As filed with the Securities and Exchange Commission on May 12, 1999
Registration No. 333-75809
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------------------------------------------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------------------------------------------
EAST/WEST COMMUNICATIONS, INC.
(Exact Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 4813 13-3964837
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
350 Stuyvesant Avenue
Rye, New York 10580
(914) 921-6300
(Address and Telephone Number,
of Principal Executive Offices)
Victoria Kane
Chairman of the Board and Chief Executive Officer
East/West Communications, Inc.
350 Stuyvesant Avenue
Rye, New York 10580
(914) 921-6300
(Name, Address and Telephone Number,
of Agent for Service)
------------------------------------------------------------------------
Copy to:
Steven Wolosky, Esq.
Adam Rappaport, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, New York 10022
(212) 753-7200
(212) 755-1467 (Facsimile)
------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /_____________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /__________________________________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /_____________________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / / _______________________________
----------------------------------------------
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
May 12, 1999
To The Stockholders of
East/West Communications, Inc.
Attached is the Company's prospectus detailing a rights offering to
stockholders. Each stockholder will receive one right for each share held. For
each four rights, a stockholder will be entitled to purchase a share of Common
Stock for $1.50. The closing bid and asked prices of the Common Stock on the OTC
Bulletin Board on May 10, 1999 were $4.00 and $9.50.
WE STRONGLY URGE YOU TO CONSIDER EXERCISING THE RIGHTS YOU RECEIVE.
EACH DIRECTOR OF THE COMPANY INTENDS TO PURCHASE THE FULL NUMBER OF SHARES HE OR
SHE IS ELIGIBLE TO PURCHASE UNDER THE BASIC SUBSCRIPTION PRIVILEGE AND TO
EXERCISE THE OVERSUBSCRIPTION PRIVILEGE WHERE APPROPRIATE.
While we are unable to finally determine the value of the Company's
licenses, we have reviewed the results of a recently concluded auction of PCS
licenses, as well as investor interest in the stocks of companies that hold PCS
licenses. We believe that they imply a value of between $4 and $8 per pop
(potential PCS subscriber). The Company's licenses cover approximately
21,000,000 pops. Of course, there can be no assurance that the Company's pops
will be valued on a comparable basis or that a purchaser will acquire all or
even a portion of the Company's pops at that price.
We believe that the rights offering merits your serious
consideration and urge that you read carefully the attached materials.
Very truly yours,
THE BOARD OF DIRECTORS
East/West Communications, Inc.
<PAGE>
We will amend and complete the information in this prospectus. Although we are
permitted by US federal securities laws to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities had been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
We will amend and complete the information in this prospectus. Although we are
permitted by US federal securities laws to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities had been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
SUBJECT TO COMPLETION, DATED MAY 12, 1999
PROSPECTUS
443,050 Shares of Class A Common Stock
EAST/WEST COMMUNICATIONS, INC.
East/West Communications, Inc. is offering at no cost to you, as a
holder of Class A common stock of East/West, a non-transferable right to
purchase shares of Class A common stock. You will be entitled to purchase one
share of Class A common stock at a price of $1.50 per share for every four
shares of Class A common stock you own as of May 10, 1999. Each right will also
carry with it an oversubscription privilege to subscribe for shares of Class A
common stock that are not purchased by other holders of rights. The rights will
be evidenced by rights certificates and will expire at 5:00 p.m. New York City
time on June 16, 1999, unless the expiration date is extended for up to 30 days.
Mario J. Gabelli, a director of East/West and, with related parties,
holder of 441,184 shares of Class A common stock, has advised East/West that he
will fully exercise his rights to purchase 110,296 shares of Class A common
stock and his oversubscription privilege. Aer Force Communications Inc., the
holder of all of the outstanding shares of Class B common stock of East/West,
which will receive a right to purchase 444,825 shares of Class B common stock at
a price of $1.50 per share, has advised East/West that it will fully exercise
its right.
We are required to register the Class A common stock offered hereby in
certain states. There can be no assurance that those state securities
commissions will declare effective such registrations. We have submitted
registrations in the following states: California, Arizona, Georgia, Michigan
and North Dakota. Should any or all of such registrations not be declared
effective, we would be unable to permit residents of these states to exercise
the rights received by them.
The Class A common stock is traded on the OTC Bulletin Board, under the
symbol EWCM. The last reported sale price of the Class A common stock on the OTC
Bulletin Board on May 10, 1999 was $3.75 per share.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. CONSIDER
CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
-----------------
Neither the Securities and Exchange Commission nor any State securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense
-----------------
Per Share Total
--------- -----
Offering price to the $1.50 $664,575(1)(2)
stockholders
- ----------------------------
(1)Before deduction of estimated expenses of $110,000 payable by
East/West, including registration, listing, legal and accounting fees,
subscription agent fees, printing expenses and other miscellaneous fees
and expenses.
(2)East/West will also receive gross proceeds of approximately $667,238
from the exercise of a right to purchase 444,825 shares of Class B
common stock at a price of $1.50 per share granted to Aer Force
Communications, Inc., the sole stockholder of the Class B common stock
of East/West. Aer Force has advised East/West that it will fully
exercise its rights to purchase Class B common stock.
The date of this Prospectus is May 12, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY............................................................3
RISK FACTORS..................................................................8
USE OF PROCEEDS..............................................................16
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY .............................16
DILUTION.....................................................................17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION..................18
DETERMINATION OF SUBSCRIPTION PRICE..........................................20
THE RIGHTS OFFERING..........................................................20
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................25
THE WIRELESS COMMUNICATIONS INDUSTRY.........................................26
LIMITATIONS OF CELLULAR TELEPHONE INDUSTRY...................................28
LEGISLATION AND GOVERNMENT REGULATION........................................32
EXECUTIVE OFFICERS AND DIRECTORS.............................................43
CERTAIN TRANSACTIONS.........................................................46
PRINCIPAL STOCKHOLDERS.......................................................47
DESCRIPTION OF CAPITAL STOCK.................................................48
DESCRIPTION OF CERTAIN INDEBTEDNESS..........................................50
EXPERTS......................................................................51
WHERE YOU CAN FIND MORE INFORMATION..........................................51
INFORMATION NOT REQUIRED IN PROSPECTUS.....................................II-1
-2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
you should consider before investing in the Class A common stock. You should
read the entire prospectus carefully, including the "Risk Factors" section and
the financial statements and notes thereto. Some of the statements contained in
this summary, as well as the sections entitled "Risk Factors," "Management's
Discussion and Analysis of Financial Condition" and "The Wireless Communications
Industry" are forward-looking. These statements include those concerning
strategy, liquidity and capital expenditures, debt levels and the ability to
obtain financing and service debt, competitive pressure in the industry, legal
proceedings, regulatory matters and general economic conditions. Actual results
may differ materially from those suggested by the forward-looking statements for
various reasons, including those discussed under "Risk Factors."
EAST/WEST
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 10 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 10 years by
the FCC, with only payments of interest during the first two years. 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 were 60.8 million wireless telephone subscribers in the United States as
of June 30, 1998, 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. An investment in
East/West stock involves a substantial degree of risk. See "Risk Factors."
We strongly urge you to consider exercsing the rights you receive.
Mario J. Gabelli, a director of East/West and, with related parties, holder of
441,184 shares of Class A common stock has advised us that he will fully
exercise his rights and his oversubscription privilege, and Aer Force
Communications Inc., the holder of the Class B common stock, has advised us that
it will fully exercise the rights it will receive. We believe that the results
of a recently concluded auction of PCS licenses, as well as investor interest in
the stock of companies holding PCS licenses, imply a value of between $4 and $8
per POP (potential PCS subscriber). Our licenses cover approximately 21,000,000
POPs. Of course, there can be no assurance that our licenses will receive such a
valuation or that a purchaser will acquire all or even a portion of our POPs at
that price.
Our address is 350 Stuyvesant Avenue, Rye, New York 10580. Our
telephone number is (914) 921-6300.
THE RIGHTS OFFERING
Rights........................ East/West will distribute to each holder of
Class A common stock one right to purchase Class
A common stock for every share of Class A common
stock owned on May 10, 1999 (the "Record Date").
You will be entitled to purchase one share of
Class A common stock for every four rights held.
East/West will distribute approximately
1,772,198 rights and approximately 443,050
shares of Class A common stock will be sold upon
exercise of the rights, assuming exercise of all
rights. In addition, Aer Force, the holder of
all outstanding shares of Class B common stock,
will receive rights to purchase 444,825
-3-
<PAGE>
shares of Class B common stock at a price of
1.50 per share on the same terms and conditions
as the holders of Class A common stock.
Oversubscription
Privilege.................. Each holder of rights who elects to exercise all
of its rights may also subscribe for additional
shares of Class A common stock available as a
result of unexercised rights, if any. If an
insufficient number of underlying shares is
available to satisfy fully all of these
subscriptions for additional shares, East/West
will prorate the available shares of Class A
common stock among holders who exercise this
privilege based on the respective numbers of
shares subscribed for pursuant to the basic
subscription privilege. See "The Rights
Offering- -Subscription Privileges."
Subscription Price.......... $1.50 in cash per share.
Shares of Common Stock
Outstanding after
Rights Offering........... Approximately 2,215,248 shares of Class A common
stock and approximately 2,224,126 shares of
Class B common stock.
Non-Transferability
of Rights................. The rights are non-transferable
Record Date................. May 10, 1999.
Expiration Date............. June 16, 1999, at 5:00 p.m., New York City time,
unless extended for up to 30 days.
Procedure for
Exercising Rights......... A stockholder who wants to exercise rights
should properly complete and sign the
subscription certificate evidencing the rights
and forward the subscription certificate, with
full payment, to the subscription agent on or
prior to the expiration date.
AN EXERCISE OF RIGHTS MAY NOT BE REVOKED. SEE
"THE RIGHTS OFFERING--EXERCISE OF RIGHTS."
Issuance of Common
Stock..................... East/West will deliver to subscribers
certificates representing shares of Class A
common stock purchased pursuant to the basic
subscription privilege as soon as practicable
after the corresponding rights have been validly
exercised and full payment for shares has been
received and has cleared. East/West will deliver
to subscribers shares purchased pursuant to the
oversubscription privilege as soon as
practicable after the expiration date and after
all prorations and adjustments contemplated by
the terms of this offering have been effected
and full payment has been received and has
cleared. See "The Rights Offering."
Use of Proceeds............. The net cash proceeds from the sale of the
shares of Class A common stock offered hereby,
after payment of fees and expenses, is
anticipated to be approximately $554,575,
assuming full exercise of the rights. Assuming
the exercise of all of the rights to purchase
Class B common stock at an exercise price of
$1.50 per share, the total net cash proceeds to
be received East/West would be approximately
$1,221,800. This offering is not conditioned
upon any minimum level of exercise of the
rights, and there can be no assurance that
East/West will raise any proceeds from the
offering. However, Mario J. Gabelli, a director
of East/West and, with related parties, holder
of 441,184 shares of Class A common stock has
advised us that he will fully exercise his
rights and his oversubscription privilege, and
Aer Force, the holder of all outstanding Class B
common
-4-
<PAGE>
stock has advised us that it will fully exercise
its rights with respect to the Class B common
stock.
East/West expects that such net proceeds will be
used primarily to fund its interest payment
obligations, to repay certain loans in the
principal amount of $700,000 (and interest
accrued thereon) made by certain directors to
East/West and for working capital and general
corporate purposes. See"Use of Proceeds."
Risk Factors............... There are substantial risks in connection with
this offering that should be considered by
prospective purchasers. See "Risk Factors."
State Securities
Regulation................. We are required to register the Class A common
stock offered hereby in certain states. There
can be no assurance that these state securities
commissions will declare effective such
registrations. We have submitted registrations
in the following states: California, Arizona,
Georgia, Michigan and North Dakota. Should any
or all of such registrations not be declared
effective, we would be unable to permit
residents of these states to exercise rights
received by them.
-5-
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data presented below were derived from the
financial statements of East/West and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition" and the financial
statements and notes thereto included elsewhere in this prospectus. East/West
has no operating history. The summary financial data for the years ended
December 31, 1998 and 1997 and the period from July 26, 1996 (inception) to
December 31, 1998 were derived from the audited financial statements of
East/West included elsewhere herein. The summary financial data for the period
from July 26, 1996 (inception) to December 31, 1997 and the period from July 26,
1996 (inception) to December 31, 1996 were derived from unaudited financial
statements of East/West not presented herein.
SUMMARY FINANCIAL AND OPERATING DATA
(In thousands, except per share and
weighted average share data)
<TABLE>
<CAPTION>
July 26, 1996 July 26, 1996 July 26, 1996
January 1 to January 1 to (Inception) to (Inception) to (Inception) to
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
--------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Interest income $9,818 $9,818
Interest expense, including
commitment fees and late fees (74,124) $(1,987,562) (3,640,186) $(3,566,062) $(1,578,500)
Other expenses (76,210) (87,607) (163,817) (87,607)
--------------------------------------------------------------------------------------
Loss before income taxes $(140,516) $(2,075,169) $(3,794,185) $(3,653,669) $(1,578,500)
Income tax benefit (expense) 56,000 (500,000) (444,000) (500,000)
--------------------------------------------------------------------------------------
Net loss $(84,516) $(2,575,169) $(4,238,185) $(4,153,669) $(1,578,500)
Dividend requirement on
preferred stock (634,689) (54,266) (688,955) (54,266)
--------- -------- --------- --------
Loss applicable to common
shares $(719,205) $(2,629,435) $(4,927,140) $(4,207,935) $(1,578,500)
======================================================================================
Basic and diluted loss per
share: $ (.20) $ (0.74)
Number of shares used in
computation 3,551,499 3,551,499
Net loss allocated to general partner (15,785)
(1%)
Net loss allocated to limited partner (1,562,715)
(99%)
</TABLE>
-6-
<PAGE>
DECEMBER 31, 1998
ACTUAL AS ADJUSTED(A)
------ --------------
BALANCE SHEET DATA: (Unaudited)
Current assets 61,805 592,332
Total assets 21,208,152 21,738,679
Current liabilities 2,294,519 1,603,233
Long-term liabilities 14,866,597 14,866,597
Total liabilities 17,161,116 16,469,830
Redeemable preferred stock 4,024,176 4,024,176
Total shareholders' equity 22,860 1,244,673
(a) The As Adjusted Balance Sheet Data at December 31, 1998 is based upon the
historical balance sheet of East/West and has been adjusted to reflect the full
exercise of the rights to subscribe for shares of Class A and Class B common
stock as described in this prospectus and also reflects the repayment of loans
made to the Company through December 31, 1998, by certain directors of the
Company and payment of $391,286 in interest due to the FCC, accrued as of
December 31, 1998. However, it does not reflect the repayment by the Company of
loans in the aggregate principal amount of $400,000 subsequent to December 31,
1998, the proceeds from which were used to pay the accrued interest discussed in
the preceding sentence.
-7-
<PAGE>
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 Class A 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 were required to make an interest payment to the
FCC 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 January 31, 1999 payment was
delayed and is now due on July 30, 1999. If this payment, (or any other required
payment) is not timely made we will forfeit our licenses.
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.
-8-
<PAGE>
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 (1) December 1, 2009, (2) upon a change of control of our Class A
common stock or Class B common stock or (3) 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 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
-9-
<PAGE>
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, ITS SUCCESS WILL BE DEPENDENT
ON ITS ABILITY TO IMPLEMENT ITS PLANS, AS WELL AS ITS ABILITY TO MEET REGULATORY
REQUIREMENTS, THE FAILURE OF ANY OF WHICH COULD HAVE A MATERIAL ADVERSE AFFECT
ON ITS 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 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 IT IN PROVIDING WIRELESS SERVICES.
-10-
<PAGE>
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 Spring 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 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.
-11-
<PAGE>
THE LIMITED CAPACITY OF ITS 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, ITS CHOICE COULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS 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.
-12-
<PAGE>
EAST/WEST IS SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION WHICH COULD MATERIALLY
ADVERSELY AFFECT ITS 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 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
services, 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: (1) permit other
competitive carriers, which may include PCS licensees, to interconnect to their
networks; (2) establish reciprocal compensation agreements with competitive
carriers to terminate traffic on each other's networks and (3) 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
IT 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.
-13-
<PAGE>
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 (1) believe that we have structured ourselves to satisfy the
Entrepreneurs Requirements, (2) intend to diligently pursue and maintain our
qualification as a Very Small Business and (3) 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."
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 ITS 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
(1) a transition plan to relocate such microwave incumbents and (2) a
-14-
<PAGE>
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 East/West. 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 East/West and, with related parties, a
substantial holder of East/West'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 East/West. Rivgam Communicators, LLC ("Rivgam"),
is an entity indirectly owned by Gabelli Funds, Inc. ("GFI"), of which Mr.
Gabelli is the Chairman and Chief Executive Officer and the principal
stockholder. Rivgam holds 6 MHZ D- and E- Block PCS licenses covering
approximately 14 million POPs in BTAs, including markets in Washington, DC
(where East/West also holds an F-Block PCS license), Baltimore, MD (2),
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 it. In addition, for 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
EAST/WEST IS OBLIGATED TO USE A SUBSTANTIAL PORTION OF THE PROCEEDS OF THE
OFFERING TO REPAY CERTAIN LOANS MADE BY CERTAIN OF OUR DIRECTORS.
East/West is required to repay the outstanding principal and interest
owed pursuant to the terms of various promissory notes held by Mario J. Gabelli
and T. Gibbs Kane, Jr., each of whom are directors of the Company. Such
promissory notes evidence loans made to the Company in the aggregate principal
amount of $700,000, and become due and payable upon the receipt of proceeds from
the offering sufficient to pay the full amount of principal and interest then
owed on the notes. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition" and "Certain Transactions."
-15-
<PAGE>
THE CONTROL BY AER FORCE COMMUNICATIONS, INC. OF EAST/WEST COULD LIMIT POTENTIAL
ACQUISITIONS OF EAST/WEST.
Aer Force Communications, Inc. ("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 East/West. 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.
USE OF PROCEEDS
If all of the rights are exercised in full at $1.50 per share of Class
A common stock, we would receive gross proceeds of approximately $664,575.
Assuming the exercise of all of the rights to purchase Class B common stock, the
aggregate net cash proceeds to be received by East/West will be approximately
$1,241,800. No discount or commission is payable in connection with any such
exercise. We cannot assume that all or any portion of the rights will be
exercised; however, Mario J. Gabelli, a director of East/West and holder of
441,184 shares of Class A common stock has advised us of his intention to fully
exercise his rights and his oversubscription privilege and, in addition, AFC has
advised East/West of its intention to fully exercise its rights to purchase
Class B common stock.
The funds, if any, received upon exercise of the rights will be used
first to repay certain loans made by certain of our directors in the principal
amount of $700,000, plus accrued interest (which will equal approximately
$99,041 as of June 16, 1999), second, to fund our interest payment obligations,
and third, for working capital and general corporate purposes. The loans to be
repaid are evidenced by two series of promissory notes, each of which bear
interest at a rate of 5.00% per year and become due and payable on the earlier
of (1) either October 22, 1999 with respect to $300,000 principal amount of such
notes or April 29, 2000 with respect to $400,000 principal amount of such notes
or (2) upon the receipt of proceeds from this offering sufficient to pay the
full amount of principal and interest then owed on the notes (provided that
repayments of $300,000 principal amount of notes is not contingent on the
ability to repay the remaining $400,000 principal amount of notes). The proceeds
of such loans have been used to fund interest payment obligations to the FCC.
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.
LOW HIGH
1998 FISCAL YEAR
First Quarter $0.609375 $1.25
-16-
<PAGE>
LOW HIGH
Second Quarter 1.00 2.50
Third Quarter 1.859375 3.00
Fourth Quarter 0.75 1.625
1999 FISCAL YEAR
First Quarter 1.75 2.00
Second Quarter (through May 10, 1999) 1.50 9.50
On May 10, 1999, the closing sales price of the Class A common stock on
the OTC market was $3.75. As of April 30, 1999, there were approximately 990
holders of record of East/West's Class A common stock.
We have not declared any cash dividends on our Class A common stock
since inception. We do not anticipate that we will pay cash dividends in the
foreseeable future. We currently plan to retain any earnings to provide for our
development and growth.
DILUTION
At December 31, 1998, we had a deficit in net tangible book value of
approximately $21,123,487 million, or $5.95 per share. The deficit in net
tangible book value per share represents the amount of total tangible assets
(total assets less intangible assets) less total liabilities, divided by the
number of shares of common stock outstanding. After giving effect to the sale of
the 443,050 shares of Class A common stock and the 444,825 shares of Class B
common stock offered hereby (assuming full exercise of all rights) and after
deducting the estimated offering expenses, our deficit in pro forma net tangible
book value as of at December 31, 1998 would have been approximately $19,901,674,
or $4.48 per share, representing an immediate and substantial dilution of $5.98
per share or 399% in respect of shares of Class A common stock purchased
pursuant to this offering. The following table illustrates this per share
dilution:
Subscription Price $1.50
Deficit in net tangible book value per share
before offering.............................. $(5.95)
Increase per share attributable to deficit in 1.47
stockholders exercising rights...............
Pro forma deficit in net tangible book value
per share after offering..................... (4.48)
Dilution to stockholders exercising rights(1). $5.98
-17-
<PAGE>
- ---------------------
(1) Dilution is determined by subtracting the deficit in pro forma net
tangible book value per share from the subscription price paid by an
investor for a share of Class A common stock in the rights offering.
-18-
<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 strongly urge you to consider exercsing the rights you receive. We
believe that the results of a recently concluded auction of PCS licenses, as
well as investor interest in the stock of companies holding PCS licenses, imply
a value of between $4 and $8 per POP. Our licenses cover approximately
21,000,000 POPs. Of course, there can be no assurance that our licenses will
receive such a valuation or that a purchaser will acquire all or a portion of
our POPs at that price.
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
July 30, 1999 388,307(1)
July 29, 1999 354,541(2)
July 31, 1999 534,641
October 31, 1999 706,566
$1,933,406
- --------------------
(1) Scheduled payment was $337,658, which was due on January 31, 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 July 30, 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 July 29, 1999.
-19-
<PAGE>
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 January 31, 1999 payment was delayed for 180 days and is now due July 30,
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
-20-
<PAGE>
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. The loans to be repaid
are evidenced by two series of promissory notes payable to the order of Mario J.
Gabelli and T. Gibbs Kane, Jr., directors of East/West. Each of the promissory
notes bears interest at a rate of 5.00% per year and becomes due and payable on
the earlier of (1) either October 22, 1999 with respect to $300,000 principal
amount of such notes or April 29, 2000 with respect to $400,000 principal amount
of such notes or (2) upon the receipt of proceeds from this offering sufficient
to pay the full amount of principal and interest then owed on the notes
(provided that repayments of $300,000 principal amount of notes is not
contingent on the ability to repay the remaining $400,000 principal amount of
notes). The proceeds of such loans have been used to fund interest payment
obligations to the FCC.
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 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
DETERMINATION OF SUBSCRIPTION PRICE
Our objective in establishing the subscription price was the
realization of the desired proceeds from this offering while providing holders
of our Class A common stock with the opportunity to make an additional
investment in East/West and to avoid involuntary dilution of their proportionate
ownership interest. In establishing the subscription price, the Board of
Directors considered such factors as the intended use of proceeds of this
offering, alternative financing sources available, market prices of the Class A
common stock over the preceding two-year period, the general condition of the
securities markets and prices in offerings that the Board considered similar to
this offering. The Board's determination does not constitute a recommendation to
stockholders as to the advisability of exercising rights in this offering.
THE RIGHTS OFFERING
THE RIGHTS
We are distributing rights at no cost to the record holders of
outstanding shares of our Class A common stock as of the record date, which is
May 10, 1999. We will distribute one right for every share
-21-
<PAGE>
of Class A common stock held on the record date. The rights will be evidenced by
subscription certificates and every four of such Rights will entitle the holder
thereof to subscribe for one share of Class A common stock. At the same time, we
are also distributing rights to purchase Class B common stock to AFC, the sole
holder of the Class B common stock, on the same terms and conditions set forth
herein. An aggregate of approximately 443,050 shares of Class A common stock
will be sold upon exercise of the rights offered hereby, assuming the exercise
of all rights, including the oversubscription privilege.
We will not issue fractional shares or cash in this offering. The
number of rights distributed to each holder will be rounded up to the nearest
whole number. No subscription certificate may be divided in such a way as to
permit the holder of such certificate to receive a greater number of rights than
the number to which such subscription certificate entitles its holder, except
that a depository, bank, trust company, or securities broker or dealer holding
shares of Class A common stock on the record date for more than one beneficial
owner may, upon proper showing to Continental Stock Transfer & Trust Co., the
subscription agent for the offering, exchange its subscription certificate to
obtain a subscription certificate for the number of rights to which all such
beneficial owners in the aggregate would have been entitled had each been a
holder on the record date. We reserve the right to refuse to issue any such
subscription certificate if such issuance would be inconsistent with the
principle that each beneficial owner's holdings will be rounded up to the
nearest whole right.
Because the number of rights distributed to each record holder will be
rounded up to the nearest whole number, beneficial owners of Class A common
stock who are also the record holders of such shares will receive more rights
under certain circumstances than beneficial owners of Class A common stock who
are not the record holders of their shares and who do not obtain, or cause the
record holder of their shares of Class A common stock to obtain, a separate
subscription certificate with respect to the shares beneficially owned by them,
including shares held in an investment advisory or similar account. To the
extent that record holders of Class A common stock or beneficial owners of Class
A common stock who obtain a separate subscription certificate receive more
rights, they will be able to subscribe for more shares pursuant to the basic
subscription privilege.
The issuance of Class A common stock pursuant to this offering is not
conditioned upon the subscription of any minimum number of shares of Class A
common stock by holders of the rights.
BEFORE EXERCISING RIGHTS, POTENTIAL INVESTORS ARE URGED TO READ
CAREFULLY THE INFORMATION SET FORTH ON PAGE 8 UNDER "RISK FACTORS" IN THIS
PROSPECTUS.
EXPIRATION DATE
The rights will expire at 5:00 p.m., New York City time, on the
expiration date, which is June 16, 1999, unless otherwise extended by the
Company for not more than 30 days. After such time, unexercised rights will be
null and void. We will not be obligated to honor any purported exercise of
rights received by the subscription agent after 5:00 p.m., New York City time,
on the expiration date, regardless of when the documents relating to such
exercise were sent.
-22-
<PAGE>
SUBSCRIPTION PRIVILEGES
Basic Subscription Privilege. Every four rights will entitle the holder
thereof to receive, upon payment of the subscription price, one share of Class A
common stock. Certificates representing shares of Class A common stock purchased
pursuant to the basic subscription privilege will be delivered to subscribers as
soon as practicable after the Expiration Date.
Oversubscription Privilege. Subject to the allocation described below,
each right also carries the right to subscribe at the subscription price for
additional shares. All beneficial holders who exercise their basic subscription
privilege in full will be entitled to exercise the oversubscription privilege.
Shares will be available for purchase pursuant to the oversubscription
privilege only to the extent that any shares are not subscribed for by
stockholders through the basic subscription privilege. If the shares not
subscribed for through the basic subscription privilege are insufficient to
satisfy all subscriptions pursuant to the oversubscription privilege, then such
shares will be allocated pro rata among those holders of rights exercising the
oversubscription privilege in proportion to the number of shares purchased
pursuant to the basic subscription privilege. Certificates representing shares
of Class A common stock purchased pursuant to the oversubscription privilege
will be delivered to subscribers as soon as practicable after the expiration
date and after all prorations and adjustments contemplated by the terms of this
offering have been effected.
Banks, brokers and other nominee holders of rights who exercise on
behalf of beneficial owners of Rights will be required to certify to the
subscription agent as to the aggregate number of rights that have been exercised
and the number of shares that are being subscribed for by each beneficial owner
of Rights on whose behalf such nominee holder is acting.
EXERCISE OF RIGHTS
Rights may be exercised by delivering to the subscription agent, at or
prior to 5:00 p.m., New York City time, on the expiration date, the properly
completed and executed subscription certificate evidencing such rights with any
signatures required to be guaranteed so guaranteed, together with payment in
full of the subscription price for each share subscribed for. All payments must
be by (1) check or bank draft drawn upon a U.S. bank or postal or express money
order payable to Continental Stock Transfer & Trust Company, or (2) by wire
transfer of same-day funds, to Continental Stock Transfer & Trust Company at its
account maintained at Chase Manhattan Bank, 52 Broadway, New York, New York
10004. Account No. 777-582821; ABA No. 021000021. Payments will be deemed to
have been received by the subscription agent only upon (1) clearance of any
uncertified personal check, (2) receipt by the subscription agent of any
certified check or bank draft upon a U.S. bank or of any postal or express money
order or (3) receipt of good funds in the account designated by the subscription
agent. If paying by uncertified personal check, please note that the funds
evidenced thereby may take at least five business days to clear. Accordingly,
holders of rights who wish to pay by means of uncertified personal check are
urged to make payment sufficiently in advance of the expiration date to ensure
that such payment is received and clears by such date and are urged to consider
payment by means of certified or cashier's check, money order or wire transfer
of funds.
The address to which the subscription certificates and payment of the
subscription price should be delivered is:
-23-
<PAGE>
By Mail, Hand or Overnight Courier:
Continental Stock Transfer & Trust Co.
2 Broadway
New York, New York 10004
Attention: William Seegraber
If a Rights holder wishes to exercise rights, but time will not permit
such holder to cause the subscription certificate evidencing such rights to
reach the subscription agent on or prior to the expiration date, such Rights may
nevertheless be exercised if all of the following conditions (the "Guaranteed
Delivery Procedures") are met: (1) such holder has caused payment in full of the
subscription price for each underlying share being subscribed for pursuant to
the basic subscription privilege and the oversubscription privilege to be
received (in the manner set forth above) by the subscription agent on or prior
to the expiration date; (2) the subscription agent receives, on or prior to the
expiration date, a guarantee notice ("Notice of Guaranteed Delivery"),
substantially in the form provided in the instructions distributed with the
subscription certificates, from a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. ("NASD"), or from a commercial bank or trust company having an
office or correspondent in the United States or from a bank, stockbroker,
savings and loan association or credit union with membership in an approved
signature guarantee medallion program, pursuant to Rule 17Ad-15 of the Exchange
Act (each, an "Eligible Institution"), stating the name of the exercising rights
holder, the number of rights represented by the subscription certificate held by
such exercising rights holder, the number of underlying shares being subscribed
for pursuant to the basic subscription privilege and the number of underlying
shares, if any, being subscribed for pursuant to the oversubscription privilege,
and guaranteeing the delivery to the subscription agent of any subscription
certificate evidencing such rights within three Nasdaq trading days following
the expiration date; and (3) the properly completed subscription certificate
evidencing the rights being exercised, with any signatures required to be
guaranteed so guaranteed, is received by the subscription agent within three
Nasdaq trading days following the expiration date. The Notice of Guaranteed
Delivery may be delivered to the subscription agent in the same manner as
subscription certificates at the address set forth above (or by facsimile (Fax
No. (212) 616-7610). Additional copies of the form of Notice of Guaranteed
Delivery are available upon request from the subscription agent
Funds received in payment of the subscription price for shares
subscribed for pursuant to the oversubscription privilege will be held in a
segregated account pending issuance of such shares. If a rights holder
exercising the oversubscription privilege is allocated less than all of the
shares of Class A common stock which such holder subscribed for pursuant to the
oversubscription privilege, the excess funds paid by such holder in respect of
the subscription price for shares not issued to him shall be returned by mail
without interest or deduction as soon as practicable after the expiration date
and after all prorations and adjustments contemplated by the terms of this
offering have been effected.
Holders who hold shares of Class A common stock for the account of
others, such as brokers, trustees or depositories for securities, should notify
the respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the rights. If the beneficial owner so instructs, the record holder of such
rights should complete subscription certificates and submit them to the
subscription agent with the proper payment. In addition, beneficial owners of
Class A common stock or rights held through a record holder should contact the
holder and request the holder to effect transactions in accordance with such
beneficial owner's
-24-
<PAGE>
instructions. If a beneficial owner wishes to obtain a separate subscription
certificate, such beneficial owner should contact the nominee as soon as
possible and request that a separate subscription certificate be issued. A
nominee may request any subscription certificate held by it to be split into
such smaller denominations as it wishes, provided that the subscription
certificate is received by the subscription agent, properly endorsed, no later
than the expiration date.
The instructions accompanying the subscription certificates should be
read carefully and followed in detail.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO EAST/WEST WILL BE AT THE ELECTION AND RISK OF THE RIGHTS
HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND
PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT MADE BY UNCERTIFIED PERSONAL
CHECK PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE
UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU
ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR
CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility
of any exercise of rights will be determined by East/West, whose determinations
will be final and binding. East/West in its sole discretion may waive any defect
or irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any rights.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as we determine in our
sole discretion. We are under no duty to give notification of any defect or
irregularity in connection with the submission of subscription certificates and
shall incur no liability for failure to give such notification.
Any questions or requests for assistance concerning the method of
exercising rights or requests for additional copies of this prospectus and
related materials should be directed to the subscription agent at 2 Broadway,
New York, New York 10004, Tel. No. (212) 509-4000, Attention: William Seegraber.
RIGHTS NON-TRANSFERABLE
All rights received in connection with this offering are for the
account of the holder and are non-transferable.
OTHER MATTERS
We are required to register the Class A common stock offered hereby in
certain states. There can be no assurance that these state securities
commissions will declare effective such registrations. We have submitted
registrations in the following states: California, Arizona, Georgia, Michigan
and North Dakota. Should any or all of such registrations not be declared
effective, we would be unable to permit residents of these states to exercise
the rights received by them.
This offering is not being made in any state or other jurisdiction in
which it is unlawful to do so, nor are we selling or accepting any offers to
purchase any shares of Class A common stock from rights holders who are
residents of any such state or other jurisdiction. We may delay the commencement
of this offering in certain states or other jurisdictions in order to comply
with the securities law requirements of such states or other jurisdictions. It
is not anticipated that there will be any changes in the terms of this offering.
East/West, if it so determines in its sole discretion, may decline to make
-25-
<PAGE>
modifications to the terms of the offering requested by certain states or other
jurisdictions, in which event rights holders resident in those states or
jurisdictions will not be eligible to participate in this offering.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary sets forth the material United States federal
income tax consequences of the receipt, ownership, exercise and disposition of
the rights to United States holders of Class A common stock under present law.
This summary is based on the Internal Revenue Code of 1986, as amended to the
date hereof, administrative pronouncements, judicial decisions and existing and
proposed Treasury Regulations, changes to any of which subsequent to the date of
this prospectus may affect the tax consequences described herein, possibly on a
retroactive basis. This summary does not discuss all aspects of United States
federal income taxation that may be relevant to a particular investor or to
certain types of investors subject to special treatment under the United States
federal income tax laws (for example, banks, dealers in securities, life
insurance companies, tax exempt organizations, foreign taxpayers or persons
holding Class A common stock as part of a straddle or conversion transaction),
nor does it discuss any aspect of state, local or foreign income or other tax
laws. This discussion is limited to United States holders of Class A common
stock who hold such stock as a capital asset. For purposes of this discussion, a
United States holder includes a holder that is (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized under the
laws of the United States or any political subdivision thereof, (iii) an estate
the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust if a United States court is able to
exercise primary supervision over the administration of the trust and one or
more United States trustees or fiduciaries have authority to control all
substantial decisions of the trust.
ISSUANCE OF RIGHTS
Holders of Class A common stock will not recognize taxable income in
connection with the receipt of the rights.
BASIS AND HOLDING PERIOD OF THE RIGHTS
Except as provided in the following sentence, the basis of the rights
received by a stockholder as a distribution with respect to such stockholder's
Class A common stock will be zero. If either (1) the fair market value of the
Rights on the date of the issuance of the rights is 15% or more of the fair
market value on the date of issuance of the Class A common stock with respect to
which they are received ("previously held Class A common stock") or (2) the
stockholder elects, in his or her federal income tax return for the taxable year
in which the rights are received, to allocate part of the basis of such
previously held Class A common stock to the rights, then upon exercise of the
rights, the stockholder's basis in such previously held Class A common stock
will be allocated between such Class A common stock and the rights in proportion
to the fair market values of each on the date of issuance of the rights. The
holding period of a stockholder with respect to the rights received as a
distribution on such stockholder's previously held Class A common stock will
include the stockholder's holding period for such Class A common stock with
respect to which the rights were issued.
LAPSE OF THE RIGHTS
-26-
<PAGE>
Stockholders who allow the rights received by them to lapse will not
recognize any gain or loss, and no adjustment will be made to the basis of the
Class A common stock, if any, owned by such holders of the rights.
EXERCISE OF THE RIGHTS; BASIS AND HOLDING PERIOD OF CLASS A COMMON STOCK
Holders of rights will not recognize any gain or loss upon the exercise
of such rights. The basis of the Class A common stock acquired through exercise
of the rights will be equal to the sum of the subscription price therefor and
the rights holder's basis in such rights, if any as described above. The holding
period for the Class A common stock acquired through exercise of the rights will
begin on the date the rights are exercised.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH STOCKHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING ON HIS OR
HER OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
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. East/West
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. East/West 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.
-27-
<PAGE>
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 East/West) 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.
-28-
<PAGE>
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 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. East/West 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.
-29-
<PAGE>
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
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.
-30-
<PAGE>
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 East/West'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 East/West 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 are currently 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 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. We 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.
-31-
<PAGE>
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 expects 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 things, 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
re-auctioned. Principal A-, B- and C-Block licensees in East/West'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 PCS networks. However, Nextel
has begun offering, apparently successfully, a competitive wireless service
based on ESMR.
Other Competition. The FCC's general policy 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
-32-
<PAGE>
services that may offer competitive wireless mobile services. For example, among
other actions, the FCC had (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 range 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 LMDS 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 spectrum to
be developed, in a fashion that will continue to expand competition in the
wireless marketplace. The FCC has also modified its rules to permit the
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 East/West. 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, our
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 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
-33-
<PAGE>
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 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. East/West'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.
-34-
<PAGE>
In addition, the Communications Assistance 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 carried to or from its subscribers and to access certain cell-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 costs on us and other
wireless carriers.
The FCC has adopted new guidelines and methods for evaluating the
effects of radio frequency 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 East/West's facilities. East/West intends to
use common carrier point-to-point microwave and traditional land line 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.
-35-
<PAGE>
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 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 re-auction 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 East/West, 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.
-36-
<PAGE>
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 "Communications 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.
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.
-37-
<PAGE>
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
end-user 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.
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.
-38-
<PAGE>
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 East/West or on CMRS providers generally.
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
-39-
<PAGE>
voluntary negotiation period and an additional 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. East/West 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 East/West 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 East/West 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 East/West. 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.
-40-
<PAGE>
By claiming status as an Entrepreneur, East/West qualified to enter the
F-Block Auction. If the FCC were to determine that East/West did not satisfy the
Entrepreneur Requirements at the time it participated in the F-Block Auction or
that East/West fails to meet the ongoing Entrepreneurs Requirements, the FCC
could revoke East/West's PCS licenses, fine East/West or take other enforcement
actions, including imposing the Unjust Enrichment Penalties. Although East/West
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 East/West, which
could include revocation of its PCS licenses. See "Risk Factors"
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 East/West) 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, East/West qualified for
the Bidding Credit. If the FCC were to determine that East/West does not qualify
as a Very Small Business, East/West 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 East/West's PCS licenses, fine East/West or take other enforcement
actions, including imposing the Unjust Enrichment Penalties. Although East/West
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 East/West, 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
-41-
<PAGE>
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, East/West's
Certificate of Incorporation provides that East/West's Class B common stock, as
a class, must constitute 50.1% of the voting power of East/West. See
"Description of Capital Stock." There can be no assurance that East/West 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
East/West, which could include revocation of its PCS licenses. Although
East/West has taken these and other steps to meet the Control Group
Requirements, there can be no assurance that East/West has or will continue to
meet the Control Group Requirements, and the failure to meet such requirements
would have a material adverse effect on East/West. 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, an entity may not own more than 25% of East/West's total
equity on a fully diluted basis, unless the Control Group owns at least 50.1% of
East/West's total equity on a fully diluted basis. There can be no assurance
that East/West 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 East/West's
lenders or investors as financial affiliates of East/West.
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
-42-
<PAGE>
allow additional indirect foreign ownership of CMRS companies to the extent that
the relevant foreign states extend reciprocal treatment to U.S. investors.
East/West's Long Form filed by East/West with the FCC after the completion of
the F-Block Auction indicates that East/West is in compliance with the FCC
foreign-ownership rules. However, if the foreign ownership of East/West were to
exceed 25% in the future, the FCC could revoke East/West's PCS licenses or
impose other penalties. Further, East/West's Certificate of Incorporation
enables East/West 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 East/West'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 East/West'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 East/West wishes to make any change in
ownership structure during the initial license term involving the de facto and
de jure control of East/West, it must seek FCC approval and may be subject to
the same costs and reimbursement conditions indicated above.
F-BLOCK RULES
East/West (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. East/West 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
East/West's investors or East/West itself will continue to satisfy these
requirements during
-43-
<PAGE>
the term of any PCS license granted to East/West or that East/West will be able
to successfully implement divestiture or other mechanisms included in
East/West's Certificate of Incorporation that are designed to ensure compliance
with FCC rules. Any non-compliance with FCC rules could subject East/West 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, East/West 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 East/West were to
become unable to meet its obligations under the Government Financing, the FCC
could in such instances reclaim some or possibly all of East/West's PCS
licenses, reauction them, and subject East/West 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"
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 May 1, 1999 for the executive
officers and directors of East/West. 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 East/West's Certificate of Incorporation, collectively the Class
B Directors collectively have three votes and the Class A Directors
collectively have two votes 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.
-44-
<PAGE>
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.
COMPENSATION OF DIRECTORS
We are not compensating our directors at the present time, although we
may do so in the future. We do indemnify directors pursuant to Delaware law and
may reimburse them for certain out-of-pocket costs in connection with serving as
directors.
EXECUTIVE COMPENSATION
We have no employees and has paid no employee or executive
compensation, although it may do so in the future.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, we have
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act.
Our Certificate of Incorporation provides that our directors and officers shall
be indemnified to the fullest extent of Delaware law.
Delaware law provides that a corporation may limit the liability of
each director to the corporation or its stockholders for monetary damages except
for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction which the director derives an improper
personal benefit. Our Certificate of Incorporation provides for the elimination
and limitation of the personal liability of directors for monetary damages to
the fullest extent permitted by Delaware law. In addition, our Certificate of
Incorporation provides that if Delaware law is amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
the directors shall be eliminated or limited to the fullest extent permitted by
Delaware law, as so amended. The effect of this provision is to eliminate our
rights and the rights of our stockholders to recover monetary damages against a
director for breach of the fiduciary duty of care as a director except in the
-45-
<PAGE>
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the our rights or the rights of any stockholder to seek
non-monetary relief such as an injunction or recission in the event of a breach
of a director's duty of care. The our Certificate of Incorporation also provides
that we shall, to the full extent permitted by Delaware law, indemnify and
advance expenses to each of its currently acting and former directors, officers,
employees and agents.
We have no directors and officers liability insurance at this time.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent where indemnification will be required or
permitted.
-46-
<PAGE>
CERTAIN 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 instalment payments on PCS
licenses won in the auction.
On August 13, 1997, East/West succeeded to the rights and obligations
of the partnership. 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 and April 29, 1999, East/West borrowed $300,000 and
$400,000, respectively, from certain of our directors. The loans to be repaid
are evidenced by two series of promissory notes payable to the order of Mario J.
Gabelli and T. Gibbs Kane, Jr., directors of East/West. Each of the promissory
notes bears interest at a rate of 5.00% per year and becomes due and payable on
the earlier of (1) either October 22, 1999 with respect to $300,000 principal
amount of such notes or April 29, 2000 with respect to $400,000 principal amount
of such notes or (2) upon the receipt of proceeds from this offering sufficient
to pay the full amount of principal and interest then owed on the notes
(provided that repayments of $300,000 principal amount of notes is not
contingent on the ability to repay the remaining $400,000 principal amount of
notes). The proceeds of such loans have been used to fund interest payment
obligations to the FCC.
-47-
<PAGE>
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 also set forth in this table as owned by Victoria G.
Kane. She 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 (1) 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), (2) 758 shares held by GFI, (3) 2,000 shares owned by a
charitable foundation of which Mr. Gabelli is a trustee, (4) 70,000
shares owned by a limited partnership of which Mr. Gabelli is the
general partner and has a 20% interest and (5) 107,164 shares subject
to a voting agreement which terminates June 26, 2001 under 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. Mr. Gabelli has sole voting and
investment power over the shares described above except for the shares
subject to the voting agreement, as to which Mr. Gabelli only has sole
voting power, but no investment power. 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 of 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 as to which she
has sole investment power. Ms. Gabelli is the daughter of Mr. Gabelli.
-48-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 19,600,000 shares of common stock, $.0001
par value, and 16,000 shares of preferred stock, $1,000 par value. The following
description of our capital stock does not purport to be complete and is subject
to and qualified in its entirety by our Certificate of Incorporation and Bylaws
and by the provisions of applicable Delaware law.
COMMON STOCK
Our authorized common stock of consists of 16,000,000 shares of Class A
common stock and 3,600,000 shares of Class B common stock. At May 10, 1999,
there were (1) 1,772,198 shares of Class A common stock outstanding; and (2)
1,779,301 shares of Class B common stock outstanding, all of which were held by
AFC. The holders of the two classes 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. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up, the holders
of the two classes of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, if any, then outstanding.
Voting Rights
Collectively, the shares of Class A common stock represent not more
than 49.9% of our voting interest, with each share of Class A common stock
issued and outstanding having one vote per share (subject to downward adjustment
if necessary to comply with the 49.9% maximum class vote) on all matters except
the election of directors or as otherwise provided by law. With respect to the
election of directors, the holders of the Class A common stock as a class are
entitled to elect members to the Board of Directors who collectively represent
two of the five votes of our Board of Directors. The Class A directors
collectively have two full votes on each matter submitted to a vote of the Board
of Directors.
Collectively, the shares of Class B common stock represent at least
50.1% of our voting interest, with each share of Class B common stock issued and
outstanding having five votes per share (subject to upward adjustment, if
necessary, to comply with the 50.1% minimum class vote), on all matters except
the election of directors or as otherwise provided by law. With respect to the
election of directors, the Class B common stock, voting together as a class, may
elect up to three members of the Board of Directors. The Class B directors
collectively have three full votes on each matter submitted to a vote of the
Board of Directors.
Redemption By East/West
If a holder of Class A common stock acquires additional shares of Class
A common stock or otherwise is attributed with ownership of such shares that
would cause us to violate the Entrepreneurs Requirements or the Foreign
Ownership Restrictions, East/West, at its option, may redeem that number of such
shares necessary to eliminate such FCC violation at a redemption price equal to
(1) 75% of the fair market value of such shares where such holder caused such
FCC violation or (2) 100% of the fair market value where such FCC violation was
caused by no fault of the holder.
-49-
<PAGE>
Transfer Restriction
The Class B common stock cannot be transferred, sold or otherwise
disposed of to any third party, directly or indirectly, except (1) to family
members, or by will or by operation of the laws of descent and devise (in which
case the transferees will continue to be bound by these restrictions), (2) such
number of shares which does not exceed 10% of the Class B common stock
outstanding when originally issued, or (3) pursuant to a transaction or series
of transactions on terms and conditions which are substantially identical in the
opinion of counsel to the terms and conditions made available to all holders of
the Class A common stock, including form, type and amount of consideration per
share, the availability of such consideration and the timing of payment. To the
extent it deems necessary, such counsel may rely on the opinion of a nationally
recognized investment banking firm in evaluating the terms of any securities or
other consideration being offered.
PREFERRED STOCK
We have outstanding 7,800 shares of preferred stock, par value $1,000
per share. The preferred stock (1) is entitled to preferred dividends at an
annual rate of 5 shares of additional preferred stock for each one hundred
shares of preferred stock outstanding, (2) has no voting rights except as
provided by law, and (3) is entitled to be redeemed at $1,000 per share (plus
accrued and unpaid dividends) on the earlier of (a) December 1, 2009, (b) upon a
change of control of the Class A or Class B common stock or (c) upon the sale of
one or more PCS licenses for cash or a non-cash sale which is subsequently
converted into or redeemed for cash in an amount proportional to that number of
persons covered by the sale of such licenses for cash, or that portion of a
non-cash sale subsequently converted into or redeemed for cash, compared to the
total persons covered by East/West's five initial PCS licenses, in each case
based on the 1996 or most recent subsequent estimate by the United States Bureau
of Census. Therefore, the number of shares redeemed shall be computed by
dividing the number of persons covered by the sale by the total number of
persons covered by the five initial PCS licenses owned by East/West.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS,
DELAWARE LAW AND CONTROL GROUP REQUIREMENTS
Certificate of Incorporation and Bylaws
Several provisions of our Certificate of Incorporation and Bylaws could
deter or delay unsolicited changes in control.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (1) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (2) upon
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of
-50-
<PAGE>
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Control Group Requirements
In order to meet the Control Group Requirements, our Certificate of
Incorporation provides that the Class B common stock, as a class, must
constitute 50.1% of the voting power. The structure that we have adopted to
ensure compliance with the Control Group Requirements will likely deter and
delay unsolicited changes in control. See "Risk Factors--Government
Regulation--Control Group Requirements" and "--Effect of Control by Certain
Stockholders."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Class A common stock is
ChaseMellon Shareholder Services.
DESCRIPTION OF CERTAIN INDEBTEDNESS
East/West is the obligor on installment payments to be made for the
F-Block PCS licenses held by it. The aggregate debt obligation of East/West to
the FCC pursuant to the government financing is approximately $15.2 million.
East/West will be required to make interest expense payments based on an
interest rate of 6.25% per annum. East/West will be required to make quarterly
payments of interest only for the first two years of the license and quarterly
payments of interest and principal over the remaining eight years of the license
term. In the event that East/West (or any of its affiliates) becomes unable to
meet its obligations under the government financing, is involved in certain
bankruptcy or insolvency proceedings or otherwise violates regulations
applicable to holders of FCC licenses, the FCC could take a variety of actions,
including requiring immediate repayment of amounts due under the government
financing, repayment of certain bidding credits, revoking East/West's PCS
licenses and fining East/West an amount equal to the difference between the
price at which East/West
-51-
<PAGE>
acquired the licenses and the amount of the winning bid at their reauction, plus
an additional penalty of three percent of the lesser of the subsequent winning
bid and East/West's bid amount. There can be no assurance that East/West will be
able to meet its obligations under the government financing or that in the event
of a failure to meet such obligations, the FCC will not require immediate
repayment of amounts due under the government financing or revoke East/West's
PCS licenses. In either such event, East/West may be unable to meet its
obligations to other creditors.
As obligor on the payments to be made for the F-Block PCS license it
holds, East/West has or must execute notes to the United States Treasury
Department documenting its payment obligations and a security agreement creating
a first priority security interest in favor of the FCC in the license (and the
proceeds of any sale thereof) in the event of a default. The security agreement
permits East/West to grant a subordinated security interest in the license to a
third party.
EXPERTS
The financial statements of East/West Communications, Inc. at December
31, 1998 and 1997 and for the years ended December 31, 1998 and 1997 and the
period from July 26, 1996 (inception) to December 31, 1998 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
East/West's ability to continue as a going concern as described in Note 1 to the
financial statements) appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
LEGAL MATTERS
The validity of the shares of Class A common stock underlying the
Rights will be passed upon for East/West by Olshan Grundman Frome Rosenzweig &
Wolosky LLP, New York, New York.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statement and
other information with the SEC. Our SEC filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. You may also
request a copy of these filings at no cost, by writing or telephoning us at the
following address: East/West Communications, Inc., 350 Stuyvesant Avenue, Rye,
New York 10580, Telephone, (914) 921-6300.
This prospectus is a part of the registration statement that we filed
with the SEC. The registration statement contains more information than the
prospectus regarding East/West and our common stock, including certain exhibits.
You can get a copy of the registration statement from the SEC at the address
listed above or from its internet site.
-52-
<PAGE>
INDEX
EAST/WEST COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE, FORMERLY AER FORCE COMMUNICATIONS B, L.P.)
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.................................................... F-1
Audited Financial Statements
Balance Sheets at December 31, 1998 and 1997...................................... F-2
Statements of Operations for the Years Ended December 31, 1998 and 1997 and F-3
the period from July 26, 1996 (inception) to December 31, 1998....................
Statements of Changes in Shareholders' Equity (Deficit) for the period from July F-4
26, 1996 (inception) to December 31, 1998.........................................
Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 and F-5
the period from July 26, 1996 (inception) to December 31, 1998....................
Notes to Financial Statements..................................................... F-6
</TABLE>
-53-
<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
F-1
<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>
F-2
<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>
F-3
<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>
F-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
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>
F-5
<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.
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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.
F-10
<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
F-11
<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.
F-12
<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.
F-13
<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.
F-14
<PAGE>
No dealer, salesman or any other person is authorized to give any information or
to make any representations in connection with this offering not contained in
this Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by East/West or any other person.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the Securities offered by this Prospectus
or an offer by any person in any jurisdiction where such an offer or
solicitation is not authorized or is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that information herein is correct as of any time subsequent to
its date.
EAST/WEST COMMUNICATIONS, INC.
443,050 SHARES OF CLASS A
COMMON STOCK
PROSPECTUS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law ("DGCL"),
East/West's Certificate of Incorporation, as amended, limits the personal
liability of a director or officer to East/West for monetary damages for breach
of fiduciary duty of care as a director. Liability is not eliminated for (i) any
breach of the director's duty of loyalty to East/West or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payment of dividends or stock purchases
or redemptions pursuant to Section 174 of the DGCL, or (iv) any transaction from
which the director derived an improper personal benefit.
East/West's by-laws provide that East/West shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the fact that he is
or was a director, officer, employee or an agent of East/West or is or was
serving at the request of East/West as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
the defense or settlement of such action, suit or proceeding, to the fullest
extent and in the manner set forth in and permitted by the General Corporation
Law of the State of Delaware, as from time to time in effect, and any other
applicable law, as from time to time in effect. Such right of indemnification is
not be deemed exclusive of any other rights to which such director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of each such person.
East/West has entered into indemnity agreements with its directors and
executive officers. The indemnity agreements provide that East/West shall
indemnify such directors and executive officers from and against any and all
liabilities, costs and expenses, amounts of judgments, fines, penalties and
amounts paid in settlement of or incurred in defense of any settlement in
connection with any threatened, pending or completed claim, action, suit or
proceeding in which such persons are a party (other than a proceeding or action
by or in the right of East/West to procure a judgment in its favor), or which
may be asserted against them by reason of their being or having been an officer
or director of East/West (the "Losses"), unless it is determined that such
directors and executive officers did not act in good faith and for a purpose
which they reasonably believed to be in, or in the case of service to an entity
related to East/West, not opposed to, the best interests of East/West and, in
the case of a criminal proceeding or action, that they had reasonable cause to
believe that their conduct was unlawful. The indemnity agreements also provide
that East/West shall indemnify such directors and executive officers from and
against any and all Losses that they may incur if they are a party to or
threatened to be made a party to any proceeding or action by or in the right of
East/West to procure a judgment in its favor, unless it is determined that they
did not act in good faith and for a purpose that they reasonably believed to be
in, or, in the case of service to an entity related to East/West, not opposed
to, the best interests of East/West, except that no indemnification for Losses
shall be made in respect of (i) any claim, issue or matter as to which they
shall have been adjudged to be liable to East/West or (ii) any threatened or
pending action to which they are a party or are threatened to be made a party
that is settled or otherwise disposed of, unless and only to the extent that any
court in which such action or proceeding was brought determines upon
II-1
<PAGE>
application that, in view of all the circumstances of the matter, they are
fairly and reasonably entitled to indemnity for such expenses as such court
shall deem proper. Such indemnification is in addition to any other rights to
which such officers or directors may be entitled under any law, charter
provision, by-law, agreement, vote of shareholders or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses (other than
underwriting discounts and commissions) which will be paid by East/West in
connection with the issuance and distribution of the securities being
registered. With the exception of the SEC registration fee, all amounts shown
are estimates.
SEC Registration Fee..................... $184.75
Blue Sky Fees and Expenses............... 2,000.00
Printing and Engraving................... 10,000.00
Subscription Agent Fees.................. 15,000.00
Accounting Fees and Expenses............. 15,000.00
Legal Fees and Expenses.................. 50,000.00
Miscellaneous expenses................... 17,815.25
-----------
Total.................................... $110,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following securities were issued by East/West within the past three
years and are not registered under the Securities Act of 1933, as amended (the
"Act"). Each of the transactions is claimed to be exempt from registration with
the Securities and Exchange Commission pursuant to Section 4(2) of the Act as
transactions by an issuer not involving a public offering. All of such
securities are deemed to be restricted securities for the purposes of the Act.
All certificates representing such issued and outstanding restricted securities
of East/West have been properly legended.
1,779,301 shares of Class B Common stock were issued to AFC upon the
incorporation of East/West.
7,800 shares of Preferred Stock of East/West were issued to Lynch PCS
Corporation F upon cancellation of certain indebtedness of East/West.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
Exhibit Description
------- -----------
3.1 Articles of Incorporation
II-2
<PAGE>
3.2 By-laws
*5.1 Opinion of Olshan Grundman Frome Rosenzweig &
Wolosky LLP 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.
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
*23.1 Consent of Ernst & Young LLP
23.2 Consent of Olshan Grundman Frome Rosenzweig &
Wolosky LLP (contained in Exhibit 5.1)
- --------------
* Filed herewith
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) to file, during any period in which if offers or sells
securities, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post0-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the
II-3
<PAGE>
Registration Statement to include any additional or changed material information
on the plan of distribution.
(2) That, for the purpose of determining any liability under
the Securities Act, treat each post-effective amendment as a new registration
statement for the securities offered, and the offering of the securities at that
time to be the initial BONA FIDE offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(b) The undersigned registrant hereby undertakes to supplement
the prospectus, after the expiration of the subscription period, to set forth
the results of the subscription offer, the transactions by the underwriters
during the subscription period, the amount of unsubscribed securities to be
purchased by the underwriters, and the terms of any subsequent reoffering
thereof. If any public offering by the underwriters is to be made on terms
differing from those set forth on the cover page of the prospectus, a
post-effective amendment will be filed to set forth the terms of such offering.
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance on Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declare effective.
(2) For the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered, and the
offering of the securities at that time to be the initial BONA FIDE offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York on the 12 day of
May, 1999.
EAST/WEST COMMUNICATIONS, INC.
By: /s/ Victoria Kane
------------------------------------------
Victoria Kane
Chairman of the Board
(Chief Executive Officer and
Chief Financial Officer)
SIGNATORIES
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Victoria Kane Chairman of the Board, Chief May 12, 1999
- ---------------------- Executive Officer and Director
Victoria Kane
/s/ T. Gibbs Kane, Jr.
- ---------------------- Director May 12, 1999
T. Gibbs Kane, Jr.
/s/ Mario J. Gabelli
- ---------------------- Director May 12, 1999
Mario J. Gabelli
II-5
May 11, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: East/West Communications, Inc. -
Registration Statement On Form SB-2 (No. 333-75809)
---------------------------------------------------
Gentlemen:
Reference is made to the Registration Statement on Form SB-2 dated
the date hereof (the "Registration Statement") filed with the Securities and
Exchange Commission by East/West Communications, Inc., a Delaware corporation
(the "Company"), in connection with the registration of an aggregate of 443, 050
shares (the "Shares") of the Company's Class A Common Stock, par value $.0001
per share (the "Class A Stock"). The Company proposes to issue the Shares upon
the exercise of non-transferable rights to purchase the Shares (the "Rights"),
which are to be distributed pro rata to holders of the Class A Stock as
described in the Registration Statement and the prospectus (the "Prospectus")
forming a part thereof (the "Rights Offering").
We advise you that we have examined originals or copies certified or
otherwise identified to our satisfaction of the Registration Statement, the
Prospectus, the form of the Rights, the Certificate of Incorporation and By-laws
of the Company, minutes of meetings of the Board of Directors of the Company and
such other documents, instruments and certificates of officers and
representatives of the Company and of public officials, and we have made such
examination of the law, as we have deemed appropriate as the basis for the
opinion hereinafter expressed. In making such
<PAGE>
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals, and the conformity to original
documents of documents submitted to us as certified or photostatic copies.
Based upon the foregoing, and in reliance thereon, we are of the
opinion that (i) the Shares and the Rights have been duly authorized; (ii) upon
the distribution pursuant to the Rights Offering as described in the
Registration Statement and the Prospectus, the Rights will be validly issued;
and (iii) upon the issuance and sale against payment of Shares therefor pursuant
to the exercise of Rights as described in the Registration Statement and the
Prospectus, the Shares will be validly issued, fully paid and non-assessable.
We are members of the Bar of the State of New York and we express no
opinion as to any laws other than the laws of the State of New York, the General
Corporation Law of the State of Delaware and the federal laws of the United
States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus.
Very truly yours,
OLSHAN GRUNDMAN FROME ROSENZWEIG
& WOLOSKY LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 19, 1999, in the Registration Statement (Form
SB-2) and related Prospectus of East/West Communications, Inc.
/s/ Ernst & Young LLP
Stamford, Connecticut
May 10, 1999
