SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
For
Annual and Transition Reports to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(Mark one)
x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended December 31, 2000 or
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required)
For the transition period from _______________________ to _______________
Commission file number 0-28362
ClearComm, L.P.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 66-0514434 |
| (State or Other Jurisdiction of | (I.R.S. Employer |
| Incorporation or Organization) | Identification No.) |
| 268 Muñoz Rivera Ave. | |
| Suite 2206 | |
| Hato Rey, Puerto Rico | 00918-1913 |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (787) 756-0840
Securities registered pursuant to Section 12(b) of the Act:
| Name of Each Exchange | |
| Title of Each Class | on Which Registered |
Securities registered pursuant to Section 12(g) of the Act:
Units
of Limited Partnership Interest
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
The Registrant’s outstanding securities consist of units of limited partnership interests which have no readily ascertainable market value since there is no public trading market for these securities on which to base a calculation of aggregate market value.
Documents incorporated by reference. None.
TABLE OF CONTENTS
Part I
FORWARD-LOOKING STATEMENTS
This Form 10-K and future filings by the Partnership on Form 10-Q and Form 8-K and future oral and written statements by the Partnership may include certain forward-looking statements, including (without limitation) statements with respect to anticipated future operating and financial performance, growth opportunities and growth rates, acquisition and divestitive opportunities, and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and “should,” and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements by the Partnership are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. The Partnership disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.
Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Partnership as a result of a number of important factors. Examples of these factors include, without limitation, failure to develop the Partnership’s PCS licenses in California due to an inability to obtain satisfactory financing or partners; rapid technological developments and changes in the telecommunications industry; ongoing deregulation (and the resulting likelihood of significantly increased price and product/service competition) in the telecommunications industry as a result of the Telecommunications Act of 1996 and other similar federal and state legislation and the federal and state rules and regulations enacted pursuant to that legislation; regulatory limitations on the Partnership’s ability to compete in the telecommunications services industry; and continuing consolidation in the telecommunications services industry. In addition to these factors, actual future performance, outcomes and results may differ materially because of other, more general, factors including, without limitation, general industry and market conditions and growth rates, domestic and international economic conditions, governmental and public policy changes and the continued availability of financing in the amounts, at the terms and on the conditions necessary to support the Partnership’s future business.
ITEM 1. BUSINESS
General
ClearComm, L.P., a Delaware limited partnership (the “Partnership”), was formed on January 24, 1995 under the name PCS 2000, L.P., to own and operate broadband personal communications services (“PCS”) licenses to be acquired in auctions conducted by the Federal Communications Commission (the “FCC”). The Partnership competed for PCS licenses in frequency Block C, set aside for “designated entities” (“Entrepreneurs”) that met certain financial and equity structure requirements and that qualify for certain benefits under rules, regulations and policies of the FCC and related statutory provisions (“FCC Rules”).
The Partnership, through its majority-owned subsidiary, NewComm Wireless Services, Inc. (“NewComm”), owns and operates a state-of-the-art PCS network in Puerto Rico (the “Puerto Rico Network”). The Partnership directly or indirectly through NewComm owns two 15 MHz C-Block PCS licenses covering the entire island of Puerto Rico (the “Puerto Rico Licenses”) and five 15 MHz licenses in California (the “California Licenses,” and together with the Puerto Rico Licenses, the “Licenses”). SuperTel Communications Corp., the general partner of the Partnership (the “General Partner”) is actively engaged in the pursuit of business alliances and strategic partners to develop the California Licenses. Although no assurances can be made, the Partnership anticipates that it will negotiate acceptable agreements regarding the California Licenses so that it will be able to offer wireless services in the regions covered by these licenses.
The Agreement of Limited Partnership of the Partnership (the “Partnership Agreement”) provides that the Partnership will terminate on December 31, 2005. The Partnership will dissolve on such date (unless terminated earlier or unless the Partnership Agreement is amended to change such date).
The Partnership started building its Puerto Rico Network during the first quarter of 1999 and the system commenced commercial operations on September 24, 1999. The Partnership was the fifth entrant into the Puerto Rico wireless telecommunications market. It currently provides wireless coverage in the areas where 90% of the Puerto Rico wireless traffic occurs. The Partnership has established points of sale in all major shopping districts and has over 250 points of sale throughout Puerto Rico. The Partnership believes that since it commenced operations it has obtained approximately one-half of all new wireless activations in Puerto Rico. The Partnership was the first wireless company to provide internet content through its wireless handsets in Puerto Rico and expects to be the leader in providing new wireless services to the Puerto Rico market.
To build and operate its Puerto Rico network, the Partnership entered into an agreement, dated February 4, 1999 (the “TLD Agreement”) with Telefónica Larga Distancia de Puerto Rico, Inc. (“TLD”). TLD is a wholly owned subsidiary of Telefónica Internacional, S.A. which is a member of the Telefónica S.A. group (Ticker: TEF) (the “Telefónica Group”), Spain’s largest traded company and one of the world’s largest telecommunication companies. Pursuant to the terms of the TLD Agreement, the Partnership transferred the Puerto Rico Licenses and associated business plans and studies to NewComm. TLD provided NewComm a loan of approximately $19.96 million and received a secured convertible promissory note (the “Note”) which entitles TLD to select a director for one of the five NewComm board of director seats (the “Board”). The Note is convertible into 49.9% of NewComm’s equity. The Note cannot be converted, however, until the FCC authorizes TLD to hold more than a 25% equity interest in NewComm. Once the Note is converted and the FCC designated entity rules no longer apply, subject to FCC approval, TLD will be entitled to three of six Board positions. NewComm and TLD have entered into a management agreement whereby TLD provides day-to-day management services for NewComm, subject to the supervision of NewComm’s Board. TLD also received an option (the “Option”) to buy an additional 0.2%, which would bring its ownership to 50.1%, subject to a third-party valuation and FCC approval. The Option cannot be exercised prior to January 22, 2002, unless the ownership restrictions on the Puerto Rico Licenses are eliminated by the FCC. In addition, the Partnership has an option to buy out TLD’s interest in NewComm before the transfer restrictions on the Puerto Rico Licenses lapse.
The Partnership’s Puerto Rico Network operates under the image and brand name “MoviStar.” MoviStar is the PCS brand name of the Telefonica Group in Spain and the Partnership expects to benefit from the goodwill associated with that name. The Puerto Rico Network is a state-of-the-art CDMA (“Code Division Multiple Access”) network. Pursuant to a roaming agreement with the Sprint PCS, MoviStar customers have mainland U.S. coverage.
Lucent Technologies, Inc. (“Lucent”), built the Puerto Rico Network on behalf of NewComm. The Partnership continues optimizing the network to maintain and offer better quality service to its customers.
The Partnership believes that the Puerto Rico market provides many unique advantages for telecommunications companies. Puerto Rico is politically stable, as it has been a territory of the United States since 1898 and its economy is fully integrated with that of the United States mainland. It has the Caribbean’s best educated, most skilled labor force and the most sophisticated manufacturing and transportation infrastructure. Puerto Rico has a solid base of major manufacturers which includes, Hewlett-Packard Company, Microsoft Corporation, BASF Corporation, Colgate-Palmolive, Johnson & Johnson, and Pfizer Pharmaceutical. Along with its U.S.-linked stability, Puerto Rico offers the advantage of emerging market type growth and a significant cash based economy. The Partnership believes that current per capita income and consumption in Puerto Rico, combined with continued economic growth will support continued strong demand for the high quality telephone services which the Partnership is offering.
The success of the Partnership’s PCS business in Puerto Rico will depend upon its ability to compete with the two cellular operators and two operating PCS providers, potential competition from two other PCS licensees and potential future wireless communications providers in the Puerto Rico market. The Partnership is aware that Sprint PCS is building a PCS network which is expected to commence operations in the second half of 2001. The Partnership expects that the existing cellular providers will upgrade their networks to provide comparable services in competition with the Partnership. The Partnership also faces competition from other existing communications technologies such as conventional mobile telephone service, specialized mobile radio (“SMR”) and enhanced specialized mobile radio (“ESMR”). The Partnership believes that ESMR will have a limited competitive impact against PCS, particularly in the consumer mass market sector, largely because of technical limitations and limited bandwidth. In the future, PCS could potentially compete more directly with traditional landline telephone service providers and other technologies including mobile satellite systems. In addition, the availability of new spectrum and resale of existing spectrum and the entry of new participants, may result in increased competition in the Puerto Rico market. At the end of 2000, Puerto Rico had a wireless market penetration of approximately 29%, while the United States mainland ended the same year with an approximate market penetration of 39.3%. Market research reflects that Puerto Rico should attain a market penetration of 50% by the end of 2004.
Markets
The following table sets forth as of December 31, 2000, with respect to each Market in which the Partnership owns a PCS license, the estimated persons of population (“POPs”).
| Market Name
|
1997 POPs*
|
1990 POPs**
|
| San Juan, PR | 2,688,000 | 2,170,250 |
| Mayaguez-Aguadilla, PR | 1,083,000 | 1,325,600 |
| Modesto, CA | 487,000 | 418,980 |
| Visalia-Porterville, CA | 487,000 | 413,390*** |
| Redding, CA | 284,000 | 253,260 |
| Merced, CA | 227,000 | 192,710 |
| Eureka, CA | 157,000 | 142,580 |
| Total: | 5,414,000 | 4,916,770 |
| * | Based on the Paul Kagan 1998 PCS Atlas and Databook. |
| ** | Based on the 1990 census figures used by the FCC. |
| *** | On August 28, 2000, the Partnership entered into a Purchase and Sale Agreement with Leap Wireless International (“Leap Wireless”), pursuant to which the Partnership will sell the Visalia license to Leap Wireless in exchange for shares of Leap Wireless stock valued at $9,500,000. The closing of this sale cannot occur until the FCC approves the transfer of this license. Under the terms of Purchase and Sale Agreement, the Partnership will receive 147,502 shares of Leap Wireless stock, with the Leap Wireless stock valued at a price of $64.45 per share. The Partnership also has the option to request a $9,500,000 cash payment in lieu of receipt of Leap Wireless stock, if at the closing the average price of Leap Wireless shares over the five-day period immediately prior to closing is less than $61.23 per share. |
Regulation
Overview
In 1993, Congress adopted the Omnibus Budget Reconciliation Act of 1993 (the “Reconciliation Act”) which, among other things, mandated auctions for the award of certain FCC licenses, including PCS licenses. Pursuant to authority granted to the FCC by the Reconciliation Act, the FCC awarded PCS licenses through a process of competitive bidding auctions in which there were multiple applications for the same license (the “Auctions”).
PCS is a radio-based transmission technology which, like cellular technology, uses the same frequencies repeatedly in a multiple-transmitter cell design. PCS is a digital technology, capable of numerous advanced service features, including caller-ID, voice-prompting, voice-recognition, scrambled (secure) calling, message and image delivery, intelligent call transfer and follow-me calling, single number service (the same number can be assigned to multiple PCS telephones in different locations) and auto-trace of crank callers. The Partnership has been offering E-mail and internet access from its handsets since June 2000. The Partnership began offering wireless banking services in October 2000.
Frequency Blocks
The FCC has divided PCS into six frequency blocks, designated Blocks A through F, such that there are six overlapping licenses in each market in each geographic area of the country. Blocks A, B and C are 30 MHz blocks, and Blocks D, E and F are 10 MHz blocks. The FCC has created new C2 blocks of 15 MHz in certain markets including Puerto Rico and California.
Entrepreneur Classes and Economic Preferences
Block C and F licenses were reserved for Entrepreneurs meeting certain limiting criteria set forth in FCC Rules. Entrepreneurs were granted a set of economic preferences in the Auctions. Under FCC Rules, an Entrepreneur is defined as an entity that, together with its affiliates and persons or entities that hold attributable interests in such entity and their affiliates, has less than (i) $500 million of assets, and (ii) $125 million of annual gross revenue over the prior two years. In addition, FCC Rules define three classes of Entrepreneurs, with each class eligible for different economic preferences in the Blocks C and F Auctions. The Partnership’s Entrepreneur qualification is as a “Small Business,” which is an entity that had less than $40 million of aggregate annual gross revenue averaged over the last three years, at the date of grant of the license.
Small Businesses are entitled to make interest-only payments for the first six years and can amortize interest and principal over the remaining four years of the license term. The interest rate applicable to Small Businesses is the 10-year treasury note rate at the date of grant of the license. In addition, Small Businesses were entitled to a bidding credit of 25%. In March 1997, the FCC issued an order suspending indefinitely interest payments on all Block C licenses; however, interest continued to accrue. Ultimately, in accordance with the FCC procedures specified in the FCC’s March 24, 1998 Order on Reconsideration of the Second Report and Order (the “Reconsideration Order”), the Partnership commenced interest payments during July, 1998.
Build-Out Requirements
All PCS license holders are required to meet certain requirements imposed by the FCC relating to the provision of service in each license area. Block C license holders must provide coverage to one-third of the POPs in each license service area within five years of license grant and two-thirds of the POPs in each license service area within ten years of license grant. These periods were rescheduled by the FCC to begin on June 8, 1998. Failure to comply with the build-out requirements could subject the Partnership to license forfeiture or other penalties, and may have a material adverse effect on the financial condition of the Partnership. The Partnership has complied with its build out requirements for the Puerto Rico licenses, and has informed the FCC of its difficulties in building out coverage in the region covered by the California licenses. If necessary, the Partnership will request an extension to the build-out requirements.
Employees
The Partnership, including its wholly owned subsidiary NewComm, had approximately 220 employees at the end of 2000.
ITEM 2. PROPERTIES
The Partnership leases office space in Hato Rey and Guaynabo, Puerto Rico. In connection with the build-out by NewComm of the Partnership’s Puerto Rico Network, NewComm leases sites where its telephone switching equipment, relay stations and other equipment are located, as well as sites and kiosks in malls and shopping centers where it sells its services to the public.
ITEM 3. LEGAL PROCEEDINGS
In March 2001, the Partnership settled two separate consolidated civil actions brought in the Circuit Court of the State of Oregon for Multnomah County by certain limited partners regarding alleged representations made by certain officers, directors, employees and consultants in connection with the sale of limited partnership units. The Partnership did not pay any compensation to settle these actions and did not admit to any wrongdoing in these matters.
Further, on February 4, 1999, the Partnership and NewComm filed an application with the FCC for a pro forma assignment of the Puerto Rico Licenses to NewComm, and the FCC granted the application on February 18, 1999. On March 22, 1999, Centennial Communications Corp. (“Centennial”) filed a Petition for Reconsideration (the “Petition”) with the FCC seeking to rescind the assignment of the Licenses to NewComm or to stay the effectiveness of the assignment pending resolution of the issues raised in the Petition. Centennial alleges that there are facts warranting an investigation into whether TLD is exercising de facto, if not de jure, control over the Puerto Rico NewComm licenses in violation of the FCC’s broadband PCS designated entity rules. The Partnership believes that all of its actions were in conformity with FCC rules, and that the allegations are without merit. The Partnership will vigorously oppose the Petition. The Partnership believes if the agreement is amended to eliminate the Option, which consists of TLD’s right to acquire an additional 0.2% interest in NewComm, the Petition will become moot and the FCC will dismiss it. The Partnership intends to amend the TLD Agreement, if necessary, to obtain a dismissal of the Petition. Any amendment requires the approval of TLD.
From time to time the Partnership is involved in litigation, some of which is ongoing. The General Partner does not believe that any litigation involving the Partnership will have a material adverse effect on the Partnership’s business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
Part II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no trading market for the Units, and it is unlikely that a trading market will exist at any time in the future unless the Partnership is restructured. Any transfer of the Units is severely restricted by certain conditions outlined in the Partnership Agreement, and requires the consent of the General Partner which can be withheld in the General Partner’s sole reasonable discretion.
As of December 31, 2000 only the General Partner holds a general partnership interest and 1,630 Investors hold an aggregate of 2,903.1 Units of limited partnership interest. There are 3.3 units held as treasury units.
There have been no cash distributions to the Investors to date. The following summary of certain allocation provisions of the Partnership Agreement is entirely qualified by reference to the Partnership Agreement, which was filed as an Exhibit to the Partnership’s Form 10-K. As a general rule, the General Partner shall cause the Partnership to make distributions, if any, of cash flow received from operations of the Partnership which the General Partner, in its sole discretion, determines to distribute to Investors (“Cash Flow”). All distributions will be made 75% to the Investors and 25% to the General Partner. Distributions to the Investors shall be made in proportion to the number of Units held by each Investor on the last day of the calendar quarter to which such distribution relates.
The availability of Cash Flow for distribution to the Investors is dependent upon the Partnership earning more than its expenses. No assurance can be given that income in any year will be sufficient to generate Cash Flow for distribution to the Investors or that there will not be cash deficits. Further, because operating expenses are subject to increases, and increases in revenue from Partnership operations may be subject to market limitations, income from the Partnership in any year may not be sufficient to generate Cash Flow.
Net losses from operations of the Partnership will be allocated as follows: first, to the Investors to offset any profits previously allocated to the Investors, and second, 75% to the Investors in accordance with the number of Units held by each Investor and 25% to the General Partner. The gain from a financing, refinancing, sale or other disposition of the Partnership’s assets (or from similar capital transactions) (collectively, “Capital Transactions”) will be allocated 75% to the Investors and 25% to the General Partner. The loss from a Capital Transaction will be allocated in the same way that net losses from the Partnership’s operations are allocated. Further adjustments to capital accounts may be required and are authorized by the Partnership Agreement to comply with the provisions of any future Internal Revenue Service regulations.
The Partnership may realize net proceeds (that is, proceeds available after the payment of certain fees and expenses including payments to the General Partner or its affiliates) from a Capital Transaction. No assurance can be given, however, as to the availability of a Capital Transaction or the amount of net cash proceeds therefrom. Any amounts received by the Partnership which constitute amounts derived from a Capital Transaction, will be treated as being received from operations of the Partnership and will be distributed to Investors only if the General Partner determines to do so.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data of the Partnership from the period from January 1, 1996 to December 31, 1996, from January 1, 1997 to December 31, 1997, from January 1, 1998 to December 31, 1998, from January 1, 1999 to December 31, 1999, and from January 1, 2000 to December 31, 2000. This information should be read in conjunction with the Partnership’s consolidated financial statements and related notes thereto and management discussion contained herein.
Statements of Operations Data
| December
31, 1996 |
December
31, 1997 (1) |
December
31, 1998 |
December
31, 1999 |
December
31, 2000 |
|
| Revenues: | |||||
| Service revenues | $- | $- | $- | $4,950,769 | $79,906,400 |
| Handsets and accessories sales | - |
- |
- |
2,357,790 |
12,104,805 |
| - |
- |
- |
7,308,559 |
92,011,205 |
|
| Expenses: | |||||
| Operating expenses | 3,610,469 | 13,436,973 | 5,696,439 | 28,072,321 | 133,397,603 |
| Omaha withdrawal fee | 1,257,771 | - | - | - | - |
| Norfolk bid withdrawal penalty | 3,273,374 | - | - | - | - |
| Forfeiture imposed by FCC | 1,000,000 | - | - | - | - |
| Settlement credit on legal disputes | - | - | (2,090,876) | - | - |
| Norfolk bid withdrawal penalty credit | - | - | (2,848,374) | - | - |
| License cost forfeiture after disaggregation, prepayment and amnesty options offered by the FCC | - |
- |
10,989,972 |
- |
- |
| 9,141,614 |
13,436,973 |
11,747,161 |
28,072,321 |
133,397,603 |
|
| Loss from operations | (9,141,614) |
(13,436,973) |
(11,747,161) |
(20,763,762) |
(41,386,389) |
| Other income (expense): | |||||
| Interest income | 66,767 | 495,614 | 324,232 | 832,006 | 490,309 |
| Interest expense | - |
(2,948) |
(5,749) |
(2,263,002) |
(11,141,769) |
| 66,767 |
492,666 |
318,483 |
(1,430,996) |
(10,651,460) |
|
| Loss before minority interest | (9,074,847) |
(12,944,307) |
(11,428,678) |
(22,194,758) |
(52,037,858) |
| Loss attributable to minority interest | - |
- |
- |
- |
282,471 |
| Net loss | $(9,074,847) |
$(12,944,307) |
$(11,428,678) |
$(22,194,758) |
$(51,755,387) |
| Net loss attributable to General Partner | $(2,268,712) |
$(3,236,077) |
$(2,857,169) |
$(5,548,689) |
$(12,938,847) |
| Net loss attributable to Limited Partners | $(6,806,135) |
$(9,708,230) |
$(8,571,509) |
$(16,646,069) |
$(38,816,540) |
| Net loss per unit attributable to Limited Partners | $(2,610) |
$(3,496) |
$(3,033) |
$(5,888) |
$(13,371) |
(1) The 1997 operating expenses include payment of $6,511,250 to Romulus Telecommunications Corp. for its services in preparation of the Partnership’s FCC application to bid in the FCC C-Block auctions and bidding at the auctions.
Balance Sheets Data
| December
31, 1996 |
December
31, 1997 |
December
31, 1998 |
December
31, 1999 |
December
31, 2000 |
|
| ASSETS: | |||||
| Cash and cash equivalents | $2,492,851 | $9,761,729 | $4,246,412 | $6,546,305 | $9,338,798 |
| Accounts receivable, net | - | - | 1,633,024 | 3,244,067 | 20,049,769 |
| Insurance claim receivable | - | - | - | - | 1,256,285 |
| Inventories | - | - | - | 9,201,823 | 12,977,164 |
| Other assets | 45,583,928 | 213,958 | 143,883 | 1,406,684 | 2,481,650 |
| Restricted cash | 6,511,250 | - | - | - | - |
| PCS licenses, net | - | 270,245,139 | 64,757,512 | 67,543,320 | 64,838,452 |
| Property and equipment, net | -
|
-
|
-
|
89,200,611 |
97,002,140 |
| $54,588,029 |
$280,220,826 |
$70,780,831 |
$177,142,810 |
$207,944,258 |
|
| LIABILITIES AND PARTNERS’ | |||||
| CAPITAL (DEFICIT): | |||||
| Accounts payable and accrued liabilities | $287,242 | $6,469,357 | $2,317,681 | $107,245,472 | $45,743,223 |
| Notes payable – short-term | - | - | - | - | 121,000,000 |
| Notes payable – long-term | - | 231,415,989 | 37,550,348 | 59,114,678 | 72,456,233 |
| Minority interest | - | - | - | - | 9,717,529 |
| Unitholders’ capital (deficit) 2,719.6 Units in 1996, 2,825.9 Units in 1997, 2,826.1 Units in 1998 and 2,903.1 Units in 1999 and 2000, and 1 general Partnership interest) | 52,300,787 |
42,335,480 |
30,912,802 |
10,782,660 |
(40,972,727) |
| $54,588,029 |
$280,220,826 |
$70,780,831 |
$177,142,810 |
$207,944,258 |
|
| BOOK VALUE PER UNIT | $19,224 |
$14,976 |
$10,934 |
$3,713 |
$(14,113) |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Partnership was formed in January 1995 and is managed by its General Partner, SuperTel Communications Corp. The Partnership was organized to acquire, own, consult and operate personal communication services PCS licenses in the Block C band and to take advantage of the benefits that the FCC has set aside for Entrepreneurs. The Partnership owns the Puerto Rico Licenses, which consist of two 15 MHz PCS licenses covering Puerto Rico, and the California Licenses, which consist of five 15 MHz PCS licenses covering the California cities of Eureka, Redding, Modesto, Merced and Visalia-Porterville.
On August 28, 2000, the Partnership entered into a Purchase and Sale Agreement with Leap Wireless International (“Leap Wireless”), pursuant to which the Partnership will sell the Visalia-Porterville license to Leap Wireless in exchange for shares of Leap Wireless stock valued at $9,500,000. The closing of this sale cannot occur until the FCC approves the transfer of this license. Under the terms of the Purchase and Sale Agreement, the Partnership will receive 147,502 shares of Leap Wireless stock, with the Leap Wireless stock valued at a price of $64.45 per share. The Partnership also has the option to request a $9,500,000 cash payment in lieu of receipt of Leap Wireless stock, if at the closing the average price of Leap Wireless shares over the five-day period immediately prior to closing is less than $61.23 per share.
The Partnership commenced commercial operations of its PCS network in Puerto Rico on September 24, 1999 when it began offering wireless services in Puerto Rico to the public. Prior to that date, its income had consisted of interest earnings only. Since the Partnership commenced commercial operations in 1999, the comparisons presented below may not be indicative of future operations.
The Partnership established its Puerto Rico network by forming a wholly owned subsidiary, NewComm on January 29, 1999. On February 4, 1999, the Partnership and NewComm entered into an agreement with TLD, whereby the Partnership contributed its two Puerto Rico Licenses to NewComm and TLD provided NewComm a $19,960,000 loan to develop the Puerto Rico Licenses. TLD’s loan is pursuant to a secured convertible promissory note (the “Note”) which is convertible into 49.9% of NewComm’s equity. The Note however, cannot be converted until the FCC authorizes TLD to hold more than a 25% equity interest in NewComm. TLD also received an option (the “Option”) to buy an additional 0.2%, which would bring its ownership to 50.1%, subject to a third-party valuation and FCC approval. The Option cannot be exercised prior to January 22, 2002, unless the ownership restrictions on the Puerto Rico licenses are eliminated by the FCC. NewComm, however, has the option to buyout TLD in the last year before the restrictions on the Puerto Rico licenses lapse. The Partnership intends to amend the TLD Agreement to eliminate the Option. Any amendment requires the approval of TLD. See “Legal Proceedings.”
With respect to its California Licenses, the Partnership anticipates developing these licenses by means of strategic alliances and/or partnerships with other operators. Although no assurances can be made, the Partnership anticipates that it will negotiate acceptable agreements regarding these licenses so that it will be able to offer wireless services in the regions covered by these licenses.
Results of Operations - 2000 Compared to 1999
The Partnership’s revenues for the year ended December 31, 2000, which amounted to $ 92,011,205, included $79,906,400 in service revenues and $12,104,805 in handset and accessories sales generated from NewComm’s wireless operations. The increase in revenues is primarily due to the fact that the Partnership had only three months of operations in 1999 as compared to 12 months of operations in 2000.
Expenses
Expenses for the year ended December 31, 2000 totaled $133,397,603, as compared to $28,072,321 for the same period in 1999. During 2000, the Partnership’s expenses included $32,309,660 ($4,430,637 for 1999) in costs of handset and accessories, $10,747,715 ($5,128,280 for 1999) in salaries and benefits, $5,928,431 ($2,144,349 for 1999) for legal and professional services, $20,458,500 ($2,957,683 for 1999) in depreciation and amortization, $17,716,025 ($625,000 for 1999) in provision for doubtful accounts, $39,044,977 ($9,663,546 for 1999) in interconnection, sales, advertising, rent, taxes and other expenses, and $7,062,610 ($2,980,718 for 1999) for services rendered by related parties. The increase in expenses during 2000 is primarily associated with a full year of NewComm’s operations, as compared with only three months during 1999.
Net loss of $51,755,387 for 2000, reflects the costs of entering the Puerto Rico market and meeting the competition of existing cellular and PCS operators in order to develop a subscriber base. To meet competition, a significant subsidy is granted in the sale of handsets and accessories, on which a negative margin of $20,204,855 was generated during 2000. In addition, a large portion of sales, advertising, and salaries and benefits expenses amounting to $25,842,980 have been required to penetrate the market and serve the established subscriber base. Depreciation and amortization expenses of $20,458,500 in 2000, include $9,704,436 related to the one-year amortization of handsets rented. New rentals of handsets were discontinued after May, 2000.
Interest expense for the year ended December 31, 2000, totaled $11,141,769, as compared to $2,263,002 for the same period in 1999. The increase in interest expense during 2000 is primarily attributable to the FCC Note, the TLD notes, the Note Payable to Lucent, and the Bridge Loan Facility (refer to Notes 10, 11 and 12 to the accompanying consolidated financial statements). In 2000, the Partnership had interest income of $490,309, as compared to $832,006 in 1999. The decrease in interest income in 2000 is due to the decrease in funds invested in connection with the requirements of cash flows for operations and acquisition of property and equipment.
Results of Operations - 1999 Compared to 1998
The Partnership’s revenues for the year ended December 31, 1999, which amounted to $7,308,559 included $4,950,769 in service revenues and $ 2,357,790 in handset and accessories sales generated from NewComm's wireless operations, which started in Puerto Rico in September 1999.
Expenses
Expenses for the year ended December 31, 1999 totaled $28,072,321 compared to $11,747,161 for the same period in 1998. Expenses incurred in 1998 included legal fees incurred in Oregon litigation and proceedings before the FCC. The increase in expenses during 1999 is attributable to the costs associated with NewComm’s operations that started in September 1999. During 1999, the Partnership’s expenses included $4,430,637 in costs of handset and accessories, $5,128,280 for salaries and benefits, $2,957,683 in depreciation and amortization, $625,000 in provision for doubtful accounts, $9,805,654 in advertising, sales, interconnection, management fee, rent and other expenses, $2,144,349 for legal and professional services and $2,980,718 for consulting and legal services associated with the start-up of NewComm charged by related parties such as TLD and TISA.
In 1998, the Partnership had interest earnings of $324,232 compared to $832,006 in 1999. The increase in interest income during 1999 is attributable to NewComm’s investment of the funds loaned by TLD. Interest expense increased in 1999 to $2,263,002, as compared to $5,749 in 1998, mostly due to the TLD and FCC notes.
Liquidity and Capital Resources
As of December 31, 2000, the Partnership had cash and cash equivalents amounting to $9,338,798, which are mostly related to proceeds from the bridge loan facility and the capital contributed by Syndicated Communication Venture Partners IV, LP (“Syncom”) and TLD, as explained below.
As part of the agreement with TLD, NewComm entered into a contract with Lucent Technologies, Inc. (“Lucent”) that requires Lucent to build a network that uses Code Division Multiple Access (“CDMA”) protocol. It is expected that the total cost will approximate $125 million. During 2000, NewComm’s management and Lucent agreed on formally extending the payment of up to $61.0 million of the total amount of network construction current payables under a formal financing agreement. The financing agreement extends payments for an eight-month period (through June 2001), at an annual rate of 1.5% over 90-day LIBOR. As of December 31, 2000, $61,000,000 is outstanding under this financing agreement (refer to Note 10 to the accompanying consolidated financial statements).
The increase in inventory as of December 31, 2000 is related to the build out of the PCS network, which requires NewComm to keep an adequate level of handset inventory to supply the demand of its increasing customer base. Inventory held as of the end of the year amounted to $12,977,164.
In addition, the Partnership owes the United States federal government approximately $51,339,555 (undiscounted) plus accrued interest at 6.5% of $1,566,871 in connection with the acquisition of its PCS licenses. As of December 31, 2000, the notes payable to FCC are presented net of a discount of approximately $11,469,668 (refer to Note 12 to the accompanying consolidated financial statements).
The Partnership has a secured promissory note payable to TLD, which bears interest at the floating rate of 90 days LIBOR plus 1.5% and is due in March, 2004. In addition, in January 2000 the joint venture agreement with TLD was amended to provide NewComm a revolving line of credit of approximately $30 million for working capital from TLD. This loan was paid-off in December 2000 by means of a $60 million bridge loan to NewComm from ABN-AMRO and BBVA (refer to Notes 1 and 12 to the accompanying consolidated financial statements).
The Partnership expects that the total cost to implement NewComm’s business plan to be approximately $200 million. This consists of approximately $125 million in costs associated with building out the Puerto Rico Network, and approximately $75 million to fund NewComm’s operations until it becomes profitable. NewComm obtained a short term financing (“Bridge Loan”) of $60 million at a rate of 1.5% over 90-day LIBOR, which came due in March 2001. NewComm obtained an extension for this loan until May 29, 2001 at a rate of 2.50% over 90-day LIBOR. In addition, the Partnership believes such banks will be willing to provide long term financing of $150 million provided that the Partnership and TLD contribute additional capital to NewComm. The Partnership, by means of Syncom and TLD, contributed $20 million of additional capital during the third and fourth quarters of 2000. Syncom invested $10 million in NewComm in exchange for 3.28% of NewComm. The Partnership believes that the additional capital contribution by Syncom and TLD, along with the proposed long term financing would fully fund NewComm’s operations.
As a result of the restructuring of its FCC debt in June 1998, the Partnership has no outstanding debt on its California Licenses, which consist of 15MHz of bandwidth covering an approximate population of 1.6 million people in Eureka, Redding, Merced, Modesto and Visalia-Porterville, all within the state of California. Holders of major C Block licenses surrounding the California Licenses are currently under bankruptcy court proceedings, which adversely affects the Partnership’s ability to enter into joint venture agreements to develop these licenses. However, a re-auction of D, E, F and disaggregated C Block licenses concluded on April 16, 1999. Another re-auction was concluded in January, 2001. It is possible that the purchasers of the re-auctioned licenses may be willing to jointly develop the California Licenses with the Partnership. The Partnership is actively pursuing alliances and possible funding mechanisms to develop its California Licenses.
The Partnership anticipates that earnings and cash distributions derived from its Puerto Rico Network once it is fully operational, interim and permanent financing and, if necessary, additional capital calls from its Investors or accessing the public capital markets, should provide it with the liquidity to meet its obligations. The Partnership also expects that once it is able to develop its California Licenses, it will have additional sources of revenues and profits.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership’s exposure to market risk through derivative financial instruments and other financial instruments is not material because the Partnership does not use derivative financial instruments and does not have foreign currency exchange risks. The Partnership invests cash balances in excess of operating requirements in short-term money market funds. As of December 31, 2000, the Partnership had cash equivalents and short-term investments of approximately $9,338,798 consisting of cash and highly liquid, short-term investments in money market funds.
The Partnership’s cash and cash equivalents will increase or decrease by an immaterial amount if market interest rates increase or decrease, and therefore, its exposure to interest rate changes has been immaterial. The Partnership’s loans payable to the FCC have a fixed interest rate of 6.5% and therefore are not exposed to interest rate risks. The TLD Note relating to indebtedness of NewComm bears interest at the floating rate of the 90-day LIBOR plus 1.5% and is due in March 2004. The amounts owed to Lucent in connection with its build out of the Puerto Rico Network are due within 2001 and bear interest at 1.5% over 90-day LIBOR. The Partnership’s short-term financing bears interest at 2.50% over 90-day LIBOR. The Partnership anticipates that the interest rate applicable to the permanent financing will be similar or lower than the ones related to the TLD Note and the short-term financing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
SuperTel Communications Corp.
All financial schedules have been omitted because they are not applicable or because the information required is included in the financial statements or notes thereto.
Report of Independent Public Accountants
To ClearComm, L.P.:
We have audited the accompanying consolidated statements of assets, liabilities and partners’ capital (deficit) of ClearComm, L.P. and subsidiaries (a Delaware limited partnership) as of December 31, 2000, and the related consolidated statements of revenues and expenses, changes in partners’ capital (deficit) accounts and cash flows for the year then ended. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides 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 ClearComm, L.P. and subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Partnership has suffered recurring operating losses, has a working capital and partners’ capital deficit and has not yet obtained the permanent financing required to pay for the cost of its network and its working capital needs. These matters raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
San
Juan, Puerto Rico,
May 4, 2001.
Revenue
Stamp Number 1701883
has been affixed to the original
copy of this report.
Report of Independent Public Accountants
To the Partners of ClearComm, L.P.
In our opinion, the consolidated statements of assets, liabilities and partners' capital (deficit) and the related consolidated statements of revenues and expenses, of changes in partners' capital (deficit) accounts and of cash flows present fairly, in all material respects, the financial position of ClearComm, L.P. and its subsidiaries (the Partnership) at December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Partnership has not yet obtained the permanent financing required for paying the cost of its network which raises substantial doubt about its ability to continue as a going concern. The Partnership has received proposals from banks to provide short term and long term financing. Such financing is subject to certain conditions, among others, additional contributions by its partners in the amount of $50 million. Management’s plans in regard to this matter are further described in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
March 29, 2000
Stamp 1705929 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
ClearComm, L.P.
| 2000
|
1999
|
|
| Assets | ||
| Current Assets: | ||
| Cash and cash equivalents | $9,338,798 | $6,546,305 |
| Accounts receivable, net of allowance for doubtful accounts of $18,341,025 and $625,000 | 20,049,769 | 3,244,067 |
| Insurance claim receivable | 1,256,285 | - |
| Subscription receivable from limited partners | - | 981,000 |
| Inventories | 12,977,164 | 9,201,823 |
| Prepaid expenses | 751,603
|
425,684
|
| Total current assets | 44,373,619 | 20,398,879 |
| Deferred Financing Costs | 1,730,047 | - |
| PCS Licenses, net | 64,838,452 | 67,543,320 |
| Property and Equipment, net | 97,002,140
|
89,200,611
|
| $207,944,258
|
$177,142,810
|
|
| Liabilities and Partners’ Capital (Deficit) | ||
| Current Liabilities: | ||
| Accounts payable and accrued liabilities | $40,314,401 | $102,735,688 |
| Note payable to Lucent Technologies | 61,000,000 | - |
| Bridge Loan Facility | 60,000,000 | - |
| Accounts payable to related parties | 2,041,767 | 2,815,302 |
| Accrued interest | 1,566,872 | 1,251,329 |
| Deferred income | 1,820,183
|
443,153
|
| Total current liabilities | 166,743,223
|
107,245,472
|
| Long-Term Notes Payable | 72,456,233
|
59,114,678
|
| Minority Interest | 9,717,529
|
-
|
| Commitments and Contingencies (Notes 2, 15, 17, and 18) | ||
| Partners’ Capital (Deficit): | ||
| Limited partners’ capital (2,903.1 units issued and outstanding in 2000 and 1999) | 73,039,616 | 73,039,616 |
| General partners’ capital | 100,000 | 100,000 |
| Undistributed losses- | ||
| Accumulated during development stage | (48,704,525) | (48,704,525) |
| Operations | (65,407,818)
|
(13,652,431)
|
| Total partners’ capital (deficit) | (40,972,727)
|
10,782,660
|
| $207,944,258
|
$177,142,810
|
The accompanying notes are an integral part of these consolidated statements.
ClearComm, L.P.
Consolidated Statements of Revenues and Expenses
December 31, 2000 1999 and 1998