UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
-------------------------------------------------
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________________ to ________________________
Commission File Number: 333-41007
East/West Communications, Inc.
------------------------------
(exact name of registrant as specified in its charter)
Delaware 13-3964837
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
350 Stuyvesant Avenue, New York, New York 10580
- ----------------------------------------- -----
(Address of principle executive offices) (Zip Code)
(914) 921-6300
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports to be filed by section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.(X) Yes( ) No
As of June 30, 1999, there were 2,215,248 shares of the Registrant's Class A
Common Stock outstanding and 2,074,126 shares of the Registrant's Class B Common
Stock outstanding.
<PAGE>
INDEX
East/West Communications, Inc.
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 3
and December 31, 1998
Consolidated Statements of Operations
for the six months ended June 30, 1999
and 1998 and the period from July 26,
1996 (inception) to June 30, 1999 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1999
and 1998 and the period from July 26,
1996 (inception) to June 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 15
of Financial Condition
PART II. OTHER INFORMATION
Item 2. Changes in Securities 17
Item 4. Submission of Matter to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
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<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, Formerly
Aer Force Communications B, L.P.)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents
Total current assets $ 545,624 $ 61,805
----------- -----------
545,624 61,805
PCS License 18,957,721 18,957,721
Capitalized costs 2,658,440 2,188,626
----------- -----------
Total assets $22,161,785 $21,208,152
=========== ===========
Liabilities and shareholder's equity
Current liabilities:
Accounts payable and accrued expenses $ 1,406,846 $ 1,250,939
Loans from shareholders 0 300,000
Current portion of Loan from FCC 743,580 743,580
----------- -----------
Total current liabilities 2,150,426 2,294,519
Loan from FCC 14,422,597 14,422,597
Deferred income taxes 416,000 444,000
Redeemable preferred stock, $1,000 par value; 5%
cumulative dividends, 16,000 shares authorized,
7,800 issued and outstanding (liquidation value -
$7,800,000) 4,192,211 4,024,176
Shareholders' equity (deficit)
Common stock, Class A, $.0001 par value, 3,600,000
shares authorized, 1,772,198 shares issued and
outstanding 221 177
Common stock, Class B, $.0001 par value,
16,000,000 sharesauthorized, 1,779,301 shares issued
and outstanding 222 178
Additional paid-in capital 6,179,684 4,949,645
Shareholders' deficit accumulated during
development stage (5,367,611) (4,927,140)
Total shareholders' equity (deficit) (812,516) 22,860
------------ ------------
Total liabilities and shareholders'
equity (deficit) $22,161,785 $21,208,152
============ ============
</TABLE>
See accompanying notes.
-3-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, Formerly
Aer Force Communications B, L.P.)
Statements of Operations
<TABLE>
<CAPTION>
July 26, 1996
Six Months Ended (Inception) to
June 30, June 30,
1999 1998 1999
---------------------------------------
<S> <C> <C> <C>
Interest income $ 1,866 5,734 11,684
Interest expense, including commitment and late fees (77,208) 0 (3,717,394)
Other expenses (57,058) (17,056) (220,875)
---------------------------------------
Loss before income taxes (132,400) (11,322) (3,926,585)
Income tax benefit (expense) 28,000 0 (416,000)
---------------------------------------
Net loss (104,400) (11,322) (4,342,585)
Dividend requirement on preferred stock (336,071) (314,735) (1,025,026)
---------------------------------------
Loss applicable to common shares $(440,471) (326,057) (5,367,611)
=======================================
Basic and diluted loss per common share (0.12) (0.09)
========= =========
Number of shares used in computation 3,586,027 3,551,499
========= =========
</TABLE>
-4-
<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
Six Months Ended (Inception) to
June 30, June 30,
1999 1998 1999
-------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net loss $ (104,400) (11,322) (4,342,585)
Adjustments to reconcile net loss to net
cash used by operating activities:
Deferred income tax (benefit) expense (28,000) 0 416,000
Changes in operating assets and liabilities:
Increase in accounts payable and
accrued expenses 156,859 (41,481) 274,394
Interest accrued, including commitment fees (470,046) 0 2,674,959
-----------------------------------------
Net cash used in Operating Activities (445,587) (52,803) (977,232)
Cash Flows from Investing Activities:
Deposits with FCC 0 0 (1,895,772)
Purchase of PCS licenses 0 0 (1,895,772)
-----------------------------------------
Net cash provided by (used in) Investing Activities 0 0 (3,791,544)
Cash Flows from Financing Activities:
Repayment of shareholders' loan (300,000) 0
Proceeds from loans from the Limited
Partner 0 0 13,738,502
Repayment of loans from the Limited Partner 0 0 (10,104,228)
Capital contributions 1,230,126 0 1,680,126
-----------------------------------------
Net Cash provided by (used in) Financing Activities 930,126 0 5,314,400
(Decrease) Increase in Cash and Cash Equivalents 484,539 (52,803) 545,624
Cash and cash equivalents, beginning of period 61,805 254,427 0
-----------------------------------------
Cash and cash equivalents, end of period $ 545,624 201,624 545,624
=========================================
</TABLE>
-5-
<PAGE>
EAST/WEST COMMUNICATIONS, INC
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
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.
-6-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
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.
-7-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
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. The
January 1, 1999 interest payment on loan payable to the FCC in the
amount of $388,307 including applicable late fees was paid on July
26, 1999. Management has elected to defer payment of interest on the
FCC loan which was due on 4/30/99 in the amount of $354,541 including
applicable late fees. The Company intends to make the required
payment on or before October 27, 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
-8-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
date of the financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ
from those estimates.
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 $2,658,440 and $1,710,250 at June 30, 1999 and 1998,
respectively. Such costs include $2,315,196 and $1,367,311 of
capitalized interest at June 30, 1999 and 1998 respectively. Total
interest charges amounted to $470,046, $221,645, and $3,235,206 for
the six months period ended June 30, 1999 and 1998 and the period
from July 26, 1996 (inception) to June 30, 1999, 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
-9-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
issuance of the common stock of the Company as if the issuance
occurred on January 1, 1997.
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 June 30, 1999 and 1998, 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 $132,400
for the second quarter 1999. 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. In order to meet the April 29, 1999
interest payment obligation to the FCC, the Corporation borrowed
additional funds in the amount of $400,000 from the same directors.
The loans in the amount of $350,000 for Mario J. Gabelli and T. Gibbs
Kane, Jr., bear interest at a rate of 5% per year. The loans were
paid in full on June 29, 1999 plus accrued interest in the amount of
$12,164.
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
-10-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
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.
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 June 30, 1999 and 1998 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 principle
and interest of $605,879 are required over the remaining eight years
of the license term. These loans
-11-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
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 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.
The interest on the loan payable to the FCC, due on October 31, 1998
amounted to $340,249. Payments made within 90 days of the due date
are subject to a 5% penalty which increases to a 15% penalty if paid
within 90 to 180 days of the due date. The Company issued the
required payment of $391,286 (including applicable penalties) on
April 26,1999. The payment of interest due on 1/31/99 in the amount
of $388,307 including applicable late fees was paid on July 26, 1999.
Management has elected to defer the interest payment due on April 30,
1999 in the amount of $354,541 including applicable 5% late fees. The
Company intends to make the required payment on or before October 27,
1999. However, if such payment is not made, the Company will forfeit
its rights to the licenses.
Aggregate principle maturities of long-term debt for each of the next
five years are as follows: 1999--$.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.
-12-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of
the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, if any, then outstanding.
Collectively, the shares of Class A Common Stock represent not more
than 49.9% of the Company's voting interest, with each share of Class
A Common Stock issued and outstanding having one vote per share on
all matters, except the election of directors or as otherwise
provided by law. The holders of the Class A Common Stock as a class
will be entitled to elect members to the Company's Board of Directors
who collectively will represent two of the five votes of the
Company's Board of Directors.
Collectively, the shares of Class B Common Stock represent at least
50.1% of the Company's voting interest, with each 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 June 30, 1999 and 1998 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.
-13-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
June 30, 1999
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.
Note 8 Rights Offering:
The Company offered, 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,
shareholders were provided on oversubcription privilege to acquire
shares not initially purchased pursuant to the Rights. The Company
also offered rights to purchase 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 Class A and Class B shareholders
exercised these rights on June 23, 1999 and the net proceeds of the
offering to the Company of the payment of expenses associated with
the offering of $101,773.40 was $1,230,039
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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.
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 (and was postponed until April 29,
1999 and paid on that date), $2.6 million in the year 2000 and $2.4 million for
the next 8 years.
The following are the remaining scheduled interest and principal
payments over the next two years:
Due Date Amount
-------- ------
October 31, 1999 388,307(1)
October 31, 1999 534,641(2)
October 31, 1999 706,566
January 31, 2000 706,566
$2,336,086
April 30, 2000 706,566
July 31, 2000 605,879
October 31, 2000 605,879
January 31, 2001 605,839
$1,918,324
- --------
(1) Scheduled payment was $337,658, which was due on April 30, 1999.
Above amount includes a 15% penalty, as provided in the loan documents, for
payments made within 180 days after due date. This payment was delayed for an
additional 90 days and is now due on October 31, 1999.
(2) Scheduled payment was 337,658, which was due on April 30, 1999.
Above amount includes a 5% penalty, as provided in the loan document, for
payments made within 90 days of the due date. This payment has been delayed for
90 days and is now due on October 31, 1999.
-15-
<PAGE>
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 30, 1999 payment was delayed for 180 days and is now due October 31,
1999. We do not have a reliable estimate of the cost to build out our PCS
licenses, should we determine to do so, 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 borrowed additional funds in the amount of $400,000 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
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 East/West may have any revenues or
operating profits.
In April 1997, the FCC suspended interest payments on its financings
through March 31, 1998. On March 24, 1998, the FCC indicated that such interest
would be resumed not earlier than 90 days subsequent to the publication in the
Federal Register of an 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 make 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 of $391,286 have been made in 1999. Remaining interest payments for
1999 are projected to be $654,210, plus quarterly suspended interest of $302,058
for the year.
On October 22, 1998 and April 29, 1999, East/West borrowed $300,000 and
$400,000, respectively, from certain of our directors. On July 22, 1999, these
loans were repaid by the Company, along with accrued interest in the amount of
$12,164.
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
East/West and third parties upon which we rely are unable to address this
-16-
<PAGE>
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
PART II
Item 2. Changes in Securities And Use of Proceeds
(c) During the fiscal quarter ended June 30, 1999, the Company issued an
aggregate of 444,825 shares of Class B Common Stock that wre not
registered under the Securities Act of 1933, as amended. The shares
were issued to Aer Force Communications, Inc., the sole shareholder
of the Class B common stock of the Company, in connection with the
Rights Offering, at a price of $1.50 per share. The issuance of the
Class B common stock is exempt from registration under the
Securities Act pursuant to Section 4(2) as a transaction by an
issuer not involving a public offering.
(d)
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1999 annual meeting of stockholders was held on June 30, 1999.
(b) The Company's nominee for Class A Director, as set forth below, was
elected. There was no solicitation in opposition to the Company's
nominee for Class A Director. The other members of the Company's
Board of Directors are T. Gibbs Kane, Jr. and Victoria G. Kane, who
are each Class B Directors of the Company.
(c) Matters voted on at the meeting and the number of votes cast.
<TABLE>
<CAPTION>
Class A Director Votes For Votes Against or Broker Non. Abstentions
Withheld Votes
<S> <C> <C> <C> <C>
Mario Gabelli 1,501,730 100 - -
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
Form 8-K dated June 23, 1999
Form 8-K/A dated June 23, 1999
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAST/WEST COMMUNICATIONS, INC.
By: /s/ Victoria G. Kane
-----------------------------------
Victoria Kane
Chairman of the Board
(Chief Executive Officer)
Dated: August 12, 1999
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1998
<CASH> 545,624
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 545,624
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,161,785
<CURRENT-LIABILITIES> 2,150,426
<BONDS> 14,422,597
4,360,246
0
<COMMON> 443
<OTHER-SE> 12,073
<TOTAL-LIABILITY-AND-EQUITY> 22,161,785
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 57,058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,208
<INCOME-PRETAX> (132,400)
<INCOME-TAX> 28,500
<INCOME-CONTINUING> (104,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104,400)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
