UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
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( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________________ to _________________
Commission File Number: 333-41007
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East/West Communications, Inc.
------------------------------
(exact name of registrant as specified in its charter)
Delaware 13-3964837
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
350 Stuyvesant Avenue, New York, New York 10580
- ----------------------------------------- -----
(Address of principle executive offices) (Zip Code)
(914) 921-6300
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports to be filed by section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.(X) Yes( ) No
As of September 30, 1999, there were 2,215,248 shares of the Registrant's
Class A Common Stock outstanding and 2,224,126 shares of the Registrant's
Class B Common Stock outstanding.
<PAGE>
INDEX
East/West Communications, Inc.
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations 4
for the three months ended September 30,
1999 and 1998, for the nine months ended
September 30, 1999 and 1998 and the
period from July 26, 1996 (inception) to
September 30, 1999
Consolidated Statements of Cash Flows 5
for the three months ended September 30,
1999 and 1998, the nine months ended
September 30, 1999 and 1998 and the
period from July 26, 1996 (inception) to
September 30, 1999
Statement of Changes in Shareholders' 6
Equity for the period from July 26, 1996
(inception) to December 31, 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 19
of Financial Condition
PART II. OTHER INFORMATION
Item 2. Changes in Securities 22
Item 6. Exhibits and Reports on Form 8-K 22
-2-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Balance Sheets
<TABLE>
<CAPTION>
September, 30 December 31,
1999 1998
------------------- ------------------
Assets (Unaudited) (A)
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 113,253 $ 61,805
------------------- ------------------
Total current assets 113,253 61,805
PCS Licenses 18,957,721 18,957,721
Capitalized costs 2,897,358 2,188,626
=================== ==================
Total assets $ 21,968,332 $ 21,208,152
=================== ==================
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,349,471 $ 1,250,939
Loans from shareholders 0 300,000
Current portion of loan from FCC 743,580 743,580
------------------- ------------------
Total current liabilities 2,093,051 2,294,519
Loan from FCC 14,422,597 14,422,597
Deferred income taxes 361,937 444,000
Redeemable preferred stock, $1,000 par value; 5% cumulative dividends, 16,000
shares authorized, 7,800 issued and outstanding (liquidation
value - $7,800,000) 4,528,282 4,024,176
Shareholders' equity:
Common stock, Class A, $.0001 par value, 3,600,000 shares authorized
2,215,248 and 1,772,198 shares issued and outstanding 221 177
Common stock, Class B, $.0001 par value, 16,000,000 shares authorized
2,224,126 and 1,779,301 shares issued and outstanding 222 178
Additional paid-in capital 6,116,363 4,949,645
Shareholders' deficit accumulated during development stage (5,554,341) (4,927,140)
------------------- ------------------
Total shareholders' equity 562,465 22,860
=================== ==================
Total liabilities and shareholders' equity $ 21,968,332 $ 21,208,152
=================== ==================
</TABLE>
(A) The Balance Sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
-3-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
July 26, 1996
Three Months Ended Nine Months Ended (Inception) to
September 30, September 30, September 30,
----------------------------------------------------------------------
1999 1998 1999 1998 1999
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Interest income $ 3,751 2,532 $ 5,617 8,266 $ 15,435
Interest expense, including commitment
and late fees (60,498) 0 (137,706) 0 (3,777,892)
Other expenses (16,011) (6,142) (73,069) (23,198) (236,886)
------------- ------------ ------------ ---------- ------------
Loss before income taxes (72,758) (3,610) (205,158) (14,932) (3,999,343)
Income tax benefit (expense) 54,063 0 82,063 0 (361,937)
------------- ------------ ------------ ---------- ------------
Net loss (18,695) (3,610) (123,095) (14,932) (4,361,280)
Dividend requirement on preferred stock (168,035) (159,976) (504,106) (474,711) (1,193,061)
------------- ------------ ------------ ---------- ------------
Loss applicable to common shares $ (186,730) (163,586)$ (627,201) (489,643) $ (5,554,341)
============= ============ ============ ========== ============
Basic and diluted loss per common share (0.046) (0.046) (0.155) (0.138)
============= ============ ============ ==========
Number of shares used in computation 4,040,074 3,551,499 4,040,074 3,551,499
============= ============ ============ ==========
</TABLE>
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<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
July 26, 1996
Three Months Ended Nine Months Ended (Inception) to
September 30, September 30, September 30,
----------------------------------------------------------------
1999 1998 1999 1998 1999
---------- --------- ---------- ------------ -------------
Cash Flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net Loss $ (18,695) $ (3,610) $ (123,095) $ (14,932) $ (4,361,280)
Adjustments to reconcile net loss to net
cash used by operating activities:
Deferred income tax (benefit) expense (54,063) 0 (82,063) 0 361,937
Changes in operating assets and liabilities:
Increase in accounts payable and accrued expenses (57,374) 88 98,533 (41,393) 217,020
Interest accrued, including commitment fees (238,918) 0 (708,732) 0 2,436,041
----------- --------- ----------- --------- ------------
Net cash used in operating activities (369,050) (3,522) (815,357) (56,325) (1,346,282)
Cash Flows from investing activities:
Deposits with FCC 0 0 0 0 (1,895,772)
Purchase of PCS licenses 0 0 0 0 (1,895,772)
----------- --------- ----------- --------- ------------
Net cash provided by (used in) investing activities 0 0 0 0 (3,791,544)
Cash Flows from financing activities:
Repayment of shareholders' loans 0 0 (700,000) 0 (700,000)
Proceeds from loans from shareholders 0 0 400,000 0 700,000
Proceeds from loans from the limited partner 0 0 0 0 13,738,502
Repayment of loans from the limited partner 0 0 0 0 (10,104,228)
Capital contributions 450,000
Net proceeds from rights offering (63,321) 0 1,166,805 0 1,166,805
----------- --------- ----------- --------- ------------
Net Cash provided by (used in) financing activities (63,321) 0 866,805 0 5,251,079
(Decrease) Increase in cash and cash equivalents (432,371) (3,522) 51,448 (56,325) 113,253
Cash and cash equivalents, beginning of period 545,624 201,624 61,805 254,427 0
----------- --------- ----------- ---------
Cash and cash equivalents, end of period $ 113,253 $ 198,102 $ 113,253 $ 198,102 $ 113,253
=========== ========= =========== ========= ============
</TABLE>
-5-
<PAGE>
EAST/WEST COMMUNICATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Statement of Changes in Shareholder's 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;
1,773,301-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>
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<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 1 ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS:
East/West Communications, Inc. ("the Company") was incorporated on
August 13, 1997, to succeed to the rights and obligations of Aer
Force Communications B, L.P. ("the Partnership"). The Partnership was
formed in July 1996, to bid for personal communications services
("PCS") licenses in the Federal Communications Commission's ("FCC")
F-Block auction. PCS is a second generation digital wireless service
utilizing voice, video or data devices that allow people to
communicate at anytime and virtually anywhere. Over the past three
years, the FCC auctioned off PCS licenses with a total of 120 MHZ of
spectrum, falling within six separate frequency blocks labeled A
through F. Frequency blocks C and F were designated by the FCC as
"entrepreneurial blocks." Certain qualifying small businesses
including the Partnership were afforded bidding credits in the
auctions as well as government financing of the licenses acquired.
The Partnership won five licenses in 1997 to provide personal
communications services over 10Mhz of spectrum to a population of
approximately 21 million, including Los Angeles and Washington, D.C.
Aer Force Communications, Inc. was the General Partner of the
Partnership with a 50.1% equity interest. Lynch PCS Corporation F
("Lynch PCS F"), a wholly-owned subsidiary of Lynch Corporation
("Lynch"), a publicly held company, was the Limited Partner of the
Partnership with a 49.9% equity interest.
On December 4, 1997, the Company succeeded to the assets and
liabilities of the Partnership under a plan where the General Partner
received 50.1% of the Common Stock of the Company (in the form of
100% of the Company's Class B Common Stock) and Lynch PCS F received
49.9% of the Common Stock of the Company (in the form of 100% of the
Company's Class A Common Stock). Just prior to the succession, the
Partners made cash contributions totaling $250,000 (in proportion to
their respective equity interests) to the Partnership and the Limited
Partner contributed $4.5 million of its outstanding loan to the
Partnership's capital.
-7-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 1 ACCOUNTING POLICIES:
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 accompanying unaudited financial statements as of
June 30, 1999 and for the six month periods ended June 30, 1999 and
1998 has been prepared in accordance with generally accepted
accounting principles applicable to interim financial information,
and in the opinion of management, include all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation.
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. As of September 30, 1999, the Company had not yet adopted
a business plan or determined how to finance its operations because
of uncertainties relating to PCS. However, as explained in Note 9,
Subsequent Events, the Company is in the process of negotiating a
merging agreement with Omnipoint Corporation.
-8-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 1 ACCOUNTING POLICIES:
BASIS OF PRESENTATION (CONTINUED):
The Company has incurred losses since inception and will need to
obtain capital in order to fund its interest and principal payment
obligations and for working capital and general corporate purposes.
There can be no assurance that the Company can raise sufficient
capital to fund its obligations and finance the construction of its
networks. Accordingly, the lack of funding creates substantial doubt
about the Company's ability to continue as a going concern. The
January 1, 1999 interest payment on loan payable to the FCC in the
amount of $388,307 including applicable late fees was paid on July
26, 1999. The April 30, 1999 installment payment in the amount of
$388,306 including applicable late fees was paid on October 25, 1999.
The July 31, 1999 payment of $561,373 including principal of $196,983
and interest and late fees of $364,390 was paid on October 25, 1999.
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.
-9-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 1 ACCOUNTING POLICIES (continued):
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the carrying amounts of assets and
liabilities and disclosures at the date of the financial statements
and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
CAPITALIZED COSTS:
Interest charges including commitment fees incurred prior to the
granting of the licenses have been expensed. Subsequent to the
license grant dates, and until operations commence, all interest
charges (excluding penalty interest and late fees) and commitment
fees on outstanding loan balances will be capitalized. These costs
amounted to $2,897,358 and $1,949,170 at September 30, 1999 and 1998,
respectively. Such costs include $2,554,114 and $1,606,231 of
capitalized interest at September 30, 1999 and 1998 respectively.
Total interest charges amounted to $708,964, $708,967, and $3,474,124
for the nine months period ended September 30, 1999 and 1998 and the
period from July 26, 1996 (inception) to September 30, 1999,
respectively.
The cost of the PCS licenses (including capitalized costs) will be
amortized over a period, consistent with the industry practice, which
will begin when operations commence.
Pursuant to FCC regulations, license holders are required to commence
providing service to one-third or the population within the license
area within five years from the date of award and two-thirds of the
population within ten years from the date of award. Such licenses may
only be transferred to other entities that meet the FCC requirements
for F-Block license holders during the first five years of the
initial license term. Transfers of such licenses to entities not
meeting such requirements in years six through ten of the initial
license term will subject the Company to substantial unjust
enrichment penalties.
-10-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 1 ACCOUNTING POLICIES (continued):
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.
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 September 30, 1999
and 1998, net deferred tax liabilities represent the tax effect of
taxable temporary differences (pertaining to capitalized costs of
approximately $1.3 million) which existed at the date the Partnership
converted to a C-Corporation offset, in part, by accumulated net
operating losses of approximately $345,000 through the third quarter
1999. The Company's net operating losses expire in 2012.
Note 2 RELATED PARTIES:
On October 22, 1998, the Company borrowed $300,000 from certain
directors of the Company. In order to meet the April 29, 1999
interest payment obligation to the FCC, the Corporation borrowed
additional funds in the amount of $400,000 from the same directors.
The loans in the amount of $350,000 for Mario J. Gabelli and T. Gibbs
Kane, Jr., bear interest at a rate of 5% per year. The loans were
paid in full on June 29, 1999 plus accrued interest in the amount of
$12,164.
-11-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
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.
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 September 30, 1999 and 1998 consists of FCC
financing of PCS licenses awarded in the following markets and
maturing in 2007:
Los Angeles, CA $ 3,579,000
Washington, DC 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
============
-12-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 4 LONG TERM DEBT (continued):
In connection with the PCS "F-Block" auction, $12.0 million was
deposited with the FCC of which $11.8 million was borrowed from Lynch
PCS F under a line of credit which was due and payable in five years.
The interest rate on the outstanding borrowings under the line was
fixed at 15%; additionally, a commitment fee of 20% per annum was
charged on the total line of credit. On December 4, 1997, the balance
of such loan was $7,835,221, including accrued interest and
commitment fees. On such date, $4.5 million was contributed to the
equity of the Partnership and the remaining balance of $3,335,221 was
converted into 7,800 shares of redeemable preferred stock (see note
6). At that time, the line of credit was terminated.
All of the FCC financing bears interest at 6.25% per annum. Quarterly
interest payments of $236,972 were required for the first two years
of the license (1997 and 1998) and quarterly payments of principle
and interest of $605,879 are required over the remaining eight years
of the license term. These loans are secured by the licenses granted.
In April 1997, the FCC suspended the interest payments on the debt
through March 31, 1998. On March 24, 1998, the FCC indicated that
such interest payments will be resumed not earlier that 90 days
subsequent to publication in the Federal Register of its "Order on
Reconsideration of the Second Report and Order." Such order was
published on April 8, 1998, requiring the suspended payments
(aggregating $805,488) to be made in eight quarterly installments of
$100,686 beginning in July 1998, plus regular interest payments for
the period of March 31, 1998 to July 31, 1998, of $311,324, subject
to deferral of up to a maximum 180 days. Payment was made on October
28, 1998, within the 90-day non-delinquency period, in the amount of
$432,610 comprising accrued interest of $412,010 and a 5% penalty fee
of $20,600.
-13-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 4 LONG TERM DEBT (continued):
The interest on the loan payable to the FCC, due on October 31, 1998
amounted to $340,249. Payments made within 90 days of the due date
are subject to a 5% penalty which increases to a 15% penalty if paid
within 90 to 180 days of the due date. The Company issued the
required payment of $391,286 (including applicable penalties) on
April 26,1999. The payment of interest due on 1/31/99 in the amount
of $388,307 including applicable late fees was paid on July 26, 1999.
The payment due on April 30, 1999 in the amount of $388,306 including
applicable late fees was paid on October 25, 1999 and July 31, 1999
payment of $561,373 including principal of $196,983 plus interest and
late fees of $364,090 was paid on October 25, 1999.
Aggregate principle maturities of long-term debt for each of the next
five years are as follows: 1999--$.744 million, 2000--$1.558 million,
2001--$1.658 million, 2002--$1.764 million and 2003--$1.877 million.
Note 5 COMMON STOCK
The Company has two classes of Common Stock authorized: Class A
Common Stock and Class B Common Stock. The authorized capital stock
of the Company consists of 3,600,000 shares of Class A Common Stock
and 16,000,000 shares of Class B Common Stock.
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.
-14-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
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 June 30, 1999 and 1998 had outstanding 7,800 shares of
Preferred Stock, par value $1,000 per share. The Preferred Stock (i)
is entitled to preferred dividends at an annual rate of five (5)
shares of additional Preferred Stock for each one hundred shares of
Preferred Stock outstanding, (ii) has no voting rights except as
provided by law, and (iii) is entitled to be redeemed at $1,000 per
share (plus accrued and unpaid dividends) on the earlier of (i)
December 1, 2009, (ii) upon a change of control of the Class A or
Class B Common Stock or (iii) upon the sale of one or more PCS
licenses for cash or a non-cash sale under certain circumstances. The
difference between the carrying value of such shares (which
approximates fair value) and the redemption price is being amortized
using the effective interest method to November 1, 2009. Accrued
dividends and accretion on the preferred stock are included in the
preferred stock account in the balance sheets and the dividend
requirement on preferred stock in the statements of operations.
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.
-15-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 8 RIGHTS OFFERING:
The Company offered, at no cost to the holders of its Class A Common
Stock, a non-transferable right to purchase up to 443,050 shares of
Class A Common Stock. The rights entitle shareholders to purchase one
additional share of Class A Common Stock for every four shares of
Class A Common Stock held at $1.50 per share. In addition, the
Company offered rights to purchase 444,825 shares of Class B Common
Stock at a price of $1.50 per share to the current owners of the
Company's Class B Common Stock. The Class A and Class B shareholders
exercised these rights on June 23, 1999.
Note 9 SUBSEQUENT EVENT:
On October 22, 1999, East/West Communications, Inc. and Omnipoint
Corporation entered into an Agreement and Plan of Merger (the
"Omnipoint Merger Agreement"), pursuant to which, among other things,
East/West will merge with and into Omnipoint (the "Merger") which
will be the surviving corporation in the Merger ("Omnipoint Merger")
Omnipoint is also party to an Agreement and Plan of Reorganization
(the "VoiceStream Merger Agreement") dated as of June 23, 1999, by
and among Omnipoint, VoiceStre am Wireless Corporation, and
VoiceStream Wireless Holding Corporation ("VoiceStream Holdings")
pursuant to which Omnipoint will be merged with a newly formed,
wholly-owned subsidiary of VoiceStream Holdings (the "VoiceStream
Merger"), and each share of common stock of Omnipoint will be
converted into the right to receive .825 shares of common stock of
VoiceStream Holdings and $8.00 in cash, subject to the right of the
holders of outstanding shares of Omnipoint common stock to elect to
receive stock and cash consideration in different proportions.
It is anticipated that the Omnipoint Merger will be consummated
immediately prior to the VoiceStream Merger. Under the terms and
conditions of the Omnipoint Merger Agreement, if the Omnipoint Merger
is consummated prior to the VoiceStream Merger, (i) in the Omnipoint
Merger, each outstanding share of Class A Common Stock and Class B
-16-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 9 SUBSEQUENT EVENT (continued):
Common Stock of the Company ("collectively, the "East/West Common
Stock") will be converted into one share of newly authorized Series E
Preferred Stock of Omnipoint (the "Series E Preferred Stock") and
(ii) each share of Series E Preferred Stock received by the holders
of East/West Common Stock in the Omnipoint Merger will be converted
in the VoiceStream Merger into (x) .825 shares of common stock of
VoiceStream Holdings and $8.00 in cash (the "Standard Election
Consideration"), multiplied by (y) a conversion ratio (the
"Conversion Ratio") equal to 1,775,000 divided by the number of
shares of East/West Common Stock outstanding immediately prior to
consummation of the Omnipoint Merger. Currently, there are 4,739,374
shares of East/West Common Stock issued and outstanding.
Under the terms of the Omnipoint Merger Agreement, if the VoiceStream
Merger occurs prior to the consummation of the Omnipoint Merger, each
share of East/West Common Stock will be converted into the right to
receive (x) the Standard Election Consideration, multiplied by (y)
the Conversion Ratio. If the VoiceStream Merger Agreement is
terminated prior to the consummation of the Omnipoint Merger, each
share of East/West Common Stock will be converted in the Omnipoint
Merger into (x) one share of Omnipoint Common Stock, multiplied by
(y) the Conversion Ratio. Under the terms and conditions of the
Omnipoint Merger Agreement, each outstanding share of preferred stock
of the Company will be converted into the right to receive in all
events cash in the amount of $1,000 per share, plus accrued
dividends.
Concurrently with the execution of the Omnipoint Merger Agreement,
East/West and Omnipoint entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement"), dated as of October 22, 1999,
pursuant to which Omnipoint bought from East/West, and East West
issued to Omnipoint, 300,000 shares of Class A Common Stock of
East/West for the purchase price of $3,000,000. $150,000 of the
proceeds of the Omnipoint stock purchase will be held in escrow by
Omnipoint and will be paid as a fee to Gabelli & Company, Inc. (an
affiliate of Mario Gabelli, a director of East/West) if the Merger
does not close. If and when the Merger closes, those funds will be
retained by Omnipoint, which will then issue Gabelli & Company, Inc.
25,000 shares of Omnipoint series E Preferred Stock. Approximately
$1.7 million of the proceeds of the Omnipoint stock purchase were
used to repay all past and currently due interest and principal
payments, including penalties on the company's obligations to the
FCC.
-17-
<PAGE>
EAST/WEST COMMUNCATIONS, INC.
(A Development Stage Enterprise, formerly
Aer Force Communications B, L.P.)
Notes to Financial Statements
September 30, 1999
Note 9 SUBSEQUENT EVENT (continued):
Pursuant to the terms and conditions of the Securities Purchase
Agreement, East/West granted to Omnipoint a right of first refusal
with respect to the sale, exchange or other disposition of PCS
licenses held by East/West. Omnipoint's right of first refusal will
be in effect for a period of two years after any termination of the
Omnipoint Merger Agreement.
Consummation of the Omnipoint Merger and the VoiceStream Merger are
subject to satisfaction of numerous conditions, including, without
limitation, receipt of requisite governmental approvals.
-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.
On October 22, 1999, we sold 300,000 shares of our Class A common stock
to Omnipoint Corporation ("Omnipoint") for a total of $3,000,000. In addition,
on that date, we signed an Agreement and Plan of Merger ("East/West merger") in
which all of our outstanding common stock, both Class A and Class B, at
consummation of the merger will be exchanged for either a Special Class B
preferred shares or common shares of Omnipoint, as discussed below.
Omnipoint is also a party to an Agreement and Plan of Reorganization,
dated as of June 23, 1999, by and among Omnipoint, Voice Stream Wireless
Corporation and VoiceStream Wireless Holding Corporation, pursuant to which
Omnipoint will be merged with a newly formed, wholly-owned subsidiary of
VoiceStream Holdings (the "Voice Stream reorganization"), and each share of
common stock of Omnipoint will be converted into the right to receive 0.825
share of common stock of VoiceStream Holdings and $8.00 in cash, subject to the
right of the holders of outstanding shares of Omnipoint common stock to elect to
receive stock and cash consideration in different proportions.
It is anticipated that the East/West merger will be consummated
immediately prior to the VoiceStream reorganization. Under the terms and
conditions of the East/West merger, if the East/West merger is consummated prior
to the Voice Stream reorganization, (i) in the East/West merger, each
outstanding share of Class A common stock and Class B common stock of East/West
will be converted into one share of newly-authorized Series E preferred stock of
Omnipoint and (ii) each share of Omnipoint's Series E preferred stock received
by the holders of the East/West common stock in the East/West merger will be
converted in the VoiceStream reorganization into (x) 0.825 shares of common
stock of VoiceStream Holdings and $8.00 in cash (the "Standard Election
Consideration"), multiplied by (y) a conversion ratio (the "Conversion Ratio")
equal to 1,775,000, divided by the number of shares of East/West common stock
outstanding immediately prior to consummation of the East/West merger.
Currently, there are 4,739,374 shares of East/West common stock issued and
outstanding, including the sale of 300,000 shares to Omnipoint on October 22,
1999.
-19-
<PAGE>
Under the terms of the East/West merger, if the VoiceStream
reorganization occurs prior to the consummation of the East/West merger, each
share of East/West common stock will be converted into the right to receive (x)
the Standard Election Consideration, multiplied by (y) the Conversion Ratio.
Under the terms and conditions of the East/West merger, each outstanding share
of preferred stock of East/West will be converted into the right to receive in
all events cash in the amount of $1,000 per share, plus accrued and unpaid
dividends.
As evidenced by the sale of shares to Omnipoint and the Merger
Agreement, we believe that our PCS licenses have substantial value. However,
should the merger with Omnipoint not take place, we have not yet adopted an
alternative business plan or determined alternative methodology of how to obtain
additional financing for 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, should the Merger with Omnipoint not be
consummated, we have not yet determined whether to develop our PCS licenses on
our 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.
If the merger with Omnipoint is not consummated and unless we sell our
PCS business or joint venture our PCS licenses with another 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. 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.
Of the $3,000,000 from the sale of shares to Omnipoint, $1,656,000
million was used to pay all past and currently due interest and principal
payments, including penalties, on our FCC obligation. This represented payments
that were originally due on April 30, 1999, July 31, 1999 and October 31, 1999.
Under the government financing, we have to make additional payments of
approximately $2.6 million in the year 2000 and $2.4 million in each of the next
seven years.
The following are the scheduled interest and principal payments over
the next two fiscal years:
Due Date Amount
January 31, 2000 $ 706,566
April 30, 2000 706,566
July 31, 2000 605,879
October 31, 2000 605,879
-----------
$ 2,624,899
January 31, 2001 605,839
April 30, 2001 605,839
-20-
<PAGE>
July 31, 2001 605,839
December 31, 2001 605,839
-----------
$ 2,423,516
===========
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.
If the merger with Omnipoint is not consummated, we will have to raise
funds within the next year in order to make interest payments on the government
financing and for working capital and general corporate purposes. 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
Pro forma for the sale of shares to Omnipoint and the principal
payments of debt in October, the principal amount of debt on September 30, 1999
was $14,897,000, compared to shareholders equity of $3,336,000. During the
period from July 26, 1996 (inception) to September 30, 1999, 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. Through September 30,
1999, the Company had made interest payments totaling $1,212,000 and, as noted
above, in October 1999 we made additional payments of $1,656,000.
During May 1999, the Company offered, at no cost to the holders of its
Class A common stock, a non- transferrable 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 common
stock held at $1.50 per share. In addition, the Company offered rights to
purchase 444,825 shares of Class B common stock at a price of $1.50 per share to
the current owner of the Company's Class B common stock. The Class A and Class B
shareholders exercise these rights on June 23, 1999, and the net proceeds from
the sale of both Class A and Class B common shares was $1,202,000.
On October 22, 1998 and April 29, 1999, East/West borrowed $300,000 and
$400,000, respectively, from certain of our directors. Such funds were used to
make the required payments on our FCC obligations. On July 22, 1999, these loans
were repaid by the Company, along with accrued interest in the amount of
$12,164, from the proceeds of the rights offering.
-21-
<PAGE>
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.
PART II
Item 2. Changes in Securities And Use of Proceeds
Reference is made to the Form 8-K (the "Form 8-K") filed by Registrant
on November 5, 1999, relating to the sale of 300,000 share of Class A Common
Stock of Registrant to Omnipoint Corporation ("Omnipoint") and the Agreement and
Plan of Merger pursuant to which Registrant will merge into Omnipoint. The
transaction agreements impose certain restrictions on Registrant and the holder
of the Class B Common Stock of Registrant relating to Registrant's securities.
The sale of the Class A Common Stock was issued pursuant to the exemption
contained in Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 -- Financial Data Schedule
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EAST/WEST COMMUNICATIONS, INC.
By: /s/ Victoria G. Kane
------------------------------------
Victoria Kane
Chairman of the Board
(Chief Executive Officer)
Dated: November 15, 1999
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 113,253
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 113,253
<PP&E> 0
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<TOTAL-ASSETS> 21,968,332
<CURRENT-LIABILITIES> 2,093,051
<BONDS> 14,422,597
4,528,282
0
<COMMON> 443
<OTHER-SE> 562,022
<TOTAL-LIABILITY-AND-EQUITY> 21,968,332
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 73,069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,706
<INCOME-PRETAX> (205,158)
<INCOME-TAX> 82,063
<INCOME-CONTINUING> (123,095)
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<NET-INCOME> (123,095)
<EPS-BASIC> (.155)
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