UNITED STATES
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)
|
ý |
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
|
|
|
|
For the calendar year ended December 31, 2004 |
|
|
|
|
|
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 |
|
|
|
|
|
City View Plaza-Suite 700 |
|
|
|
Guaynabo, Puerto Rico |
|
00968 |
|
(Address of Principal Executive Offices) |
|
(Zip Code) |
Registrant’s Telephone Number, Including Area Code: (787) 620-0140
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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
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.
ClearComm, L.P.
TABLE OF CONTENTS
2
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 divestiture 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, 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.
General
ClearComm, L.P., a Delaware limited partnership (the “Partnership” or “ClearComm”), 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 four 15 MHz licenses in California (the “California Licenses,” and together with the Puerto Rico Licenses, the “Licenses”). The California Licenses have been sold and the transaction was approved by the FCC.
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 Agreement also provides for a reasonable time to wind-up the affairs of the Partnership in case of termination. The Partnership’s General Partner, SuperTel Communications Corporation, is considering alternatives to dissolution, including an extension of the Partnership’s termination date that would require the consent of the Partnership’s partners.
NewComm
In August 2004, the Partnership retained the services of a consulting firm (other than its external auditors) to audit the operations and performance of NewComm under the management of Telefónica Moviles, S.A. (“TEM”). The results
3
of the audit were reported to the Board of Directors of NewComm on September 30, 2004 with the conclusion that TEM had not performed adequately. Under the Partnership’s direction, the Board of Directors of NewComm terminated TEM as Manager under the Management Agreement on October 28, 2004. Arbitration proceedings have begun in accordance to the Joint Venture Agreement. See discussion below at The Puerto Rico Network and Legal Proceeding sections.
The Puerto Rico Network
The Partnership and NewComm 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 and expanding. The Partnership has established points of sale in all major shopping districts and has over 200 points of sale throughout Puerto Rico. The Partnership believes that it currently has approximately 8% 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 32 million subscribers worldwide. Pursuant to the terms of the TLD Agreement, the Partnership transferred the Puerto Rico Licenses (including its related debt) 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 was assigned to TEM on September 23, 2003. The Note is convertible into 49.9% of NewComm’s equity. The Note cannot be converted without FCC authorization. NewComm and TEM entered into a management agreement whereby TEM provided 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 had agreed to sell 0.2% control interest at market value to TEM. The transfer of this control interest was approved by the FCC during 2004. As part of the requirements of the Stock Purchase Agreement, TEM (and Telefónica Internacional, S.A., its parent company) had agreed to issue their corporate guarantee as collateral for long-term financing of NewComm of approximately $110 million. 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 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 TEM. Due to Telefónica’s re-organization and new market conditions, the possibility of publicly registering an exclusive wireless service company limited to the Puerto Rico market is very unlikely. However, under the Sale Agreement, the Partnership can force the sale of NewComm to TEM and/or third parties.
The Sale Agreement provides that from and after May 12, 2003, either party (the Partnership or TLD) may trigger a shareholder obligation to sell NewComm. Within 30 days of a notice of sale, TEM (or the Partnership as the case may be) would have the right to purchase the Partnership’s (or TEM’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 TEM does not exercise its right to buy out the Partnership’s interest, TEM is bound, together with the Partnership, to proceed with the sales process to attempt a sale of NewComm. TEM and the Partnership 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 originally held by TLD (and assigned to TEM) will terminate without compensation, and no premium for controlling interest or discount for holding a minority interest in NewComm will apply.
The Sale Agreement will continue in full force and effect even if the Stock Purchase Agreement with TEM, for whatever reason, does not close. The Stock Purchase Agreement and the Sale Agreement are currently subject to arbitration proceedings that were filed by TEM upon TEM’s termination as manager of NewComm. See Legal Proceedings section below.
4
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 for over 100 years 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, Amgen, Pharmacia, and Pfizer Pharmaceutical. Along with its U.S.-linked stability, Puerto Rico offers the advantage of emerging market type growth and 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 demand for high quality telephone services, which NewComm 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 five other wireless operators (including Verizon, Sprint PCS, SunCom, Centennial and Cingular) and potential future wireless communications providers in the Puerto Rico market. All wireless operators compete in the optimization of their networks to provide a better service for their customers. As wireless use increases, wireless operators compete more directly with traditional landline telephone service providers and other technologies including mobile satellite systems and cable operators offering voice communications. 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 2004, Puerto Rico had a wireless market penetration of approximately 47% while the United States mainland ended the same year with an approximate market penetration of 57%.
5
Markets
The following table sets forth as of December 31, 2004, with respect to each Market in which the Partnership owns a PCS license, the estimated persons of population (“POPs”).
|
Market Name |
|
2004 POPs* |
|
|
San Juan, PR |
|
2,364,414 |
|
|
Mayaguez-Aguadilla, PR |
|
1,444,196 |
|
* Based on US Census Bureau 2000 figures.
Internet Surfing Stores of Puerto Rico, Inc
On April 16, 2002, the Partnership entered into a Shareholders’ Agreement to form a joint venture with eMilios International, L.L.C., a Florida limited liability company, to promote and establish in Puerto Rico the eMilios concept (described below). The joint venture was formed under a Puerto Rico corporation named Internet Surfing Stores of Puerto Rico, Inc. (“ISS”). The Partnership owns 49% and eMilios International owns 51% of ISS.
The eMilios concept involves internet communication galleries that are geared towards educating people in the use of computers and the internet, and acts as a communication and recreational center as well. The broadband connectivity that is offered at eMilios allows the stores to efficiently offer internet communications and also access to a great variety of interactive content, such as cyber games, as well as software and tools for free lancers and small business entities. The service is provided and collected with a proprietary smart card and software application. The Partnership is responsible for the management and day to day operations of ISS. ISS opened its first store with 48 computer stations on October 23, 2002. A second store with 40 computer stations was inaugurated on January 11, 2003 to serve the western part of Puerto Rico. The Partnership has decided to concentrate its operations on the San Juan area and decided to close the store located in Mayaguez effective December 31, 2004. As a result, the Partnership has written down its investment in the subsidiary by $165,306 to reflect the change. The investment has an exit mechanism whereby at any time after 2003, the Partnership can force the acquisitions of its shares in ISS or the sale of the whole company.
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 of 2000. The Partnership began offering wireless banking services in October of 2000. The Partnership also pioneered in the Puerto Rico market short text messaging services from its handsets in October of 2001. An average of 600,000 text messages per month is being sent by subscribers from their handsets.
6
Frequency Blocks
The FCC 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.
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 holds 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 at the date of grant of the license had less than $40 million of aggregate annual gross revenue averaged over the last three years.
Small Businesses were 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. The Partnership originally owed $51.3 million exclusively in connection with the Puerto Rico License. As of December 31, 2004 the Partnership owes the FCC the principal amount of $33.6 million.
During the year ended December 31, 2004, the Partnership paid the amount of $11,009,302 including interest and principal. The payment due in October 2004 was not made and was accumulated with its related interest and penalty charge of approximately $122,000. The subsequent payment due in January 2005 was not made.
Build-Out Requirements
The Partnership has complied with its build out requirements for the Puerto Rico Licenses.
Employees
The Partnership, including its majority owned subsidiary NewComm, had approximately 378 employees at the end of 2004. On November of 2004, approximately 35 employees were terminated as part of an organizational restructuring plan.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to these reports, and other information with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1800-SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We also make available, free of charge, through our Internet website (www.clearcommlp.com), our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if available, amendments to those reports filed or furnished pursuant to the Securities
7
Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The Partnership leases office space in Hato Rey and Guaynabo, Puerto Rico. In connection with 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.
In August 2004, the Partnership retained the services of a consulting firm (other than its external auditors) to audit the operations and performance of NewComm under the management of TEM. The results of the audit were reported to the Board of Directors of NewComm on September 30, 2004, with the conclusion that TEM had not performed adequately. Under the Partnership’s direction, the Board of Directors of NewComm terminated TEM as the Manager of NewComm under the Management Agreement on October 28, 2004.
TEM filed for arbitration proceedings in accordance with the Joint Venture Agreement. TEM alleges unlawful and wrongful termination of the Technology and Management Agreements. The Partnership, on behalf of NewComm, intends to proactively demand and seek compensation for damages caused by what the Partnership believes was TEM’s nonperformance and breach of the Technology and Management Agreements. Javier O. Lamoso has assumed responsibility for the day-to-day management of NewComm since the termination of the Technology and Management Agreements.
8
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. Any transfer of the Units is severely restricted by certain conditions outlined in the Partnership Agreement, and requires the consent of the Partnership’s General Partner, SuperTel Communications Corp., which can be withheld in the General Partner’s sole reasonable discretion.
During the months of May and June of 2004, the Partnership conducted a voluntary tender offer program to all partners holding less than 2 Units. The program was available to over 1,100 partners. The price per Unit offered was $8,500.00. A total of 130 Unit-holders tendered their Units, amounting to approximately 140 Units re-purchased and representing approximately a 5% reduction of outstanding partnership Units.
As of December 31, 2004, the General Partner holds one general partnership interest, and approximately 1,445 investors hold an aggregate of 2,765.20 Units of limited partnership interest. There are 3.3 Units held as treasury.
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 previously attached as an Exhibit to the Partnership’s Form 10-K, filed March 31, 1997. 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 given 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.
The following table summarizes selected consolidated financial data of the Partnership from the period from January 1, 2002 to December 31, 2002, from January 1, 2003 to December 31, 2003 and from January 1, 2004 to December 31, 2004. This information should be read in conjunction with the Partnership’s audited consolidated financial statements and related notes thereto and management discussion contained herein.
9
Statements of Operations Data
|
|
|
December 31, |
|
December 31, |
|
December 31, |
|
Percent Increase/Decrease (-) |
|
|||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
2004 vs 2003 |
|
2003 vs 2002 |
|
|||
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Service revenues |
|
$ |
100,336,047 |
|
$ |
101,557,423 |
|
$ |
99,779,656 |
|
-1 |
% |
2 |
% |
|
Handsets and accessories sales |
|
4,665,889 |
|
7,336,689 |
|
8,177,441 |
|
-36 |
% |
-10 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Total Revenues |
|
105,001,936 |
|
108,894,112 |
|
107,957,097 |
|
-4 |
% |
1 |
% |
|||
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||
|
Operating expenses |
|
107,644,333 |
|
100,086,717 |
|
103,734,297 |
|
8 |
% |
-4 |
% |
|||