licenses. If we
decide to sell our PCS licenses, there are various FCC restrictions that may be
applicable. Under FCC regulations, a sale of our licenses may cause certain
payment penalties to be imposed or cause our outstanding indebtedness incurred
in connection with the purchase of our PCS licenses to become immediately due
and payable depending on the size of the acquiring party and its ability to
assume such debt. See "Legislation and Governmental Regulations." In addition,
if a license is sold for cash, we will need to redeem a corresponding proportion
of our preferred stock.
Many of the risks relating to the development of PCS licenses may also
apply if we decide to joint venture our PCS licenses. In addition, certain joint
venturers or purchasers may already operate wireless telephone or other
telecommunications operations or have greater background and experience in
developing wireless telephony and possess greater organizational, management
and/or financial resources. If we decide to joint venture our PCS licenses or
sell our licenses other than for cash, we may be at risk with respect to the
other operations of the joint venturer or purchaser.
If we decide to develop our PCS licenses, we would have to develop and
implement a business plan, which may require attracting and retaining qualified
individuals as managers and employees and developing a business infrastructure.
We cannot assure you as to the timing and extent of revenues and expenses, or
our ability to successfully manage all the tasks associated with developing and
maintaining a successful enterprise. Any failure by management to guide and
control growth effectively, which includes implementing adequate systems,
procedures and controls in a timely manner, could have a material adverse effect
on our business, financial condition and results of operations. In addition, we
will incur significant operating losses and generate negative cash flow from
operating activities during the next several years if we seek to develop and
construct our PCS networks and build a customer base. These losses and negative
cash flows could be substantial and increase during the initial years of the
build-out and operation of our PCS networks. We cannot assure you that we can
successfully launch our services, or that we will achieve or sustain
profitability or positive cash flow from operating activities in the future. If
we cannot achieve operating profitability or positive cash flow from operating
activities, we may not be able to meet our debt service or working capital
requirements and, consequently, the Class A common stock may have little or no
value.
Should we determine to develop or joint venture our PCS licenses, we
will likely rely significantly upon third parties to provide equipment and
services to distribute our products and services and to provide certain
functions such as customer billing. We cannot assure you that such third parties
will provide acceptable equipment and services on a timely basis and any failure
to do so will have a material adverse effect upon our business, results of
operations and financial condition.
IF EAST/WEST DECIDES TO DEVELOP ITS PCS NETWORK, OUR SUCCESS WILL BE DEPENDENT
ON OUR ABILITY TO IMPLEMENT OUR PLANS, AS WELL AS OUR ABILITY TO MEET REGULATORY
REQUIREMENTS, THE FAILURE OF ANY OF WHICH COULD HAVE A MATERIAL ADVERSE AFFECT
ON OUR BUSINESS AND OPERATIONS.
If we develop the PCS licenses, the construction and implementation of
our PCS networks would involve a high degree of risk including, but not limited
to, network design, site selection and acquisition, equipment availability
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and microwave relocation. We cannot assure you that we can successfully develop
and implement our PCS networks. Any failure to do so would have a material
adverse effect on our business, results of operations and financial condition.
In addition, each of our PCS licenses is subject to an FCC requirement
that we construct PCS networks that provide adequate service to at least
one-third of the population in each such PCS market within five years of the
date on which the license was granted or make a showing of substantial service
in a licensed area within five years of the license grant date and two-thirds
within ten years from the license grant date. We cannot assure you that this
required coverage will be achieved in accordance with FCC requirements, and
failure to comply with these requirements in any market could cause revocation
of our PCS licenses or the imposition of fines or other sanctions by the FCC.
EAST/WEST'S COMPETITORS HAVE SUBSTANTIALLY GREATER ACCESS TO CAPITAL, FINANCIAL,
TECHNICAL, MARKETING, SALES AND DISTRIBUTION RESOURCES AND SIGNIFICANTLY MORE
EXPERIENCE THAN US IN PROVIDING WIRELESS SERVICES.
PCS is a new technology and service and, as a result, the level and
timing of development of a customer base for PCS applications, on which our
future revenues depend significantly, is uncertain. In the development of the
PCS market, we will be competing with the more established cellular industry, as
well as other wireless communications technologies, existing and future, with
similar service offerings. Many of our PCS and cellular telephone competitors,
have substantially greater access to capital than us, substantially greater
financial, technical, marketing, sales and distribution resources than ours, and
significantly more experience than us in providing wireless services. Several of
our competitors are able to market other services, such as cable television
service, landline telephone service and internet access with their wireless
communications service offerings. In addition, several competitors are
operating, or planning to operate, independently or through joint ventures and
affiliation arrangements, wireless communications networks that cover most of
the United States.
Assuming that we determine to develop our PCS licenses, we will
compete directly with up to five other PCS providers in each of our markets
including providers holding the A- and B-Block licenses which were granted on
June 23, 1995, providers holding C-Block licenses awarded in September 1996 and
January 1997 and providers holding D, E and F-Block licenses subsequently
granted. PCS licensees in our license areas include Cox Enterprises, American
Personal Communications, Pacific Telesis, Nextwave, AT&T, Inc., Rivgam
Communicators L.L.C., OPCSE-Galloway Consolidated, Aerial Communications, PCS
Prime Co., Sprint COM, Inc., BellSouth Wireless, Inc., Sprint Spectrum, PCS
2000, L.P., Alpine PCS, Inc. and Entertainment Unlimited. The FCC recently
modified its rules to permit the partitioning and disaggregation of broadband
PCS licenses into licenses to serve smaller service areas, which could allow
other new entrants to enter wireless markets. Additionally, we will compete with
existing cellular providers, most of which have infrastructure in place, have an
established brand identity, have generated positive cash flow and have been
operational for as many as ten years or more. We expect that many cellular
operators will upgrade their networks to provide comparable digital services in
competition with us. Cellular operators in our license areas include BellSouth,
Bell Atlantic NYNEX Mobile, Air Touch and GTE Mobilenet.
The success of our PCS service business will depend upon our ability
to compete, especially with respect to pricing, service, reliability and
availability of features, such as data and voice transmission, call waiting,
call forwarding and short messaging capability. In addition to PCS and cellular
operators, we may also face competition from other existing communications
technologies, such as conventional mobile telephone services, specialized mobile
radio ("SMR") service, enhanced SMR ("ESMR") service, paging services (including
two-way digital paging), and domestic and global mobile satellite service
("MSS"). Nextel is providing competitive wireless communications on an ESMR
system. In the future, cellular and PCS service will also compete more directly
with traditional landline telephone service operators, energy utilities, local
multipoint distribution service ("LMDS") providers, and cable and wireless cable
operators seeking to offer communications services by leveraging their existing
infrastructure. In the spring of 1997, the FCC also auctioned 30 MHZ of spectrum
in the 2.3 GHz band for wireless communications services ("WCS"). The FCC has
proposed that WCS providers be permitted to offer a broad range of fixed, mobile
radio location and satellite broadcast services, some of which could be in
competition with our service offerings. The FCC has auctioned 1300 megahertz
("MHZ") of spectrum in the 27.5 - 29.5 GHZ and 31.0 - 31.3 GHz bands for LMDS.
The FCC contemplates
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that the LMDS spectrum would provide very high subscriber capacity for two-way
video telecommunications. We may also face competition from other as yet
unidentified technologies.
THE LIMITED CAPACITY OF OUR LICENSES MAY PUT EAST/WEST AT A DISADVANTAGE.
Cellular telephone licenses are for 25 MHZ of spectrum each and
certain of the PCS licenses in the A, B and C-Blocks are for 30 MHZ of spectrum
each. The D, E and F-Block licenses, which have only 10MHz of spectrum,
therefore have less capacity with which to provide wireless telephone service.
This may eventually limit growth opportunities as demand increases in the future
for mobile PCS services. In addition, the cost to build out a digital mobile PCS
system to an equivalent standard may be greater with a 10 MHZ license than with
either a 25 MHZ cellular or 30 MHZ PCS license. Potential lenders may also
require that 10 MHZ licensees have arrangements for additional spectrum. As a
result, we may either initially, or at a later time, have to joint venture or
make other arrangements with holders of additional spectrum in order to provide
the amount or breadth of service to be or remain competitive, or may consider
the provision of telephone services other than mobile PCS such as fixed wireless
local loop, data or internet access. Our ability to enter into certain
arrangements is limited by FCC regulations, and we cannot assure you that we
will be able to enter into such arrangements on favorable terms or at all.
EAST/WEST'S LICENSES ONLY OFFER LIMITED TERRITORY COVERAGE AND SCOPE OF
SERVICES.
If we were to develop our PCS licenses, our areas of services would be
relatively limited, and it would be necessary to enter into joint ventures or
other affiliation arrangements with other service providers to give our
customers a broader area of service coverage, as well as a broader spectrum of
services, and would require those other providers to have compatible technology.
We may be unable to enter into such joint ventures or other arrangements on
favorable terms or at all, which would have a material adverse affect on our
ability to develop our licenses.
IF EAST/WEST DOES NOT CHOOSE THE APPROPRIATE TECHNOLOGY IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
If we were to develop the PCS licenses, we would be required to choose
from among several competing digital technologies in order to build and operate
a PCS system. To some extent, the choice of technology may be substantially
influenced by what other PCS licensees have chosen in our areas, and whether our
technology is compatible, or whether we may be able to compete with similar
technologies. We cannot assure you that we will choose the appropriate
technology or that the technology chosen will be successful. The selection of a
particular protocol technology could materially adversely affect our ability to
successfully offer PCS service. See "Wireless Communications Industry."
IF EAST/WEST DEVELOPS ITS PCS LICENSES, ITS ABILITY TO HIRE AN EFFECTIVE
MANAGEMENT TEAM WILL HAVE A LARGE IMPACT ON ITS ABILITY TO MANAGE ITS
OPERATIONS.
If we develop our PCS licenses, such development would place
substantial demands on executive resources. We have no employees, and our
directors and officers only provide a limited amount of time to our affairs. If
we are to develop the licenses, we will need to hire a significant number of
employees. We cannot assure you that such employees will be able to effectively
manage the development of our operations and facilities, fully exploit our
wireless communications assets. Any inability to manage growth could have a
material adverse effect on our business, results of operations and financial
condition.
EAST/WEST IS SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
The spectrum licensing, construction, operation, sale and
interconnection arrangements of our wireless communications networks are
regulated to varying degrees by state regulatory agencies, the FCC, Congress,
the courts and other governmental bodies. We cannot assure you that any of these
governmental bodies having jurisdiction over us will not adopt or change
regulations or take other actions that would materially adversely affect our
business, financial condition or results of operations. Although the FCC has
issued rules regarding the F-Block Auction and
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numerous other matters, not all of them have been subject to FCC or judicial
interpretation. Accordingly, for certain matters, such as the structure of our
Board of Directors and management, we are relying on public and private informal
interpretation of the rules from the staff of the FCC and other sources. 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.
A failure to comply with FCC rules could subject us to serious penalties and
have a material adverse effect upon our business, results of operations and
financial condition. In addition, although our PCS licenses are renewable after
the expiration of their 10-year terms, there can be no assurance that our
licenses will be renewed.
In addition, in general, as a provider of commercial mobile radio
service, we are subject to numerous pending and future FCC rulemaking and other
proceedings that could adversely affect our business, financial condition and
results of operations.
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 has been
challenged in numerous respects in various Federal courts and has involved, and
may continue to involve, numerous changes in established rules and policies that
could adversely affect our business, financial condition and results of
operations.
EAST/WEST IS SUBJECT TO VARIOUS F-BLOCK LICENSE REQUIREMENTS WHICH COULD SUBJECT
US TO SERIOUS PENALTIES IF NOT MET.
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 various qualifications include:
o Entrepreneurs Requirements.
o Very Small Business Requirements.
o Control Group Requirements.
o Asset and Revenue Calculation.
o Transfer Restrictions.
We (i) believe that we have structured ourselves to satisfy the
Entrepreneurs Requirements, (ii) intend to diligently pursue and maintain our
qualification as a Very Small Business and (iii) have structured our Class A
common stock and Class B common stock in a manner intended to ensure compliance
with the applicable FCC Rules. We have relied on representations of our
investors to determine our compliance with the FCC's rules applicable to F-Block
licensees. We cannot assure you that our investors or ourselves will continue to
satisfy these requirements during the term of any PCS license or that we will be
able to successfully implement divestiture or other mechanisms included in our
certificate of incorporation which are designed to ensure compliance with FCC
rules. Any non-compliance with FCC rules could subject us to serious penalties,
including revocation of our 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.
We have not begun any build out of our licenses. There are also substantial
restrictions on the transfer of control of C-and F-Block PCS licenses. See
"Legislation and Government Regulation."
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THERE ARE POTENTIAL HEALTH RISKS INVOLVED WITH WIRELESS HANDSETS.
Media reports have suggested that certain radio frequency emissions
from wireless handsets may be linked to various health concerns, including
cancer, and may interfere with various electronic medical devices, including
hearing aids and pacemakers. Although management does not believe RF emissions
raise health concerns, concerns over RF emissions may have the effect of
discouraging the use of wireless handsets or exposing us to potential litigation
which could have an adverse effect on our financial condition and results of
operations.
IF EAST/WEST IS REQUIRED TO RELOCATE ITS LICENSEES, A DELAY IN AND/OR THE COST
OF SUCH RELOCATION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
For a period of up to five years after the grant of a PCS license, PCS
licensees may be required to share spectrum with existing fixed microwave
licensees operating on the F-Block spectrum. To secure a sufficient amount of
unencumbered spectrum to operate our PCS networks efficiently, we may need to
pay to relocate existing microwave paths to alternate spectrum locations or
transmission technologies. In an effort to balance competing interests of
existing microwave users and newly authorized PCS licensees, the FCC has adopted
(i) a transition plan to relocate such microwave incumbents and (ii) a cost
sharing plan so that if the relocation of an incumbent benefits more than one
PCS license, the benefitting PCS licensees are required to share the costs of
the relocation. The transition and cost sharing plans expire on April 4, 2005,
at which time remaining microwave incumbents in the PCS spectrum will be
responsible for their costs to relocate to alternate spectrum locations. We
cannot assure you that we will be able to reach timely agreements to relocate
these incumbents or that we could afford the shared costs of such relocation.
Any delay in the relocation of such licensees may adversely affect our ability
to commence timely commercial operation. Furthermore, depending on the terms of
such agreements, our ability to operate our PCS networks profitably may be
materially adversely affected. See "Legislation and Government Regulation."
EAST/WEST MAY SEEK TO ACQUIRE OR OTHERWISE ENTER INTO JOINT VENTURES WITH
CERTAIN INDIRECTLY RELATED ENTITIES IN THE FUTURE.
Fortunet Communications, L.P. ("Fortunet"), is an entity controlled by
Victoria Kane, the Chairman and Chief Executive Officer of the Company. Fortunet
holds 15 MHZ C-Block PCS Licenses covering approximately 784,991 POPs based upon
1990 census figures) in 3 BTAs, Tallahassee, Panama City and Ocala, Florida. Mr.
Gabelli, a director of the Company and, with related parties, a substantial
holder of the Company's Class A common stock, is also is the Chairman of the
Board and Chief Executive Officer and a major stockholder of Lynch Corporation,
which is a 49.9% limited partner of Fortunet and owns the $7.8 million of
Preferred Stock of the Company. Rivgam Communicators, LLC ("Rivgam"), is an
entity indirectly owned by Gabelli Funds, Inc. ("GFI"), of which Mario J.
Gabelli is the Chairman and Chief Executive Officer and the principal
stockholder. Rivgam holds 10 MHZ D- and E-Block PCS Licenses covering
approximately 14 million POPs in BTAs, including markets in Washington, DC
(where the Company also holds an F-Block PCS license), Baltimore, MD,
Philadelphia, PA, Buffalo, NY and Atlantic City, NJ.
For various reasons we might decide to acquire Fortunet for stock or
other securities (though probably not cash) or enter into other arrangements
with them. In addition, or various reasons, including possibly more favorable
terms or requirements for raising capital, it may be necessary or advisable for
us to enter into joint venture and/or working or other arrangements with Rivgam.
Our ability to acquire or enter into any other arrangements with Fortunet or
Rivgam may be limited by law or FCC regulations, and there can be no assurance
that we will be able to enter into such arrangements on terms which are
favorable to us or at all. In addition, a subsidiary of Lynch and GFI are
investors in entities bidding in the FCC's reauction of certain PCS licenses
which began in March 1999, and together with affiliates may participate directly
or indirectly in other spectrum auctions or in other telecommunications
investments
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THE CONTROL BY AER FORCE COMMUNICATIONS, INC. ("AFC") OF EAST/WEST COULD LIMIT
POTENTIAL ACQUISITIONS OF EAST/WEST.
AFC has at least 50.1% of the voting power of the outstanding equity
and is entitled to elect up to three members (the "Class B Directors") to the
Board, who have votes comprising a total of three full votes. It also has to
have actual control of the Company. The remaining members of the Board of
Directors, as elected by the holders of Class A common stock, have votes
comprising a total of two full votes. We cannot assure you that we have met or
will be able to continue to meet the Control Group Requirements. See "Risk
Factors."
Control by AFC has the effect of deterring and delaying unsolicited
changes in control. In addition, other provisions of our certificate of
incorporation and bylaws as well as provisions under Delaware law may discourage
potential acquisition proposals.
THE WIRELESS COMMUNICATIONS INDUSTRY
GROWING DEMAND FOR WIRELESS SERVICES
Demand for wireless communications has grown rapidly over the past
decade and has been driven by technological advancements and increased
competition. Wireless communication products and services have evolved from
basic tone-only paging services to mass-market cellular technology services and
are now entering the next generation of development with the evolution of
wireless communication technology. Each new generation of wireless communication
products and services has generally been characterized by improved product
quality, broader service offerings and enhanced features.
As of June 30, 1998, according to the Cellular Telecommunications
Industry Association, there were 60.8 million wireless telephone subscribers in
the United States, representing an overall wireless penetration rate of 22.4%
and a subscriber growth rate of 24.9% from June 30, 1997. Paul Kagan Associates,
a leading telecommunications consultant, estimates that the number of cellular
and PCS wireless service subscribers will reach 98.4 million by 2001. The
Company believes that a significant portion of the predicted growth in the
consumer market for wireless telecommunications will result from anticipated
declines in costs of service, increased functional versatility, and increased
awareness of the productivity, convenience and privacy benefits associated with
the services provided by PCS providers, which are the first direct wireless
competitors of cellular providers to offer all-digital mobile networks. The
Company also believes that the rapid growth of notebook computers and personal
digital assistants, combined with emerging software applications for delivery of
electronic mail, fax and database searching, will contribute to the growing
demand for wireless service.
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INDUSTRY OVERVIEW
General. Wireless communications networks use a variety of radio
frequencies to transmit voice and data signals. Wireless communications
technologies include one-way radio applications, such as paging or beeper
services, and two-way radio applications, such as cellular telephone, SMR
networks and PCS services as well as emerging WCS, LMDS and other wireless
services. Each application operates on a distinct portion of radio frequency
spectrum. Although the principal wireless voice application to date has been
cellular telephony, PCS is developing rapidly.
Cellular. The cellular telephone industry commenced in 1983 when the
FCC began granting two 20 MHZ licenses per market throughout the United States.
In 1986, the FCC granted an additional 5 MHZ of spectrum per cellular license to
provide a total of 25 MHZ for each cellular operator. Today, there are two
cellular operators in each market.
PCS. In order to increase competition in wireless communications,
promote improved quality and service, and make available the widest possible
range of wireless services to U.S. consumers, Federal legislation was enacted in
1993 directing the FCC to allocate radio frequency spectrum for PCS by
competitive bidding. The FCC established PCS service areas in the United States
based upon Rand McNally & Co.'s market definition of 51 major trading areas
("MTAs") and 493 basic trading areas ("BTAs"), which are the geographic
territories for which PCS licenses have been or will be auctioned.
PCS licenses differ from existing cellular licenses in three basic
ways: location of the licensed frequencies on the radio spectrum, amount of
spectrum allocated per license and geographic area licensed. PCS networks
operate at higher frequencies (120 MHZ in the 1850-1990 MHZ frequency band)
compared to cellular frequencies (50 MHZ in the 800-900 MHZ frequency band).
Also, PCS licenses permit the use of spectrum blocks of 30 MHZ or 10 MHZ (like
those held by the Company) versus spectrum blocks of 25 MHZ for cellular
licenses. Finally, the geographic areas for PCS licenses are divided differently
than for cellular licenses. PCS is segmented among 51 MTAs for A- and B-Block
licenses and 493 BTAs for other PCS licenses, including F-Block licenses, as
opposed to cellular's 306 metropolitan statistical areas and 428 rural service
areas.
In March 1995, the FCC awarded two 30 MHZ licenses (the A- and B-Block
PCS licenses) in each of the MTAs. In May 1996, the FCC completed the C-Block
auction, resulting in the award of one license for 30 MHZ of spectrum in each of
the BTAs. In July 1996, the FCC reauctioned 18 C- Block licenses for which the
high bidders failed to make initial post-auction down payments. In September,
1997, the FCC gave C-Block licensees several restructuring options, which
included the right to turn back to the FCC 15 MHZ of their 30 MHZ of spectrum
for a reduction of debt. Any such spectrum returned would be reauctioned. In
January 1997, the FCC completed the auction of D-, E- and F- Block licenses,
which are for licenses of only 10 MHZ of spectrum in each of the BTAs. Although
the F-Block licenses were reserved for Entrepreneurs, the D- and E-Block
licenses are not reserved for any specific class of applicants. The FCC is
currently in the process of re-auctioning a number C, D, E and F-Block PCS
licenses that were reclaimed.
LIMITATIONS OF CELLULAR TELEPHONE INDUSTRY
Despite its widespread availability and growth to date, analog
cellular services have several limitations, including inconsistent service
quality, lack of privacy, limited capacity and, currently, the inability to
transfer data without a modem. Most current cellular services transmit voice and
data signals over analog-based systems, which use one continuous electronic
signal that varies in amplitude or frequency over a single radio channel
accommodating one conversation. In contrast, digital networks, including PCS
networks, convert voice or data signals into a stream of digits and typically
use voice compression techniques to allow a single radio channel to carry
multiple simultaneous signal transmissions. This enhanced capacity, along with
improvements in digital protocols, allows PCS and other digital wireless
technologies to offer greater call privacy and single number service, and more
robust data transmission features.
We believe that due to relatively high per minute airtime charges and
unpredictable monthly bills, there is a price-sensitive mass consumer market
that refrains from subscribing to or extensively using cellular services. We
believe
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that if the mass consumer market were offered significantly lower per minute
airtime charges and more predictable and affordable pricing plans, mass
consumers would increase their use of wireless communications services,
contributing to a new phase of growth in the industry. We also believe that
business customers who are high- volume users of wireless communications will be
attracted to lower priced airtime service, as they would realize substantial
aggregate savings. We believe that PCS operators have the opportunity to capture
a substantial market share due to technical and other advantages that they will
have relative to incumbent cellular operators, including (i) greater flexibility
to reduce per minute airtime usage charges, (ii) increased network capacity,
(iii) enhanced voice quality and (iv) the ability to include enhanced
capabilities such as advanced calling features, data transmissions to and from
portable computers, and short messaging and facsimile services without need of a
modem.
THE PCS SOLUTION
PCS operators are constructing all-digital wireless telephony networks
and will compete primarily with each other and with existing cellular telephone
operators. PCS operators using digital technology will have several technical
and capacity related advantages relative to analog cellular providers. We
believe that the enhanced capacity of PCS networks will allow PCS operators to
offer wireless communications services at per minute airtime prices
significantly below the per minute airtime prices currently being charged by
cellular operators. As a result PCS subscribers are expected to use more airtime
minutes per month than cellular subscribers due to both lower effective airtime
pricing and enhanced features. We believe that PCS operators will realize
substantial revenue growth from broad penetration and greater levels of usage.
PCS was introduced in the United States in the Washington, D.C. MTA in
late 1995. Despite the PCS network having a much smaller geographic coverage
area than existing cellular competitors and no current roaming capability,
approximately 90,000 customers subscribed for PCS services in the first seven
months of commercial availability. The Company believes that the experience in
international markets where PCS has already been introduced provides additional
support for the potential growth of PCS in the United States. For example, in
approximately three years, the two PCS operators in the United Kingdom have
gained over 1.1 million subscribers. In Japan, approximately 600,000 new PCS
subscriptions were activated during the first year of operations.
INDUSTRY OUTLOOK
Industry sources expect the wireless telecommunications market in
general and the PCS market in particular to grow at a rapid rate in the United
States. As of June 30, 1998, according to the Cellular Telecommunications
Industry Association, there were 60.8 million wireless telephone subscribers in
the United States, representing an overall wireless penetration rate of 22.4%
and a subscriber growth rate of 24.9% from June 30, 1997. Paul Kagan Associates
estimates that the number of cellular and PCS wireless service subscribers will
reach 98.4 million by 2001. We believe that a significant portion of the
predicted growth in the consumer market for wireless telecommunications will
result from anticipated declines in costs of service, increased functional
versatility, and increased awareness of the productivity, convenience and
privacy benefits associated with the services provided by PCS providers, which
are the first direct wireless competitors of cellular providers to offer
all-digital mobile networks. We also believe that the rapid growth of notebook
computers and personal digital assistants, combined with emerging software
applications for delivery of electronic mail, fax and database searching, will
contribute to the growing demand for wireless service.
DIGITAL TECHNOLOGY SELECTION
There are three prominent network technologies that provide digital
service in the 1850-1990 MHZ frequency band: CDMA, TDMA and GSM.
PCS service areas are divided into multiple regions called "cells,"
each of which contains a base station consisting of low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
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in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The base station in each cell is
connected to a base station controller and each base station controller is
connected to a switching office by microwave, fiber optic cable, telephone wires
or a hard-wired interface. The switching office controls the operation of the
wireless telephone networks for its entire service area, performing inter-base
station hand-offs, managing call delivery to handsets, allocating calls among
the cells within the networks and connecting calls to and from the local
landline telephone system or to a long distance telephone carrier. Wireless
service providers have interconnection agreements with various LECs and long
distance carriers, thereby integrating wireless telephone networks with landline
telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long distance networks,
subscribers can receive and originate both local distance calls from their
wireless telephones.
The signal strength of a transmission between a handset and a base
station declines as the handset moves away from the base station, so the
switching office and the base stations monitor the signal strength of calls in
progress. In an analog system, when the signal strength of a call declines to a
predetermined level, the switching office may "hand off" the call to another
base station that can establish a stronger signal within the handset. It a
handset leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is available to hand off
the call to an adjacent system.
There are different radio air-interface standards established in the
United States for the provisions of PCS to multiple users over the allocated
spectrum. The primary methods of digital wireless communications widely accepted
by the wireless industry are based on TDMA and CDMA. These multiple access
techniques provide for communications over the radio channel either by dividing
it into distinct time slots and transmitting user-specific data in each time
slot (a method known as TDMA) or by assigning specific codes to each packet of
user data that in conjunction with many other users' data comprise a signal (a
method known as CDMA). While the FCC has mandated that licensed cellular
networks in the U.S. must utilize compatible analog signaling protocols, the FCC
has intentionally avoided mandating a universal digital signaling protocol for
PCS. Three principal competing, incompatible digital wireless standards have
been proposed by various vendors for use in PCS networks; CDMA, GSM and TDMA. An
older version of TDMA developed in Europe, GSM constitutes the oldest and most
extensive PCS technology in international markets. TDMA, while currently being
offered by cellular providers in certain U.S. cities, has, in the Company's
opinion, often been associated with poor sound quality and numerous dropped
calls. CDMA is currently being deployed by a number of cellular and PCS
providers in the U.S., and also has been implemented on a commercial basis in
Hong Kong and South Korea. CDMA networks are in operation in over 40 cities
worldwide and at least 100 additional networks are currently under construction.
Although CDMA has only recently been widely deployed in the U.S., it is the
mostly widely subscribed by PCS service providers and the Company believes that
CDMA technology will be less costly to deploy and will provide better quality,
greater capacity and more flexibility than either GSM or TDMA.
Because these protocols currently are incompatible with each other as
well as with analog cellular, a subscriber utilizing a GSM handset, for example,
will be unable to use his handset when traveling in an area covered only by a
CDMA or TDMA based network unless he carries a dual-mode/dual-band handset that
permits the subscriber to use the analog cellular networks in that area. For
this reason, the success of each protocol will depend both on its ability to
offer quality wireless service and on the extent to which its users will be able
to use their handsets when roaming outside their service area. PCS service
providers holding licenses covering 99% of the U.S. population have announced an
intent to use CDMA technology, including all of the top 100 markets in the U.S.
COMPETITION
The wireless communications market in the United States is expected to
become increasingly competitive. Cellular operators and other wireless services
providers are already exploiting existing wireless technology and have
established and continue to augment wireless telecommunications networks that
will directly compete with many of the
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services to be offered by us. Additionally, other PCS operators are expected to
compete with us in each market. Our success will depend largely upon our ability
to satisfy the mass consumer and business markets, which we believe have not
been adequately served by existing cellular service operators. We plan to
compete with cellular and other PCS operators on the basis of affordable
pricing, predictable monthly bills and voice transmission quality.
Cellular Operators. The Company will compete with established cellular
telephone service operators in the markets it intends to enter. Principal
cellular providers in our markets are AT&T Wireless Services, Inc., BellSouth
Mobility, Inc., GTE Mobile Communications Inc., AirTouch Communications, Inc.,
Centennial Cellular Corp., U.S. Cellular Corp., Independent Cellular Network
Inc. and Palmer Wireless, Inc. Under FCC rules, cellular telephone service
licensees have enjoyed a duopoly because the FCC only permits two licensees in
each market. Cellular licensees to date have faced limited competition from
businesses that "resell" cellular telephone service to customers, but we could
face additional competition from resellers of cellular and PCS networks.
The introduction of digital transmission technologies to supplant
traditional analog cellular systems will increase the capacity and quality of
existing cellular telephone systems once deployed. However, we believe that
upgrading from analog to digital is expensive and that it will likely be several
years before cellular networks are fully converted to digital technology. We
expect the analog infrastructure to continue to be used for the foreseeable
future due in part to a lack of a national digital technology standard. We
further expect that many cellular licensees will also attempt to acquire an
additional 10 MHZ PCS license in the D- and E- Block auctions in areas in which
they currently provide cellular telephone services, as permitted by the FCC
under its PCS licensing rules. This would provide the cellular operators with
greater capacity and potentially allow them to add additional customers and
offer more advanced services in their markets in the near term. We believe that
by providing low-priced services and new wireless features on its digital PCS
networks, it will be competitive with cellular services.
Other PCS Operators. We will compete with A- and B-Block licensees,
many of whom are cellular-affiliated companies that will utilize PCS spectrum in
new markets to expand their national or regional coverage as well as C-Block
licenses. In September, 1997, the FCC, among other options, gave C-Block
licensees the right to turn back to the FCC 15 MHZ of their 30 MHZ of spectrum
for a reduction of debt. The returned spectrum is in the process of being
returned would be reauctioned. Principal A-, B- and C-Block licensees in the
Company's markets are PCS PrimeCo, Cox Enterprises, American Personal
Communications, Nextwave, PCS 2000 L.P., Alpine PCS, Inc., Pacific Telesis,
Sprint Spectrum, Aerial Comm. and AT&T PCS, whose A- and B-Block licenses were
granted in June 1995, and whose C-Block licenses were granted in September 1996
have all had substantial lead-time to develop their networks and some of these
parties, particularly the A- and B-Block licenses have significantly greater
financial, technical, marketing and other resources than ours.
In addition, we will compete with other F-Block winners and with the
D- and E-Block license winners (principally, ATT Wireless PCS, Inc., Rivgam
Communicators, L.L.C., Sprint Comm., OPSCE-Galloway Consol., Bell South
Wireless, Inc. and Entertainment Unlimited) to the extent that such licenses are
not acquired by existing cellular or A-, B- or C-Block PCS licenses. Although
the D- and E- and F-Block licenses are for only 10 MHZ like our own entities
can, subject to FCC's rules limiting entities to 45 MHZ of cellular, broadband
PCS and SMR spectrum in a given market, can acquire 10 MHZ licenses and
consolidate them so as to design a 20 MHZ or 30 MHZ PCS system which could have
more capacity than ours.
SMR and "Enhanced" SMR Services. As a result of advances in digital
technology, some service providers have begun to design and deploy digital
mobile networks, which are referred to as "Enhanced SMR" or "ESMR." ESMR
networks increase the capacity of SMR system frequencies to a level that may be
competitive with that of analog cellular networks. SMR service providers offer
or plan to offer fleet dispatch services, short messaging, data services and
interconnected voice telephony services over wide geographic service areas.
Given similar developments in the deployment of digital technology in the
cellular operators' networks, it is unclear at this time whether the quality and
capacity of SMR-based digital mobile networks will be able to compete
effectively with analog and digital cellular and
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PCS networks. However, Nextel has begun offering, apparently successfully, a
competitive wireless service based on ESMR.
Other Competition. The FCC's general polic in recent years has been to
promote flexible use of the radio spectrum, which has resulted in rules
authorizing a number of additional spectrum-based services that may offer
competitive wireless mobile services. For example, among other actions, the FCC
has (i) authorized the use of the 37 and 39 GHZ bands for the provision of fixed
and mobile communications services; (ii) created rules and assigned licenses to
permit WCS providers to provide a broad rante of fixed, mobile, radio location
and satellite broadcasting services; (iii) created rules and assigned licenses
to permit LMDS providers to provide fixed and mobile broadband services; and
authorized MDS providers to use their spectrum to provide two -way broadband
wireless services. The FCC is expected to continue making new spectrum
available, and to allow for existing allocated spectrume to be developed, in
fashion that will continue to expand competi partitioning and disaggregation of
broadband PCS licenses into licenses to serve smaller service areas, and/or use
smaller spectrum blocks. The purpose of the FCC's rule change was to permit
existing PCS licensees and new PCS entrants to have greater flexibility to
determine how much spectrum and geographic area they need or desire in order to
provide PCS service. The FCC's action could also result in A-, B-, C-, D-,
and/or E- Block PCS licensees in our PCS markets partitioning or disaggregating
their licenses in a manner that provides increased competition to the Company.
See "Legislation and Government Regulation."
In addition, as a result of the enactment of the 1996 Act, regional
energy utility companies are expected to enter the wireless and wireline
telecommunications markets by leveraging their significant capital assets,
brand-name value, existing customer base and infrastructure advantages in their
geographical areas of operation. Similarly, the 1996 Act also eliminates
barriers for cable television system operators to provide wireline local loop
services over their existing wireline infrastructure.
LEGISLATION AND GOVERNMENT REGULATION
As a recipient of licenses acquired through the F-Block Auction, the
Company's ownership structure and operations are and will be subject to
substantial FCC regulation.
OVERVIEW
FCC Authority. The Communications Act of 1934, as amended (the
"Communications Act"), grants the FCC the authority to regulate the licensing
and operation of all non-federal government radio-based services in the United
States. The scope of the FCC's authority includes (i) allocating radio
frequencies, or spectrum, for specific services, (ii) establishing
qualifications for applicants seeking authority to operate such services,
including PCS applicants, (iii) approving initial licenses, modifications
thereto, license renewals, and the transfer or assignment of such licenses, (iv)
promulgating and enforcing rules and policies that govern the operation of
spectrum licensees, (v) the technical operation of wireless services,
interconnection responsibilities between and among PCS, other wireless services
such as cellular, and landline carriers, and (vi) imposing of fines and
forfeitures for any violations of those rules and regulations. Under its broad
oversight authority with respect to market entry and the promotion of a
competitive marketplace for wireless providers, the FCC regularly conducts
rulemaking and adjudicatory proceedings to determine and enforce rules and
policies potentially affecting broadband PCS operations.
Regulatory Parity. The FCC has adopted rules designed to create
symmetry in the manner in which it and the states regulate similar types of
mobile service providers. According to these rules, all "commercial mobile radio
service" ("CMRS") providers that provide substantially similar services will be
subject to similar regulation. A CMRS service is one in which the mobile radio
service is provided for a profit, interconnected to the public switched
telephone
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networks, and made available to the public. Under these rules, providers of PCS,
SMR, and ESMR services are subject to regulations similar to those governing
cellular carriers if they offer an interconnected commercial mobile service. The
FCC announced that it would forbear from applying several regulations to these
services, including its rules concerning the filing of tariffs for the provision
of interstate services. Congress specifically authorized the FCC to forbear from
applying such regulation in the Omnibus Budget Reconciliation Act of 1993. With
respect to PCS, the FCC has stated its intent to continue monitoring competition
in the PCS service marketplace. The FCC also concluded that Congress intended to
preempt state and local rate and entry regulation of all CMRS providers,
including PCS, but established procedures for state and local governments to
petition the FCC for authority to continue or initiate such regulation.
Commercial Mobile Radio Service Spectrum Ownership Limit. The FCC has
limited the amount of broadband CMRS spectrum (including cellular, broadband PCS
and SMR) in which an entity may hold an attributable interest in a given
geographic area to 45 MHZ. For these purposes only PCS and other CMRS licenses
are attributed to an entity where its investments exceed certain thresholds or
the entity is an officer or director of a broadband PCS, cellular or SMR
licensee. Thus, entities with attributable interests in cellular licenses (which
are for 25 MHZ) in certain markets cannot hold more than 20 MHZ of PCS spectrum
in the same markets. The Company's ability to raise capital from entities with
attributable broadband CMRS interests in certain geographic areas is likely to
be limited by this restriction.
Other FCC Requirements. The FCC had been conducting rulemakings to
address interconnection issues among CMRS carriers and between CMRS and LECs.
These proceedings were significantly affected by the 1996 Act and FCC
rulemakings conducted pursuant to the 1996 Act. See "--1996 Act" and "--FCC
Interconnection Proceedings."
The FCC has adopted rules that prohibit broadband PCS, cellular and
certain SMR licensees from unreasonably restricting the resale of their
services. The FCC has determined that the availability of resale will increase
competition at a faster pace by allowing new entrants to the wireless market
quickly through the resale of their competitors' services while they are
building out their own facilities. This prohibition will expire on November 4,
2002. Additionally, the FCC requires such carriers to provide manual roaming
service to subscribers of other such carriers, through which traveling
subscribers of other carriers may make calls after establishing a method of
payment with a host carrier.
The FCC has revised its rules to permit CMRS operators, including PCS
licensees, to use their assigned spectrum to provide fixed local loop and other
services on a co-primary basis with mobile services. The FCC is continuing its
rulemaking proceeding to determine the extent to which such fixed services fall
within the scope of CMRS regulation.
The FCC has adopted requirements for CMRS providers to implement
various enhanced 911 capabilities between April 1998 and October 2001. FCC rules
also require CMRS providers to meet several number portability requirements,
including enabling calls from their networks to be delivered to ported wireline
numbers. CMRS providers must offer long-term service provider number portability
in the 100 largest MSAs, including the ability to support nationwide roaming, by
November 24, 2002.
In addition, the Communications Assistaance for Law Enforcement Act of
1994 ("CALEA") requires all telecommunications carriers, including wireless
carriers, as of June 30, 2000, to ensure that their equipment is capable of
permitting the government, pursuant to a court order or other lawful
authorization, to intercept any wire and electronic communications carried by
the carrier to or from its subscribers and to access certain call-identifying
information that is reasonably available to carriers. Although final standards
have yet to be promulgated, compliance with the requirements of CALEA could
impose significant additional direct and/or indirect on us and other wireless
carriers.
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The FCC has adopted new guidelines and methods for evaluating the
effects of radiofrequency emissions from transmitters including PCS mobile
telephones and base stations. The guidelines, which are generally more stringent
than previous requirements, were effective immediately for hand-held devices and
otherwise became effective January 1, 1997.
Other Federal Regulations. Wireless networks are subject to certain
Federal Aviation Administration and FCC guidelines regarding the location,
lighting and construction of transmitter towers and antennas. In addition, the
FCC has authority to enforce certain provisions of the National Environmental
Policy Act as they would apply to the Company's facilities. The Company intends
to use common carrier point-to-point microwave and traditional landline
facilities to connect base station sites and to link them to their respective
main switching offices. These microwave facilities have historically been
separately licensed by the FCC on a first-come, first-served basis (although the
FCC has proposed to auction certain such licenses) and are subject to specific
service rules.
Wireless providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent wireless users,
permittees and licensees in order to avoid electrical interference between
adjacent networks. In addition, the height and power of base station
transmitting facilities and the type of signals they emit must fall within
specified parameters.
State and Local Regulation. The scope of state regulatory authority
covers such matters as the terms and conditions of interconnection between LECs
and wireless carriers under FCC oversight, customer billing information and
practices, billing disputes, other consumer protection matters, certain
facilities construction issues, transfers of control, the bundling of services
and equipment and requirements relating to making capacity available to third
party carriers on a wholesale basis. In these areas, particularly the terms and
conditions of interconnection between LECs and wireless providers, the FCC and
state regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively.
The FCC and a number of state regulatory authorities have initiated
proceedings or indicated their intention to examine access charge obligations,
mutual compensation arrangements for interconnections between LECs and wireless
providers, the pricing of transport and switching facilities provided by LECs to
wireless providers, the implementation of "number portability" rules to permit
telephone customers to retain their telephone numbers when they change telephone
service providers, and alterations in the structure of universal service
funding, among other matters.
Proceedings with respect to the foregoing policy issues before the FCC
and state regulatory authorities could have a significant impact on the
competitive market structure among wireless providers and the relationships
between wireless providers and other carriers.
GENERAL PCS REGULATIONS
In June 1994 the FCC allocated spectrum for broadband PCS services
between the 1850 to 1990 MHZ bands. Of the 140 MHZ available for PCS services,
the FCC created six separate blocks of spectrum identified as the A-, B-, C-,
D-, E- and F-Blocks. The A-, B- and C-Blocks are each allocated 30 MHZ of
spectrum, the D-, E- and F-Blocks are allocated 10 MHZ each. For each block, the
FCC adopted a 10-year PCS license term with an opportunity to renew. 20 MHZ of
spectrum within the PCS band is reserved for unlicensed use.
The FCC adopted a "rebuttable presumption" that all PCS licensees are
common carriers, subject to Title II of the Communications Act. Accordingly,
each PCS licensee deemed to be a common carrier must provide services
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upon reasonable request and the rates, terms and conditions of service must not
be unjustly or unreasonably discriminatory.
Structure of PCS Block Allocations. The FCC defines the geographic
contours of the licenses within each PCS block based on the MTAs and BTAs
developed by Rand McNally & Co. The FCC awarded A- and B-Block licenses in 51
MTAs. The C-, D-, E- and F-Block spectrum were allocated on the basis of 493
smaller BTAs. In addition, there are spectrum aggregation caps on PCS licensees
limiting them to 45 MHZ of broadband CMRS spectrum (e.g., no more than one 30
MHZ PCS license and one 10 MHZ license) in any given market.
All but three of the 102 total A-Block licenses and all B-Block
licenses were auctioned in 1995. The three A-Block licenses were awarded
separately pursuant to the FCC's "pioneer's preference" program. The auctioned
A- and B- Block licenses were awarded in June 1995. The C- and F-Block spectrums
are reserved for Entrepreneurs. See "--F-Block License Requirements." The FCC
completed its auction for C-Block licensees in May, 1996 and reallocated 18
C-Block licenses on which initial auction winners defaulted in a reauction that
ended in July 1996. The FCC completed its auction for the D-, E-, and F-Block
licenses in January 1997.
In December 1996 the FCC adopted rules permitting broadband PCS
carriers to partition any service areas within their license areas and/or
disaggregate any amount of spectrum within their spectrum blocks to entities
that meet the eligibility requirements for the spectrum blocks. The purpose of
the FCC's rule change was to permit existing PCS licensees and new PCS entrants
to have greater flexibility to determine how much spectrum and geographic area
they need or desire in order to provide PCS service. Thus, A-, B-, D-, and
E-Block licensees may sell or lease partitioned or disaggregated portions of
their licenses at any time to entities that meet the minimum eligibility
requirements of the Communications Act. Entrepreneur (C- and F-) Block
licensees, such as the Company, may only sell or lease partitioned or
disaggregated portions of their licenses to other qualified entrepreneurs during
the first five years of their license terms. Thereafter, if Entrepreneur Block
licensees partition or disaggregate to non-entrepreneurs, they must repay a
proportional share of the outstanding balance on their installment payments and
a share of any bidding credits that they received.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the President signed the Telecommunications Act
of 1996 (the "1996 Act"), which effected a sweeping overhaul of the
Communications Act of 1934 (the "Communication Act"). In particular, the 1996
Act substantially amended Title II of the Communications Act, which governs
telecommunications common carriers. The policy underlying this legislative
reform was the opening of the telephone exchange service markets to full
competition. The 1996 Act makes all state and local barriers to competition
unlawful, whether they are direct or indirect. It directs the FCC to initiate
rulemaking proceedings on local competition matters and to preempt all
inconsistent state and local laws and regulations. The 1996 Act requires
incumbent wireline LECs to open their networks to competition through
interconnection and access to unbundled network elements and prohibits state and
local barriers to the provision of interstate and intrastate telecommunications
services.
The 1996 Act prohibits state and local governments from enforcing any
law, rule or legal requirement that prohibits or has the effect of prohibiting
any person from providing interstate or intrastate telecommunications services.
States retain jurisdiction under the 1996 Act to adopt laws necessary to
preserve universal service, protect public safety and welfare, ensure the
continued quality of telecommunications services and safeguard the rights of
consumers.
Implementation of the provisions of the 1996 Act will be the task of
the FCC, the state public utility commissions and a joint federal-state board.
Much of the implementation of the 1996 Act is being completed in numerous
rulemaking proceedings with short statutory deadlines. These proceedings address
issues and proposals that were already before the FCC in pending rulemaking
proceedings affecting the wireless industry as well as additional areas of
telecommunications regulation not previously addressed by the FCC and the
states.
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Some specific provisions of the 1996 Act which are expected to affect
wireless providers are summarized below:
Expanded Interconnection Obligations: The 1996 Act establishes a
general duty of all telecommunications carriers, including F-Block PCS
licensees, to interconnect with other carriers, directly or indirectly. The 1996
Act also contains a detailed list of requirements with respect to the
interconnection obligations of LECs. These "interconnect" obligations include
resale, number portability, dialing parity, access to rights-of-way and
reciprocal compensation.
LECs designated as "incumbents" (i.e., those providing landline local
exchange telephone service at the time the 1996 Act was adopted) have additional
obligations including: to negotiate in good faith; to interconnect on terms that
are reasonable and non-discriminatory at any technically feasible point at
cost-based rates (plus a reasonable profit); to provide non- discriminatory
access to facilities and network elements on an unbundled basis; to offer for
resale at wholesale rates any service that LECs provide on a retail basis; and
to provide actual co-location of equipment necessary for interconnection or
access.
The 1996 Act establishes a framework for state commissions to mediate
and arbitrate negotiations between incumbent LECs and carriers requesting
interconnection, services or network elements. The 1996 Act establishes
deadlines, policy guidelines for state commission decision making and federal
preemption in the event a state commission fails to act.
Review of Universal Service Requirements. The 1996 Act contemplates
that interstate telecommunications providers, including CMRS providers, will
"make an equitable and non-discriminatory contribution" to support the cost of
providing universal service. Telecommunications providers are to base their
contributions on end user interstate and for certain programs intrastate
revenues.
Prohibition Against Subsidized Telemessaging Services. The 1996 Act
prohibits incumbent LECs from subsidizing telemessaging services (i.e., voice
mail, voice storage/retrieval, live operator services and related ancillary
services) from their telephone exchange service or exchange access and from
discriminating in favor of its own telemessaging operations.
Conditions on RBOC Provision of In-Region InterLATA Services. The 1996
Act generally requires that before engaging in landline long distance services
in the states in which they provide landline local exchange service referred to
as in-region interLATA services, the Regional Bell Operating Companies ("RBOCs")
must (1) provide access and interconnection to one or more unaffiliated
competing facilities-based providers of telephone exchange service, or after 10
months after enactment of the 1996 Act, no such provider requested such access
and interconnection more than three months before the RBOCs has applied for
authority and (2) demonstrate to the FCC its satisfaction of the 1996 Act's
"competitive checklist."
The specific interconnection requirements contained in the competitive
checklist, which the RBOCs must offer on a non-discriminatory basis, include
interconnection and unbundled access; access to poles, ducts, conduits and
rights-of-way owned or controlled by the RBOCs; unbundled local loops, unbundled
transport and unbundled switching; access to emergency 911, directory
assistance, operator call completion and white pages; access to telephone
numbers, databases and signaling for call routing and completion; number
portability; local dialing parity; reciprocal compensation; and resale.
The 1996 Act eliminates the previous prohibition on RBOC provision of
out- of-region, interLATA services and all interLATA services associated with
the provision of CMRS service, including in-region CMRS service.
RBOC Commercial Mobile Joint Marketing. The RBOCs are permitted to
market jointly and sell wireless services in conjunction with telephone exchange
service, exchange access, intraLATA and interLATA telecommunications and
information services.
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CMRS Facilities Siting. The 1996 Act limits the rights of states and
localities to regulate placement of CMRS facilities so as to "prohibit" or
prohibit effectively the provision of wireless services or to "discriminate"
among providers of such services. It also eliminates environmental effects from
RF emissions (provided the wireless system complies with FCC rules) as a basis
for states and localities to regulate the placement, construction or operation
of wireless facilities. The FCC's implementation of these provisions and the
scope thereof have neither been adopted by the agency nor reviewed by the
courts.
Equal Access. The 1996 Act provides that wireless providers are not
required to provide equal access to common carriers for toll services. The FCC
is authorized to require unblocked access subject to certain conditions.
Deregulation. The FCC is required to forebear from applying any
statutory or regulatory provision that is not necessary to keep
telecommunications rates and terms reasonable or to protect consumers. A state
may not apply a statutory or regulatory provision that the FCC decides to
forebear from applying. In addition, the FCC must review its telecommunications
regulations every two years and change any that are no longer necessary.
FCC INTERCONNECTION PROCEEDINGS
In August 1996 the FCC adopted rules to implement the interconnection
provisions of the 1996 Act. In its interconnection order, the FCC determined
that CMRS-to-CMRS interconnection may be accomplished indirectly through the
interconnection of each CMRS provider to an incumbent LEC's network. The FCC
determined that LECs are required to enter into reciprocal compensation
arrangements with all CMRS providers for the transport and termination of LEC-
originated traffic. Additionally, the FCC established default "proxy" rates for
reciprocal compensation, interconnection and unbundled network elements to be
used unless or until a state develops rates for these items based on the Total
Element Long Run Incremental Cost ("TELRIC"). The proxy rates for CMRS- to-LEC
interconnection would result in significant savings when compared with rates
that CMRS providers, principally cellular carriers, have been paying to LECs.
In July 1997 the U.S. Court of Appeals for the Eighth Circuit, acting
on consolidated petitions for review of the FCC's interconnection order, vacated
the rate-related portions of the order. The court found that the FCC was without
jurisdiction to establish pricing regulations regarding intrastate telephone
service.
On January 25, 1999, the Supreme Court reversed the Eighth Circuit's
ruling, and held, among other things, that the FCC has general jurisdiction to
implement the local competition provisions of the 1996 Act. Although the Supreme
Court affirmed the FCC's authority to develop pricing guidelines, it did not
evaluate the FCC's TELRIC methodology, and has remanded the case to the Eighth
Circuit for further proceedings. There will also be additional remand and
related proceedings at the FCC. It is not possible at this time to determine the
final outcome of the Eighth Circuit or FCC remand proceedings, or the effect
that such proceedings will have on the Company or on CMRS providers generally.
The portions of the FCC's interconnection order that are not related
to pricing issues have gone into effect. In addition to the federal circuit
court, several parties have petitioned the FCC for reconsideration of its
decision. It is not possible to determine the final outcome of the court
proceedings or the petitions for reconsideration or the effect such outcome will
have on CMRS carriers, including the Company.
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
In an effort to balance the competing interests of existing microwave
users and newly authorized PCS licensees in the spectrum allocated for PCS use,
the FCC has adopted (i) a transition plan to relocate fixed microwave operators
that currently are operating in the PCS spectrum, and (ii) a cost sharing plan
so that if the relocation of an incumbent benefits more than one PCS licensee,
the benefitting PCS licensees will help defray the costs of the relocation. PCS
licensees will only be required to relocate fixed microwave incumbents if they
cannot share the same spectrum. The transition and cost sharing plans expire on
April 4, 2005, at which time remaining incumbents in the PCS spectrum will be
responsible for their costs to relocate to alternate spectrum locations.
Relocation generally involves a PCS operator compensating an incumbent
for costs associated with system modifications and new equipment required to
move to alternate, readily available spectrum. This transition plan allows most
microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional
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one-year mandatory negotiation period. For public safety entities dedicating a
majority of their system communications for police, fire, or emergency medical
service operations, the voluntary negotiation period is three years. The FCC
currently is considering whether to shorten the voluntary negotiation period by
one year. Parties unable to reach agreement within these time periods may refer
the matter to the FCC for resolution, but the existing microwave user is
permitted to continue its operations until final FCC resolution of the matter.
The FCC's cost-sharing plan allows PCS licensees that relocate fixed
microwave links outside of their license areas to receive reimbursements from
later-entrant PCS licensees that benefit from the clearing of their spectrum. A
non-profit clearinghouse will be established to administer the FCC's cost-
sharing plan.
F-BLOCK LICENSE REQUIREMENTS
When the FCC allocated spectrum to PCS, it designated the F-Block as
an "Entrepreneurs' Block." FCC rules require F-Block Entrepreneurs to meet
various qualifications to hold F-Block licenses or to receive certain financing
preferences. Among these are: (i) the various structural requirements governing
equity investments, including the Entrepreneurs Requirements, Small Business
Requirements and Control Group Requirements, all of which apply specifically to
Entrepreneurs, and the Foreign Ownership Limitations, which apply to all
communications entities governed by the FCC; (ii) transfer restrictions
limiting, among other things, the sale of F-Block licenses; and (iii) other
ongoing requirements that mandate network build-out schedules and limit
cross-ownership of cellular and other wireless investments. The Company was the
winning bidder for 5 licenses in the F-Block Auction. The FCC also determined
that Entrepreneurs that qualify as a Very Small Business would be eligible to
receive a 25% bidding credit and a F-Block Loan from the federal government for
80% of the dollar amount of their winning bids in the F-Block Auction. The
Government Financing provided to the Company is F- Block Loans. See "Description
of Certain Indebtedness." 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 FCC's qualifications or requirements, and
the failure to do so would have a material adverse effect on the Company. See
"Risk Factors"
STRUCTURAL REQUIREMENTS
Entrepreneurs Requirements. In order to hold a F-Block license, an
entity must: (i) meet the Entrepreneurs Revenues Limit by having less than $125
million in gross revenues and (ii) meet the Entrepreneurs Asset Limit by having
less than $500 million in total assets (excluding the value of C-Block
licenses). 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 Short Form. For at least
five years after winning a 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 to enter
the F-Block Auction. If the FCC were to determine that the Company did not
satisfy the Entrepreneur 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. 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. See "Risk Factors"
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Small Business Requirements. An entity that meets the Entrepreneurs
Requirements may also receive certain preferential financing terms if it meets
the Small Business Requirements. These preferential financing terms include a
15% bidding credit for Small Businesses and a 25% Bidding Credit for Very Small
Businesses (such as the Company) and the ability to make quarterly interest-only
payments on its F-Block Loan for the first two years of the license term (for
Very Small Businesses). To meet the Small Business or Very Small Business
Requirements, a licensee must have had annual average gross revenues of not more
than $40 million or $15 million, respectively, for the three calendar years
preceding the date it filed its Short Form. In calculating a licensee's gross
revenues for purposes of the Small and 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 Bidding Credit. If the FCC were to determine that the Company does not
qualify as a Very Small Business, the Company would, at a minimum, be forced to
repay the portion of the Bidding Credit to which it was not entitled. 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. See "Risk Factors"
Control Group Requirements. If a F-Block licensee meets the Control
Group Requirements, the FCC excludes certain assets and revenues from such
licensee's total revenues and assets, making it easier for the licensee to meet
the Entrepreneurs Requirements and the 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 the Qualifying Investor
Option if its Control Group is comprised of the following: (i) 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
Control Group Members that hold at least 10% of the equity interest in the
F-Block licensee. Additional Control Group Members must be either: (a) the same
Qualifying Investors in 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 hold any of the licensee's
equity interest 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. See
"Description of Capital Stock." 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. See "Risk Factors"
Asset and Revenue Calculation. In determining whether an entity
qualifies as an Entrepreneur and/or as a 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 "passive" 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 passive investor,
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an entity may not own more than 25% of the Company's total equity on a fully
diluted basis, unless the Control Group owns at least 50.1% 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 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 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 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.
Foreign Ownership Limitations. The Communications Act requires that
non-U.S. citizens, their representatives, foreign governments or corporations
otherwise subject to domination and control by non-U.S. citizens may not own of
record or vote (i) more than 20% of the capital contribution to a common carrier
radio station directly, or (ii) more than 25% of the capital contribution to the
parent corporation of a common carrier radio station licensee if the FCC
determines such holding are not within the public interest. Because the FCC
classifies PCS as a common carrier offering, PCS licensees are subject to the
foreign ownership limits. Congress recently eliminated restrictions on non-U.S.
citizens serving as members on the board of directors and officers of a common
carrier radio licensee or its parent. The FCC also recently adopted rules that,
subject to a public interest finding by the FCC, could allow additional indirect
foreign ownership of CMRS companies to the extent that the relevant foreign
states extend reciprocal treatment to U.S. investors. The Company's Long Form
filed by the Company with the FCC after the completion of the F-Block Auction
indicates that the Company is in compliance with the FCC foreign-ownership
rules. However, if the foreign ownership of the Company were to exceed 25% in
the future, the FCC could revoke the Company's PCS licenses or impose other
penalties. Further, the Company's Certificate of Incorporation enables the
Company to redeem shares from holders of common stock whose acquisition of such
shares results in a violation of such limitation. The restrictions on foreign
ownership could adversely affect the Company's ability to attract additional
equity financing from entities that are, or are owned by, non-U.S. entities. The
recent World Trade Organization ("WTO") agreement on basic telecommunications
services could eliminate or loosen foreign ownership limitation but could also
increase the Company's competition. Under this agreement, the United States and
other members of the WTO committed themselves to opening their
telecommunications markets to competition and foreign ownership and to adopting
regulatory measures to protect competitors against anticompetitive behavior by
dominant telephone companies, effective as early as January 1, 1998. See "Risk
Factors"
TRANSFER RESTRICTIONS
License Transfer Restrictions. During the first five years after the
License Grant Date, transfer or assignment of a F-Block license is prohibited to
any entity that fails to satisfy the Entrepreneurs Requirements. If such a
transfer occurs to an entity that does not qualify for bidding credits, such a
sale would be subject to payment of the bidding credit and the licensee must
adjust its installment payments to the FCC to effect the bidding credits and
payment plan applicable to the new entity (e.g., an enterprise that is not a
Very Small Business). After five years, all such transfers and assignments of
the licenses remain subject to the Unjust Enrichment Penalties.
Unjust Enrichment. Any transfer during the full license term (10
years) may require certain costs and reimbursements to the government of bidding
credits and/or outstanding principal and interest payments (the "Unjust
Enrichment Penalties"). In addition, if the Company wishes to make any change in
ownership structure during the initial license term involving the de facto and
de jure control of the Company, it must seek FCC approval and may be subject to
the same costs and reimbursement conditions indicated above.
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F-BLOCK RULES
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 its securities,
including certain restrictions on ownership, in a matter 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 licenses. 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 that 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. See "Risk Factors"
OTHER ONGOING REQUIREMENTS
Build-Out Requirements. The FCC has mandated that recipients of PCS
licenses adhere to a five year build-out requirement. Under the five year
build-out requirement, all 10 MHZ PCS licensees (such as F-Block licensees) must
construct facilities to offer adequate service to at least one-third of the
population in their service area within five years from the date of initial
license grants or make a showing of substantial service in its licensed areas
within five years of the initial license grants. Service must be provided to
two-thirds of the population within 10 years. Violation of this regulation could
result in license revocations or forfeitures or fines.
Additional Requirements. As a F-Block licensee, the Company will be
subject to certain restrictions that limit, among other things, the number of
PCS licenses it may hold as well as certain cross-ownership restrictions
pertaining to cellular and other wireless investments.
Penalties for Payment Default. In the event that the Company were to
become unable to meet its obligations under the Government Financing, the FCC
could in such instances reclaim some or possibly all of the Company's PCS
licenses, reauction them, and subject the Company to a penalty comprised of the
difference between the price at which it acquired its license and the amount of
the winning bid at reauction, plus an additional penalty of three percent of the
lesser of the subsequent winning bid and the defaulting bidders bid amount. See
"Risk Factors"
ITEM 2. PROPERTIES
The Company has no properties except as described above.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings which are currently pending
or, to the Company's knowledge, contemplated against the Company or to which it
is a party, except for a United States Department of Justice investigation to
determine whether there has been bid rigging and market allocation for license
auctions by the FCC for PCS. The Company, together with various other bidders in
the PCS auctions, has received a civil investigative demand ("CID") requesting
documents and information relating to bidding, and in May 1997, the Company
complied with the CID. The Company does not know what further action, if any,
the Justice Department or the FCC may take.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Class A common stock is traded on the OTC Bulletin Board. The
following table sets forth the high and low bid prices for the Class A common
stock, for the periods indicated, as reported by published sources. All
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
LOW HIGH
1998 FISCAL YEAR
First Quarter $0.609375 $1.25
Second Quarter 1.00 2.50
Third Quarter 1.859375 3.00
Fourth Quarter 0.75 1.625
On March 18, 1999, the closing sales price of the Class A common stock
on the OTC Bulletin Board was $1.75.
At March 30, 1999 the records of the Company's transfer agent
indicated that there were 990 holders of record of the Company's Class A Common
Stock.
At March 30, 1999, all of the Company's Class B Common Stock was held
by Aer Force Communications, Inc. ("AFC"), all of whose capital stock is owned
by Victoria Kane.
We have not declared any cash dividend on our Class A common stock
since inception. We do not anticipate that we will pay cash dividends in the
foreseeable future. Under the provisions of our Preferred Stock, we cannot
declare dividends on our Class A or Class B common stock until all accrued
dividends on our Preferred Stock are paid. We currently plan to retain any
earnings to provide for our development and growth.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN
OF OPERATION
We are a development stage company with no significant results of
operations to date. We hold 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. 80% of the cost of the licenses (or $15.2
million) was financed over ten years by the FCC, with only payments of interest
during the first two years after award of the licenses.
We believe that our PCS licenses have substantial potential. However,
we have not yet adopted a business plan or determined how to finance our
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, we have not yet determined whether to develop our PCS
licenses on its own, joint venture our licenses with other PCS wireless
telephone licenses holders or operators or others, or sell some or all of our
licenses. We expect to continually evaluate these factors and to adopt a plan or
plans once the financing, regulatory and market aspects of PCS are less
uncertain. Our principal expense to date has been interest, including commitment
fees, plus minor administrative expenses.
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Unless we sell our PCS business or joint venture our PCS licenses with
an entity that has the capacity to provide substantial funds, we will need to
raise substantial capital to fund our installment payments to the FCC and the
build out of our PCS licenses. Under the government financing, we have to make
payments of approximately $2.3 million in 1999 including an interest payment of
$337,658 that was due on October 31, 1998, $2.6 million in the year 2000 and
$2.4 million for the next 8 years.
The following are the scheduled interest and principal payments over
the next two years:
Due Date Amount
April 29, 1999 $388,307(1)
May 1, 1999 354,541(2)
April 30, 1999 337,658
July 31, 1999 534,641
October 31, 1999 706,566
$2,321,713
January 31, 2000 $ 706,566
April 30, 2000 706,566
July 31, 2000 605,879
October 31, 2000 605,879
$2,624,890
Under FCC rules, scheduled payments may be delayed for up to 90 days
upon payment of a 5% penalty and for 90-180 days upon payment of a 15% penalty.
The April 29, 1999 payment may not be further delayed and the May 1, 1999
payment may only be delayed for an additional 90 days. We do not have a reliable
estimate of the cost to build out our PCS licenses but it is likely to be
substantial.
We will have to raise funds shortly in order to make interest payments
on the government financing and for working capital and general corporate
purposes. We believe that we will be required to borrow additional funds from
certain of our directors in order to meet our April 29, 1999 payment obligation
under the same terms and provisions of prior loans received from our directors.
The report of our independent auditors with respect to our financial statements
as of December 31, 1998 and 1997, for the years ended December 31, 1998 and 1997
and the period from July 26, 1996 (inception) to December 31, 1998 contains a
paragraph indicating that substantial doubt exists as to our ability to continue
as a going concern. Among the factors cited by the auditors as raising
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(1) Scheduled payment was $337,658, which was due on October 31, 1998. Above
amount includes a 15% penalty, as provided in the loan documents, for
payments made between 90-180 days after the due date.
(2) Scheduled payment was $337,658, which was due on January 31, 1998. Above
amount includes a 5% penalty, as provided in the loan documents, for
payments made within 90 days after due date.
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substantial doubt as to our ability to continue as a going concern is that, with
respect to the periods covered, we have incurred losses since inception and have
not yet adopted a business plan or determined how to finance our operations and
will need to obtain capital in order to fund our interest and principal 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, 1998 was $15,466,177, compared to shareholders equity of $22,860. During the
period from July 26, 1996 (inception) to December 31, 1998, we had no revenues
or operating profits and cannot predict when the Company may have any revenues
or operating profits.
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, we were required to issue an
additional interest payment of $236,972 plus suspended interest of $100,686.
Total interest payments required for year 1998 amounted to $749,688. 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 loans
payable to FCC due on October 31, 1998 in the amount of $337,658. Payments
issued within 90 days of the due date will be subject to a 5% penalty and 15%
penalty if paid within 90 to 180 days of the due date.
On October 22, 1998, the Company borrowed $300,000 from certain
directors of the Company. The loans are evidenced by promissory notes in the
amount of $150,000 each to Mario J. Gabelli and T. Gibbs Kane, Jr., which notes
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 this
offering, sufficient to pay the full amount of principal and interest then owed
on the notes.
YEAR 2000 COMPLIANCE
We have considered the potential impact of the year 2000 on our future
business and operations. Any programs that recognize a date using "00" as the
year 1900 rather than the year 2000 could result in errors or system failures.
If we decide to develop our PCS licenses, we may utilize a number of computer
programs. Because we currently have no operations, we are unable to assess the
potential impact of the year 2000 on any systems we may use nor have we been
able to complete our assessment of any year 2000 issues which may affect
third-parties. We believe that the costs of addressing this issue in the future
will not have a material adverse impact on our financial position. However, if
the Company and third parties upon which we rely are unable to address this
issue in a timely manner, it could result in a material financial risk,
including the possibility that we may be liable to such third parties for a
material failure of our systems due to year 2000 issues
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Financial Statements on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
-26-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth the name, business address, present principal
occupation, employment and material occupations, positions, offices or
employments for the past five years and ages as of March 1, 1999 for the
executive officers and directors of the Company. Members are the board are
elected and serve for one year terms or until their successors are duly elected
and shall have qualified. All executive officers serve at the discretion of the
board.
NAME AGE POSITION WITH EAST/WEST*
- - ---- --- ------------------------
Victoria G. Kane(1) 50 Class B Director, Chairman and Chief
Executive Officer
T. Gibbs Kane, Jr.(1) 51 Class B Director
Mario J. Gabelli 56 Class A Director(2)
Robert E. Dolan 47 Assistant Secretary
- - ----------------------
* Under the Company's Certificate of Incorporation each of the Class B
Directors has one and one-half votes and each of the Class A Directors
has one vote on all matters properly brought before the Board of
Directors.
(1) T. Gibbs Kane, Jr. and Victoria G. Kane are husband and wife.
(2) One of the two available Class A Director positions is currently
vacant.
VICTORIA G. KANE, Entrepreneur and investor. Owner and instructor of
dance studio (from 1986 to 1996).
T. GIBBS KANE, JR., President, Sound Shore Management (since 1978), a
registered investment advisor; Director, Sound Shore Fund (since 1985), a mutual
fund.
MARIO J. GABELLI, has served as Chairman, Chief Executive Officer and
Chief Investment Officer of Gabelli Funds, Inc. and Gabelli Asset Management,
Inc. and their predecessors since November 1976. In connection with those
responsibilities, he serves as Chairman and/or President of thirteen registered
investment companies managed by Gabelli Funds, LLC. Mr. Gabelli also serves as a
Governor of the American Stock Exchange, and Chairman and Chief Executive
Officer of Lynch Corporation, a public company engaged in multimedia,
specialized transportation and manufacturing.. Mr. Gabelli received a B.S. from
Fordham University and an M.B.A. from Columbia University Graduate School of
Business.
ROBERT E. DOLAN, Chief Financial Officer(since February 1992) and
Controller (since May 1990) of Lynch.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company is not compensating its directors at the present time,
although it may do so in the future. The Company does indemnify directors
pursuant to Delaware law and may reimburse them for certain out-of-pocket costs
in connection with serving as directors.
-27-
<PAGE>
EXECUTIVE COMPENSATION
The Company has no employees and has paid no employee or executive
compensation, although it may do so in the future.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding
beneficial ownership of our common stock by (i) each person who is known by us
to own beneficially more than five percent of our common stock, (ii) each of our
officers and directors, (iii) and all current executive officers and directors
as a group.
<TABLE>
<CAPTION>
Class A Beneficially Class B Beneficially Owned Total Beneficially Owned
Owned
---------------------------- ----------------------------- ----------------------------
Shares Percent Shares Percent Shares Percent
---------- ---------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aer Force -- -- 1,779,301 100% 1,779,301 50.1%
Communications,
Inc.(1)
Victoria G. Kane (1) -- -- 1,779,301 100% 1,779,301 50.1%
T. Gibbs Kane, Jr. (1) -- -- 1,779,301 100% 1,779,301 50.1%
Mario J. Gabelli (2) 441,184 24.9% -- -- 441,184 12.4%
Robert E. Dolan (3) 235 -- -- -- 235 --
Elisa Gabelli (4) 200,043 11.3% - - 200,043 5.6%
All Directors and 441,419 24.9% 1,779,301 100% 2,220,720 62.5%
Executive Officers as a
Group (3 in total)
</TABLE>
(1) Victoria G. Kane is the sole shareholder of AFC and therefore shares
owned by AFC are set forth in this table as owned by Victoria G. Kane.
Victoria Kane has sole voting and dispositive power with respect to
the shares owned by AFC. T. Gibbs Kane Jr. is the husband of Victoria
G. Kane, and therefore shares owned by Victoria G. Kane are also set
forth as owned by T. Gibbs Kane Jr. T. Gibbs Kane Jr. disclaims
ownership of the shares. The address of AFC, Victoria G. Kane and T.
Gibbs Kane Jr. is 350 Stuyvesant Avenue, Rye, New York 10580.
(2) Includes 261,262 shares owned directly by Mr. Gabelli (including 3,120
shares held for the benefit of Mr. Gabelli in the Lynch 401(k) Savings
Plan), 758 shares held by GFI, 2,000 shares owned by a charitable
foundation of which Mr. Gabelli is a trustee, 70,000 shares owned by a
limited partnership in which Mr. Gabelli is the general partner and
has a 20% interest and 107,164 shares subject to a voting agreement
which terminates June 26, 2001 for which Mr. Gabelli has sole voting
power. Mr. Gabelli disclaims the ownership of the shares owned by the
foundation, by GFI to the extent of the minority interest in GFI held
by third parties and by the partnership except for his 20% interest
therein. The address of GFI and Mr. Gabelli is 555 Theodore Fremd
Avenue, Corporate Center at Rye, NY 10580.
(3) Includes 35 shares registered in the name of Mr. Dolan's children with
respect to which Mr. Dolan has sole voting and investment power.
(4) Consists of 200,043 shares held in trusts for which Ms. Gabelli is the
trustee or beneficiary and for which Ms. Gabelli has sole voting and
investment power and 5,043 shares held by Ms. Gabelli for which she
holds sole investment power. Ms. Gabelli is the daughter of Mario
Gabelli.
-28-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AFC and Lynch PCS Corporation F ("LPCS"), a subsidiary of Lynch,
formed a limited partnership, Aer Force Communications B, L.P. in July 1996 for
the purpose of bidding for PCS licenses in the F-Block Auction. AFC, the general
partner, contributed $100,200 to the partnership for a 50.1% equity interest and
LPCS, the limited partner, contributed $99,800 to the partnership for a 49.9%
equity interest. LPCS also agreed to loan the partnership an additional $11.4
million, primarily for down-payments and to service installment payments on PCS
licenses won in the auction.
On August 13, 1997, East/West succeeded to the rights and obligations
of Aer Force Communications B, L.P. . At that time, AFC received 1,779,301
shares of our Class B common stock and LPCS received 1,772,198 shares of our
Class A common stock. Concurrently, LPCS transferred the 1,772,198 shares to
Lynch, which subsequently transferred 1,417,048 shares to its stockholders and
355,150 shares to GFI in satisfaction of Lynch's obligation to share a profits
interest in LPCS's partnership interest.
As a part of these transactions, AFC and LPCS contributed an
additional $125,250 and $124,750, respectively, in cash, as equity to East/West,
and LPCS contributed to East/West's capital, $4.5 million of our existing
indebtedness to LPCS. Our remaining indebtedness to LPCS was converted into $7.8
million of redeemable preferred stock and LPCS's obligations to make additional
loans to East/West terminated.
On October 22, 1998, the Company borrowed $300,000 from certain
directors of the Company. The loans are evidenced by promissory notes in the
amount of $150,000 each to Mario J. Gabelli and T. Gibbs Kane, Jr., which notes
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 this
offering, sufficient to pay the full amount of principal and interest then owed
on the notes.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Information
See index to Financial Statements on Page F-1
(2) Financial Statement Schedules
Supplemental schedules are omitted because they are
not required, inapplicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits *
3.1 Certificate of Incorporation of East/West Communications,
Inc.
3.2 By-Laws of East/West Communications, Inc.
10.1 Expenses Agreement dated as of July 31, 1996 among AER
Force Communications B, L.P., a Delaware limited
partnership, AER Force Communications Inc., a New York
corporation, and Lynch PCS Corporation F, a Delaware
corporation.
-29-
<PAGE>
10.2 Limited Partnership Agreement of AER Force Communications
B, L.P. entered into as of July 26, 1996, by and between
AER Force Communications Inc., a New York corporation, as
general partner, and Lynch PCS Corporation F, a Delaware
corporation, as the Initial Limited Partner.
10.3 Loan Agreement dated as of August 12, 1996 by and between
AER Force Communications B, L.P., a Delaware limited
partnership, and Lynch PCS Corporation F, a Delaware
corporation.
10.4 Form of Security Agreement
10.5 Form of Installment Payment Plan Note
*27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
purposes only and not filed.
- - -----------------------------------------
* - Except as noted, all exhibits have been filed as exhibits to Registrant's
Form S-1 filed November 25, 1997.
(B) REPORTS ON FORM 8-K
None
-30-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
East/West Communications, Inc.
We have audited the accompanying balance sheets of East/West Communications,
Inc. (the "Company") a development stage enterprise, formerly Aer Force
Communications B, L.P., as of December 31, 1998 and 1997, and the related
statements of operations, changes in shareholders' equity (deficit), and cash
flows for the years ended December 31, 1998 and 1997 and the period from July
26, 1996 (inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 and the period from July 26, 1996
(inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming East/West
Communications, Inc. will continue as a going concern. As more fully described
in Note 1, the Company has incurred losses since inception and has not yet
adopted a business plan or determined how to finance its operations and will
need to obtain capital in order to fund its interest and principal payment
obligations and for working capital and general corporate purposes. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 19, 1999
-31-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
BALANCE SHEETS
<TABLE>
<CAPTION>
12/31/98 12/31/97
----------------------------
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 61,805 $ 254,427
------------- ------------
Total current assets 61,805 254,427
PCS Licenses 18,957,721 18,957,721
Capitalized costs 2,188,626 1,240,434
============= ============
Total assets $ 21,208,152 $ 20,452,582
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,250,939 $ 654,853
Loans from shareholders 300,000 -
Current portion of Loan from FCC 743,580 -
------------------------------
Total current liabilities 2,294,519 654,853
Loan from FCC 14,422,597 15,166,177
Deferred income taxes 444,000 500,000
Redeemable preferred stock, $1,000 par value; 5% cumulative
dividends, 16,000 shares authorized, 7,800 issued and
outstanding (liquidation value - $7,800,000) 4,024,176 3,389,487
Shareholders' 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
Shareholders' deficit accumulated during development stage (4,927,140) (4,207,935)
------------ ------------
Total shareholders' equity 22,860 742,065
------------- ------------
Total liabilities and shareholders' equity $ 21,208,152 $ 20,452,582
============= ============
</TABLE>
<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 DEC 31, TO DEC 31, (INCEPTION) TO
1998 1997 DEC 31, 1998
-----------------------------------------------
<S> <C> <C> <C>
Interest income $ 9,818 $ 0 $ 9,818
Interest expense, including commitment and late fees (74,124) (1,987,562) (3,640,186)
Other expenses (76,210) (87,607) (163,817)
---------------------------------------------
Loss before income taxes (140,516) (2,075,169) (3,794,185)
Income tax benefit (expense) 56,000 (500,000) (444,000)
---------------------------------------------
Net loss (84,516) (2,575,169) (4,238,185)
Dividend requirement on preferred stock (634,689) (54,266) (688,955)
---------------------------------------------
Loss applicable to common shares $ (719,205) $ (2,629,435) $(4,927,140)
=============================================
Basic and diluted loss per common share (0.20) (0.74)
========== ============
Number of shares used in computation 3,551,499 3,551,499
========== ============
</TABLE>
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JULY 26, 1996 (INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
LIMITED TOTAL
ADDITIONAL GENERAL PARTNERS SHAREHOLDER'S
COMMON PAID IN ACCUMULATED PARTNER'S EQUITY EQUITY
STOCK CAPITAL DEFICIT EQUITY (DEFICIT) (DEFICIT)
---------------------------------------------------------------------------------------------
Balance at July 26, 1996
<S> <C> <C> <C> <C> <C> <C>
(inception) $ - $ - $ - $ - $ - $ -
Capital contributions - - - 100,200 99,800 200,000
Net loss - - - (15,785) (1,562,715) (1,578,500)
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 - - - 84,415 (1,462,915) (1,378,500)
Capital contributions - - - 125,250 4,624,750 4,750,000
Issuance of 3,551,499 shares of
Common Stock, $.0001 par
value (1,772,198-Class A;
1,779,301-Class B) 355 4,949,645 (1,578,500) (209,665) (3,161,835) -
Net loss - - (2,575,169) - - (2,575,169)
Preferred dividends - - (54,266) - - (54,266)
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 355 4,949,645 (4,207,935) - - 742,065
Net loss - - (84,516) - - (84,516)
Preferred dividends - - (634,689) - - (634,689)
===========================================================================================
Balance at December 31, 1998 $ 355 $ 4,949,645 $ (4,927,140) $ - $ - $ 22,860
===========================================================================================
</TABLE>
<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 DEC 31, TO DEC 31, DEC 31,
1998 1997 1998
--------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net Loss $ (84,516) $ (2,575,169) $ (4,238,185)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income tax (benefit) expense (56,000) 500,000 444,000
Changes in operating assets and liabilities:
Increase in accounts payable and
accrued expenses 57,335 60,920 118,255
Interest accrued, including commitment fees (409,441) 1,975,946 3,145,005
-------------------------------------------
Net cash used in Operating Activities (492,622) (38,303) (530,925)
Cash Flows from Investing Activities:
Deposits with FCC -- 10,104,228 (1,895,772)
Purchase of PCS licenses -- (1,895,772) (1,895,772)
-------------------------------------------
Net cash provided by (used in) Investing Activities -- 8,208,456 (3,791,544)
Cash Flows from Financing Activities:
Proceeds from shareholders' loan 300,000 300,000
Proceeds from loans from the Limited
Partner -- 1,938,502 13,738,502
Repayment of loans from the Limited Partner -- (10,104,228) (10,104,228)
Capital contributions -- 250,000 450,000
-------------------------------------------
Net Cash provided by (used in) Financing Activities 300,000 (7,915,726) 4,384,274
(Decrease) Increase in Cash and Cash Equivalents (192,622) 254,427 61,805
Cash and cash equivalents, beginning of period 254,427 -- --
-------------------------------------------
Cash and cash equivalents, end of period $ 61,805 $ 254,427 $ 61,805
===========================================
</TABLE>
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 with 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 ACCOUNTING POLICIES (CONTINUED):
DESCRIPTION OF BUSINESS (CONTINUED):
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.
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 to adopt a business plan once the financing,
regulatory and market aspects of PCS are less uncertain.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 ACCOUNTING POLICIES (CONTINUED):
BASIS OF PRESENTATION (CONTINUED):
The Company has incurred losses since inception and will need
to obtain capital in order to fund its interest and principal
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. Management has elected
to defer payment of interest due on the loan payable to the FCC
which was due on October 31, 1998 in the amount of $337,658.
The Company intends, to make the required payment, including
applicable penalties of approximately $390,000 on or before
April 29, 1999. However, if such payment is not made, the
Company will forfeit its rights to the licenses.
Certain prior year amounts have been reclassified to conform to
the current year presentation.
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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 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 (excluding penalty interest and late fees) and
commitment fees on outstanding loan balances will be
capitalized. These costs amounted to $2,188,626 and $1,240,434
at December 31, 1998 and 1997, respectively. Such costs include
$1,845,150 and $897,267 of capitalized interest at December 31,
1998 and 1997 respectively. Total interest charges amounted to
$947,883, $1,119,111, and $2,765,160 for the years ended
December 31, 1998 and 1997 and the period from July 26, 1996
(inception) to December 31, 1998, respectively.
The cost of the PCS licenses (including capitalized costs) will
be amortized over a period, consistent with the industry
practice, which will begin when operations commence.
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. Such licenses may only be transferred to
other entities that meet the FCC requirements for F-Block
license holders during the first five years of the initial
license term. Transfers of such licenses to entities not
meeting such requirements in years six through ten of the
initial license term will subject the Company to substantial
unjust enrichment penalties.
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
common 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 common 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 ACCOUNTING POLICIES (CONTINUED):
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, 1998 and 1997,
net deferred tax liabilities represent the tax effect of
taxable temporary differences (pertaining to capitalized costs
of approximately $1.3 million) which existed at the date the
Partnership converted to a C-Corporation offset, in part, by
accumulated net operating losses of approximately $140,000 in
1998. The Company's net operating losses expire in 2012.
NOTE 2 RELATED PARTIES:
On October 22, 1998, the Company borrowed $300,000 from certain
directors of the Company. The loans in the amount of $150,000
from Mario J. Gabelli and T. Gibbs Kane, Jr., bear interest at
a rate of 5.00% per year, and 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 and Class B Common Stock during 1999 (See Note 8).
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. 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 PARTNERSHIP AGREEMENT (CONTINUED):
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 at December 31, 1998 and 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
Less amounts due within one year (743,580)
-------------
$ 14,422,597
-------------
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 (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 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 $805,488) to
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 4 LONG TERM DEBT (CONTINUED):
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, subject to
deferral of up to a maximum 180 days. Payment was made on
October 28, 1998, within the 90-day non-delinquency period, in
the amount of $432,610 comprising accrued interest of $412,010
and a 5% penalty fee of $20,600.
Management has elected to defer payment of interest due on the
loan payable to the FCC, which was due on October 31, 1998 in
the amount of $337,658. Payments made within 90 days of the due
date will be subject to a 5% penalty which increases to a 15%
penalty if paid within 90 to 180 days of the due date. A 15%
interest penalty has been accrued in the financial statements.
The Company intends to make the required payment of
approximately $390,000 (including applicable penalties) on or
before April 29,1999. However, if such payment is not made, the
Company will forfeit its rights to the licenses.
Aggregate principal maturities of long-term debt for each of
the next five years are as follows: 1999--$.744 million,
2000--$1.558 million, 2001--$1.658 million, 2002--$1.764
million and 2003--$1.877 million.
NOTE 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.
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY
AER FORCE COMMUNICATIONS B, L.P.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 5 COMMON STOCK (CONTINUED):
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, 1998 and 1997 had 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) December 1, 2009,
(ii) upon a change of control of the Class A or Class B Common
Stock or (iii) upon the sale of one or more PCS licenses for
cash or a non-cash sale under certain circumstances. The
difference between the carrying 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 account in the balance
sheets and the dividend requirement on preferred stock in the
statements of operations.
NOTE 7 LEGAL MATTERS:
The United States Department of Justice initiated an
investigation during 1997 to determine whether there had 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, had 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
DECEMBER 31, 1998
NOTE 8 RIGHTS OFFERING:
The Company has announced that it intends to offer, at no cost
to the holders of its Class A Common Stock, a non-transferable
right to purchase up to 443,050 shares of Class A Common Stock.
The rights entitle shareholders to purchase one additional
share of Class A Common Stock for every four shares of Class A
Common Stock held @ $1.50 per share. In addition, the Company
intends to sell 444,825 shares of Class B Common Stock at a
price of $1.50 per share to the current owners of the Company's
Class B Common Stock.
The Company intends to file a Registration Statement with the
Securities and Exchange Commission ("SEC") in April 1999
commencement of the proposed sale will be as soon as possible
after the Registration Statement is declared effective by the
SEC.
<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
31st day of March, 1999 on its behalf by the undersigned, thereunto duly
authorized.
EAST/WEST COMMUNICATIONS, INC.
By:/s/ Victoria Kane
---------------------------------
Victoria Kane
Chairman of the Board
(Chief Executive Officer and
Chief Financial Officer)
POWER OF ATTORNEY
East/West Communications, Inc. and each of the undersigned do hereby
appoint Victoria Kane, its or her true and lawful attorney to execute on behalf
of East/West Communications, Inc. and the undersigned any and all amendments to
this Annual Report on Form 10-KSB and to file the same with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission; each of such attorneys shall have the power to act hereunder with or
without the other.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Victoria Kane Chairman of the Board, Chief March 31, 1999
- - ---------------------------- Executive Officer
Victoria Kane and Director
/s/ T. Gibbs Kane, Jr.
- - ---------------------------- Director March 31, 1999
T. Gibbs Kane, Jr.
/s/ Mario J. Gabelli
- - ---------------------------- Director March 31, 1999
Mario J. Gabelli
-31-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 61,805
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 61,805
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,208,152
<CURRENT-LIABILITIES> 2,294,519
<BONDS> 14,422,597
4,024,176
0
<COMMON> 355
<OTHER-SE> 22,505
<TOTAL-LIABILITY-AND-EQUITY> 21,208,152
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 76,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,124
<INCOME-PRETAX> (140,516)
<INCOME-TAX> 56,000
<INCOME-CONTINUING> (84,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,516)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>