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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------------
Form 10/A
Amendment No. 4
GENERAL FORM FOR REGISTRATION OF SECURITIES
Under Section 12(b) or 12(g) of
THE SECURITIES EXCHANGE ACT OF 1934
-------------------------
ClearComm, L.P.
(formerly PCS 2000, L.P.)
(Exact Name of Registrant as Specified in its charter)
Delaware 66-0514434)
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.
620 Broadway 95476
Sonoma, California (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number: (707) 938-2428
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be registered each class is to be registered
Securities to be registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
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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"). On
April 17, 1997, the Partnership was renamed ClearComm, L.P. The Partnership
competed for PCS licenses in frequency Block C, set aside for "designated
entities" ("Entrepreneurs") that meet 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"). On
January 22, 1997, the Partnership was awarded 15 PCS licenses covering
markets in the United States and Puerto Rico (the "Licenses") by the FCC. The
Partnership's business strategy is to acquire the Licenses and operate such
Licenses with a view to providing capital appreciation in the value of the
Partnership's units of limited partnership interest (the "Units"). Unicom
Corporation, the former general partner ("Unicom") of the Partnership, and
SuperTel Communications Corp., the current general partner of the
Partnership, which was formed on June 7, 1996 ("SuperTel" or the "General
Partner"), have taken steps to qualify the Partnership for the maximum
benefits allowed by the FCC for an Entrepreneur under 47 C.F.R. Sections
24.711(d) (installment payments) and 24.712(c) (bidding credits) of the final
rules of the FCC for PCS systems. Unicom is not related to the parent of
Commonwealth Edison. See "Background of Personal Communications Services
Business and FCC Auctions--Entrepreneur Classes and Economic Preferences" and
"The Partnership--Transfer of General Partner's Interest."
The Partnership filed an application (the "Application") with the FCC for
the authority to acquire licenses to provide PCS systems in all Basic Trading
Areas in the United States. The Partnership was high bidder for the Licenses at
the Block C auction for the award of PCS licenses authorized under Part 24 of
the FCC's rules. The Partnership expects to develop, own and operate the
Licenses it has been awarded. See "The Partnership --The Partnership's Business
to Date" below. On January 22, 1997, the FCC issued its Memorandum Opinion and
Order, FCC, 97-15 (the "Order") granting the Partnership the Licenses. See "The
Partnership--Transfer of the General Partnership Interest." The FCC's grant of
the Licenses may, however, be reversed on the basis of an interested party's
motion for reconsideration or on appeal to the United States Court of Appeals
for the District of Columbia Circuit. On February 21, 1997, the SDE Trust, a
stockholder of Unicom, filed with the FCC a motion for reconsideration with
respect to the Order (the "Petition for Reconsideration"). The Partnership filed
a response to the Petition for Reconsideration on March 6, 1997 and is
vigorously defending its interests in this matter. The SDE Trust filed on reply
on March 18, 1997. See "The Partnership--Petitions to Deny."
The Partnership currently anticipates that it will take 18 months or more to
complete the initial build-out of its PCS systems and to begin offering wireless
services in the markets
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covered by its Licenses. Development of the infrastructure necessary to offer
PCS systems is subject to delays, including those associated with design,
acquisition, obtaining of financing, installation and construction of
wireless telephone systems. See "Development of the Licenses" below.
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 General Partner
anticipates that it will have developed its Licenses by such date, and depending
upon business considerations, will have restructured itself or transferred or
sold its Licenses.
BACKGROUND OF PERSONAL COMMUNICATIONS
SERVICES BUSINESS AND FCC AUCTIONS
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").
The PCS technology is expected to be a completely digital technology
designed from the ground up to be a wireless "telecommunicator" system. Since
PCS will be digital, it is 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. In addition,
if such features are incorporated into a given PCS network, PCS subscribers will
have E-mail access and personal computer compatibility.
PCS is a radio-based transmission technology which, like cellular
technology, uses the same frequencies repeatedly in a multiple-transmitter cell
design. PCS systems use frequencies in the 1900 MHz band, not the 800 MHz band
(which is used by cellular technology). PCS transmissions are not as prone to
out-of-cell interference, which can occur with the existing cellular telephone
frequencies. The first PCS system began operations in the Washington, D.C.
metropolitan area in the fourth quarter of 1995 and new PCS systems continue to
commence operations in different markets.
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. Thirty MHz blocks allow for the PCS operator to
provide the full range of services
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described above to a larger number of subscribers. Conversely, 10 MHz blocks
allow the PCS operator to provide either a smaller range of services, such as
paging or E-mail to a larger number of subscribers, or a larger range of
services to a smaller number of subscribers. Subject to certain restrictions
applicable to Blocks C and F, PCS operators can combine blocks to provide
subscribers with a broader range of services.
FCC Rules now allow companies to hold up to 45 MHz of cellular, PCS and
other commercial mobile service spectrum in any combination per market. As a
result, an existing cellular provider may acquire up to two additional 10 MHz
PCS licenses in a market in which it provides cellular services, and a person
holding any Block A or Block B 30 MHz license in a particular market may also
hold one 10 MHz license for the same area. This rule is subject to
reconsideration and review or appeal. A single licensee may hold 51 Block A or B
licenses nationally. Other than the 45 MHz ceiling per market described above,
there are no limitations on the number of Block D and E licenses that a single
operator may hold. With respect to Blocks C and F, no license holder may hold
more than 10% of the licenses, or 98 licenses, available nationwide.
FCC Rules permitted any U.S. entity, regardless of size, to participate in
the Auctions at which Blocks A, B, D and E licenses were sold. Blocks C and F,
however, were set aside for Entrepreneurs, which are entities meeting certain
financial and equity structure requirements and that qualify for certain
benefits under FCC Rules. The General Partner qualified the Partnership as an
Entrepreneur, and the Partnership was awarded the Licenses in the Block C
auction. Although the Partnership was eligible to bid in the Block F auction,
the General Partner determined not to do so because it believes that the
Partnership must devote its efforts to fully develop its Block C Licenses. In
addition, the General Partner has considered the amount of capital the
Partnership will need to develop its Block C Licenses and the availability of
additional capital.
MAJOR TRADING AREA; BASIC TRADING AREA
PCS licenses are awarded either on the basis of Major Trading Areas (each, a
"MTA") or Basic Trading Areas (each, a "BTA"). Each MTA is comprised of one or
more BTAs. The FCC has divided the entire United States into 51 MTAs and 493
BTAs. The MTAs contain anywhere from one to 23 BTAs. Block A and B licenses were
awarded on the basis of MTAs. Block C, D, E and F Auctions awarded licenses
covering the entire country on the basis of BTAs, including Puerto Rico,
American Samoa, Guam, Northern Mariana Islands and the U.S. Virgin Islands.
FCC AUCTIONS
The FCC began the Auctions in December 1994. The first Auction was for
frequency Blocks A and B (30 MHz) licenses, which lasted from December 1994 to
March 1995. This Auction was open to all bidders, and the major
telecommunications companies were the principal participants in this Auction,
which awarded 99 MTA licenses in Blocks A and B.
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The price paid per person of population ("POP") for a 30 MHz license ranged
from $1 to $32. The average price was approximately $15.25 per POP. Total
Auction proceeds were approximately $7.7 billion.
The Auction for Block C (30 MHz) licenses, in which the Partnership
participated, began on December 18, 1995 and ended on May 6, 1996. This
Auction, in which the Block C spectrum was offered in each of the 493 BTAs,
was restricted to companies which qualified as Entrepreneurs, as described
below. The prices bid per POP ranged approximately from $1.91 to $101.93. The
average price bid was $52.39 per POP. Total Auction bids were approximately
$13.25 billion. These prices will be discounted, however, because of bidding
credits and installment financing options available to Entrepreneurs, as
described below.
The remaining Auctions in which frequency Blocks D, E and F licenses (all 10
MHz licenses) were offered on a BTA basis were completed in January 1997. In
these Auctions, Blocks D and E licenses were open to all bidders and Block F
licenses were restricted to Entrepreneurs. Total auction proceeds for these
Auctions were approximately $2.52 billion. The FCC has not yet published
detailed information on the results of these Auctions, but the average price per
POP is estimated by the General Partner to have been approximately $3.32 per
POP.
ENTREPRENEUR CLASSES AND ECONOMIC PREFERENCES
Blocks 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. A "Large Business
Entrepreneur" is defined as an entity that has aggregate gross revenues for each
of the last two years between $75 million and $125 million. A "Business
Entrepreneur" is an entity that has aggregate gross revenues for each of the
last two years between $40 million and $75 million. A "Small Business" is an
entity that has less than $40 million of aggregate annual gross revenue averaged
over the last three years. (Originally the FCC had defined four classes, but, as
a result of constitutional challenges to the benefits granted to Minority- or
Women-Owned Businesses, the FCC decided to grant the benefits originally
intended for Minority-or Women-Owned Businesses to all entities that fit the
criteria for being a Small Business.)
Each class of Entrepreneurs was entitled to differing economic preferences,
which are summarized in the table below. All Entrepreneurs qualified for the
FCC's installment
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payment plan under which the federal government will finance 90% of the
winning Auction bid in the Block C spectrum. The terms of the installment
plan vary according to the Entrepreneurial class. A Large Business
Entrepreneur can finance the balance of its Auction bid in the Block C
Auction at an interest rate equal to the 10-year treasury note rate at the
date of grant of the license plus 3.5%, with principal and interest amortized
over the 10-year license term. A Business Entrepreneur is entitled to similar
terms in the Block C Auction, except that interest-only payments are
permitted in the first year and that the interest rate is the 10-year
treasury note rate plus 2.5%.
Small Businesses are entitled to make interest-only payments for the first
six years and to amortize interest and principal over the remaining four years
of the license term. In March 1997, the FCC issued an order suspending
indefinitely interest payments on all Block C licenses; however, interest will
continue to accrue. 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 are entitled to a bidding credit of 25%. The bidding credit
operates as follows: if a qualifying Small Business submits a winning bid, the
price it bids for the license is reduced by the bidding credit, and the reduced
price is then eligible for the installment payment benefits applicable to such
Small Business.
SUMMARY OF ECONOMIC PREFERENCES FOR ENTREPRENEURS IN BLOCK C AUCTION
<TABLE>
<CAPTION>
INSTALLMENT INTEREST RATE/ BIDDING
PLAN AMORTIZATION CREDIT
--------------- ------------------------------------------ ------------
<S> <C> <C> <C>
Large Business Entrepreneur Yes 10-year treasury note rate plus 3.5% n/a
Principal and interest amortized over the
10-year license term
Business Entrepreneur Yes 10-year treasury note rate plus 2.5% n/a
Interest-only payments permitted in the
first year and principal and interest
amortized over remaining nine years of the
license term
Small Business Yes 10-year treasury note rate 25% bidding
credit
Interest-only payments permitted for the
first six years and principal and interest
amortized over the remaining four years
of the license term
</TABLE>
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GENERAL PARTNER STRUCTURE
As noted above, as originally promulgated, in order to be classified as both
a Small Business and a Minority-or Women Owned Business (entitled to the maximum
benefits under the original rules), FCC Rules required minorities and women to
exercise control over the Partnership through an entity that qualified as a
Small Business. Unicom, and its successor, the General Partner, were created to
serve as the entity through which these requirements could be met. The
Partnership met these requirements by placing management control of the
Partnership in the General Partner, restricting ownership of a majority of its
shares of Common Stock (the "Common Stock") to minorities and women, and
providing the General Partner with 25% of the equity of the Partnership.
Accordingly, the General Partner manages the Partnership and limited partners
only have certain limited rights amounting to less than de facto and de jure
control.
PARTICIPATION IN THE AUCTION
The Partnership filed with the FCC its Short Form Application ("Form 175"),
in which the Partnership certified that it: (i) met all of the FCC's
requirements for PCS license holders, including specific legal, technical,
financial and other qualification requirements for the licenses for which it
applied, that it was in compliance with certain foreign ownership requirements,
and that it was eligible for the special benefits and credits given to a Small
Business and consents to FCC audits to verify such eligibility; (ii) was the
real party in interest and that no undisclosed agreements or understandings
provide that someone other than the Partnership will have an interest in the
licenses for which it applied; and (iii) did not and would not enter into any
agreements or understandings regarding the amount to be bid, bidding strategies
or the license on which to bid, except with parties identified in the Form 175.
The Partnership was required to make a one-time up-front bidding deposit to
the FCC equal to $0.015 per POP per MHz for Block C licenses, for the largest
combination of MHz-POPs encompassed by licenses on which the Partnership
intended to bid. The Partnership made a deposit of $50 million, which entitled
it to bid for 111 million POPs. This deposit was the fifth largest deposit
received by the FCC for the Block C Auction. The Partnership's bidding in any
single round was limited by the amount of this payment.
FCC Rules strictly prohibit collusion among bidders, and strictly limit
communications among applicants after the filing of Form 175 to the extent such
communications concern bids, bidding strategies and markets on which bids will
be placed while the auction is in progress.
POST AUCTION PROCEDURES
Of the $50 million that the Partnership deposited with the FCC,
approximately $34.5 million was credited toward the license down payments for
the Licenses the Partnership was
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awarded. The remainder of the deposit, approximately $11,039,602 after
deduction of two bid withdrawal penalties, was returned to the Partnership on
January 27, 1997. On January 27, 1997, the Partnership paid a forfeiture of
$1,000,000 with respect to actions of Anthony T. Easton following an
erroneous bid in the Norfolk, Virginia market. See "The Partnership--Bidding
Error" and "--Omaha Withdrawal."
Successful bidders had 10 business days after the conclusion of the Block C
Auction to file a long form application ("Form 600") for the markets purchased
at the Auction. The Partnership timely filed its Form 600, and on July 2, 1996
filed an amendment to the Form 600. Following the filing of the original Form
600, the FCC issued a public notice which commenced a period during which any
interested party could file a petition to deny the Partnership's Form 600. This
period commenced on May 2, 1996 and ended on July 1, 1996. Two parties filed
petitions to deny the award of any of the Licenses to the Partnership. See "The
Partnership--Petitions to Deny." Additionally, on July 11, 1996, the FCC issued
a public notice commencing a second 30-day period (which ended on August 12,
1996) during which any interested party could file a petition to deny with
respect to matters covered in the Partnership's July 2, 1996 amendment to its
Form 600. A third petition to deny was filed during this second period. In the
FCC's Order dated January 22, 1997, the FCC rejected the three petitions to deny
and awarded the Partnership its Licenses. Any interested party, however, still
has the right to file a motion asking the FCC to reconsider its decision, or
appeal the FCC's decision to the United States Court of Appeals for the District
of Columbia Circuit. On February 21, 1997, the SDE Trust filed the Petition for
Reconsideration. See "The Partnership-- Transfer of the General Partnership
Interest" and "The Partnership--Petitions to Deny." The Partnership filed a
response to the Petition for Reconsideration on March 6, 1997 and is vigorously
defending its interests in this matter. The SDE Trust filed a reply on March 18,
1997. There is no statute or regulation prescribing the time period during which
the FCC must act on the Petition for Reconsideration. Once the FCC acts on this
petition, interested parties have a 30-day period to appeal the FCC's decision
to the United States Court of Appeals for the District of Columbia.
Entrepreneurs made an initial payment within five days of the end of the
Auction to increase their up-front bidding deposit to 5% of the purchase price,
net of bidding credits. They were required to pay an additional 5% of the net
purchase price after the grant of license, with the remaining 90% payable in
installments. If an Entrepreneur's initial up-front bidding deposit was in
excess of 10% of the purchase price, the FCC returned the excess. As the
Partnership was the high bidder for the 15 Licenses at an aggregate net bid
price of $344,293,125, the Partnership, which had deposited $50 million at the
commencement of the auction, received back approximately $12.3 million in excess
payments from the FCC, after payment of approximately $4.5 million of bid
withdrawal penalties assessed by the FCC. In addition, the Partnership paid to
the FCC a forfeiture of $1 million with respect to actions subsequent to the
Bidding Error. See "The Partnership--Bidding Error" and "--Omaha Withdrawal."
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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. 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.
DEVELOPMENT OF THE LICENSES
The Partnership currently anticipates requiring, for each of the Licenses it
has acquired, 18 months or more to complete the initial build-out and to begin
offering wireless service in the Markets. Development of the infrastructure
necessary to offer PCS systems is subject to delays and risks, including those
inherent in the general uncertainty associated with further regulatory review
and appeal of the license grants, financing design, acquisition, installation
and construction of wireless telephone systems. The successful implementation of
the Licenses also depends on the Partnership's ability to lease or acquire sites
for the location of its base station equipment, which includes the negotiation
of lease or acquisition terms for numerous sites per Market (varying with the
size of the Market) and may require in many instances that the Partnership
obtain zoning variances or other governmental or local regulatory approvals that
are beyond the Partnership's control. Delays in the site acquisition process as
well as construction delays and other factors could adversely affect the timing
for build-out and commercial operation of the Partnership's Licenses.
THE PARTNERSHIP
THE GENERAL PARTNER
Unicom was incorporated in Puerto Rico in March 1993 and the General Partner
was incorporated in Puerto Rico in June 1996. Unicom was structured to ensure
that the Partnership would receive the maximum benefits eligible to
Entrepreneurs. The General Partner, as the successor of Unicom, was also
structured to receive the benefits offered to Small Businesses and Minority-or
Women-Owned Businesses. (As noted above, the FCC subsequently determined to
grant to all Small Businesses the benefits that Minority- or Women-Owned
Businesses were to receive.) Currently, Fred H. Martinez is the Chairman of the
General Partner's Board of Directors which includes Richard Reiss, Javier
Lamoso, Gary H. Arizala, Margaret W. Minnich, Lawrence Odell, James T. Perry,
Nezam Tooloee and Daniel J. Parks. Richard Reiss is the President and Chief
Executive Officer of the General Partner, Javier Lamoso is the Executive Vice
President, John Duffy is the Senior Vice President for External Affairs, Eric
Spackey is the Vice President, Daniel J. Parks is the General Counsel and
Lawrence Odell is the Secretary.
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From January 26, 1995 through August 18, 1995, the Partnership raised
$65,112,500 in its private placement (the "Private Placement") of 2,604.5 of its
Units. Consistent with the terms of the Private Placement, the proceeds were
used as follows: (i) 80% of the proceeds were used to bid for and make down
payments on the PCS licenses the Partnership acquired, and to develop, own and
operate these licenses and (ii) 20% of the proceeds were allocated for payment
to Romulus Telecommunications, Inc., a Puerto Rico corporation ("Romulus"), for
its services in preparing and filing of the Application and assisting the
Partnership in bidding under the Services Agreement. See "Item 7--Payments to
Romulus." One-half of such fee ($6,511,250) was non-refundable and was paid to
Romulus prior to the commencement of the Auctions. The remaining one-half of
such fee ($6,511,250) is held in a separate account controlled by Quentin L.
Breen and Anthony T. Easton, and was intended to be paid to Romulus only if the
Partnership was successful in acquiring at least one PCS license. The
Partnership has filed suit in Puerto Rico, however, attaching the amount held in
this account until resolution of the bidding error described below. Under the
Services Agreement, had the Partnership been unsuccessful in obtaining a PCS
license, the $6,511,250 held in the account would have been returned to the
Partnership. If the Partnership License grants are reversed on reconsideration
or appeal, the Partnership shall return to the holders of Units (the
"Investors") their pro-rata investment (less the fee paid to Romulus and any
other fees and expenses the Partnership may incur), without interest.
THE PARTNERSHIP'S BUSINESS TO DATE
The Partnership's operations to date have focused on raising capital in
the Private Placement, preparing for the Auctions, bidding in the Block C
Auction and obtaining the Licenses. In addition, the Partnership has been
conducting preliminary discussions with telecommunications equipment vendors
and strategic service providers. See "The Partnership's Plan of Operation"
below.
The Partnership deposited $50 million with the FCC on November 18, 1995
qualifying it to bid on 111 million POPs. On January 22, 1997, the FCC awarded
the Partnership the Licenses; however, the license grants are subject to
reconsideration by the FCC and appeal to the United States Court of Appeals for
the District of Columbia Circuit.
The table below identifies each market to which the Licenses pertain, the
population, the Partnership's winning bid and the net price payable by the
Partnership per person of population ("Price/POP").
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<TABLE>
<CAPTION>
MARKET NAME POPULATION* BID** PRICE/POP**
- ------------------------------------------------------ ----------- -------------- -------------
<S> <C> <C> <C>
San Juan, PR.......................................... 2,170,250 $ 84,687,825 $ 39.02
Mayaguez-Aguadilla, PR................................ 1,325,600 $ 29,400,075 $ 21.75
Salt Lake City-Ogden, UT.............................. 1,308,040 $ 82,293,825 $ 62.91
Logan, UT............................................. 79,420 $ 276,825 $ 3.49
Provo-Orem, UT........................................ 269,410 $ 6,678,075 $ 24.79
Reno, NV.............................................. 439,280 $ 27,802,575 $ 63.29
Fresno, CA............................................ 755,580 $ 47,026,575 $ 62.24
Bakersfield, CA....................................... 543,480 $ 26,941,575 $ 49.57
Modesto, CA........................................... 418,980 $ 12,320,325 $ 29.41
Visalia-Porterville, CA............................... 413,390 $ 9,371,325 $ 22.67
Redding, CA........................................... 253,260 $ 4,500,825 $ 17.77
Merced, CA............................................ 192,710 $ 3,532,575 $ 18.33
Eureka, CA............................................ 142,580 $ 1,181,325 $ 8.29
Boise-Nampa, ID....................................... 416,500 $ 7,742,325 $ 18.59
Lewiston-Moscow, ID................................... 110,030 $ 537,075 $ 4.88
Totals:............................................... 8,864,510 $ 344,293,125 $ 38.84
</TABLE>
- ------------------------
* Based on the 1990 census figures used by the FCC.
** Gives effect to the 25% bidding credit to which the Partnership is eligible
under FCC rules.
The net cost of the Partnership's Licenses was $344,293,125. The Partnership
made a down payment of 10% of the net cost, or approximately $34,429,312, and
owes the federal government approximately $309,863,813, which amount is payable
over 10 years, as follows. Interest only payments are required to be made for
the first six years, at an interest rate of 6.5% per year. Interest (at 6.5% per
year) and principal payments are required to be made during the seventh through
the tenth year, when the loan must be paid off completely. In March 1997, the
FCC issued an order suspending indefinitely interest payments on all Block C
licenses; however, interest on the licenses will continue to accrue. The
Partnership anticipates that interest payments on the cost of the Licenses will
be approximately $20.2
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million a year for the first six years, and the entire $309,863,813 must be
amortized during the remaining four years.
Although the Partnership was awarded these Licenses, no assurance can be
made that the Partnership ultimately will retain these Licenses. FCC Rules
provide other parties the opportunity to file petitions to deny the licenses
and three parties filed such petitions with respect to matters covered in the
Partnership's original and amended Form 600 applications. See "The
Partnership--Petitions to Deny" below. The persons filing these petitions to
deny had the right until February 21, 1997, to ask the FCC to reconsider its
award of the Licenses to the Partnership or file claim in the United States
Court of Appeals for the District of Columbia Circuit. On February 21, 1997,
the SDE Trust filed the Petition for Reconsideration asking that the FCC
reconsider its approval of the transfer of the Partnership's general
partnership interest. The Partnership filed a response to the Petition for
Reconsideration on March 6, 1997 and is vigorously defending its interests in
these matters. The SDE Trust filed a reply on March 18, 1997. See "The
Partnership--Petitions to Deny."
BIDDING ERROR
On January 23, 1996, Anthony T. Easton entered an erroneous bid on behalf of
the Partnership for the PCS license for the Norfolk, Virginia market. Mr.
Easton, in his capacity as bidding agent and Director of Engineering of Romulus,
mistakenly entered a bid of $180,060,000 when he had meant to bid $18,006,000
(the "Bidding Error"). At the time, Mr. Easton was also the acting chief
executive officer of Unicom and a member of its Board of Directors. Unicom
engaged special counsel to investigate and report (the "Report") to Unicom the
circumstances surrounding the Bidding Error. Unicom also engaged Price
Waterhouse LLP to evaluate Romulus' bidding procedures and recommend steps to
ensure that no other errors would occur.
The Report concluded that a preponderance of the evidence indicated that Mr.
Easton prepared and directed submission of the erroneous bid, and that Mr.
Easton was most likely the person who erroneously typed an extra zero on the
erroneous bid, causing the bid to be changed from $18,006,000 to $180,060,000.
In addition, the Report concluded that a preponderance of the evidence indicated
that upon learning of the erroneous bid, Mr. Easton took affirmative steps to
conceal his possible responsibility for the mistake. The Report stated that
there was no evidence that any other person knowingly took affirmative steps to
conceal responsibility for the mistake.
Upon receiving the Report, the board of directors of Unicom asked for and
received Mr. Easton's resignation from his positions as acting chief executive
officer of Unicom and a member of its board of directors effective February 19,
1996. Mr. Breen, who is President of Romulus and who was not directly involved
in the Bidding Error, resigned from his position as a member of Unicom's board
of directors on April 26, 1996. In addition, Unicom's board of directors
determined to assume greater control over the Partnership's
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bidding, and to restrict Romulus' role. Accordingly, Unicom's management
oversaw the preparation and submission of all bids after February 19, 1996.
The Partnership withdrew the erroneous bid on January 24, 1996 and requested
the FCC to waive or reduce the amount of any withdrawal penalty. Under FCC
Rules, a bidder who withdraws a high bid during the course of an auction is
subject to a penalty equal to the difference between the amount of the withdrawn
bid and the amount of the bid awarded the license. Since the high bid for the
license for the Norfolk, Virginia market was $87,569,000, the Partnership could
have been subject to a withdrawal penalty as high as $92,491,000. On December
19, 1996, however, the FCC determined to assess the Partnership a bid withdrawal
penalty of $3,273,374. The Partnership has requested further reduction in the
amount of this penalty.
In addition, in a Notice of Apparent Liability for Forfeiture, dated January
22, 1997 (the "Notice"), the FCC proposed forfeiture of $1,000,000 on the
Partnership because of the actions of Mr. Easton. In the Notice, the FCC
concluded that in connection with the Bidding Error, although the error was
inadvertent, Mr. Easton misrepresented facts to the FCC, lacked candor before
the FCC and otherwise attempted to mislead it. The FCC proposed that the
Partnership pay this forfeiture because Mr. Easton was an officer and director
of the Partnership's former general partner at the time the misrepresentations
were made. The FCC concluded, however, that because the Partnership moved
quickly to take adequate remedial steps to eliminate any ownership or management
participation by anyone possibly responsible for the misrepresentations, the
Partnership was not to be disqualified from receiving its Licenses. See
"Transfer of General Partnership Interest" below. Accordingly, the FCC granted
the Partnership the 15 Licenses in the Order.
The Partnership is seeking to recover this penalty in a legal action
against Mr. Easton and Romulus. Although the Partnership has determined to
seek a full reimbursement, through litigation if necessary, of any penalty
and all costs related to it from Romulus, the General Partner does not have
specific information on the financial condition of Romulus. The General
Partner believes, however, that Romulus could pay at least $6.5 million held
in the account which the Partnership has attached.
Romulus does not currently and will not in the future have any involvement
in the affairs of the General Partner or the Partnership.
TRANSFER OF THE GENERAL PARTNERSHIP INTEREST
Based upon the Report and after discussions and consultations with FCC
staff, Unicom's board of directors concluded that it was in the best interest of
the Partnership and the Investors that the beneficial interests of Mr. Easton,
or any members of his family, in Unicom be divested. Mr. Easton's wife, Susan D.
Easton, is the beneficiary of the SDE Trust which owned shares in Unicom. Since
Unicom and the SDE Trust were unable to come to an agreement on transferring
such shares back to Unicom or to a third party,
12
<PAGE>
Unicom determined to sell its general partnership interest in the Partnership
to SuperTel. On June 18, 1996, pursuant to an Asset Purchase Agreement, dated
as of June 18, 1996, Unicom sold its general partnership interest in the
Partnership to SuperTel for $100,000 by means of a nonrecourse 7% promissory
note due in seven years.
Other than the SDE Trust and the Breen Family Trust, all stockholders of
Unicom received the same amount of shares of SuperTel that each held in Unicom.
The SDE Trust and the Breen Family Trust still hold shares in Unicom and have
not received any consideration for such shares. The proportion of SuperTel
shares that were not issued to the SDE Trust were issued to Richard Reiss, Chief
Executive Officer of SuperTel, and are subject to an agreement that allows the
Partnership to reacquire them at nominal consideration for use as incentive
compensation for current and future management necessary to build and operate
the Licenses or to attract additional investors. Mr. Breen is beneficiary of the
Breen Family Trust, which was issued a warrant instead of any SuperTel shares.
The warrant provides the Breen Family Trust the right to purchase, for nominal
consideration, the same proportion of SuperTel shares as it owned in Unicom only
if the FCC awards the Partnership its Licenses and if the FCC consents to the
acquisition of the SuperTel shares by the Breen Family Trust. In addition, Mr.
Breen beneficially owned three Partnership Units, and the Partnership
repurchased these Units at the original price paid by Mr. Breen.
Except for Messrs. Easton and Breen, the officers and directors of SuperTel
are the same as those of Unicom, other than Lawrence Odell and Nezam Tooloee,
who were elected to the Board of Directors of SuperTel, and Patricia J. Jordan
who was not reelected to Unicom's board of directors in the June 1996
stockholders meeting and who was not elected to the Board of Directors of
SuperTel.
Susan D. Easton filed suit against the Partnership on May 28, 1996,
challenging the transfer of the general partnership interest, which suit was
later withdrawn without prejudice. Mr. Easton filed an amended complaint (the
original complaint had never been served) on June 18, 1996 seeking declaratory
judgment that he is not responsible and should have no liability for the Bidding
Error, which suit was dismissed by the court without leave to amend on December
24, 1996; on January 31, 1997, Mr. Easton filed a motion for reconsideration
which was denied on March 7, 1997. On January 27, 1997, the Trustee of the SDE
Trust filed a suit seeking damages for the elimination of its interest in the
Partnership. In addition, the SDE Trust filed with the FCC the Petition for
Reconsideration. See "Item 8." The General Partner has vigorously defended the
interests of the Partnership in these cases and will continue to do so.
PETITIONS TO DENY
On July 1, 1996, two parties filed petitions to deny the award of any
Licenses to the Partnership. Susan D. Easton, the beneficiary of the SDE Trust,
filed a petition maintaining that the Partnership should not receive any
Licenses because the SDE Trust's interest in the Partnership was extinguished as
described above. (Subsequently, the SDE Trust also filed the
13
<PAGE>
petition described below). In addition, an Investor, WillowRun, L.P., filed a
petition stating that the Partnership should not receive any Licenses on
grounds that the General Partner does not hold a 25% equity interest in the
Partnership, and that the General Partner was not truthful with the FCC or in
its disclosures to the Investors. In the alternative, WillowRun, L.P.
requested that the FCC release records that it collected in connection with
its investigation of the Bidding Error, fully inform the Investors of
developments and extend the comment period for opposition to the award of any
Licenses to the Partnership following release of such information. The
Partnership filed an opposition statement to these two petitions on July 16,
1996.
In addition, on August 12, 1996, the SDE Trust filed a new petition to deny
the award of any Licenses to the Partnership. This petition, like the one filed
by Susan D. Easton, also maintained that the Licenses should not be granted
because of the elimination of the interest of the SDE Trust and its beneficiary,
Susan D. Easton, in the Partnership. On August 27, 1996, the Partnership filed
its opposition statement to this petition. Following the filing of the
Partnership's opposition statements, the parties who filed the petitions to deny
had an opportunity to file replies, and did so.
In its Order issued on January 22, 1997, the FCC rejected these petitions to
deny and awarded the Partnership the Licenses. On February 21, 1997, the SDE
Trust filed the Petition for Reconsideration requesting the FCC to reconsider
the Notice and the Order. See "--Bidding Error." The Petition for
Reconsideration argues that the grounds upon which the FCC based the Notice and
the Order should be corrected and clarified because, as written, the Notice and
the Order could be misinterpreted to impute wrongdoing to the SDE Trust thereby
jeopardizing a lawsuit filed by the SDE Trust against the Partnership, Unicom,
the General Partner and certain of these entities' officers, directors, trustees
and attorneys in California state court. See "Item 8." The Partnership filed a
response to the Petition for Reconsideration on March 6, 1997 and is vigorously
defending its interests in this matter. The SDE Trust filed a reply on March 18,
1997.
Although no assurances can be made, the General Partner expects that the
Partnership will ultimately retain its Licenses. There is no statute or
regulation prescribing the time period during which the FCC must act on the
Petition for Reconsideration. Once the FCC acts on this petition, interested
parties may appeal the FCC's decision to the United States Court of Appeals for
the District of Columbia Circuit within 30 days of the FCC's decision.
OMAHA WITHDRAWAL
The Partnership was subject to a withdrawal penalty for its strategic
withdrawal of a bid for the PCS license covering Omaha, Nebraska. On December
19, 1996, the FCC issued the Partnership a penalty of $1,257,711 for the
withdrawal. This withdrawal was the result of the Partnership's targeting and
bidding, at one point during the Block C auction, for certain midwestern
markets. During the course of the auction, however, the Partnership was outbid
in all of its bids in the midwest except for Omaha, Nebraska. Accordingly, the
Partnership
14
<PAGE>
withdrew its bid for the Omaha market and became subject to the
withdrawal penalty. The bidding team decided it was more desirable to risk
paying a bid withdrawal penalty rather than have to spend the $30 million to
develop what would have been a stand alone market. The presence of a stand alone
market without any relationship to the two clusters the Partnership acquired
would have made financing it difficult and would have taken too much of
management's focus. The withdrawal penalty adds 12.6 cents per POP to the cost
of the Partnership's 8.8 million POP portfolio.
THE PARTNERSHIP'S PLAN OF OPERATION
The Partnership's operations to date have focused on raising capital,
preparing for and bidding in the Auctions, working to retain the Licenses it
has been awarded, raising financing and conducting preliminary discussions
with telecommunications equipment vendors and strategic service providers.
The Partnership has no revenues (other than interest income) and is likely to
incur operating losses after commencing commercial operations, until such
time when its subscriber base generates revenue in excess of the
Partnership's expenses. Development of a significant subscriber base is
likely to take time, during which the Partnership must finance its operations
by other means than its revenues. Consequently, should the Partnership
ultimately retain the Licenses, the Partnership will need additional debt or
equity financing to hire and retain qualified key employees, pay accrued
interest on the License debt, develop and construct the infrastructure
necessary to operate complex wireless telephone systems, introduce and market
a new range of service offerings on a commercial basis and otherwise operate
its licensed PCS systems. The Partnership owes the federal government
approximately $309,863,813 in connection with the acquisition of the
Licenses, which is payable over 10 years. Interest only payments (at a rate
of 6.5% a year) are required for the first six years, and interest (at a rate
of 6.5% a year) and principal payments are required during the seventh
through the tenth year, when the loan must be paid off completely. In March
1997, the FCC issued an order suspending indefinitely all interest payments
on Block C licenses; however, interest will continue to accrue. The
Partnership anticipates that interest payments (or accruals) on this amount
will be approximately $20.2 million a year for the first six years. In
addition, the Partnership believes that the total equipment costs, including
design and engineering, will approximate some $20 per POP acquired. The
Partnership may also need as much as $13 per POP to cover negative cash flow
from initial operations and other start-up costs before it becomes
profitable. Accordingly, as the Partnership was awarded Licenses in 15
markets with approximately 8.8 million POPs (based on 1990 population
statistics used by the FCC), and, therefore, based on the cost estimations,
the Partnership will need approximately $290 million in additional financing
over the next three years.
The Partnership plans to be a leading provider of PCS systems in its
licensed markets. It plans to construct its markets as quickly as possible to
both fulfill the FCC build-out requirements as well as to have enough capacity
to handle the anticipated growth of its customer base. It plans to employ
focused marketing strategies targeted at specific audiences to build market
share. The Partnership believes it has acquired markets with strong potential
15
<PAGE>
for high growth consisting of persons with high levels of income and education
who are eager to adopt new technologies. It plans to gain a competitive
advantage by providing quality service at a competitive price.
The Partnership is currently in various stages of discussions with a variety
of equipment vendors to determine the best selection of equipment with the most
attractive financing terms. The Partnership is seeking vendors that meet the
Partnership's goals of prompt construction, system reliability, pricing and
vendor financing. Presently, the Partnership has entered into an agreement with
respect to the Puerto Rico market with Ericsson, a PCS equipment manufacturer.
The agreement is binding only if the Partnership obtains the Puerto Rico license
and if the Partnership obtains financing that is mutually acceptable to finance
the acquisition and installation of the PCS equipment.
The Partnership plans to begin prompt construction of its PCS systems. The
Partnership is conducting a series of meetings with major Wall Street investment
firms to discuss its long term capital requirements. Although no assurances can
be made that the Partnership will be successful, it is anticipated that the
Partnership will complete a round of third-party financing in the future. This
financing will be used as working capital. The Partnership also has commenced a
capital call to raise up to approximately $2 million from its Investors to
increase its equity base thereby becoming more attractive to new investors.
If the Partnership is unable to develop the Licenses, it can transfer them
to a third person only with FCC approval. In addition, within the first five
years, it can only transfer the Licenses to another Entrepreneur. Further, such
a transfer could subject the Partnership to reduced favorable government
financing and to loss of bidding credits unless, within the first five years of
receipt of the Licenses, the Partnership transfers them to qualified
Entrepreneurs, or unless the Licenses are transferred after five years.
Accordingly, the Partnership does not expect to transfer any of its licenses
until such time as it is not subject to such a loss.
The General Partner has no plans or arrangements to purchase the
Partnership's assets.
On April 14, 1997, the Partnership formed three Delaware limited
liability companies: CommClear, LLC; ClearCorp, LLC; and ClearComm West, LLC.
The Partnership is the sole member of these three entities. The Partnership
may, at some future date, transfer its western U.S. Licenses to ClearComm
West, LLC which would develop the Partnership's business in the markets which
cover these Licenses. Also on April 14, 1997, ClearCorp, LLC and CommClear,
LLC formed a Delaware general partnership, ClearComm de Puerto Rico. The
Partnership may transfer its two Puerto Rico Licenses to ClearComm de Puerto
Rico which would develop the Partnership's business in Puerto Rico. Transfer
of any Licenses will only occur after the Partnership receives all requisite
FCC approvals.
16
<PAGE>
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER
31, 1996 AND FOR THE QUARTERS ENDED MARCH 31, 1996 AND MARCH 31, 1997
The following tables summarize selected financial data of the Partnership
from the period from inception (January 24, 1995) to December 31, 1995, from
January 1, 1996 to December 31, 1996 and for quarters ended March 31, 1996 and
March 31, 1997. The table should be read in conjunction with the more detailed
financial statements contained in Item 15 below.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
FISCAL YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------- --------------------------
1995 1996 1996 1997
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
TOTAL REVENUES:
Interest Earnings....................................... $ 1,469,099 $ 66,767 $ 27,167 $ 109,707
------------- -------------- ------------ -------------
TOTAL EXPENSES:
Consulting and legal services rendered by related
parties............................................... 6,756,250(1) 744,862 247,057 7,213,023(2)
Management Fee to General Partner....................... 513,288 424,334 108,831 102,114
Other Legal Fees........................................ 368,704 1,283,356 252,703 403,204
Miscellaneous Consulting Services....................... 325,604 557,353 104,402 585,495
Travel.................................................. 118,850 282,890 53,520 67,208
Insurance............................................... 32,000 133,784 32,000 31,721
Other Administrative Expenses........................... 68,769 183,890 12,743 49,882
Omaha Withdrawal Fee.................................... 1,257,771
Norfolk Bid Withdrawal.................................. 3,273,374
Forfeiture Imposed by FCC............................... 1,000,000
Subtotal................................................ $ 8,183,465 $ 9,141,614 $ 811,256 $ 8,452,647
------------- ------------- ----------- -------------
Net Income (Loss)....................................... ($ 6,714,366) ($ 9,074,847) ($ 784,089) ($ 8,342,940)
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
Net Income (Loss) Attributable to General Partner....... ($ 1,678,592) ($ 2,268,712) ($ 196,022) ($ 2,085,735)
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net Income (Loss) Attributable to Unitholders
($1,933.49) in 1995; ($2,609.71) in 1996; ($225.79)
for March 31, 1996; and ($2,266.12) for March 31, 1997
per Unit respectively)................................ ($ 5,035,774) ($ 6,806,135) ($ 588,067) ($ 6,257,205)
------------- ------------- ----------- -------------
------------- ------------- ----------- -------------
</TABLE>
- ------------------------
(1) Includes payments of $6,511,250 to Romulus for its services in preparation
of the Application and bidding at Auctions, see "Item 7--Payments to
Romulus," and other consulting fees.
(2) Includes the expense of $6,511,250 to Romulus under the Services Agreement.
18
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
DECEMBER 31
-------------------------------------------- --------------
PROFORMA MARCH 31
1995 1996 1996(1) 1997
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and Cash Equivalents......................... $ 2,727,541 $ 2,492,851 $ 13,532,394 $ 12,043,317
Prepaid Expenses.................................. 96,000 100,538 100,538 68,758
Deposits.......................................... 50,000,000 45,468,855 0 25,000(2)
Restricted Cash(3)................................ 6,511,250 6,511,250 0 0
Equipment Net..................................... 0 14,535 14,535 13,627
PCS Licenses...................................... 344,293,125 348,097,566
Total............................................. $ 59,334,791 $ 54,588,029 $ 357,940,592 $ 360,248,268
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
LIABILITIES AND PARTNERS' CAPITAL:
Accounts Payable and Accrued Liabilities.......... 836,657 2,287,242 2,287,242 1,582,168
Licenses Loan Payable............................. 309,863,813 309,863,813
Accrued Interest on Licenses Loan................. 3,804,441
Unitholders' Equity (2,604.5 Units in 1995;
2,719.6 Units in 1996; 2,762.20 Units in 1997;
and 1 general partnership interest)............. 58,498,134 52,300,787 45,789,537 44,997,847
Total............................................. $ 59,334,791 $ 54,588,029 $ 357,940,592 $ 360,248,268
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Book Value Per Unit............................... $ 22,452 $ 19,224 $ 16,831 $ 16,291
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
</TABLE>
- ------------------------
(1) The pro forma financial data gives effect to the Partnership's receipt of
the Licenses, which were granted by the FCC on January 22, 1997, the related
liability and the refunding of a portion of the Partnership's deposit by the
FCC. As a result of the grant of the Licenses, the Partnership became liable
to Romulus for $6,511,250, which amount has been attached in connection with
the Partnership's lawsuit against Romulus.
(2) Reflects a deposit required in connection with the Partnership's attachment
of $6,511,250 of restricted cash.
(3) The Partnership has filed suit attaching this amount, which will only be
released after resolution of the Partnership lawsuit against Romulus.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The Partnership was formed in January 1995 and is managed by the General
Partner. The Partnership was organized to acquire, own and operate PCS licenses
in frequency Blocks C and F, and to take advantage of the benefits that the FCC
has set aside for Entrepreneurs.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 compared to Three Months Ended March 31,
1996
REVENUES
The Partnership's sole source of revenue continued to be interest income
for the quarter ended March 31, 1997. Interest income for this quarter was
$109,707. In the first quarter of 1996, the Partnership had interest earnings
of $27,167. The increase in interest earnings was primarily due to the FCC
refunding to the Partnership approximately $11,040,000, which the Partnership
had placed on deposit with the FCC in connection with the acquisition of the
Licenses.
EXPENSES
Expenses for the quarter ended March 31, 1997 totaled $8,452,647. This
amount included $6,511,250 advanced to Romulus under the Services Agreement.
This amount had been classified in earlier financial statements as restricted
cash because it would be paid to Romulus only if the Partnership received its
Licenses. Although this amount is no longer considered restricted cash because
the Partnership was awarded its licenses in January 1997, the Partnership has
filed a suit attaching this amount in connection with its efforts to recover
costs, penalties and fines which were incurred as a result of the bidding error
in the Norfolk, Virginia market. The Partnership's expenses in the first quarter
of 1997 were greater than the first quarter of 1996 because of the costs
associated in developing the Partnership's licenses.
Expenses for the quarter ended March 31, 1996 were $811,256. This amount
differs from the expenses previously reported for that quarter (which were then
stated to be $702,425) because the expenses for that quarter now includes an
accrual of $108,831 of expenses to be reimbursed to the General Partner,
including its management fee. Pursuant to the original Partnership Agreement,
the management fee was 1% of the Partnership's gross assets plus reasonable
costs and expenses in managing the Partnership. The General Partner then amended
the Partnership Agreement to reduce the management fee to all reasonable costs
and expenses, plus 10% of such amount. Subsequent to the issuance of the
Partnership's 1995 financial statements, the General Partner determined that the
management fee was not contingent upon the Partnership making a down payment to
the FCC to purchase
20
<PAGE>
a license, but should have been accrued in the 1995
financial statements. As a result the management fee for the first quarter 1996
and earlier periods were then accrued and included in the respective reporting
periods.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
REVENUES
The Partnership's sole source of revenue continued to be interest income for
the year ended December 31, 1996. Interest income for this year was $66,767. In
1995, the Partnership had interest earnings of $1,469,099. Interest income in
1995 was greater than 1996 because the Partnership had invested the capital
contributions of its Investors until it placed its $50 million deposit with the
FCC in November 1995.
EXPENSES
Expenses for the year ended December 31, 1996 totaled $9,141,614. This
amount included an accrual for $424,334 of expenses to be reimbursed to the
General Partner, including its management fee. As described above, after the
amendment to the management fee provision of the Partnership Agreement, and
subsequent to the issuance of the Partnership's 1995 financial statements, the
General Partner determined that the management fee was not contingent upon the
Partnership making a down payment to the FCC to purchase a License, but should
have been accrued in the 1995 financial statements. This management fee,
approximately $513,000, was accrued with respect to fiscal year ending December
31, 1995, and the 1995 financial statements were restated to reflect this
accrual. As a result, in 1995 the Partnership's loss increased by approximately
$513,000.
General and administrative expenses for the period ended December 31,
1995 were $8,183,465, which included amounts paid to Romulus under the
Services Agreement and the expenses and the management fee of the General
Partner. Expenses for the year ended on December 31, 1996 are higher than the
expenses for the same period of 1995 because the 1996 expenses includes the
Omaha withdrawal fee of $1,257,771, the Norfolk bid withdrawal fee of
$3,273,374, the $1,000,000 forfeiture imposed by the FCC, and related legal
fees and certain consulting expenses amounting to $1,373,547 which were
incurred in connection with the result of the Bidding Error. The Partnership
is seeking to recover the costs, penalties and fines associated with the
Bidding Error from Romulus and Mr. Easton, and has attached $6,511,250 of
restricted cash held in the account controlled by Romulus. Although no
assurances can be made, the General Partner believes it will prevail in
collecting these amounts.
21
<PAGE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Partnership had assets totaling $360,248,268,
consisting of $12,043,317 in cash and cash equivalents, $68,758 in prepaid
expenses, $25,000 on deposit, $344,293,125 of PCS licenses plus $3,804,441 of
capitalized interest on the license debt during the construction period of the
PCS system and $13,627 of equipment. Current liabilities totaled $1,582,168 and
long-term debt of $313,668,254 with an annual interest rate of 6.5% relating to
the acquisition of the PCS licenses. This debt is represented by 10-year notes
due to the FCC, including interest. According to the notes, interest shall be
paid quarterly for the first six (6) years, and interest and principal shall be
paid quarterly over the last four (4) years. In March 1997, the FCC issued an
order suspending interest payments on all C Block licenses indefinitely;
however, interest on the notes will continue to accrue at an annual rate of
6.5%. The Partnership's assets and liabilities increased significantly during
the first quarter of 1997 because of the Partnership's receipt of the PCS
licenses which were awarded in January 1997.
During the quarter ending March 31, 1997 the Partnership raised $1,040,000
of additional capital from a capital call of its limited partners that began on
September 30, 1996 and ended on January 22, 1997. The total amount raised in
this capital call was $3,992,500.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Partnership had assets totaling $54,588,029,
consisting of $2,492,851 in cash and cash equivalents, $45,468,855 ($50 million
less bid withdrawal penalty) on deposit with the FCC, $6,511,250 in restricted
cash, $100,538 in prepaid expenses, $14,535 in equipment and current liabilities
of $2,287,242. As of December 31, 1995, the Partnership had assets totaling
$59,334,791, consisting of $2,727,541 in cash and cash equivalents, $50 million
on deposit with the FCC, other assets of $96,000, $6,511,250 in restricted cash
and current liabilities of $836,657. The Partnership assets decreased during
1996 because of expenses associated with securing the Licenses and a forfeiture
and bid withdrawal penalty associated with the Bidding Error. During 1995, the
Partnership assets increased as the result of the Private Placement begun in
1995, which ended during the fourth quarter of 1995.
As of December 31, 1996 the Partnership raised $2,952,500 of additional
capital from a capital call that began on September 30, 1996 and ended on
January 22, 1997. The total amount raised in this capital call was $3,992,500.
Three Units were repurchased during the second quarter 1996 from Mr. Breen
following the Bidding Error.
22
<PAGE>
On March 26, 1997, the Partnership commenced a second capital call to
raise up to an additional $2 million by offering its existing Investors
one-fifth Units at a price of $6,000 per one-fifth Unit. As of June 30, 1997,
the Partnership has sold 146 one-fifth Units for an aggregate price of
$876,000. This capital call is expected to terminate on September 1, 1997,
unless extended by the General Partner. In addition, the Partnership is
continuing to seek additional capital for purposes of developing the
Licenses. The Partnership's efforts to raise additional capital to develop
Licenses is dependent upon whether the Partnership retains any of the
Licenses. Failure to retain its Licenses or the failure to prevail in the
litigation to which the Partnership is subject will have a material adverse
impact on the Partnership's business and operations. Although no assurance
can be made, the Partnership expects to raise the additional amounts it needs
to develop the Licenses it retains. The Partnership currently estimates it
will need to raise approximately $290 million over the next three years to
develop all of the Licenses. In addition, the Partnership owes the federal
government approximately $309,863,813 in connection with the acquisition of
the Licenses. Although no assurances can be made, the Partnership expects to
prevail in the litigation in which it is a party. See "Item 8."
ITEM 3. PROPERTIES
The Partnership did not own any property as of the end of fiscal year ended
December 31, 1996. The Partnership sublets its principal offices in California
from its General Counsel at no charge.
The Partnership is embarking on an aggressive build-out phase which includes
leasing sites where its telephone switching equipment, relay stations and other
equipment will be located. In addition, the Partnership anticipates leasing
offices in cities where it has Licenses at such time as when necessary to
develop the Licenses. The Partnership also intends to establish a strategically
located principal office from where it can best manage the Licenses.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Exclusive management and control of the Partnership's business is vested in
the General Partner. The Partnership has no employees and is managed and
controlled by the Board of Directors and executive officers of the General
Partner. The General Partner owns 100% of the Partnership's general partnership
interest. The shares of General Partner are held by certain Puerto Rican
individuals and Puerto Rico trusts.
The following table sets forth, as of June 30, 1997, information with
respect to beneficial ownership of the Partnership's Units by: (i) all persons
known to the General Partner to be the beneficial owner of 5.0% or more thereof;
(ii) each Director of the General Partner; (iii) each of the executive officers
of the General Partner; and (iv) all executive officers and Directors as a group
of the General Partner. All persons listed have sole voting and investment power
with respect to their Units unless otherwise indicated.
23
<PAGE>
<TABLE>
<CAPTION>
UNITS BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENTAGE OWNERSHIP
- ---------------------------------------------------------------- ----------------------- -----------------------
<S> <C> <C>
Fred H. Martinez(1)............................................. 1.2 *
Richard Reiss(2)................................................ 1.2 *
Javier O. Lamoso(3)............................................. 0 *
Gary H. Arizala(4).............................................. 2.4 *
Margaret W. Minnich(5).......................................... 0 *
Daniel J. Parks(6).............................................. 4 *
James T. Perry(7)............................................... 2.4 *
Nezam Tooloee(8)................................................ 0 *
John Duffy(9)................................................... 1.2 *
Lawrence Odell(10).............................................. 1.2 *
Eric Spackey(11)................................................ 0 *
All executive officers and directors of the General Partner as a
group (11 persons)............................................ 12.4 *
</TABLE>
- ------------------------
* Less than 1.0%.
(1) Mr. Martinez is Chairman of the Board of Directors of the General Partner.
Mr. Martinez and Mr. Odell are Trustees of Martinez Odell & Calabria Pension
Fund, which owns the Unit reflected in the table.
(2) Mr. Reiss is President, Chief Executive Officer and Treasurer of the General
Partner and a member of the Board of Directors.
(3) Mr. Lamoso is Executive Vice President of the General Partner and a member
of the Board of Directors.
(4) Mr. Arizala is a Director.
(5) Ms. Minnich is a Director. The Table does not include 12 Units held by The
Wealden Company, of which Ms. Minnich is a director and vice president, and
4.8 Units held by J.B. Wharton, Jr. Residual Trust, of which Ms. Minnich is
a co-trustee and a contingent beneficiary.
(6) Mr. Parks is a Director and General Counsel of the General Partner. The
Units reflected in the table consist of 4 Units held by a pension plan, of
which Mr. Parks and another individual are beneficiaries, and of which Mr.
Parks is a trustee.
(7) Mr. Perry is a Director.
(8) Mr. Tooloee is a consultant and a Director.
(9) Mr. Duffy is Senior Vice President of External Affairs of the General
Partner.
(10) Mr. Odell is a Director and Secretary of the General Partner. Mr. Martinez
and Mr. Odell are trustees of Martinez Odell & Calabria Pension Fund, which
owns the Unit reflected in the table.
(11) Mr. Spackey is Vice President of the General Partner.
24
<PAGE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no employees, directors or executive officers. The
Partnership is managed by the General Partner, whose directors and executives
officers are listed below.
Fred H. Martinez, Director and Chairman of the Board, age 51, has been
chairman of the board of trustees of the University of Puerto Rico from 1993 to
the present. During 1977 to 1979, Mr. Martinez was director of the Puerto Rico
Income Tax Bureau, member of the Governor's Economic Advisory Council, chairman,
Committee on Section 936, Government of Puerto Rico, assistant secretary of the
treasury, Internal Revenue, PR Treasury Department (1978-1979), president, Tax
Committee, PR Chamber of Commerce (1978-1979). In 1993 he was chairman of the
board of the Solid Wastes Management Authority, Government of PR. Mr. Martinez
has extensive experience in contract negotiations, corporate and tax law, and in
directing major institutions. He holds a B.S. in Economics from Villanova
University (1967), an LL.B. (law) from the University of Puerto Rico (1971), and
an LL.M (taxation) from Georgetown University (1972).
Richard Reiss, Director, President, Chief Executive Officer and Treasurer,
age 50, has been president of his own business consulting firm since 1979,
specializing in financial and management matters. Mr. Reiss has long experience
in developing, structuring and managing corporate equity and debt placements,
and in the overseeing and management of substantial businesses. Formerly Mr.
Reiss was chief financial officer and chief operating officer of Bacardi
Corporation. He has been a member of the Board of Directors of Banco Santander,
Puerto Rico for 16 years. Since February 1996, Mr. Reiss has been a member of
the Board of Directors of Pepsi Cola Puerto Rico Bottling Co., Inc. Mr. Reiss is
a member of the Board of Directors of NovaComm Corporation, a manufacturer of
access control units for financial institutions, and was its President from 1995
to 1996. Mr. Reiss is a certified public accountant and graduated magna cum
laude from the University of Puerto Rico with B.B.A. in business administration.
Javier O. Lamoso, Director and Executive Vice President, age 32, has had
extensive experience in the telecommunications industry and has been responsible
for developing, negotiating and overseeing numerous strategic operational,
economic and political aspects of the cellular telephone industry, including
cell-site acquisition, environmental impacts, leasing contractual arrangements
and inter-company relations with other operating telecommunications
organizations, including interexchange carriers and local telephone companies.
Until recently, Mr. Lamoso acted as counsel to the Puerto Rico Cable Operators
Association in various matters which include the negotiation of rates and levies
and the drafting of new legislation. From 1986 to 1987 Mr. Lamoso held a
non-legal position in the corporate finance department of Simpson, Thacher &
Bartlett, and was involved with 1987 successful external debt restructuring of
Chile. He holds a B.A. in Political Science/ Economics from Fordham University
(1986), and a J.D. in law from the University of Puerto Rico (1990).
25
<PAGE>
Gary H. Arizala, Director, age 58, is an entrepreneur and successful
businessman. Mr. Arizala has extensive experience in the cellular telephone
industry serving as chairman of United Cellular Associates from 1988 to the
present and of Aikane Cellular from 1991 to the present. In these capacities he
directed the executive committee activities to oversee the development of the
ME-3 RSA cellular telephone system which was successfully acquired by Telephone
& Data Systems in early 1994. In 1972 Mr. Arizala founded Alphabetland Preschool
and Kindergarten, which he owns and operates. Alphabetland provides high-quality
child care and preschool education services to 400 to 500 families annually
through five child care centers located on Oahu, Hawaii, and employs
approximately 90 people. From 1963 to 1971, Mr. Arizala was an assistant civil
engineer with the State of California responsible for utilities relocation for
the State Water Project. His duties included negotiating plans and agreements
with Southern California Edison, Southern California Gas, the United State
Forest Service among other major private and public organizations. He is on the
Guardian Advisory Council of the National Federation of Independent Businesses,
and an active member of the Chamber of Commerce, and Small Business Hawaii
organizations. Mr. Arizala holds a B.S. in Civil Engineering from the University
of Hawaii (1963).
Margaret W. Minnich, Director, age 42, has held management and supervisory
positions in finance and accounting over a 10-year period in the non-profit,
manufacturing and public accounting field. She has been a member of the board of
several privately-held companies and a private foundation for over seven years.
From 1992 to the present, she has served as director of finance/controller of
The California Wellness Foundation, and is responsible for all financial
reporting, accounting, budgeting and tax functions including investment
performance and asset allocation review of a $450 million investment portfolio,
and managing cash flow for an annual budget exceeding $40 million. From 1984
through 1990, Ms. Minnich held several key positions with MICOM Communications
Corporation, including manager of financial planning where she directed all
accounting and financial functions. From 1981 to 1984, Ms. Minnich was a senior
accountant with Ernst & Young, Los Angeles, specializing in electronics,
aerospace and heavy industry fields. Ms. Minnich is a member of the California
Society of Certified Public Accountants, the Southern California Association for
Philanthropy, and serves on the boards of the Wharton Foundation and The Wealden
Company. She holds a B.A. in Philosophy from the University of Southern
California (1978) and an MBA in accounting from USC (1981).
Lawrence Odell, Director and Secretary, age 47, is the co-managing partner
of Puerto Rico's third largest law firm with substantial expertise in the fields
of corporate finance, administrative law, securities and banking. He is a member
of the Trial Lawyers Association of America, served as a member of the
Inter-American Law Review from 1973 to 1974, and has written for that
publication in the past. He holds a B.A. (1971) and a J.D. (1974) from the
Inter- American University of Puerto Rico, and an LL.M. in labor law from New
York University (1975). Mr. Odell has served in the capacity of secretary for
several major corporations, including Buenos Aires Embotelladora, S.A. (BAESA).
26
<PAGE>
Daniel J. Parks, Director and General Counsel, age 52, is a lawyer with a
private practice located in Sonoma, California. Mr. Parks graduated from the
University of Hawaii with a B.S. in Geology in 1969 and received his Juris
Doctor degree from Hastings College of Law in 1972. For the past 10 years, Mr.
Parks has specialized in the tax, corporate and transactional aspects of the
representation of entities holding and operating FCC licenses. Mr. Parks is also
the proprietor of Parks Vineyards which owns premium vineyards in Sonoma and
Napa counties.
James T. Perry, Director, age 64, is a successful entrepreneur and
businessman with substantial experience in the real estate and retail foods
industries. From 1987 to the present, he has been general partner of Telenode
Rincon, the original owner and developer of the RSA cellular telephone system
for PR-1, which was successfully acquired by Cellular Communications, Inc., as
well as managing other cellular telephone and telecommunications holdings. From
1959 to 1975, Mr. Perry was the president and/or owner of several successful
licensed real estate firms including United Realty Group, Milwaukee, the largest
black-owned real estate firm in Wisconsin, and Perry and Sherard Realty,
Milwaukee, which specialized in rehabilitating and selling between 75 to 100
properties per year utilizing a staff of approximately 30 people. From 1975 to
1992, Mr. Perry owned and operated a McDonald's franchise in Saint Louis,
Missouri, and was responsible for all operations of this successful business.
Mr. Perry served in the U.S. Army in Korea, and has taken extensive courses in
the fields of general business and real estate. From 1988 to 1992 he was vice
president of the Ronald McDonald Children's Charities, and from 1980 to 1984 he
served as a member of the McDonald's Advertising Committee. His memberships
include the board of directors of the Skinker DeBaliviere Business Association,
Hamilton Community Schools, Saint Louis, and the admissions committee of the
Milwaukee Board of Realtors. He is a past president of the Urban Brokers
Association, and a director of the Multiple Listing Service.
Nezam Tooloee, Director and Consultant, age 38, is a consultant to the Chief
Executive Officer and will act as chief executive officer of the western
region of the United States in which the Partnership has Licenses. Mr.
Tooloee most recently was vice president and corporate development officer of
U.S. AirWaves Inc., a bidder in the PCS auctions until its withdrawal.
Previously, he was a senior vice president of International Wireless
Communications, in which position he was responsible for its PCS business.
Through his work in international markets, Mr. Tooloee is experienced in
wireless operations, license and frequency acquisition, strategy formulation,
supply contracts negotiation, vendor financing and economic analysis.
Formerly, he was a principal at Strategic Decisions Group, specializing in
management and strategic consulting for major high-technology corporations.
Mr. Tooloee has nearly 10 years of experience in creating and managing
strategic alliances, partnerships and joint ventures.
John Duffy, Senior Vice President of External Affairs, age 47, has been
associated with the Partnership's general partner since September, 1994. Mr.
Duffy is responsible for the Partnership's capital raising activities. He was
the principal in his own consulting firm from 1990 until joining the General
Partner. He worked with a variety of start-up companies
27
<PAGE>
developing business plans, market strategies and raising investment capital
and was at various times a client service representative of Romulus. Prior to
that time, he was employed with Drexel Burnham Lambert, an international
securities firm from 1981 to 1989, where he held the position of vice
president. Prior to Drexel, Mr. Duffy was an associate vice president with
Dean Witter Reynolds from 1979 to 1981.
Eric Spackey, Vice President, age 34, was appointed vice president of the
General Partner in January 1996. Mr. Spackey is responsible for the development
and the day to day operations of the Puerto Rico market. Prior to joining the
General Partner, Mr. Spackey served as an independent consultant providing
strategic planning and business development to telecommunication, finance, and
health care organizations throughout Northern California. During this same
period, he served on the board of directors of Health Business Development.
Previously, he was affiliated with General Cellular Corporation from 1990 to
1993, where he was most recently manager of financial planning. Mr. Spackey
graduated from the University of California at Berkeley in 1986.
ITEM 6. EXECUTIVE COMPENSATION
The partnership has no employees. It is managed by the General Partner's
Board of Directors and employees. The Partnership reimburses the General Partner
for all reasonable expenses incurred by it in connection with managing the
Partnership, including salaries and expenses of the General Partner's employees
who manage the Partnership.
The following Summary Compensation Table sets forth certain information
concerning the cash and non-cash compensation earned by or awarded to the chief
executive officer of the Partnership's General Partner and the other most highly
compensated executive officers who earned more than $100,000 in 1996. It also
includes information regarding Anthony T. Easton, who acted as Unicom's chief
executive officer until his resignation on February 19, 1996. Mr. Easton did not
receive a salary from the Partnership or Unicom in 1995. Richard Reiss was
appointed Unicom's chief executive officer effective February 19, 1996, and is
the Chief Executive Officer of the General Partner.
28
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------------- -------------------
SECURITIES
OTHER UNDERLYING
NAME & PRINCIPAL FISCAL ANNUAL OPTIONS/
POSITION YEAR SALARY($) BONUS($) COMPENSATION SAR'S
- ------------------------------------------ ----------- ---------- ---------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Richard Reiss, 1996 $289,000 $0 $25,000(1) 0
President, Chief 1995 $0 $0 $0 0
Executive Officer,
and Treasurer
Anthony T. Easton 1995 $0 $0 $0 0
Former Acting
Chief Executive
Officer
Javier Lamoso 1996 $125,000 $ 41,250 $25,000(1) 0
Executive Vice
President
John Duffy 1996 $125,000 $111,250 $0 0
Senior Vice 1995 $0 $0 $0 0
President
External Affairs
Eric Spackey 1996 $125,000 $ 31,250 $0 0
Vice President 1995 $0 $0 $0 0
<CAPTION>
ALL
NAME & PRINCIPAL OTHER
POSITION COMPENSATION($)
- ------------------------------------------ ---------------------
<S> <C>
Richard Reiss, $0
President, Chief $0
Executive Officer,
and Treasurer
Anthony T. Easton $0
Former Acting
Chief Executive
Officer
Javier Lamoso $0
Executive Vice
President
John Duffy
Senior Vice
President
External Affairs $0
Eric Spackey $0
Vice President $0
</TABLE>
- ------------------------
(1) Consists of director's fee in the amount of $25,000.
In 1996, the General Partner engaged a compensation consulting company to
assist it in determining the appropriate levels for executive compensation.
Other than with respect to the Chief Executive Officer, the General Partner's
Board of Directors determined to pay each of the executive officers the salary
recommended by the compensation consulting company. The Board of Directors
determined that the Chief Executive Officer should receive a higher salary than
that recommended by the compensation consultants.
In 1996, each of the executive officers agreed to defer 60% of their salary
listed in the Summary Compensation Table. The deferred amounts were to be paid
only if the Partnership was granted its Licenses. Subsequent to the FCC's grant
of the Licenses, the Board of Directors of the General Partner determined to
award each of the executive officers the deferred amounts, along with the
bonuses listed in the Summary Compensation Table.
29
<PAGE>
The General Counsel of the General Partner presently receives an annual
salary of $75,000, is eligible for an annual bonus of $20,000 and receives
director's fees of $25,000. For 1996, the General Counsel earned $76,250.
On March 19, 1997, the General Partner determined that future executive
compensation should be established by a committee of non-employee directors.
Accordingly, the Board of Directors established a Compensation Committee that
consists of Mr. Martinez, Ms. Minnich and Mr. Perry.
Directors receive an annual fee of $25,000 each, other than the Chairman of
the Board, Mr. Martinez, who received an annual fee of $50,000 for 1996 (and
will receive a fee of $100,000 for 1997), Mr. Odell, who receives an annual fee
of $35,000 and Mr.Tooloee, who does not receive a fee. Directors are reimbursed
for their reasonable expenses in attending board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors, including the following officers of the
General Partner participated in deliberations regarding executive compensation
during fiscal year 1996: Richard Reiss, Daniel Parks and Javier Lamoso.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL PARTNERSHIP INTEREST
Unicom contributed $100,000, which entitled it to receive 100% of the
Partnership's general partner interest. The general partnership interest was
transferred to SuperTel in exchange for $100,000. The general partner interest
entitles the General Partner to 25% of the equity of the Partnership. See "Item
9."
MANAGEMENT FEE
The General Partner has amended the Partnership Agreement to provide that
the General Partner will be entitled to reimbursement for all reasonable
operating expenses, plus 10% of such amount. The management fee is paid on a
monthly basis. The Partnership Agreement had originally provided for an annual
management fee equal to 1% of the amount of the Partnership's gross assets
including the value of the licenses purchased at the Block C Auction, plus
reimbursement for all reasonable expenses and costs incurred in managing and
operating the Partnership. The General Partner, by a resolution approved by its
shareholders, amended the Partnership Agreement and reduced the management fee
because it believed the original fee would adversely affect the ability of the
Partnership to receive additional funding for developing the Licenses. The
management fee for 1995 was accrued in accordance with the amended Partnership
Agreement.
30
<PAGE>
PAYMENTS TO ROMULUS
Unicom and Romulus entered into a Services Agreement, dated as of January
24, 1995, whereby in exchange for a fee of up to 20% of the amount which the
Partnership raised in the Private Placement of its Units, Romulus agreed to
prepare and file the Application with the FCC for licenses to provide PCS
systems in certain markets and bid at the Auction for such licenses on the
Partnership's behalf. As the Partnership raised $65,112,500 in the Private
Placement, Romulus may be entitled to as much as $13,022,500. The Application
prepared by Romulus included all information required by the FCC for authority
to bid, including any engineering and engineering forms required under the FCC
reports and orders, rules, regulations, and other guidelines issued by the FCC.
Quentin L. Breen, formerly a Director of Unicom, is the President of Romulus.
Mr. Breen and Anthony T. Easton, formerly a Director and acting chief executive
officer of Unicom, are beneficial owners of Romulus. Mr. Easton and Mr. Breen,
as principals of Romulus, were appointed as two of the Partnership's
representatives in bidding for Markets in the Auctions. See "Bidding Error"
above.
Under the Services Agreement, Romulus was entitled to a fee of $5,000 per
Unit sold in the Private Placement. One-half of this fee was non- refundable and
was paid to Romulus prior to the commencement of the Block C Auction. In
accordance with the Services Agreement, Romulus was paid $6,511,250 during 1995.
The remaining $6,511,250 is held in a separate account controlled by Messrs.
Easton and Breen. The Partnership has filed a suit attaching this account. The
Partnership is seeking to recover from the account the penalty for the Norfolk,
Virginia bid withdrawal and the forfeiture which totalled approximately $4.27
million, and related costs associated with the Bidding Error.
OTHER RELATIONSHIPS AND TRANSACTIONS
Mr. Martinez and Mr. Odell are partners of Martinez, Odell & Calabria, a law
firm which provides legal services to the General Partner and the Partnership.
Mr. Tooloee is paid $10,000 per month for 40% of his time for services as an
outside consultant to the Partnership. If Mr. Tooloee spends more than 40% of
his time consulting on Partnership business, he will be compensated accordingly.
Mr. Breen beneficially owned three Partnership Units, and following the
Bidding Error, the Partnership repurchased these Units at the original price
paid by Mr. Breen.
ITEM 8. LEGAL PROCEEDINGS
The Partnership is a party to three legal proceedings, two demands for
arbitration and a FCC license proceeding in which three petitions to deny the
award of any of the Licenses to the Partnership were filed, all of which have
arisen in connection with the Bidding Error.
31
<PAGE>
In addition, two additional lawsuits were filed, one of which was voluntarily
withdrawn and the other was dismissed with prejudice.
On June 6, 1996, the Partnership filed suit in San Juan, Superior Court for
the Commonwealth of Puerto Rico and attached the Romulus account which holds
approximately $6.5 million which would be payable to Romulus under its agreement
with the Partnership. See "Item 1--Bidding Error." The Partnership took steps to
attach the funds to ensure that Romulus funds were available to repay the
Partnership the amount of the Norfolk, Virginia withdrawal penalty, forfeiture
and related expenses totaling approximately $5.5 million that the Partnership
paid in connection with the Bidding Error.
On July 26, 1996, Romulus and Mr. Easton each filed a demand for arbitration
with the American Arbitration Association at its Miami, Florida office seeking
to arbitrate all matters relating to the Bidding Error, including the attachment
of the Romulus account. The General Partner is presently determining its
response to these demands for arbitration.
In addition, certain officers, directors, employees and consultants of the
General Partner, as well as persons unrelated to the General Partner and the
Partnership, have been sued by certain limited partners in the Circuit Court for
the State of Oregon, Multnomah County. This lawsuit was commenced on November
27, 1996, and alleges certain securities law violations, common law fraud and
activities violating Oregon's racketeering laws in connection with the
Partnership's initial sale of Units. Although the Partnership is not a named
party, the Partnership has agreed to indemnify all persons related to it in this
suit. The Partnership believes the suit is totally without merit and is
vigorously defending this lawsuit.
On January 27, 1997, in the Superior Court of the State of California for
the County of San Mateo, the trustee of the SDE Trust filed a complaint for
damages of $300 million and equitable relief against Unicom, the General
Partner, the Partnership and certain officers and directors, trustees of
trusts holding Unicom shares and attorneys for breach of fiduciary duty
arising out of an alleged conspiracy among the defendants to attempt to
unlawfully purchase the Unicom shares held by the SDE Trust for the personal
gain of Unicom shareholders. The Partnership denies engaging in any unlawful
activity in connection with the Unicom shares held by the SDE Trust. On April
7, 1997, the Partnership filed a motion to move this case to Puerto Rico on
grounds of forum non conveniens.
In addition, the Partnership was subject to three petitions to deny the
award of any of the Licenses to the Partnership. Although the FCC denied
these petitions on January 22, 1997, on February 21, 1997 the SDE Trust filed
a petition asking that the FCC reconsider its statements regarding the
transfer of the Partnership's general partnership interest. See "Item
1--Petitions to Deny." On March 6, 1997, the Partnership filed a response
with the FCC to this petition and the SDE Trust filed a reply on March 18,
1997.
32
<PAGE>
The General Partner believes that an adverse result in any of these lawsuits
or the failure to retain some or all of the Licenses will have a materially
adverse effect on the financial condition and operations of the Partnership.
Although no assurances can be made, the General Partner expects that the
Partnership will ultimately prevail in all of these matters.
In addition, Anthony T. Easton filed a suit in the Superior Court for the
State of California, County of San Mateo, on June 18, 1996, seeking
declaratory judgment that he is not responsible or liable for the Bidding
Error. As noted above, the General Partner maintains that Romulus must
reimburse the Partnership for the penalty, forfeiture and related costs
incurred by the Partnership in connection with the Bidding Error. This case
was dismissed without leave to amend on December 24, 1996 and Mr. Easton has
filed a motion for reconsideration on January 31, 1997. On March 7, 1997, the
motion for reconsideration was denied.
Susan D. Easton, beneficiary of the SDE Trust and wife of Anthony T. Easton,
filed suit in Superior Court for the State of California, County of San Mateo,
on May 28, 1996, seeking declaratory judgment with respect to the transfer of
the general partnership interest to the General Partner. Ms. Easton withdrew
this suit without prejudice on December 12, 1996.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE 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 General Partner which can be withheld in the
General Partner's sole reasonable discretion. See "Item 11--Restrictions on
Transfer."
As of June 30, 1997, only the General Partner holds a general partnership
interest and 1,634 Investors hold an aggregate of 2,790.4 Units of limited
partnership interest.
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 is filed
as an Exhibit to this Form 10. 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
33
<PAGE>
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 General Partner is entitled to reimbursement of all reasonable operating
expenses, plus 10% of such amount. See "Item 7--Management Fee."
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
From January 26, 1995 to August 18, 1995, the Partnership conducted the
Private Placement of the Units in accordance with Regulation D promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). A total of
2,601.5 Units were sold to 1,641 Investors for an aggregate price of $65,112,500
in the Private Placement. In addition, between September 30, 1996 and January
27, 1997, the Partnership conducted a capital call, in which it sold to its
existing Investors one-fifth Units at a price of $5,000 per one-fifth Unit. The
Partnership sold 798.5 one-fifth Units to its existing Investors for an
aggregate price of $3,992,500. Five one-fifth units are the equivalent of one
Unit. On March 26, 1997, the Partnership commenced a second capital call to
raise up to an additional $2 million by offering to its existing Investors
one-fifth Units at a price of $6,000 per one-fifth Unit. As of June 30, 1997,
the Partnership has sold 146 one-fifth Units for an aggregate price of $876,000.
This capital call is expected to terminate on September 1, 1997, unless extended
by the General Partner.
These offerings were made in reliance upon, among others, the exemption from
registration pursuant to Section 4(2) thereof and Regulation D of the Rules and
Regulations
34
<PAGE>
of the Securities and Exchange Commission for an offer and sale of securities
which do not involve a public offering. The sales qualify as an exempt
offering under Rule 506 of Regulation D because all of the Investors, other
than one, are Accredited Investors as defined by Regulation D.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE
REGISTERED
The Partnership was formed as a limited partnership under the Delaware
Revised Uniform Limited Partnership Act (the "Revised Act"). The rights and
obligations of the partners are governed by the Partnership Agreement. The
following summary of certain provisions of the Partnership Agreement is entirely
qualified by reference to the Partnership Agreement, which is filed as an
Exhibit to this Form 10.
DESCRIPTION OF THE UNITS
The Partnership Agreement authorized the issuance and sale of Units for
$25,000 a Unit, payable in cash or property including contractual rights or
other assets that may be acceptable to the General Partner in its sole
discretion. A total of 2,601.5 Units were issued in the Private Placement and
798.5 one-fifth Units were issued in the Partnership's capital call which
commenced on September 30, 1996 and ended on January 22, 1997. In addition, as
of June 30, 1997, 146 one-fifth Units have been issued in the Partnership's
current capital call.
THE RESPONSIBILITIES OF THE GENERAL PARTNER
The General Partner has full, exclusive and complete responsibility and
discretion in the management and control of the Partnership, and the Investors
have no authority to transact business for, or participate in the management
activities and decisions of, the Partnership. The General Partner is expressly
authorized to, on behalf of the Partnership, borrow money and issue evidences of
indebtedness in connection therewith, refinance, increase the amount of or
otherwise amend the terms of any indebtedness and to secure such indebtedness by
a security agreement, pledge or other lien on Partnership assets. Certain other
major decisions affecting the Partnership, however, including the sale of all or
substantially all of the assets of the Partnership, a material change in the
business or purpose of the Partnership and the voluntary withdrawal of a General
Partner, are decided only with the consent of the General Partner and Investors
holding at least a majority of the then outstanding Units held by Investors. The
authority of the General Partner is subject to certain other express
restrictions set forth in the Partnership Agreement.
The General Partner is not required to devote full time to Partnership
business and is specifically permitted to engage in any other business,
including, but not limited to, acting as a general partner on other partnerships
formed for purposes similar to the purpose of the Partnership. The General
Partner may not, however, indirectly or directly compete with the
35
<PAGE>
business of the Partnership without first offering to share these investment
opportunities with the Investors or the Partnership.
The General Partner has the exclusive right to admit any person as an
additional general partner of the Partnership upon, in most cases, the approval
of Investors holding at least a majority of the then outstanding Units held by
Investors. In addition, the General Partner may, without the consent of the
Investors, substitute in its stead as General Partner, any entity which has by
merger or otherwise, acquired substantially all of the assets of the General
Partner and continued its business, provided that such substitution does not
violate FCC Rules applicable to PCS or cause the Partnership to lose its status
as an Entrepreneur.
FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER
The General Partner is accountable to the Partnership as a fiduciary, and
consequently must exercise good faith and integrity in handling the affairs of
the Partnership. Under the Revised Act, a limited partner may bring a derivative
action to the same extent as a stockholder under Delaware corporation law to
enforce a right of the limited partnership to recover a judgment. There is no
express statutory authority for a limited partners' class action in Delaware,
and the Supreme Court of Delaware has not held that a limited partner may
institute legal action on behalf of himself or herself and all other similarly
situated limited partners to recover damages for a breach by a general partner
of its fiduciary duties. Similarly, the Partnership Agreement contains no
provisions for a class action by limited partners. Accordingly, legal remedies
may not be available or affordable if the General Partner breaches its fiduciary
obligations to the Partnership.
If the General Partner is sued, the General Partner will determine, based on
all the facts and circumstances in the case, whether it believed that its
actions constituted a breach of its fiduciary responsibility. If the suit were
to proceed under circumstances where the General Partner believed that it did
not breach its fiduciary duty, the General Partner may use any defenses which it
or any other defendant in a similar position would have, including those
described below and any other available legal or equitable defenses (such as
estoppel, expiration of the statute of limitations or applicability of the
statute of frauds).
WITHDRAWAL, RETIREMENT, REMOVAL OR SUBSTITUTION OF THE GENERAL PARTNER
The General Partner may voluntarily retire only with the approval of
Investors holding at least a majority of the then outstanding Units held by all
Investors and provided that such withdrawal does not violate FCC Rules
applicable to PCS or cause the Partnership to lose its status as an
Entrepreneur. The General Partner will retire automatically upon filing its
certificate of dissolution or its equivalent. Upon retirement or removal, the
General Partner will become a limited partner and as such will not have any
right to participate in the management of the affairs of the Partnership but
will continue to own its Partnership interest and the retained rights which it
owned as a general partner. Investors holding at least 75% of the then
outstanding Units held by all Investors have the right to remove any general
partner,
36
<PAGE>
subject to certain FCC Rules. See "Voting Rights of Investors" below. The
terminated General Partner's interest in the Partnership will be converted to
an Investor's interest, and the terminated General Partner will be entitled
to vote with the other Investors on any matters requiring the Investors'
consent, or the terminated General Partner may elect to cause the Partnership
to pay for the terminated General Partner's interest. The value of the
terminated General Partner's interest will be the fair market value of such
interest as determined by agreement between the terminated General Partner
and the Partnership (which agreement will require the approval of a majority
in interest of the Investors), or if they cannot agree, by an independent,
qualified appraiser mutually selected by the terminated General Partner and
either the remaining General Partner or Investors holding a majority of the
outstanding Units held by Investors, or if such appraiser cannot be selected,
by binding arbitration in San Juan, Puerto Rico. The General Partner may
substitute in its place without the Investors' consent any entity that has
acquired substantially all of its assets and continued its business if such
substitution does not violate the FCC Rules.
TERMINATION OF THE PARTNERSHIP
The Partnership will continue in full force and effect until December 31,
2005, except that the Partnership shall be dissolved prior to such date upon the
happening of any of the following events:
(a) the sale or other disposition of all or substantially all of the assets
of the Partnership;
(b) the entry of a decree of judicial dissolution of the Partnership;
(c) the election of a general partner to dissolve the Partnership;
(d) the election to dissolve the Partnership made in writing by Investors
holding at least 75% of the then outstanding Units; or
(e) if a general partner ceases to be a general partner, unless (i) there
remains a general partner of the Partnership and the remaining general partners
elect to continue the Partnership within 60 days or (ii) there is no remaining
general partner and the Investors elect within 90 days to continue the
Partnership in accordance with Section 10(a) of the Partnership Agreement.
Upon dissolution of the Partnership, the Partnership's assets will be
liquidated and the proceeds of liquidation will be applied and distributed as
described under Item 9 above.
LIABILITY OF INVESTORS TO THIRD PARTIES
The General Partner will be liable for all debts, liabilities and
obligations of the Partnership, except for non-recourse indebtedness (if any) to
the extent not paid by the
37
<PAGE>
Partnership. The Partnership Agreement, however, limits the liability of the
General Partner and certain other persons to the Partnership and to
Investors, and provides for indemnification of such persons in the case of
liability to third parties, under certain circumstances and subject to
certain exceptions and limitations. See "Fiduciary Responsibility of the
General Partner" and "Item 12" below.
Under the Revised Act, a limited partner is not liable for the debts,
liabilities and obligations of the Partnership in excess of his or her Capital
Contribution and his or her share of undistributed net income as long as he or
she does not take part in the management or control of the Partnership's
business. Under Delaware law, however, an Investor may be liable for Partnership
debts up to the amount of any distribution made to such Investor if the Investor
knew at the time of such distribution that, after giving effect to the
distribution, all liabilities of the Partnership, other than liabilities to
Investors on account of their interests in the Partnership and liabilities for
which the recourse of creditors is limited to specified property of the
Partnership, exceed the fair value of the Partnership's assets, except that for
purposes of calculating the assets of the Partnership, assets subject to
liabilities for which the recourse of creditors is limited to specified property
of the Partnership will be included only to the extent that the fair market
value of the assets exceeds the liability. If the Investor receives a
distribution in violation of this limitation or the Partnership Agreement, he or
she is liable to the Partnership for return of the distribution for a period of
three years from the date of the distribution. An Investor may also be liable
for the return of distributions under applicable laws for such three-year
period.
AMENDMENTS AND POWER OF ATTORNEY
The General Partner may utilize the power of attorney granted to it by each
Investor to execute certain types of amendments to the Partnership Agreement. In
particular, the Partnership Agreement provides that the power of attorney
permits the General Partner to execute and deliver all instruments and file all
documents required to carry out the provisions of the Partnership Agreement,
including, without limitation, the following:
(a) any certificates and any amendments that may be required to qualify or
continue the Partnership and conduct its business;
(b) any amendments to the Partnership Agreement in accordance with the terms
thereof;
(c) any certificate or other instrument necessary to reflect the dissolution
and termination of the Partnership;
(d) any amendment that (i) does not have a material adverse effect upon the
Investors; (ii) adds to the representations or obligations of the General
Partner or surrenders any right or power granted to the General Partner herein;
(iii) corrects any error or resolves any ambiguity in or inconsistency between
any of the provisions hereof; (iv) deletes or adds
38
<PAGE>
any provision required to be so deleted or added by any state securities
commission or other governmental authority; or (v) is deemed to be necessary
or desirable, in the reasonable determination of the General Partner, (A) to
satisfy any requirements, conditions or guidelines contained in any
regulation, ruling, order directive or opinion of any federal or state agency
or judicial authority or contained in any federal or state statute (including
any amendment in accordance with Section 5.2 and Section 7.1(a) of the
Partnership Agreement) or (B) to preserve the status of the Partnership as a
partnership for federal income tax purposes or to ensure that Investors will
be treated as limited partners for federal income tax purposes.
In addition, the General Partner may amend the Partnership Agreement upon
the advice of counsel that such amendment is necessary for the Partnership to
comply with FCC Rules and regulations as currently existing or as modified by
the FCC in the future. In the event any such amendment is made by the General
Partner and such amendment has a material adverse effect on the Investors, then
each Investor has 10 days after notification of the change to notify the General
Partner that as to such Investor the amendment is not accepted and that such
Investor chooses to withdraw from the Partnership and receive a refund of the
cash portion of such Investor's capital contribution.
Other than as provided above, the Partnership Agreement may not otherwise be
modified or amended except with the consent of the General Partner and Investors
holding a majority of the then outstanding Units.
Investors have no appraisal, or dissenters, rights in the event that they
are opposed to a duly adopted amendment of the Partnership Agreement except with
respect to amendments required to qualify the Partnership under FCC Rules
pertaining to PCS.
VOTING RIGHTS OF INVESTORS
The Partnership Agreement provides that Investors holding at least 75% of
the then outstanding Units held by Investors have the right to remove any
general partner. The FCC rules restrict the Partnership's ability to remove or
replace the General Partner for five years after grant of the Licenses. FCC
Rules may require the Partnership Agreement to be amended to remove or restrict
such right of removal. The General Partner shall not amend this provision unless
its legal counsel advises that such amendment is required by the FCC. If the
Partnership Agreement is required to be amended, Investors may lose any ability
they have to remove the General Partner.
The approval of Investors holding at least a majority of the then
outstanding Units held by Investors will be required for the admission of an
additional or successor general partner if there is one or more remaining
general partner; however, the admission of an additional general partner also
requires the approval of the then general partner. The unanimous approval of the
Investors is required for the admission of a general partner and an election to
continue the business of the Partnership where there is no remaining general
39
<PAGE>
partner, unless (i) the remaining general partner was removed, in which case the
approval of Investors holding at least 75% of the then outstanding Units held by
Investors is required for such admission and election or (ii) the last remaining
general partner voluntarily withdrew as a general partner, in which case the
approval of Investors holding at least a majority of the then outstanding Units
held by Investors is required for such admission and election. The approval of
the general partner and Investors holding at least a majority of the then
outstanding Units held by Investors is required to cause a material change to be
made in the business or purpose of the Partnership, permit the voluntary
withdrawal of the general partner, or permit the merger or other reorganization
of the Partnership, to the extent approval of Investors is required under the
Revised Act.
REPORTS TO INVESTORS
The General Partner sends, within 90 days after the end of each calendar
year, to each Investor such tax information as necessary for the preparation by
such Investor up the Investor's federal tax return, and such other reports as
may be required by the Revised Act.
ACCOUNTING BOOKS AND RECORDS
The Partnership method of accounting will be selected by the General
Partner, and will be in accordance with generally accepted accounting principles
and its fiscal year is the calendar year. An annual audit of the financial
statements of the Partnership will be conducted by the independent certified
public accountant firm of Price Waterhouse. The books and records of the
Partnership will be maintained at its principal place of business and will be
available at reasonable hours during the business day for inspection by any
Investor or his duly authorized representative.
TAX ELECTIONS
Upon the transfer of the interest of an Investor in the Partnership, the
Partnership, in the General Partner's sole discretion, may elect, pursuant to
Section 754 of the Code, to adjust the basis of the Partnership's interest in
its property. All other elections required or permitted to be made by the
Partnership under the Code will be made by the General Partner in such manner as
will be most advantageous to the Investors.
CAPITAL CALLS AND ADDITIONAL INVESTORS
If the General Partner determines that additional capital is required by the
Partnership, the General Partner must make a call for additional Capital
Contributions (a "Capital Call") and notify each Investor of the total amount of
the Capital Call and of the total number of additional Units that the
Partnership will offer to issue and sell (and the price per Unit) in order to
raise the amount of the Capital Call. Each Investor has the right to make an
additional Capital Contribution to the Partnership in proportion to the number
of Units such Investor holds. If any Investors declines to participate in the
Capital Call, or fails
40
<PAGE>
to pay the additional Capital Contribution when due, the General Partner may,
in its absolute discretion, (i) offer to the other Investors the opportunity
to make additional Capital Contributions in an aggregate amount equal to all
or a portion of the total Capital Call remaining unpaid, (ii) purchase the
Units itself, and/or (iii) offer to third parties the opportunity to purchase
the Units. Failure to participate in the Capital Call will result in a
reduction of the Investor's proportionate interest in the Partnership. The
General Partner is not required to participate in any Capital Calls and its
equity interest in the Partnership will not be reduced.
MEETINGS
The General Partner may at any time call a meeting of the Investors and is
required to call such a meeting or vote following receipt of a written request
therefor signed by 20% or more of the outstanding Units. The Partnership does
not intend to hold annual meetings of Investors.
RESTRICTIONS ON TRANSFER
Investors bear the economic risk of the investment for an indefinite period
of time because the Units were not registered under the Securities Act and
therefore may not be sold unless they are subsequently registered under the
Securities Act or an exemption from registration is available. Each Investor who
acquired a Unit represented that such purchase was for the investor's own
account for investment purposes and not with a view toward resale or
distribution, and agreed not to sell a Unit without registration under
applicable federal and state securities laws, unless there is an available
exemption thereunder. In addition, the General Partner may require that, before
an Investor's interest is transferred, the transferror deliver to the General
Partner a legal opinion satisfactory to it and counsel to the Partnership to the
effect that the transfer will not violate federal or state securities laws.
In addition, the Partnership Agreement provides that Investors may not sell,
transfer, assign, pledge or otherwise dispose of all or any part of a Unit
without the General Partner's written consent (which consent will not be
unreasonably withheld). In determining whether to grant consent to an
assignment, the General Partner may, in its discretion, require that the
following conditions, be complied with: (i) the assignee consents in writing to
be bound by the terms and conditions of the Partnership Agreement; (ii) the
assignee delivers an opinion of counsel satisfactory to the General Partner, to
the effect that (A) the Partnership would not lose its status as an Entrepreneur
under FCC Rules applicable to PCS or would otherwise violate, or suffer material
adverse consequences under, FCC Rules applicable to PCS; (B) the Partnership
would not become subject to the Department of Labor's plan asset regulations as
a result of the assignment; (C) the assignment would be in compliance with all
the requirements of the Revised Act; and (D) the assignment would be in
compliance with federal securities laws and state securities laws; and (iii) the
assignee pay any reasonable charges of the General Partner or the Partnership in
connection with the substitution.
41
<PAGE>
A legend has been placed on the Partnership Agreement and certificates
representing the Units referring to the restrictions on transferability and sale
of the Units. In addition, a notation has been made on the records of the
Partnership that the sale and transferability of the Units are restricted.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Partnership Agreement provides that, in general, the Partnership, its
receiver or trustee shall indemnify and hold harmless the General Partner and
its affiliates for any liability or loss (including attorneys' fees) suffered by
such persons by reason of any (i) act performed by such persons on behalf of or
in furtherance of the Partnership's business or (ii) inaction by such persons,
if the conduct of such persons does not constitute fraud or willful misconduct
and such persons reasonably believed, at time of the action or inaction, that
such conduct was in connection with the Partnership's business and in best
interests of the Partnership.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Partnership or the General Partner pursuant to the provisions described
above, the Partnership has been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
ClearComm, L.P.
Report of Independent Accountants...................................... 45
Statement of Assets, Liabilities and Partners' Capital for fiscal years
ended December 31, 1995 and December 31, 1996........................ 46
Statement of Revenues and Expenses for fiscal years ended December 31,
1995 and December 31, 1996........................................... 48
Statement of Cash Flow for fiscal years ended December 31, 1995 and
December 31, 1996.................................................... 49
Statement of Changes in Partners' Capital Accounts for fiscal years
ended December 31, 1996.............................................. 51
Notes to Financial Statements.......................................... 52
Statement of Assets, Liabilities and Partners' Capital as of March 31,
1997 (unaudited)..................................................... 57
42
<PAGE>
Statement of Revenues and Expenses for the three months ended March 31,
1997 and March 31, 1996 (unaudited).................................. 58
Statement of Cash Flows for the three months ended March 31, 1997 and
March 31, 1996 (unaudited)........................................... 59
Statement of Changes in Partners' Capital Accounts from inception on
January 24, 1995 through March 31, 1997 (unaudited).................. 61
Notes to Interim Financial Statements.................................. 62
SuperTel Communications Corp.
- -----------------------------
Report of Independent Accountants...................................... 69
Balance Sheet, December 31, 1996....................................... 0
Statement of Revenues and Expenses from inception to December 31,
1996................................................................. 71
Statement of Cash Flows from inception to December 31, 1996............ 72
Notes to Financial Statements.......................................... 73
43
<PAGE>
CLEARCOMM, L.P.
(a development stage enterprise)
REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of ClearComm, L.P.
In our opinion, the accompanying statement of assets, liabilities and
partners' capital, and the related statements of revenues and expenses, of
cash flows and of changes in partners' capital accounts, after the
restatement described in Note 7, present fairly, in all material respects,
the financial position of ClearComm, L.P. (formerly PCS 2000, L.P.) (the
Partnership), a development stage enterprise, at December 31, 1996 and 1995
and the results of its operations and its cash flows for the year ended
December 31, 1996 and for the periods from inception (January 24, 1995)
through December 31, 1995 and December 31, 1996, in conformity with generally
accepted accounting principles. 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 generally
accepted auditing standards 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 the opinion expressed
above.
PRICE WATERHOUSE
San Juan, Puerto Rico
February 7, 1997
45
<PAGE>
CLEARCOMM, L.P.
(a development stage enterprise)
STATEMENT OF ASSETS, LIABILITIES AND
PARTNERS' CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31,
----------------- ----------------------------
PRO FORMA 1996 1995
--------- ---- -----
(UNAUDITED)
(NOTE 8)
----------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 13,532,394 $ 2,492,851 $ 2,727,541
Prepaid expenses............................................... 100,538 100,538 96,000
Other current assets--FCC deposit.............................. 45,468,855
----------------- ------------- -------------
Total current assets.......................................... 13,632,932 48,062,244 2,823,541
Restricted cash--escrow account................................. 6,511,250 6,511,250
FCC deposits.................................................... 50,000,000
PCS licenses.................................................... 344,293,125 -- --
Other assets.................................................... 14,535 14,535
----------------- ------------- -------------
$ 357,940,592 $ 54,588,029 $ 59,334,791
----------------- ------------- -------------
----------------- ------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Bank overdraft................................................. $ 46,173
Payable to FCC................................................. $ 1,000,000 $ 1,000,000
Accounts payable and accrued liabilities....................... 204,927 204,927 130,634
Accounts payable for legal fees................................ 440,847 440,847
Accounts payable to related parties............................ 641,468 641,468 659,850
----------------- ------------- -------------
Total current liabilities..................................... 2,287,242 2,287,242 836,657
----------------- ------------- -------------
Payable to FCC.................................................. 309,863,813
----------------- ------------- -------------
Contingency (Note 10)
Partners' capital:
Limited partners' capital (2,719.6 units issued and outstanding
in 1996 and 2,604.5 in 1995)................................. 67,990,000 67,990,000 65,112,500
General partner's capital....................................... 100,000 100,000 100,000
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C> <C>
Undistributed losses accumulated during development stage....... (22,300,463) (15,789,213) (6,714,366)
----------------- ------------- -------------
Total partners' capital....................................... 45,789,537 52,300,787 58,498,134
----------------- ------------- -------------
Total liabilities and partners'capital........................ $ 357,940,592 $ 54,588,029 $ 59,334,791
----------------- ------------- -------------
----------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
47
<PAGE>
CLEARCOMM, L.P.
(a development stage enterprise)
STATEMENT OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
JANUARY 24, 1995 JANUARY 24, 1995
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Interest income........................ $ 66,767 $1,469,099 $ 1,535,866
---------- ---------- -----------
Expenses:
Consulting and legal services rendered
by related parties.................... 744,862 6,756,250 7,501,112
Management fee to General Partner...... 424,334 513,288 937,622
Other legal fees....................... 1,283,356 368,704 1,652,060
Miscellaneous consulting services...... 557,353 325,604 882,957
Travel................................. 282,890 118,850 401,740
Insurance.............................. 133,784 32,000 165,784
Other administrative expenses.......... 183,890 68,769 252,659
Bid withdrawal penalty (Omaha,
Nebraska)............................. 1,257,771 1,257,771
Bid withdrawal penalty (Norfolk,
Virginia)............................. 3,273,374 3,273,374
Forfeiture imposed by FCC.............. 1,000,000 1,000,000
---------- ---------- -----------
9,141,614 8,183,465 17,325,079
---------- ---------- -----------
Net loss............................... $9,074,847 $6,714,366 $15,789,213
---------- ---------- -----------
---------- ---------- -----------
Net loss attributable to general
partner................................ $2,268,712 $1,678,592
---------- ----------
---------- ----------
Net loss attributable to limited
partners ($2,609.71 and $1,933.49 per
limited partnership unit in 1996 and
1995, respectively).................... $6,806,135 $5,035,774
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
48
<PAGE>
CLEARCOMM, L.P.
(a development stage enterprise)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 24, 1995 JANUARY 24, 1995
YEAR ENDED (INCEPTION) TO (INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating
activities -Net loss.................. ($9,074,847) ($ 6,714,366) ($15,789,213)
------------ ------------- -------------
Adjustments to reconcile net loss for
the period to net cash used by
operating activities:
Increase in prepaid expenses.......... (4,538) (96,000) (100,538)
(Decrease) increase in bank
overdraft............................ (46,173) 46,173
Increase in payable to FCC............ 1,000,000 1,000,000
Increase in accounts payable and
accrued liabilities.................. 74,293 130,634 204,927
Increase in accounts payable for
legal fees........................... 440,847 440,847
(Decrease) increase in accounts
payable to related parties.......... (18,382) 659,850 641,468
------------ ------------- -------------
Total adjustments................... 1,446,047 740,657 2,186,704
------------ ------------- -------------
Net cash used by operating
activities......................... (7,628,800) (5,973,709) (13,602,509)
------------ ------------- -------------
Cash provided (used) by flows investing
activities:
FCC auction deposit................... (50,000,000) (50,000,000)
Bid withdrawal payment................ 4,531,145 4,531,145
Other assets.......................... (14,535) (14,535)
------------ ------------- -------------
Net cash provided (used) by investing
activities......................... 4,516,610 (50,000,000) (45,483,390)
------------ ------------- -------------
Cash flows from financing activities:
Capital investment by partners........ 2,952,500 65,212,500 68,165,000
Capital repurchased from partner...... (75,000) (75,000)
Restricted cash....................... (6,511,250) (6,511,250)
------------ ------------- -------------
Net cash provided from financing
activities......................... 2,877,500 58,701,250 61,578,750
------------ ------------- -------------
Net (decrease) increase in cash......... (234,690) 2,727,541 2,492,851
Cash and cash equivalent at beginning
49
<PAGE>
of period.............................. 2,727,541
------------ ------------- -------------
Cash and cash equivalents
at end of period....................... $2,492,851 $ 2,727,541 $ 2,492,851
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
50
<PAGE>
CLEARCOMM, L.P.
(a development stage enterprise)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL ACCOUNTS
<TABLE>
<CAPTION>
LIMITED PARTNERS GENERAL TOTAL
UNITS AMOUNT PARTNER
------------------------ ------- -----
<S> <C> <C> <C> <C>
Capital invested.......................... 2,604.5 $65,112,500 $ 100,000 $65,212,500
Share of undistributed losses............. (5,035,774) (1,678,592) (6,714,366)
------- ----------- ------------ ------------
Balance (deficit) at December 31, 1995.... 2,604.5 60,076,726 (1,578,592) 58,498,134
Repurchase of limited partners units...... (3.0) (75,000) (75,000)
Capital invested in 1996.................. 118.1 2,952,500 2,952,500
Share of undistributed losses............. (6,806,135) (2,268,712) (9,074,847)
------- ------------ ------------ ------------
Balance (deficit) at December 31, 1996.... 2,719.6 $56,148,091 ($3,847,304) $52,300,787
------- ----------- ------------ ------------
------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of this statement.
51
<PAGE>
CLEARCOMM, L.P.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--REPORTING ENTITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
ClearComm, L.P. (formerly PCS 2000, L.P.) (the Partnership), a development
stage enterprise, is a limited partnership organized on January 24, 1995
under the laws of the State of Delaware. The Partnership was formed to file
applications with the Federal Communications Commission ("FCC") under
personal communications service ("PCS") frequency Block C, originally
restricted to minorities, small businesses and designated entities, to become
a provider of broadband PCS, a new telecommunications technology. The
Partnership will terminate on December 31, 2005, or earlier upon the
occurrence of certain specified events as detailed in the Partnership
Agreement. The Partnership has not yet generated revenues from commercial
operations.
In 1996, the Partnership's former general partner, Unicom Corporation,
sold its interest in the Partnership to SuperTel Communications Corp.
(SuperTel), a Puerto Rico corporation (the "General Partner"). The General
Partner's total share of the income and losses of the Partnership is 25% as
per the Partnership's Agreement. Approximately 1,600 limited partners also
invested in the Partnership through a private placement.
Use of estimates in preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Basis of accounting and fiscal year
The Partnership's records are maintained on the accrual basis of accounting
for financial reporting and tax purposes. The fiscal year of the Partnership
ends on December 31.
Cash equivalents
The Partnership considers all highly liquid investment instruments purchased
with an original maturity of three months or less to be cash equivalents.
PCS Licenses
Upon the acquisition of the licenses, the Partnership will record them at
cost, to be amortized over the estimated life of the licenses (forty years)
once the PCS network is placed in service. The Partnership will capitalize
the interest related to debt pertaining to the PCS licenses during the
construction period.
52
<PAGE>
NOTE 2--FINANCING REQUIREMENTS:
The Partnership has no revenues (other than interest income) and is likely to
incur operating losses after commencing commercial operations until such time
as its subscriber base generates revenue in excess of the Partnership's
expenses. Development of a significant subscriber base is likely to take
time, during which the Partnership must finance its operations by other means
than its revenues. Consequently, following the grant of the licenses, the
Partnership will need additional debt or equity financing to develop and
construct the infrastructure necessary to operate wireless telephone systems,
introduce and market a new range of service offerings on a commercial basis
and otherwise operate its licensed PCS systems.
The Partnership is currently in various stages of discussions with a variety
of equipment vendors to determine the selection of equipment with the best
financing terms.
The Partnership plans to begin construction of its system as soon as it
receives the licenses from the FCC and is currently evaluating several
options to satisfy its financing needs.
NOTE 3--BID WITHDRAWAL PAYMENT AND PENALTY:
In 1996, the Partnership, through its bidding agent, inadvertently submitted
to the FCC an erroneous bid for one of the PCS licenses being auctioned
(Norfolk, Virginia). Although the Partnership withdrew the bid immediately,
the FCC could have imposed a substantial penalty for withdrawal of the then
highest submitted bid, which penalty is based on the difference between the
bid withdrawn and the eventual highest bid. The General Partner met with FCC
officials and filed a petition for a waiver of the penalty or, in the
alternative, a substantial reduction in the penalty amount, as the FCC's
rules were intended to deter frivolous and manipulative bids, and not errors.
On December 20, 1996, the FCC issued an order (the "Order") resolving the
Partnership's request for waiver of the related bid withdrawal payment for
the license applicable to Round 11 of the Broad Band PCS C Block auction
(Norfolk, Virginia) for which the FCC ordered the Partnership to pay a
penalty of approximately $3,273,000. This Order also assessed a bid
withdrawal payment of approximately $1,258,000 for license B332 (Omaha,
Nebraska) for the Broad Band PCS C block auction. In accordance with the
Order, these amounts were deducted from the Partnership's deposit with the
FCC. In addition to the December 20, 1996 Order, the FCC issued a Notice of
Apparent Liability and Forfeiture dated January 22, 1997, finding the
Partnership liable for $1,000,000 for misrepresentations made to the
Commission by its bidding agent. This amount has been recorded as of December
31, 1996 and is reflected as a liability in the accompanying balance sheet.
The Partnership and its General Partner have filed several actions in court
to recover the FCC assessments made in connection with the bidding error as
well as other related expenses incurred (See Note 10). One of the actions
filed resulted in the attachment of a $6.5 million escrow account deposited
in the name of the bidding agent, Romulus Telecommunications, Inc.
("Romulus"), with a local bank, which would have been payable upon obtaining
the PCS licenses.
It is management's intention to pursue vigorously the recovery of the FCC
assessments from Romulus. Management believes it will prevail in collecting
from the restricted cash all the assessments made by the FCC in connection
with the bidding error and other related expenses.
53
<PAGE>
NOTE 4--RESTRICTED CASH:
As of December 31, 1996, restricted cash amounting to $6,511,250 is held in
trust for Romulus and is restricted for payment of all services related to
the auction process. The amount is payable only if the Partnership obtains at
least one PCS license. However, the Partnership has obtained a Court Order
attaching this amount as a result of a lawsuit more fully explained in
Note 10.
NOTE 5--FCC DEPOSITS:
This account represents the deposits placed with the FCC to participate in
the auctions for the licenses mentioned above. The deposits will be partly
used for the downpayment of the licenses to be acquired.
NOTE 6--PARTNERS' CAPITAL:
At December 31, 1995, the limited partners' capital was composed of 2,604 1/2
units distributed among approximately 1,600 limited partners. In 1996, the
Partnership repurchased 3 units from a limited partner and sold to its
limited partners 590.5 one-fifth units. As a result the limited partners'
capital at December 31, 1996 consists of 2,601.5 units and 590.5 one-fifth
units.
The Partnership Agreement provides that the Partnership may sell additional
limited partnership interests after the initial offering to raise additional
equity.
Cash flow received from normal operations of the Partnership which the
General Partner, in its sole discretion, determines to distribute to the
investors of the Partnership, will be distributed 75% to the limited partners
and 25% to the General Partner. The operating losses of the Partnership for
federal income tax purposes will be allocated first to the partners as
necessary to offset any profits previously allocated to them until each
partner has cumulative losses equal to cumulative profits previously
allocated to each partner, and second, 75% to the limited partners in
accordance with the number of units held by each limited partner and 25% to
the General Partner; provided, however, that any losses that would have the
effect of causing or increasing a partner's capital account deficit will be
allocated first, pro rata to the other partners in accordance with their
respective share of partnership distributions, and second, when such
allocations can be made without increasing a partner's capital account
deficit, to the General Partner.
NOTE 7--RELATED PARTY TRANSACTIONS:
In 1996, the Partnership incurred legal and consulting expenses paid to
limited partners and members of the Board of Directors amounting to
approximately $745,000 (1995--$245,000).
Additionally, the application, preparation and auction bidding services were
performed by a related party for which a fee of $6,511,250 was paid during
1995. An additional $6,511,250 remains as a contingent fee payable upon
acquisition of at least one PCS license.
The Partnership Agreement, as amended, provides for payment of a management
fee to its General Partner, equal to the reasonable costs of operating the
business of the Partnership, plus 10% of such aggregate amount, which fee
shall be payable monthly, on the first day of each month during the year.
Expenses reimbursed include, but are not limited to, compensation costs and
expenses related to the officers, directors, and employees in the performance
of their duties. In connection with this agreement, the General Partner
billed $424,000 in 1996 for these services.
54
<PAGE>
Subsequent to the issuance of the Partnership's 1995 financial statements,
management became aware that the management fee was not contingent upon
obtaining a PCS license as originally interpreted. As a result, the
Partnership has recognized a management fee of approximately $513,000 in 1995
in the accompanying financial statements which increased the previously
reported net loss by the same amount. Of this amount $128,250 and $384,750
were attributed to the General Partner and the limited partners, respectively.
NOTE 8--LICENSES:
On January 22, 1997, the Partnership was granted the Broad Band PCS C block
licenses. This resulted in recognizing the cost of the licenses of
$344,293,125 and the related liability of $309,863,813. The down payment, or
10% of the bid amount, was deducted by the FCC from the deposits held, along
with $4,531,145 for bid withdrawal payments assessed by the FCC (see Note 3).
The FCC deposits returned to the Partnership amounted to $11,039,543.
As a result of obtaining the licenses, the Partnership became liable for
services provided by Romulus as discussed in Note 4. However, management is
challenging in court the payment of such fees (See Notes 3 and 10).
The pro forma effects of obtaining the licenses are reflected on the
unaudited pro forma balance sheet as if the licenses had been granted on
December 31, 1996.
NOTE 9--INCOME TAX:
The Partnership, as a limited partnership, is not subject to income tax and
the tax effect of its activities accrues to the partners.
Taxable income to the General and Limited Partners differs from that reported
in the statement of revenues and expenses mainly due to different treatment
of operational expenses incurred in 1996 and 1995 for tax and book purposes.
Since the partnership has not been assigned any PCS licenses yet, all
operating expenses were deferred for tax purposes creating a temporary
difference for the partners.
These expenses will be amortized over a period not exceeding 10 years. The
taxable income for the partners is determined as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Net loss per books................. ($9,074,846) ($6,714,366)
Add--Operating expenses deferred
until a PCS license is assigned
to the Partnership................ 9,141,613 8,183,465
------------ -----------
Taxable income..................... $ 66,767 $1,469,099
------------ -----------
------------ -----------
</TABLE>
There are no other significant differences between taxable income for the
partners and the net loss reported in the statement of revenues and expenses.
55
<PAGE>
NOTE 10--CONTINGENCY:
In 1996, the Partnership's bidding agent, Romulus, submitted an erroneous bid
for one of the PCS licenses being auctioned (Norfolk, Virginia). The
Partnership withdrew the bid immediately and the General Partner filed a
petition for a waiver of the penalty or, in the alternative, a substantial
reduction in the penalty amount.
On December 20, 1996, the FCC resolved the Partnership's request and assessed
a bid withdrawal payment of $3,273,000 for the Norfolk, Virginia market.
Also, on January 22, 1997 the FCC issued a Notice of Apparent Liability and
Forfeiture and found the Partnership liable for $1,000,000 for
misrepresentations made by its bidding agent.
As a result of the penalty and assessment imposed by the FCC, the Partnership
and its General Partner filed, on June 6, 1996, an action for damages against
Romulus (bidding agent) and one of its directors, wherein they seek
reimbursement for the defendants' gross negligence and subsequent fraudulent
acts in covering up an error in bidding in the January 23, 1996 FCC auction
for certain telecommunication markets. In connection with this case, the
Partnership has attached the $6.5 million deposited in the name of Romulus
with a local bank and posted a $25,000 bond pursuant to such order. Romulus
and its director have both filed separate requests for arbitration. The
Partnership has filed for dismissal of these proceedings. Management is
pursuing this matter vigorously and is confident that its position will
prevail.
On June 28, 1996 Romulus's director filed a declaratory relief action against
the Partnership's general partner in regard to the respective rights and
duties revolving around the erroneous bid submitted on behalf of the
Partnership to the FCC in connection with PCS licenses.
In November 1996, certain limited partners of the Partnership filed a suit in
the Circuit Court of the State of Oregon against the Company and certain of
its officers, directors, employees and consultants. The suit alleges that
defendants employed misstatements and omissions of fact in connection with
the sale of limited partnership units of the Partnership and seeks the return
of the investment of $25,000 per unit for approximately 22 units, plus
interest and attorney fees. The case is in the early stage, however, the
Company is defending this matter vigorously.
56
<PAGE>
CLEARCOMM, L.P. (formerly PCS 2000, L.P.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF ASSETS, LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
ASSETS MARCH 31, 1997 DECEMBER 31, 1996
- ------------------------------------------------------ ---------------- --------------------
<S> <C> <C>
Current Assets
Cash equivalents.................................... $ 12,043,317 $ 2,492,851
Prepaid expenses.................................... 68,758 100,538
Other current assets--deposits...................... 25,000 45,468,855
---------------- -----------
Total current assets.............................. 12,137,075 48,062,244
Licenses............................................ 344,293,125 --
Capitalized interest................................ 3,804,441
Restricted cash..................................... -- 6,511,250
Equipment, net...................................... 13,627 14,535
---------------- -----------
Total assets...................................... $ 360,248,268 54,588,029
---------------- -----------
---------------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Payable to the FCC.................................. -- $ 1,000,000
Accounts payable and accrued liabilities............ $ 302,674 204,927
Accounts payable General Partner.................... 64,068 101,954
Accounts payable for legal fees..................... 675,912 440,847
Accounts payable to related parties................. 539,514 539,514
---------------- -----------
Total current liabilities......................... 1,582,168 2,287,242
---------------- -----------
Long term liabilities
Note payable FCC.................................... 309,863,813
Accrued interest FCC notes.......................... 3,804,441
----------------
Total long term liabilities....................... 313,668,254
----------------
Limited partners' capital (2601.5 units and 798.5
one-fifth units in 1997; and 2601.5 and 592
one-fifth units in 1996; authorized and issued)...... 69,030,000 67,990,000
General partner's capital........................... 100,000 100,000
Undistributed losses................................ (24,132,153) (15,789,213)
---------------- -----------
Total partners' capital........................... 44,997,847 52,300,787
---------------- -----------
Total liabilities and partners' capital........... $ 360,248,269 $ 54,588,029
---------------- -----------
---------------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT
57
<PAGE>
CLEARCOMM, L.P.
STATEMENT OF REVENUES AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
<S> <C> <C>
1997 1996
------------- -----------
Revenues:
Interest income................................................... $ 109,707 $ 27,167
Expenses:
Consulting and legal services rendered by Related Parties......... 7,213,023 247,057
General and administrative services billed by the General
Partner......................................................... 102,114 108,831
Other legal fees.................................................. 403,204 252,703
Miscellaneous consulting services................................. 585,495 104,402
Insurance......................................................... 31,721 32,000
Travel............................................................ 67,208 53,520
Other administrative expenses..................................... 49,882 12,743
Total expenses.................................................... 8,452,647 811,256
------------- -----------
Net loss.......................................................... ($ 8,342,940) ($ 784,089)
------------- -----------
------------- -----------
Net loss attributable to General Partner.......................... (2,085,735) (196,022)
------------- -----------
Net loss attributable to limited partners......................... (6,257,205) (588,067)
------------- -----------
Net loss per limited partner unit................................. ($ 2,266.12) ($ 225.79)
------------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
58
<PAGE>
CLEARCOMM, L.P.
(A DEVELOPMENT STATE ENTERPRISE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------------------
1997 1996
---------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................... ($ 8,342,940) ($ 784,089)
----------- -----------
Adjustments to reconcile the net loss for the
period to net cash used by operating
activities: Depreciation................... 908
Decrease in prepaid expenses and
other assets............................... 31,780 32,000
Decrease in Bank overdraft.................... (46,173)
Increase in security deposit................. (25,000)
Decrease in payable to the FCC............... (1,000,000)
Increase in accounts payable................. 97,747 115,991
(Decrease) increase in accounts payable to
General Partner.............................. (37,886) 108,831
Increase (decrease) in accounts payable to related
parties.................................... 235,065 (77)
----------- -----------
----------- -----------
Total adjustments............................ (697,386) 210,572
----------- -----------
Net cash used by operating activities...... (9,040,326) (573,517)
----------- -----------
Cash flows used in investing activities:
Auction deposit returned by FCC.............. 11,039,542
----------- -----------
Equipment.................................... (11,143)
----------- -----------
Net cash provided (used) by investing
activities............................... 11,039,542 (11,143)
----------- -----------
Cash flows from financing activities:
Capital investment by partners............... 1,040,000
Restricted cash.............................. 6,511,250 --
----------- -----------
Net cash from financing activities......... 7,551,250
----------- -----------
Net increase (decrease) in cash.............. $ 9,550,466 ($ 584,660)
----------- -----------
----------- -----------
Summary:
Net increase (decrease) in cash.............. 9,550,466 (584,660)
Cash and cash equivalents at the beginning of
the period................................. 2,492,851 2,727,541
----------- -----------
Cash and cash equivalents at the end of the
period..................................... $ 12,043,317 $ 2,142,881
----------- -----------
----------- -----------
</TABLE>
59
<PAGE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
60
<PAGE>
CLEARCOMM, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
THREE MONTH PERIOD ENDED MARCH 31, 1997
--------------------------
Supplemental schedule of non cash investing and financing activities:
The Partnership was granted by the FCC on January 1997 PCS licenses for
which the bid had been previously submitted. In conjunction with this
acquisition, the following loan was granted by the FCC:
<TABLE>
<S> <C>
Acquisition of PCS licenses......................... $344,293,125
Auction deposit..................................... (34,429,312)
-----------
$309,863,813
-----------
-----------
</TABLE>
61
<PAGE>
CLEARCOMM, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL ACCOUNTS
FOR THE PERIOD FROM INCEPTION ON JANUARY 24, 1995 THROUGH MARCH 31, 1997
<TABLE>
<CAPTION>
LIMITED
GENERAL LIMITED PARTNERS
PARTNER PARTNERS TOTAL UNITS
---------------------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Capital invested thru
December 31, 1995....... $ 100,000 $65,112,500 $65,212,500 2,604.5 units
1995 share of
undistributed losses.... (1,678,592) (5,035,774) (6,714,366)
---------------------- ------------- -------------
Capital account balance
(deficit) at December
31, 1995................ (1,578,592) 60,076,726 58,498,134
---------------------- ------------- -------------
Repurchase of Limited
Partners units.......... -- (75,000) (75,000) -3 units
Capital contributed during
1996.................... -- 2,952,500 2,952,500 590.5 one-fifth
units
1996 Share of
undistributed losses...... (2,268,712) (6,806,135) (9,074,847)
---------------------- ------------- -------------
Capital account balance
(deficit) at December
31, 1996................ (3,847,304) 56,148,091 52,300,787 2601.5 units and
590.5 one-fifth
units
Capital contributed during
first quarter 1997...... -- 1,040,000 1,040,000 208 one-fifth
units
First quarter 1997 share
of undistributed
losses.................. (2,085,735) (6,257,205) (8,342,940)
---------------------- ------------- -------------
Capital account balance
(deficit) at March 31,
1997.................... ($5,933,039) $50,930,886 $44,997,847 2,601.5 units and
798.5 one-fifth
units
---------------------- ------------- ------------- ---------------------
---------------------- ------------- ------------- ---------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
62
<PAGE>
CLEARCOMM, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1--REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ClearComm, L.P. (the "Partnership") (formerly, PCS 2000, L.P.), a
development stage enterprise, is a limited partnership organized on January
24, 1995 under the laws of the State of Delaware. The Partnership was formed
to file applications with the Federal Communications Commission ("FCC") under
personal communications service ("PCS") frequency Block C, originally
restricted to minorities, small businesses and designated entities, to become
a provider of broadband PCS, a new telecommunications technology. The
Partnership will terminate on December 31, 2005, or earlier upon the
occurrence of certain specified events as detailed in the Partnership
Agreement. The Partnership has not yet generated revenues from commercial
operations.
In 1996, the Partnership's former general partner, Unicom Corporation, sold
its interest in the Partnership to SuperTel Communications Corp., a Puerto Rico
corporation (the "General Partner"). The General Partner's total share of the
income and losses of the Partnership is 25% as per the Partnership's Partnership
Agreement. Approximately 1,600 limited partners also invested in the Partnership
through a private placement.
INTERIM FINANCIAL DATA; USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The interim financial data is unaudited; however, in the opinion of the
management, the interim data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results of the
interim periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF ACCOUNTING AND FISCAL YEAR
The Partnership's records are maintained on the accrual basis of
accounting for financial reporting and tax purposes. The fiscal year of the
Partnership ends on December 31.
63
<PAGE>
CASH EQUIVALENTS
The Partnership considers all highly liquid investment instruments
purchased with an original maturity of three months or less to be cash
equivalents.
PCS LICENSES
PCS licenses are recorded at cost, and will be amortized over the
estimated life of the licenses (forty years) once the PCS network is placed
in service. The Partnership will capitalize the interest related to debt
pertaining to the PCS licenses during the construction period.
NOTE 2--FINANCING REQUIREMENT:
The Partnership has no revenues (other than interest income) and is
likely to incur operating losses after commencing commercial operations until
such time as its subscriber base generates revenue in excess of the
Partnership's expenses. Development of a significant subscriber base is
likely to take time, during which the Partnership must finance its operations
by other means than its revenues. Consequently, the Partnership will need
additional debt or equity financing to develop and construct the
infrastructure necessary to operate wireless telephone systems, introduce and
market a new range of service offerings on a commercial basis and otherwise
operate its licensed PCS systems.
The Partnership expects to raise an additional $2 million from its
investors in an offering that commenced on March 26, 1997. In addition, the
Partnership is in various stages of discussions with a variety of equipment
vendors to determine the selection of equipment with the best financing terms.
The Partnership is now soliciting construction permits to build its
system and is currently evaluating several options to satisfy its financing
needs.
NOTE 3--BID WITHDRAWAL PAYMENT AND PENALTY:
In 1996, the Partnership, through its bidding agent, inadvertently
submitted to the FCC an erroneous bid for one of the PCS licenses being
auctioned (Norfolk, Virginia). Although the Partnership withdrew the bid
immediately, the FCC could have imposed a substantial penalty for withdrawal
of the then highest submitted bid, which penalty is based on the difference
between the bid withdrawn and the eventual highest bid. The General Partner
met with FCC officials and filed a petition for a waiver of the penalty or,
in the alternative, a substantial reduction in the penalty amount, as the
FCC's rules were intended to deter frivolous and manipulative bids, and not
errors.
On December 20, 1996, the FCC issued an order (the "Order") resolving the
Partnership's request for waiver of the related bid withdrawal payment for the
license applicable to Round 11 of the Broad Band PCS C Block auction (Norfolk,
Virginia) for which the FCC ordered the Partnership to pay a penalty of
approximately $3,273,000. This Order also assessed a bid withdrawal payment of
approximately $1,258,000 for license B332 (Omaha, Nebraska) for the
64
<PAGE>
Broad Band PCS C block auction. In accordance with the Order, these amounts
were deducted from the Partnership's deposit with the FCC. In addition to the
December 20, 1996 Order, the FCC issued a Notice of Apparent Liability and
Forfeiture dated January 22, 1997, finding the Partnership liable for
$1,000,000 for misrepresentations made to the Commission by its bidding
agent. This amount was recorded as of December 31, 1996 and is reflected as a
liability in the accompanying balance sheet as of that date.
The Partnership and its General Partner have filed several actions in
court to recover the FCC assessments made in connection with the bidding
error as well as other related expenses incurred (See Note 10). One of the
actions filed resulted in the attachment of a $6.5 million escrow account
deposited in the name of the bidding agent, Romulus Telecommunications, Inc.
("Romulus"), with a local bank, which would have been payable upon obtaining
the PCS licenses. It is management's intention to pursue vigorously the
recovery of the FCC assessments from Romulus. Management believes it will
prevail in collecting from the restricted cash all the assessments made by
the FCC in connection with the bidding error and other related expenses.
NOTE 4--RESTRICTED CASH:
As of December 31, 1996, restricted cash amounting to $6,511,250 was held
in trust by Romulus and was restricted for payment of all services related to
the auction process. The amount is payable only if the Partnership obtains at
least one PCS license. However, the Partnership has obtained a court order
attaching this amount as a result of a lawsuit more fully explained in Note
10. On January 22, 1997, the Partnership was granted its 15 Broad Band PCS C
block licenses.
NOTE 5--AUCTION DEPOSITS:
This account represents the deposits placed with the FCC to participate
in the auctions for the licenses mentioned above. This deposit was partly
used for the down payment of the PCS licenses the Partnership acquired.
NOTE 6--PARTNERS' CAPITAL:
At December 31, 1995, the limited partners' capital was composed of
2,604.5 units distributed among approximately 1,600 limited partners. In
1996, the Partnership repurchased 3 units from a limited partner and sold to
its limited partners 590.5 one-fifth units. As a result the limited partners'
capital at December 31, 1996 consisted of 2,601.5 units and 590.5 one-fifth
units.
During the quarter ending on March 31, 1997, the Partnership raised
$1,040,000 from a capital call that ended on January 22, 1997. As a result,
the limited partners' capital at March 31, 1997 consisted of 2,601.5 units
and 798.5 one-fifth units.
The Partnership Agreement provides that the Partnership may sell
additional limited partnership interests after the initial offering to raise
additional equity.
65
<PAGE>
Cash flow received from normal operations of the Partnership which the
General Partner, in its sole discretion, determines to distribute to the
investors of the Partnership, will be distributed 75% to the limited partners
and 25% to the General Partner. The operating losses of the Partnership for
federal income tax purposes will be allocated first to the partners as
necessary to offset any profits previously allocated to them until each
partner has cumulative losses equal to cumulative profits previously
allocated to each partner, and second, 75% to the limited partners in
accordance with the number of units held by each limited partner and 25% to
the General Partner; provided, however, that any losses that would have the
effect of causing or increasing a partner's capital account deficit will be
allocated first, pro rata to the other partners in accordance with their
respective share of partnership distributions, and second, when such
allocations can be made without increasing a partner's capital account
deficit, to the General Partner.
NOTE 7--RELATED PARTY TRANSACTIONS:
During the first quarter 1997, the Partnership incurred legal and
consulting expenses paid to limited partners and members of the Board of
Directors amounting to approximately $701,773 (1996--$247,057).
Additionally, the application, preparation and auction bidding services
were performed by a related party for which a fee of $6,511,250 was paid
during 1995. An additional $6,511,250 was expensed in the first quarter of
1997 as a contingent fee payable upon acquisition of at least one PCS license.
The Partnership Agreement, as amended, provides for payment of a
management fee to its General Partner, equal to the reasonable costs of
operating the business of the Partnership, plus 10% of such aggregate amount,
which fee shall be payable monthly, on the first day of each month during the
year. Expenses reimbursed include, but are not limited to, compensation costs
and expenses related to the officers, directors, and employees in the
performance of their duties. In connection with this agreement, the General
Partner billed $102,114 in the first quarter of 1997 for these services.
NOTE 8--LICENSES AND LONG TERM NOTES PAYABLE:
On January 22, 1997, the Partnership was granted its 15 Broad Band PCS C
block licenses. This resulted in recognizing the cost of the licenses of
$344,293,125 and the related liability of $309,863,813. The down payment, or 10%
of the bid amount, was deducted by the FCC from the deposit held.
The liability is represented by 10-year notes due to the FCC bearing
interest at 6.5%. According to the notes, interest shall be paid quarterly
for the first six (6) years and principal and interest over the next four (4)
years. In March 1997, the FCC issued an order suspending interest payments on
Block C licenses indefinitely; however, interest on the notes is accrued.
NOTE 9--INCOME TAX:
66
<PAGE>
The Partnership, as a limited partnership, is not subject to income tax
and the tax effect of its activities accrues to the partners.
Taxable income to the General Partner and the limited partners differs
from that reported in the statement of revenues and expenses mainly due to
different treatment of operational expenses incurred in 1996 and 1995 for tax
and book purposes. Since the Partnership has not operated any PCS licenses
yet, all operating expenses were deferred for tax purposes creating a
temporary difference for the partners.
These expenses will be amortized over a period not exceeding 10 years.
The taxable income for the partners is determined as follows:
<TABLE>
<CAPTION>
THRU
1ST QUARTER
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net loss per books................................................... ($8,342,940) ($9,074,846) ($6,714,366)
Add-Operating expenses deferred until a PCS license is assigned to
the Partnership.................................................... 8,452,647 9,141,613 8,183,465
------------- ------------- -------------
Taxable income....................................................... $ 109,707 $ 66,767 $1,469,099
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
There are no other significant differences between taxable income for the
partners and the net loss reported in the statement of revenues and expenses.
NOTE 10--CONTINGENCY:
In 1996, the Partnership's bidding agent, Romulus, submitted an erroneous
bid for one of the PCS licenses being auctioned (Norfolk, Virginia). The
Partnership withdrew the bid immediately and the General Partner filed a
petition for a waiver of the penalty or, in the alternative, a substantial
reduction in the penalty amount.
On December 20, 1996, the FCC resolved the Partnership's request and
assessed a bid withdrawal payment of $3,273,000 for the Norfolk, Virginia
market. Also, on January 22, 1997 the FCC issued a Notice of Apparent
Liability and Forfeiture and found the Partnership liable for $1,000,000 for
misrepresentations made by its bidding agent.
As a result of the penalty and assessment imposed by the FCC, the
Partnership and its General Partner filed, on June 6, 1996, an action for
damages against Romulus (bidding agent) and one of its directors, wherein they
seek reimbursement for the defendants' gross negligence and subsequent
fraudulent acts in covering up an error in bidding in the January 23, 1996 FCC
auction for certain telecommunication markets. In connection with this case,
67
<PAGE>
the Partnership has attached the $6.5 million deposited in the name of
Romulus with a local bank and posted a $25,000 bond pursuant to such order.
Romulus and one of its directors have both filed separate requests for
arbitration. The Partnership has filed for dismissal of the arbitration
proceedings. Management is pursuing this matter vigorously and is confident
that its position will prevail.
In November 1996, certain limited partners of the Partnership filed a
suit in the Circuit Court of the State of Oregon against the Company and
certain of its officers, directors, employees and consultants. The suit
alleges that defendants employed misstatements and omissions of fact in
connection with the sale of limited partnership units of the Partnership and
seeks the return of the investment of $25,000 per unit for approximately 22
units, plus interest and attorney fees. The case is in the early stage,
however, the Partnership is defending this matter vigorously.
On January 27, 1997, in the Superior Court of the State of California for
the County of San Mateo, the trustee of the SDE Trust filed a complaint for
damages of $300 million and equitable relief against Unicom Corporation, the
General Partner, the Partnership and certain officers and directors, trustees
of trusts holding Unicom shares and attorneys for breach of fiduciary duty
arising out of an alleged conspiracy among the defendants to attempt to
unlawfully purchase the Unicom shares held by the SDE Trust for personal gain
of Unicom shareholders. The Partnership denies engaging in any unlawful
activity in connection with the Unicom shares held by the SDE Trust. On April
7, 1997, the Partnership filed a motion to move this case to Puerto Rico.
The Partnership was subject to three petitions to deny the award of any
licenses to the Partnership. Although the FCC denied these petitions on January
22, 1997, on February 21, 1997 the SDE Trust filed a petition asking the FCC to
reconsider its statements in its order granting the licenses. The Partnership
filed its response on March 6, 1997, and the SDE Trust filed a reply on March
18, 1997.
Failure to retain its licenses or failure to prevail in the litigation to
which the Partnership is subject will have a material adverse effect on the
Partnership's business and operations.
68
<PAGE>
SUPERTEL COMMUNICATIONS CORP.
REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 1996
69
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
SuperTel Communications Corp.
In our opinion, the accompanying balance sheet and the related statements of
loss and deficit and of cash flows present fairly, in all material respects,
the financial position of SuperTel Communications Corp. at December 31, 1996
and the results of its operations and its cash flows for the period from
inception on June 7, 1996 to December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards 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 audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
San Juan, Puerto Rico
February 7, 1997
70
<PAGE>
SUPERTEL COMMUNICATIONS CORP.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Assets:
Cash................................................ $ 8,237
Accounts receivable from affiliated company......... 101,954
--------
Total assets............................ $110,191
--------
--------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Accounts payable to officers and directors......... $ 63,304
Accounts payable to affiliated company............. 30,997
Income tax payable................................. 3,277
Note payable to affiliate.......................... 100,000
--------
Total liabilities...................... 197,578
--------
Stockholders' deficiency:
Common stock, no par value, 1,000 shares authorized;
1,000 shares issued and outstanding 1,000
Accumulated deficit................................. (88,387)
---------
Total stockholders' deficiency.......... (87,387)
---------
Total liabilities and stockholders' deficiency............. $110,191
--------
--------
</TABLE>
The accompanying notes are an integral part of this statement.
71
<PAGE>
SUPERTEL COMMUNICATIONS CORP.
STATEMENT OF REVENUES AND EXPENSES AND DEFICIT
FOR THE PERIOD FROM INCEPTION ON JUNE 7, 1996
TO DECEMBER 31 1996
<TABLE>
<S> <C>
Revenues:
Management fees.................................... $ 205,036
---------
Expenses:
Directors' fees.................................... 112,000
Salaries........................................... 29,167
Travel expenses.................................... 27,658
Interest expense................................... 3,749
Other general and administrative expenses.......... 17,572
---------
Total expenses........................ 190,146
---------
Income before loss on investment and income taxes........ 14,890
Loss on investment in partnership........................ (100,000)
---------
(85,110)
Provision for income taxes............................... (3,277)
---------
Net loss and deficit at December 31, 1996................. ($ 88,387)
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
72
<PAGE>
SUPERTEL COMMUNICATIONS CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION JUNE 7, 1996
TO DECEMBER 31, 1996
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss........................................ ($88,387)
Adjustments to reconcile net income to net cash
provided by operating activities: Loss on
investment in subsidiary....................... 100,000
Increase in accounts receivable-trade...... (101,954)
Increase in accounts payable and accruals.. 97,578
---------
Total adjustment................. 95,624
---------
Net cash from operating activities.................. 7,237
Cash flows provided by financing activities -
Proceeds from issuance of common stock........ 1,000
---------
Net increase in cash and
cash equivalents at end of the period......... $ 8,237
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
73
<PAGE>
SUPERTEL COMMUNICATIONS CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--REPORTING ENTITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
REPORTING ENTITY
SuperTel Communication Corp. (the "Company") was organized on June 7, 1996
under the laws of Puerto Rico. It was created to serve as General Partner of
ClearComm, L.P. (formally PCS 2000 L.P.) (the "Partnership"), a development
stage enterprise.
On June 18, 1996, the Company acquired the general partnership interest in
the Partnership from Unicom Corporation ("Unicom") for $100,000 by means of a
nonrecourse promissory note. The stockholders, officers and directors of the
Company are essentially the same as those of Unicom. All stockholders of
Unicom received the same number of shares of the Company that they previously
held in Unicom except for shares held by two trusts for the benefit of the
respective families of two former directors of Unicom. The transfer is the
subject of a lawsuit brought by a trust that is a substantial shareholder of
Unicom, and whose sole beneficiary is the wife of a former director. The
Company is vigorously defending its position in this case; it believes it has
meritorious defenses to such suit and that the outcome of such suit will not
adversely affect the financial position and future operations of the Company.
During 1996, most of the Company's transactions were related to the
administration of the Partnership, a limited partnership organized on
February 14, 1995 under the laws of the State of Delaware, for which the
Company has served as the general partner since June 18, 1996. The
Partnership is engaged in the acquisition of licenses from the Federal
Communications Commission ("FCC") to serve as provider of Personal
Communications Services ("PCS"). The Company is entitled to 25% of all
distributions made by the Partnership.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles. The following summarizes the most significant
accounting policies followed in the preparation of the accompanying financial
statements:
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
74
<PAGE>
CASH EQUIVALENTS
The Company considers highly liquid investments with maturity of three months
or less, at the time of purchase, to be cash equivalents. No cash equivalents
were held by the Company at December 31, 1996.
INVESTMENT IN PARTNERSHIP
The investment in the Partnership represents an investment amounting to
$100,000. The Company accounts for the investment in the Partnership using
the equity method. As of December 31, 1996, the Company's investment in the
undistributed losses of the Partnership amounted to approximately $3,847,000,
therefore, the carrying value of its investment was written down to zero.
NOTE 2--RELATED PARTY TRANSACTIONS:
The partnership agreement with the Partnership, as amended, provides for
payment of a management fee to its general partner, equal to the reasonable
costs of operating the business of the Partnership, plus 10% of such
aggregate amount, which fee shall be payable monthly, on the first day of
each month during the year. Expenses reimbursed include, but are not limited
to, compensation costs, and expenses related to officers, directors, and
employees in the performance of their duties. During 1996, fees billed
amounted to approximately $205,000.
All other related party transactions are advances from / to affiliated
companies made in the ordinary course of business.
NOTE 3--NOTE PAYABLE:
Note payable consists of a nonrecourse promissory note due to an affiliate
amounting to $100,000, bearing interest at 7%, and due on June 18, 2003.
NOTE 4--INCOME TAX:
Under the provisions of the Puerto Rico tax law, the loss on the investment
in partnership is not deductible until it is finally determined that the
investment is worthless.
75
<PAGE>
NOTE 5--CAPITAL:
The Company is authorized to issue 2,000 shares, which shall be divided into
1,000 shares of restricted voting common stock without par value and 1,000
shares of restricted non-voting preferred stock without par value. The
preferred shares are divided into classes, from A to J with 100 shares each
class and upon their issuance the Company has the option to redeem them at
their issuance price plus accrued dividends. At December 31, 1996 none of the
preferred shares had been issued.
NOTE 6--SUPPLEMENTAL CASH FLOW INFORMATION:
During the year, the Company issued a nonrecourse promissory note amounting
to $100,000 (See Note 3) to acquire the investment in the Partnership.
NOTE 7--BID WITHDRAWAL PAYMENT AND PENALTY:
In 1996, the Partnership, through its bidding agent, inadvertently submitted
an erroneous bid for one of the licenses being auctioned. Although the
Partnership withdrew the bid immediately, the FCC could have imposed a very
substantial penalty for withdrawal of the then highest submitted bid, which
penalty is based on the difference between the bid withdrawn and the eventual
highest bid. The Company filed a petition for a waiver of the penalty or, in
the alternative, a substantial reduction in the penalty amount, as the FCC's
rules were intended to deter frivolous and manipulative bids, and not errors.
On December 20, 1996, the FCC issued an order (the "Order") resolving the
Partnership's request for waiver of the related bid withdrawal payment for
the license applicable to Round 11 of the Broad Band PCS C Block auction for
which the FCC ordered the Partnership to pay a penalty of approximately
$3,300,000. This Order also assessed a bid withdrawal payment of
approximately $1,258,000 for license B332 (Omaha, Nebraska) for the Broad
Band PCS C block auction. In accordance with the Order, these amounts were
deducted from the Partnership's deposit with the FCC. In addition to the
December 20, 1996 order, the FCC issued a Notice of Apparent Liability for
Forfeiture dated January 22, 1997, finding the Partnership liable for
$1,000,000 for misrepresentations made to the FCC by its bidding agent. It is
the Partnership's intention to recover this and other expenses related to the
bidding error from its former bidding agent.
As a result of the assessment made and penalty imposed by the FCC, the
Partnership and its General Partner filed, on June 6, 1996, an action for
damages against Romulus Telecommunications, Inc. (bidding agent) and one of
its directors, wherein they seek reimbursement for the defendants' gross
negligence and subsequent fraudulent acts in covering up an error in bidding
in the January 23, 1996 FCC auction for certain telecommunication
76
<PAGE>
market. In connection with this case, the Partnership has attached the $6.5
million deposited in the name of Romulus Telecommunications, Inc. ("Romulus")
with a local bank and posted $25,000 bond pursuant to such order. Romulus and
its director have both filed separate requests for arbitration. The
Partnership has filed for dismissal of these proceedings. Management is
pursuing this matter vigorously and is confident that its position will
prevail.
NOTE 8--CONTINGENCY:
In mid 1996, Romulus's director and his wife filed declaratory relief actions
against the Company in regard to the respective rights and duties revolving
around the erroneous bid submitted on behalf of the Partnership to the FCC in
connection with PCS licenses (See Note 7).
In November 1996, certain limited partners of the Partnership filed a suit in
the Circuit Court of the State of Oregon against the Company and certain of
its officers, directors, employees and consultants. The suit alleges that
defendants employed misstatements and omissions of fact in connection with
the sale of limited partnership units of the Partnership and seeks the return
of the investment of $25,000 per unit for approximately 22 units, plus
interest and attorney fees. The case is in the early stage, however, the
Company is defending this matter vigorously.
Management believes that the outcome of these lawsuits will not have an
adverse effect on the Company's financial condition or results of operations.
NOTE 9--SUBSEQUENT EVENTS:
On January 22, 1997 the Partnership was granted the 15 Broad Band PCS C block
licenses for which it has been the high bidder in the PCS auctions which
remained pending at December 31, 1996.
77
<PAGE>
ITEM 14.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 15.FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements
ClearComm, L.P.
Report of Independent Accountants 45
Statement of Assets, Liabilities and Partners' Capital for fiscal
years ended
December 31, 1995 and December 31, 1996 46
Statement of Revenues and Expenses for fiscal years ended
December 31, 1995 and December 31, 1996 48
Statement of Cash Flow for fiscal years ended December 31, 1995 and
December 31, 1996 49
Statement of Changes in Partners' Capital Accounts for fiscal years
ended December 31, 1996 51
Notes to Financial Statements 52
Statement of Assets, Liabilities and Partners' Capital as of
March 31, 1997 (unaudited) 57
Statement of Revenues and Expenses for the three months ended
March 31, 1997 and March 31, 1996 (unaudited) 58
Statement of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 (unaudited) 59
Statement of Changes in Partners' Capital Accounts
from inception on January 24, 1995 through March 31, 1997
(unaudited) 61
Notes to Interim Financial Statements 62
SuperTel Communications Corp.
Report of Independent Accountants 69
Balance Sheet, December 31, 1996 70
Statement of Revenues and Expenses from inception to
December 31, 71
Statement of Cash Flows from inception to December 31, 1996 72
Notes to Financial Statements 73
78
<PAGE>
(b) Exhibits
Exhibit
Number
3.1 Agreement of Limited Partnership (Exhibit 3.1 of the
Partnership's Registration Statement on Form 10 (File No.
0-28362), effective June 28, 1996, is hereby incorporated by
reference)
10.1 Form of Services Agreement between PCS 2000, L.P. and Romulus
Telecommunications, Inc. (Exhibit 10.1 of the Partnership's
Registration Statement on Form 10 (File No. 0-28362), effective
June 28, 1996, is hereby incorporated by reference)
10.2 Asset Purchase Agreement, dated as of June 18, 1996, by and
between SuperTel Communications Corp. and Unicom Corporation
(Exhibit 10.2 of the Partnership's Registration Statement on Form
10 (File No. 0-28362), effective June 28, 1996, is hereby
incorporated by reference)
27 Financial Data Schedule
79
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
ClearComm, L.P.
By: SuperTel Communications Corp.
By: /s/ Richard Reiss
--------------------------
Name: Richard Reiss
Title: Chief Executive Officer
Capacity in
Signature Which Signed Date
/s/ Fred H. Martinez Director and Chairman June 19, 1997
- -------------------------- of the Board
Fred H. Martinez
/s/ Richard Reiss Director, Chief Executive June 19, 1997
- -------------------------- Officer and Treasurer
Richard Reiss
/s/ Javier O. Lamoso Director and Executive June 19, 1997
- -------------------------- Vice President
Javier O. Lamoso
/s/ Gary H. Arizala Director June 19, 1997
- --------------------------
Gary H. Arizala
/s/ Margaret W. Minnich Director June 19, 1997
- --------------------------
Margaret W. Minnich
/s/ Lawrence Odell Director June 19, 1997
- --------------------------
Lawrence Odell
/s/ Daniel J. Parks Director June 19, 1997
- --------------------------
Daniel J. Parks
/s/ James T. Perry Director June 19, 1997
- --------------------------
James T. Perry
/s/ Nezam Tooloee Director June 24, 1997
- -------------------------
Nezam Tooloee
80
<PAGE>
EXHIBIT INDEX
Exhibit Description
3.1 Agreement of Limited Partnership (Exhibit 3.1 of the Partnership's
Registration Statement on Form 10 (File No. 0-28362), effective June
28, 1996, is hereby incorporated by reference)
10.1 Form of Services Agreement between PCS 2000, L.P. and Romulus
Telecommunications, Inc. (Exhibit 10.1 of the Partnership's
Registration Statement on Form 10 (File No. 0-28362), effective June
28, 1996, is hereby incorporated by reference)
10.2 Asset Purchase Agreement, dated as of June 18, 1996, by and between
SuperTel Communications Corp. and Unicom Corporation (Exhibit 10.2 of
the Partnership's Registration Statement on Form 10 (File No.
0-28362), effective June 28, 1996, is hereby incorporated by
reference)
27 Financial Data Schedule
81
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,043
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,137
<PP&E> 18
<DEPRECIATION> (4)
<TOTAL-ASSETS> 360,248
<CURRENT-LIABILITIES> 1,582
<BONDS> 313,668
0
0
<COMMON> 69,130
<OTHER-SE> (24,132)
<TOTAL-LIABILITY-AND-EQUITY> 360,248
<SALES> 0
<TOTAL-REVENUES> 110
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,343)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,343)
<EPS-PRIMARY> (2.3)
<EPS-DILUTED> (3.0)
</TABLE>
