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)

 

ClearComm, L.P.

(Exact Name of Registrant as Specified in its Charter)

 

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  ý    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
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Part II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Consideration and Results of Operations
Item 7A.	Quantitative And Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Part III
Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions
Part IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
EXHIBITS INDEX

 

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”).

 

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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 four  15 MHz licenses in California (the “California Licenses,” and together with the Puerto Rico Licenses, the “Licenses”).   Since January 2002, the Partnership has been offering wireless DSL service throughout certain areas in California under the California Licenses and in compliance with the FCC’s build-out requirements.

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 Puerto Rico Network

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 95% 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 it currently has approximately 15% of the Puerto Rico wireless 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.  Telefónica Móviles (Ticker:  TEM), the wireless communications affiliate of Telefónica, currently has approximately 25 million subscribers world-wide.  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.  NewComm and TLD entered into a management agreement whereby TLD provides day-to-day management services for NewComm, subject to the supervision of NewComm’s Board.  Pursuant to a certain Stock Purchase Agreement dated as of March 12, 2002, by and between the Partnership and TLD, the Partnership has agreed to sell 0.2% control interest at market value to TLD.  The transfer of this control interest and validity of the agreement is subject to FCC approval.  This Stock Purchase Agreement, in addition to FCC approval, requires TLD to secure a permanent  Project Finance Facility of approximately $175 million no later than July 15, 2002.  Together with the Stock Purchase Agreement and as part of the transaction a Shareholders’ Agreement and a Sale Agreement were executed between the parties.  The Shareholders’ Agreement provides for a

 

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great number of general and specific protections and rights for the Partnership as a minority shareholder in NewComm.  The Sale Agreement provides for a convenient exit for the Partnership from NewComm.  Under the Joint Venture Agreement the Partnership’s principal means of exiting from NewComm was by exercising Registration Rights against TLD.  Due to Telefónica’s re-organization and new market conditions, the possibility of publicly registering  an exclusive wireless service company in the Puerto Rico market is very unlikely.  However, under the Sale Agreement, the Partnership can force the sale of NewComm at any time after May 12, 2003.

The new Sale Agreement provides that after 14 months from March 12, 2002 (i.e. May 12, 2003) either party (ClearComm or TLD) may trigger a shareholder obligation to sell NewComm.  Within 30 days of a notice of sale, TLD (or ClearComm as the case may be) would have the right to purchase ClearComm’s (or TLD’s) interest.  The purchase price to be paid at that time would be based on a valuation performed by an internationally recognized investment banking firm selected by both parties.  If TLD does not exercise its right to buy out ClearComm’s interest, TLD is bound together with ClearComm to proceed with the sales process to attempt a sale of NewComm.  TLD and ClearComm are bound to accept the highest price proposed by an interested buyer, which price must be payable in cash or freely tradable securities, or a combination thereof, and which must be for a price not less than the valuation prepared by the investment banker.  At the closing of the sale the Management Agreement and the Technology Transfer Agreement held by TLD will terminate without compensation, and no premium for controlling interest or discount for holding a minority interest in NewComm will apply.

The Sale Agreement shall continue in full force and effect even if the Stock Purchase Agreement with TLD, for whatever reason, does not close.

The Partnership’s Puerto Rico Network operates under the image and brand name “MoviStar.”  MoviStar is the PCS brand name of the Telefónica Group in Spain and certain other countries in Latin America.  The Puerto Rico Network is a state-of-the-art CDMA (“Code Division Multiple Access”) network.  Pursuant to a roaming agreement with 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 Puerto Rico Market

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

 

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consumption in Puerto Rico, combined with continued economic growth will support continued  demand for the high quality telephone services which the Partnership is offering.

Competition in Puerto Rico

The continued success of the Partnership’s PCS business in Puerto Rico will depend upon its ability to compete with the two cellular operators and three operating PCS providers, potential competition from two other PCS licensees and potential future wireless communications providers in the Puerto Rico market.    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 is expected to 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 2001, Puerto Rico had a wireless market penetration of approximately 33% while the United States mainland ended the same year with an approximate market penetration of 45%.  Market research reflects that Puerto Rico should attain a market penetration of 47% by the end of 2004.

Markets

The following table sets forth as of December 31, 2001, 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
Redding, CA		284,000		253,260
Merced, CA		227,000		192,710
Eureka, CA		157,000		142,580
Total:		4,927,000,		4,503,380

*              Based on the Paul Kagan 1998 PCS Atlas and Databook.

**           Based on the 1990 census figures used by the FCC.

 

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On August 28, 2001, the Partnership entered into a Purchase and Sale Agreement with Leap Wireless International (“Leap Wireless”), pursuant to which the Partnership sold the Visalia license to Leap Wireless in exchange for $9,500,000 cash payment. This sale was approved by the FCC and it closed on June 8, 2001.

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.  The Partnership also pioneered in the Puerto Rico market short text messaging services from its handsets in October 2001.  An average of a million messages a month are being sent among subscribers within the network.

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

 

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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 the California Licenses.

Employees

The Partnership, including its wholly owned subsidiary NewComm, had approximately 300 employees at the end of 2001.

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

Sprint/Centennial

On September 21, 2001, Newcomm Wireless Services, Inc. d/b/a MoviStar (“MoviStar”) filed a Complaint and Motion and Memorandum of Law Requesting Temporary Restraining Order and Preliminary Injunction in the Federal District Court for the District of Puerto Rico, which alleged serious and unlawful interruptions, interferences and irreparable damages to MoviStar’s operations rising out of Sprint’s refusal to broadcast a SID for the Puerto Rico market

 

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 that will not interfere with the services presently being offered by MoviStar to its subscribers.  During October 15^th to 18^th, 2001, the District Court held an evidentiary hearing related to the injunctive relief sought.  In its Opinion and Order of October 29, 2001, the District Court ordered Sprint to “immediately cease and desist from using SID 5142 and/or any other SID which similarly interferes with plaintiff’s operations in Puerto Rico.”

On October 30, 2001, Centennial filed a Motion of Intervention of Right in which it requested leave from the District Court to join the Sprint litigation.  Despite MoviStar’s opposition, the District Court granted Centennial’s motion on November 5, 2001.  Both Sprint and Centennial are currently appealing, in the First Circuit Court of Appeals, the injunctive relief granted by the District Court of Puerto Rico.  On April 6, 2002, the First Circuit Court of Appeals issued an order reversing the injunction release.  On or about April 20, 2002, MoviStar plans to file a Petition for a Re-Hearing.

PRAICO

This is a civil action for breach of contract and collection of moneys before the Superior Court of San Juan on September 17, 2001, wherein the NewComm Wireless Services, Inc. (“NewComm”) is suing the Puerto Rican American Insurance Company (“PRAICO”) demanding the payment of claims made by NewComm under insurance policies issued by PRAICO.  NewComm attempts to recover four million dollars ($4,000,000) against PRAICO to recover from PRAICO under an insurance policy issued by that company to cover theft and damages of handsets sold to the public.  The four million dollar claim covers approximately four thousand (4,000) phones reported as either lost or stolen.  The complaint has been filed but no answer has been filed to date.  The parties are currently in negotiations for a settlement of the subject claim.  PRAICO has offered the sum of two million dollars ($2,000,000) as settlement.  NewComm has made a counteroffer of three point eight million dollars ($3,800,000).

Puerto Rico Telecommunications Regulatory Board

On January 31, 2002, NewComm filed a Petition for Arbitration before the Puerto Rico Telecommunications Regulatory Board (“PRTRB”) whereby NewComm petitions PRTRB for arbitration of rates, terms and conditions for interconnection and related arrangements in conjunction with a revised interconnection agreement between NewComm and the Puerto Rico Telephone Company (“PRTC”).

Jaime L. Santiago

On February 22, 2002, MoviStar answered a complaint filed by Jaime Luis Santiago Cajigas alleging damages based on Law 44 of December 20, 1991, 1 L.P.R.A. § 501 et. seq., which is Puerto Rico’s Law Against Discrimination Based on Disability. The plaintiff is also alleging damages under the Americans With Disabilities Act (ADA). The damages alleged against all defendants amounts to $1,000,000.00. The plaintiff is also claiming equitable

 

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remedies such as reinstatement to his former employment, with reasonable accommodation, costs and attorneys fees. The next step for the parties is to initiate discovery in this case.  Once discovery is completed, MoviStar will be in a much better position to assess the case and provide more detailed information as to the possibilities of prevailing or opting for settlement.

Complaint

A complaint was filed against Movistar on December 7, 2001. It alleges discrimination based on national origin against the Plaintiff, who was allegedly terminated from his employment for being from the Dominican Republic. Additionally, it claims unjust termination. The Plaintiff requests $100,000 to compensate for his emotional damages, $6,000 for his alleged unjust dismissal and $10,000 as special damages for alleged unpaid compensation.

Movistar filed an answer to the complaint on December 31, 2001. Therein MoviStar denied the allegations set forth in the complaint and plead as an affirmative defense, inter alia, that the Plaintiff was terminated, not for his national origin, but after it was discovered that he had lied in his employment application process when he furnished a resume to the Defendants where he claimed that he had earned a Bachelor in Science of Civil Engineering.

On January 23, 2002, MoviStar filed a Motion to Dismiss for the insufficiency of the process and the service of the process. On February 6, 2002, the court ordered the Plaintiff to show cause as to why our Motion to Dismiss should not be granted.  The Plaintiff complied with the Court’s order and on February 19, 2002, filed a Motion in Compliance with the Order to Show Cause. The Court’s decision is still pending. In the meantime, the Court has scheduled a Status Conference to be held on April 26, 2002.

From time to time the Partnership is involved in litigation arising from the ordinary course of business, 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.

 

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As of December 31, 2001 only the General Partner holds a general partnership interest and 1,604 Investors hold an aggregate of 2,907.7 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.

 

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ITEM 6.  SELECTED FINANCIAL DATA

The following table summarizes selected consolidated financial data of the Partnership from the period from January 1, 1997 to December 31, 1997, from January 1, 1998 to December 31, 1998, from January 1, 1999 to December 31, 1999, from January 1, 2000 to December 31, 2000, and from January 1, 2001 to December 31, 2001.  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, 1997 (1)			December 31, 1998			December 31, 1999			December 31, 2000			December 31, 2001
Revenues:
Service revenues		$	—		$	—		$	4,950,769		$	79,906,400		$	112,025,407
Handsets and accessories sales								2,357,790			12,104,805			11,710,520