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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
For Annual and Transition Reports to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(Mark one)
/_/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1999 or
-----------------
/_/ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from _______________________ to _______________
Commission file number 0-28362
ClearComm, L.P.
(Exact Name of Registrant as Specified in its Charter)
Delaware 66-0514434
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
221 Ponce de Leon Avenue
Suite 1401
Hato Rey, Puerto Rico 00917-1825
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (787) 756-0840
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The Registrant's outstanding securities consist of units of limited
partnership interests which have no readily ascertainable market value since
there is no public trading market for these securities on which to base a
calculation of aggregate market value.
Documents incorporated by reference. None.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
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Page
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<S> <C> <C>
Item 1. Business..................................................................... 4
Item 2. Properties................................................................... 8
Item 3. Legal Proceedings............................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......................... 9
Part II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................................... 9
Item 6. Selected Financial Data...................................................... 11
Item 7. Management's Discussion and Analysis of Financial Consideration and
Results of Operations........................................................ 14
Item 7A. Quantitative And Qualitative Disclosures About Market Risk................... 18
Item 8. Financial Statements and Supplementary Data.................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 51
Part III
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Item 10. Directors and Executive Officers of the Registrant........................... 51
Item 11. Executive Compensation....................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 54
Item 13. Certain Relationships and Related Transactions............................... 55
Part IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 56
SIGNATURES
............................................................................. 58
</TABLE>
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FORWARD-LOOKING STATEMENTS
This Form 10-K and future filings by the Partnership on Form 10-Q and
Form 8-K and future oral and written statements by the Partnership may include
certain forward-looking statements, including (without limitation) statements
with respect to anticipated future operating and financial performance, growth
opportunities and growth rates, acquisition and divestitive opportunities, and
other similar forecasts and statements of expectation. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," and
"should," and variations of these words and similar expressions, are intended to
identify these forward-looking statements. Forward-looking statements by the
Partnership are based on estimates, projections, beliefs and assumptions of
management and are not guarantees of future performance. The Partnership
disclaims any obligation to update or revise any forward-looking statement based
on the occurrence of future events, the receipt of new information, or
otherwise.
Actual future performance, outcomes and results may differ materially
from those expressed in forward-looking statements made by the Partnership as a
result of a number of important factors. Examples of these factors include,
without limitation, failure to develop the Partnership's PCS licenses in
California due to an inability to obtain satisfactory financing or partners;
rapid technological developments and changes in the telecommunications industry;
ongoing deregulation (and the resulting likelihood of significantly increased
price and product/service competition) in the telecommunications industry as a
result of the Telecommunications Act of 1996 and other similar federal and state
legislation and the federal and state rules and regulations enacted pursuant to
that legislation; regulatory limitations on the Partnership's ability to compete
in the telecommunications services industry; and continuing consolidation in the
telecommunications services industry. In addition to these factors, actual
future performance, outcomes and results may differ materially because of other,
more general, factors including, without limitation, general industry and market
conditions and growth rates, domestic and international economic conditions,
governmental and public policy changes and the continued availability of
financing in the amounts, at the terms and on the conditions necessary to
support the Partnership's future business.
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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"). The
Partnership competed for PCS licenses in frequency Block C, set aside for
"designated entities" ("Entrepreneurs") that met certain financial and equity
structure requirements and that qualify for certain benefits under rules,
regulations and policies of the FCC and related statutory provisions ("FCC
Rules").
The Partnership, through its wholly-owned subsidiary, NewComm Wireless
Services, Inc. ("NewComm"), owns and operates a state-of-the-art PCS network in
Puerto Rico (the "Puerto Rico Network"). The Partnership directly or indirectly
through NewComm owns two 15 MHz C-Block PCS licenses covering the entire island
of Puerto Rico (the "Puerto Rico Licenses") and five 15 MHz licenses in
California (the "California Licenses," and together with the Puerto Rico
Licenses, the "Licenses"). SuperTel Communications Corp., the general partner of
the Partnership (the "General Partner") is actively engaged in the pursuit of
business alliances and strategic partners to develop the California Licenses.
Although no assurances can be made, the Partnership anticipates that it will
negotiate acceptable agreements regarding the California Licenses so that it
will be able to offer wireless services in the regions covered by these
licenses.
The Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement") provides that the Partnership will terminate on
December 31, 2005. The Partnership will dissolve on such date (unless terminated
earlier or unless the Partnership Agreement is amended to change such date). The
General Partner is contemplating reorganizing the Partnership to convert it to a
corporation. The General Partner is considering such a reorganization so that
the Partnership can access the public capital markets and potentially provide
liquidity to its limited partners (the "Investors"). Such a reorganization would
require the approval of the General Partner as well as the approval of the
holders of a majority of Partnership's units of limited partnership (the
"Units").
The Puerto Rico Network
The Partnership started building its Puerto Rico Network during the
first quarter of 1999 and the system commenced commercial operations during
September 1999. The Partnership was the fifth entrant into the Puerto Rico
wireless telecommunications market. It currently provides wireless coverage in
the areas where 90% of the Puerto Rico wireless traffic occurs. The Partnership
has established points of sale in all major shopping districts in Puerto Rico.
The Partnership believes that since it commenced operations it has obtained
approximately one-half of all new wireless activations in Puerto Rico. The
Partnership expects to be the first wireless company to provide internet content
through its wireless terminals in Puerto Rico and expects to continue its rapid
growth.
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To build and operate its Puerto Rico network, the Partnership entered
into an agreement, dated February 4, 1999 (the "TLD Agreement") with Telefonica
Larga Distancia de Puerto Rico, Inc. ("TLD"). TLD is a wholly owned subsidiary
of Telefonica Internacional, S.A. which is a member of the Telefonica S.A. group
(Ticker: TEF) (the "Telefonica Group"), Spain's largest traded company and one
of the world's largest telecommunication companies. Pursuant to the terms of the
TLD Agreement, the Partnership transferred the Puerto Rico Licenses and
associated business plans and studies to NewComm. TLD provided NewComm a loan of
approximately $19.96 million and received a convertible promissory note (the
"Note") which entitles TLD to select a director for one of the five NewComm
board of director seats (the "Board"). The Note is convertible into 49.9% of
NewComm's equity. The Note cannot be converted, however, until the FCC
authorizes TLD to hold more than a 25% equity interest in NewComm. Once the Note
is converted and the FCC designated entity rules no longer apply, subject to FCC
approval, TLD will be entitled to three of six Board positions. NewComm and TLD
have entered into a management agreement whereby TLD provides day-to-day
management services for NewComm, subject to the supervision of NewComm's Board.
TLD also received an option (the "Option") to buy an additional 0.2%, which
would bring its ownership to 50.1%, subject to a third-party valuation and FCC
approval. The Option cannot be exercised prior to January 22, 2002, unless the
ownership restrictions on the Puerto Rico Licenses are eliminated by the FCC. In
addition, the Partnership has an option to buy out TLD's interest in NewComm
before the transfer restrictions on the Puerto Rico Licenses lapse.
The Partnership's Puerto Rico Network operates under the image and
brand name "MoviStar." MoviStar is the PCS brand name of the Telefonica Group in
Spain and the Partnership expects to benefit from the goodwill associated with
that name. Pursuant to a roaming agreement with the Puerto Rico Telephone
Company's cellular division, MoviStar customers have island wide coverage in
Puerto Rico, as well as mainland U.S. coverage pursuant to an agreement with the
Sprint PCS network. In addition, the Partnership expects to benefit from the
experience and knowledge of the Telefonica Group. The Puerto Rico Network is a
state-of-the-art CDMA (Code Division Multiple Access) network that will be
combined with the telecommunications services that are already being offered in
Puerto Rico to TLD customers. TLD offers a variety of telecommunications
services in Puerto Rico ranging from intra-island long distance for local
clients and "carriers" to data transmission and internet. Since February 1999,
it has also been offering intra-island telephone services.
Lucent Technologies, Inc. ("Lucent"), builder of the Puerto Rico
Network, will complete the island wide PCS network by the second quarter of
2000. The build out costs represent an investment of approximately $125 million
which, as a turn-key project, includes the training of technical personnel, and
the operation and maintenance of the network by Lucent during the first year.
The Puerto Rico Market
The Partnership believes that the Puerto Rico market provides many
unique advantages for telecommunications companies. Puerto Rico is politically
stable, as it has been a territory of the United States since 1898 and its
economy is fully integrated with that of the United States mainland. It has the
Caribbean's best educated, most skilled labor force and the most sophisticated
manufacturing and transportation infrastructure. Puerto Rico has a solid base of
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major manufacturers which includes, Digital Equipment Corporation, Intel Corp.,
Hewlett-Packard Company, Microsoft Corporation, BASF Corporation,
Colgate-Palmolive Partnership, Johnson & Johnson, and Pfizer Pharmaceutical Inc.
Along with its U.S.-linked stability, Puerto Rico offers the advantage of
emerging market type growth and a significant cash based economy. The
Partnership believes that current per capita income and consumption in Puerto
Rico, combined with continued economic growth will support continued strong
demand for the high quality telephone services which the Partnership is
offering.
Competition in Puerto Rico
The success of the Partnership's PCS business in Puerto Rico will
depend upon its ability to compete with the two cellular operators and two
operating PCS networks, potential competition from two other PCS licensees and
potential future wireless communications providers in the Puerto Rico market.
The Partnership is aware that Sprint PCS is building a PCS network which is
expected to commence operations in 2001. The Partnership expects that the
existing cellular providers will upgrade their networks to provide comparable
services in competition with the Partnership. The Partnership also faces
competition from other existing communications technologies such as conventional
mobile telephone service, specialized mobile radio ("SMR") and enhanced
specialized mobile radio ("ESMR"). The Partnership believes that ESMR will have
a limited competitive impact against PCS, particularly in the consumer mass
market sector, largely because of technical limitations and limited bandwidth.
In the future, PCS could potentially compete more directly with traditional
landline telephone service providers and other technologies including mobile
satellite systems. In addition, the availability of new spectrum and resale of
existing spectrum and the entry of new participants, may result in increased
competition in the Puerto Rico market.
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Markets
The following table sets forth as of December 31, 1999, with respect to
each Market in which the Partnership owns a PCS license, the estimated persons
of population ("POPs").
Market Name 1997 POPs* 1990 POPs**
-------------------------- ----------------- -----------------
San Juan, PR 2,688,000 2,170,250
Mayaguez-Aguadilla, PR 1,083,000 1,325,600
Modesto, CA 487,000 418,980
Visalia-Porterville, CA 487,000 413,390
Redding, CA 284,000 253,260
Merced, CA 227,000 192,710
Eureka, CA 157,000 142,580
Total: 5,414,000 4,916,770
*Based on the Paul Kagan 1998 PCS Atlas and Databook.
**Based on the 1990 census figures used by the FCC.
Regulation
Overview
In 1993, Congress adopted the Omnibus Budget Reconciliation Act of 1993
(the "Reconciliation Act") which, among other things, mandated Auctions for the
award of certain FCC licenses, including PCS licenses. Pursuant to authority
granted to the FCC by the Reconciliation Act, the FCC awarded PCS licenses
through a process of competitive bidding auctions in which there were multiple
applications for the same license (the "Auctions").
PCS is a radio-based transmission technology which, like cellular
technology, uses the same frequencies repeatedly in a multiple-transmitter cell
design. 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.
Frequency Blocks
The FCC has divided PCS into six frequency blocks, designated Blocks A
through F, such that there are six overlapping licenses in each market in each
geographic area of the country. Blocks A, B and C are 30 MHz blocks, and Blocks
D, E and F are 10 MHz blocks. The FCC has created new C2 blocks of 15 MHz in
certain markets including Puerto Rico and California.
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Entrepreneur Classes and Economic Preferences
Block C and F licenses were reserved for Entrepreneurs meeting certain
limiting criteria set forth in FCC Rules. Entrepreneurs were granted a set of
economic preferences in the Auctions. Under FCC Rules, an Entrepreneur is
defined as an entity that, together with its affiliates and persons or entities
that hold attributable interests in such entity and their affiliates, has less
than (i) $500 million of assets, and (ii) $125 million of annual gross revenue
over the prior two years. In addition, FCC Rules define three classes of
Entrepreneurs, with each class eligible for different economic preferences in
the Blocks C and F Auctions. The Partnership's Entrepreneur qualification is as
a "Small Business," which is an entity that has less than $40 million of
aggregate annual gross revenue averaged over the last three years.
Small Businesses are entitled to make interest-only payments for the
first six years and can amortize interest and principal over the remaining four
years of the license term. The interest rate applicable to Small Businesses is
the 10-year treasury note rate at the date of grant of the license. In addition,
Small Businesses were entitled to a bidding credit of 25%. In March 1997, the
FCC issued an order suspending indefinitely interest payments on all Block C
licenses; however, interest continued to accrue. Ultimately, in accordance with
the FCC procedures specified in the FCC's March 24, 1998 Order on
Reconsideration of the Second Report and Order (the "Reconsideration Order"),
the Partnership commenced interest payments during July, 1998.
Build-Out Requirements
All PCS license holders are required to meet certain requirements
imposed by the FCC relating to the provision of service in each license area.
Block C license holders must provide coverage to one-third of the POPs in each
license service area within five years of license grant and two-thirds of the
POPs in each license service area within ten years of license grant. These
periods were rescheduled by the FCC to begin on June 8, 1998. Failure to comply
with the build-out requirements could subject the Partnership to license
forfeiture or other penalties, and may have a material adverse effect on the
financial condition of the Partnership.
Employees
The Partnership including its wholly owned subsidiary NewComm had 211
employees in 1999.
ITEM 2. PROPERTIES
The Partnership leases office space in Hato Rey, Puerto Rico. In
connection with the build-out by NewComm of the Partnership's Puerto Rico
Network, NewComm leases sites where its telephone switching equipment, relay
stations and other equipment are located, as well as sites and kiosks in malls
and shopping centers where it sells its services to the public.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is subject to two separate civil actions that have now
been consolidated in the Circuit Court of the State of Oregon for Multnomah
County. The first was filed in
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November 1996 and amended in August 1997. The second was filed in August 1997.
In both cases certain officers, directors, employees, and consultants of the
General Partner, as well as persons unrelated to the General Partner and the
Partnership have been named as defendants. Both lawsuits alleged certain
securities law violations, common law fraud, and activities violating Oregon's
racketeering laws in connection with the Partnership's initial sale of Units. In
February 1998, the court dismissed the racketeering claim and dismissed the
other claims in August 1998. On or about October 20, 1998, the Partnership was
notified that the plaintiffs had filed a request for arbitration of some of
these claims underlying these actions with the American Arbitration Association.
In addition, the plaintiffs have noticed an appeal of the dismissal order. The
Partnership believes the suit is without merit and is vigorously defending this
lawsuit.
Further, on February 4, 1999, the Partnership and NewComm filed an
application with the FCC for a pro forma assignment of the Puerto Rico Licenses
to NewComm, and the FCC granted the application on February 18, 1999. On March
22, 1999, Centennial Communications Corp. ("Centennial") filed a Petition for
Reconsideration (the "Petition") with the FCC seeking to rescind the assignment
of the Licenses to NewComm or to stay the effectiveness of the assignment
pending resolution of the issues raised in the Petition. Centennial alleges that
there are facts warranting an investigation into whether TLD is exercising de
facto, if not de jure, control over the Puerto Rico NewComm licenses in
violation of the FCC's broadband PCS designated entity rules. The Partnership
believes that all of its actions were in conformity with FCC rules, and that the
allegations are without merit. The Partnership will vigorously oppose the
Petition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no trading market for the Units, and it is unlikely that a
trading market will exist at any time in the future unless the Partnership is
restructured. Any transfer of the Units is severely restricted by certain
conditions outlined in the Partnership Agreement, and requires the consent of
the General Partner which can be withheld in the General Partner's sole
reasonable discretion.
Between September 15, 1999 and December 31, 1999, the Partnership
conducted a capital call, in which it sold to its existing Investors one-fifth
Units at a price of $6,000 per one-fifth Unit. The Partnership sold 385
one-fifth Units to its existing Investors for an aggregate price of $2,310,000
and incurred approximately $245,000 in related expenses. Five one-fifth Units
are the equivalent of one Unit. The Partnership did not pay any commissions in
connection with the capital call. This offering was made in reliance upon, among
others, the exemption from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D of the Rules and
Regulations of the Securities and Exchange Commission for an offer and sale of
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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.
As of December 31, 1999 only the General Partner holds a general
partnership interest and 1,633 Investors hold an aggregate of 2,903.1 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 was filed
as an Exhibit to the Partnership's 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 will not be cash deficits. Further,
because operating expenses are subject to increases, and increases in revenue
from Partnership operations may be subject to market limitations, income from
the Partnership in any year may not be sufficient to generate Cash Flow.
Net losses from operations of the Partnership will be allocated as
follows: first, to the Investors to offset any profits previously allocated to
the Investors, and second, 75% to the Investors in accordance with the number of
Units held by each Investor and 25% to the General Partner. The gain from a
financing, refinancing, sale or other disposition of the Partnership's assets
(or from similar capital transactions) (collectively, "Capital Transactions")
will be allocated 75% to the Investors and 25% to the General Partner. The loss
from a Capital Transaction will be allocated in the same way that net losses
from the Partnership's operations are allocated. Further adjustments to capital
accounts may be required and are authorized by the Partnership Agreement to
comply with the provisions of any future Internal Revenue Service regulations.
The Partnership may realize net proceeds (that is, proceeds available
after the payment of certain fees and expenses including payments to the General
Partner or its affiliates) from a Capital Transaction. No assurance can be
given, however, as to the availability of a Capital Transaction or the amount of
net cash proceeds therefrom. Any amounts received by the Partnership which
constitute amounts derived from a Capital Transaction, will be treated as being
received from operations of the Partnership and will be distributed to Investors
only if the General Partner determines to do so.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data of
the Partnership from the period from inception (January 24, 1995) to December
31, 1995, and from January 1, 1996 to December 31, 1996, from January 1, 1997 to
December 31, 1997, from January 1, 1998 to December 31, 1998 and from January 1,
1999 to December 31, 1999. This information should be read in conjunction with
the Partnership's consolidated financial statements and related notes thereto
and management discussion contained herein.
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Statement of Operations Data
<TABLE>
<CAPTION>
January 24, 1995
(Date of Inception)
to December 31, December 31, December 31, December 31, December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Revenues:
Service Revenues $ 4,950,769
Handsets and Accessories Sales 2,357,790
Interest Income $ 1,469,099 $ 66,767 $ 495,614 $ 324,232 832,006
----------- ------------ ------------ ---------- ------------
Total Revenues $ 1,469,009 $ 66,767 $ 495,614 $ 324,232 $ 8,140,565
Total Expenses:
Operating expenses $ 8,183,465 $ 3,610,469 $ 13,439,921 $ 5,702,188 $ 30,335,323
Omaha Withdrawal Fee 1,257,771
Norfolk Bid Withdrawal 3,273,374
Forfeiture Imposed by FCC 1,000,000
Settlement credit on legal disputes (2,090,876)
Norfolk Bid Withdrawal (2,848,374)
License cost forfeiture after
disaggregation, prepayment and amnesty
options offered FCC 10,989,972
Subtotal: $ 8,183,465 $ 9,141,614 $13,439,921 $11,752,910 $ 30,335,323
----------- ------------ ------------ ----------- ------------
Net Loss (6,714,366) (9,074,847) (12,944,307) (11,428,678) (22,194,758)
============ ============ ============ ============ ============
Net Loss Attributable to General
Partner.................................... $(1,678,592 $(2,268,712) $ (3,236,077) $(2,857,169) $ (5,548,689)
============ ============ ============ ============ ============
Net Loss Attributable to
Unitholders ($1,933.49) in 1995, ($2,609.71)
in 1996, ($3,495.94) in 1997, ($3,033.08)
in 1998 and ($5,888.24) in 1999 per
Unit, respectively $(5,035,774) $(6,806,135) $ (9,708,230) $(8,571,509) $(16,646,069)
============ ============ ============ ============ ============
</TABLE>
(1) The 1997 amounts include payment of $6,511,250 to Romulus Telecommunications
Corp. for its services in preparation of the Partnership's FCC application to
bid in the FCC C-Block auctions and bidding at the auctions.
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<TABLE>
<CAPTION>
Balance Sheet Data
December 31, December 31, December 31, December 31, December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and Cash Equivalents......... $ 2,727,541 $ 2,492,851 $ 9,761,729 $ 4,246,412 $ 6,546,305
Accounts Receivable............... 1,633,024 3,244,067
Inventory......................... 9,201,823
Other Assets...... 50,096,000 45,583,928 213,958 143,883 1,406,684
Restricted Cash................... 6,511,250 6,511,250
PCS Licenses...................... 270,245,139 64,757,512 67,543,320
Property Equipment, Net........... 89,200,611
----------- ----------- ------------ ----------- ------------
Total:............................ $59,334,791 $54,588,029 $280,220,826 $70,780,831 $177,142,810
=========== =========== ============ =========== ============
LIABILITIES AND PARTNERS'
CAPITAL:
Accounts Payable and Accrued
Liabilities....................... $ 836,657 $ 287,242 $ 6,469,357 $ 2,317,681 108,375,688
Notes Payable..................... 231,415,989 37,550,348 57,984,462
Unitholders' Equity (2,604.5 Units
in 1995, 2,719.6 Units in 1996,
2,825.9 Units in 1997 and 2,826.1
Units in 1998; 2,903.1 Units
in 1999 and 1 general partnership
interest)......................... $58,498,134 52,300,787 $ 42,335,480 $30,912,802 10,782,660
----------- ---------- ------------ ----------- ------------
Total:............................ $59,334,791 $54,588,029 $280,220,826 $70,780,831 $177,142,810
=========== =========== ============ =========== ============
Book Value Per Unit $ 22,452 $ 19,224 $ 14,976 $ 10,934 $ 3,713
=========== =========== ============ =========== ============
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The Partnership was formed in January 1995 and is managed by its
General Partner, SuperTel Communications Corp. The Partnership was organized to
acquire, own, consult and operate personal communication services PCS licenses
in the Block C band and to take advantage of the benefits that the FCC has set
aside for Entrepreneurs. The Partnership owns the Puerto Rico Licenses, which
consist of two 15 MHz PCS licenses covering Puerto Rico, and the California
Licenses, which consist of five 15 MHz PCS licenses covering the California
cities of Eureka, Redding, Modesto, Merced and Visalia.
The Partnership commenced commercial operations of its PCS network in
Puerto Rico on September 26, 1999 when it began offering wireless services in
Puerto Rico to the public. Prior to that date, its income had consisted of
interest earnings only. Since the Partnership has only recently commenced
commercial operations, the comparisons presented below may not be indicative of
future operations.
The Partnership established its Puerto Rico network by forming a wholly
owned subsidiary, NewComm on January 29, 1999. On February 4, 1999 the
Partnership and NewComm entered into an agreement with TLD, whereby the
Partnership contributed its two Puerto Rico Licenses to NewComm and TLD provided
NewComm a $19,960,000 loan to develop the Puerto Rico Licenses. TLD's loan is
pursuant to a secured convertible promissory note (the "Note") which is a
convertible into 49.9% of NewComm's equity. The Note however, cannot be
converted until the FCC authorizes TLD to hold more than a 25% equity interest
in NewComm. TLD also received an option (the "Option") to buy an additional
0.2%, which would bring its ownership to 50.1%, subject to a third-party
valuation and FCC approval. The Option cannot be exercised prior to January 22,
2002, unless the ownership restrictions on the Puerto Rico licenses are
eliminated by the FCC. NewComm, however, has the option to buyout TLD in the
last year before the restrictions on the Puerto Rico licenses lapse.
With respect to its California Licenses, which cover approximately 1.6
million POPS in California, the Partnership anticipates establishing the
California Network. Although no assurances can be made, the Partnership
anticipates that it will negotiate acceptable agreements regarding these
licenses so that it will be able to offer wireless services in the regions
covered by these licenses.
Results of Operations - 1999 Compared to 1998
The Partnership's revenues for the year ended December 31, 1999, which
amounted to $8,140,565 included $ 4,950,769 in service revenues and $ 2,357,790
in handset and accessories sales generated from NewComm's wireless operations,
which started in Puerto Rico in September 1999. In 1998, the Partnership had
interest earnings of $324,232 compared to
14
<PAGE>
$832,006 in 1999. The increase in interest during 1999 is attributable to
NewComm's investment of the funds loaned by TLD.
Expenses
Expenses for the year ended December 31, 1999 totaled $30,335,323
compared to $11,752,910 for the same period in 1998. Expenses incurred in 1998
included legal fees incurred in Oregon litigation and proceedings before the
FCC. The increase in expenses during 1999 is attributable to the costs
associated with NewComm's operations that started in September 1999. During
1999, the Partnership's expenses included $4,430,637 in costs of handset and
accessories, $5,128,280 for salaries and benefits, $2,263,002 for interest
expense due on notes payable, $2,957,683 in depreciation and amortization,
$10,430,654 in advertising, sales, interconnection, management fee, rent and
other expenses, $2,144,349 for legal and professional services and $2,980,718
for consulting and legal services associated with the start-up of NewComm
charged by related parties such as TLD and TISA.
Liquidity and Capital Resources
As of December 31, 1999, the Partnership had cash and cash equivalents
amounting to $6,546,305, which are mostly related to the loan proceeds NewComm
received from TLD and the net proceeds received from the capital call conducted
between September 15, 1999 and December 31, 1999. In the capital call, the
Partnership sold to its existing Investors 385 one-fifth Units, at a price of
$6,000 per one-fifth Unit, and received net proceeds of approximately
$2,065,000.
In connection with the build out of the Partnership's Puerto Rico
Network, NewComm has incurred a liability with Lucent Technologies, Inc. (the
entity which is building out the network) for the PCS network under construction
in the amount of $82,919,119. The total amount of this contract is approximately
$125 million.
In addition the Partnership owes the United States federal government
approximately $51,339,555 (undiscounted) plus accrued interest at 6.5% of
$1,251,329 in connection with the acquisition of its PCS licenses. As of
December 31, 1999, the notes payable to FCC are presented net of a discount of
approximately $13,026,161.
The Partnership has a secured promissory note payable to TLD which
bears interest at the floating rate of 90 days LIBOR plus 1.5% and is due in
March 2004. In addition, in February 2000 the joint venture agreement with TLD
was amended to provide NewComm a revolving line of credit of approximately $30
million for working capital from TLD.
The increase in inventory as of December 31, 1999 is related to the
build out of the PCS network which requires NewComm to keep an adequate amount
of inventory to supply the demand of its increasing customer base. Inventory
held as of the end of the year amounted to $9,201,823.
The Partnership expects that the total cost to implement NewComm's
business plan to be approximately $200 million. This consists of approximately
$125 million in costs associated
15
<PAGE>
with building out the Puerto Rico Network, and approximately $75 million to fund
NewComm's operations until it becomes profitable. NewComm has been negotiating
with two banks and the Partnership believes that it can obtain short term
financing of $60 million at a rate of 1.5% over 90 day LIBOR. In addition, the
Partnership believes such banks will be willing to provide long term financing
of $150 million provided that the Partnership and TLD contribute additional
capital to NewComm. The Partnership believes that the additional capital
contribution by it and TLD along with the proposed long term financing would
fully fund NewComm's operations.
As a result of the restructuring of its FCC debt in June 1998, the
Partnership has no outstanding debt on its California Licenses, which consist of
15MHz of bandwidth covering an approximate population of 1.6 million people in
Eureka, Redding, Merced, Modesto and Visalia, all within the state of
California. Major C Block license holders surrounding the California Licenses
are currently under bankruptcy court proceedings which adversely affects the
Partnership's ability to enter into joint venture agreements to develop these
licenses. However, a re-auction of D, E, F and disaggregated C Block licenses
concluded on April 16, 1999. It is possible that the purchasers of the
re-auctioned licenses may be willing to jointly develop the California Licenses
with the Partnership. The Partnership is actively pursuing alliances and
possible funding mechanisms to develop its California Licenses.
The Partnership anticipates that earnings and cash distributions
derived from its Puerto Rico Network once it is fully operational, and, if
necessary, additional capital calls from its Investors or accessing the public
capital markets, should provide it with the liquidity to meet its obligations.
The Partnership also expects that once it is able to develop its California
Licenses, it will have additional sources of revenues and profits.
Results of Operations - 1998 Compared to 1997
Revenues
The Partnership's sole source of revenue was interest income for the
year ended December 31, 1998. Interest income for this year was $324,232. In
1997, the Partnership had interest earnings of $495,614. The decrease in
interest earnings was primarily due to a decrease in interest rates and a
reduction in available cash used to pay Partnership expenses.
Expenses
Expenses for the year ended December 31, 1998 totaled $11,752,910. This
amount included an accrual for $360,452 of expenses to be reimbursed to the
General Partner, including its management fee, and a license costs for
forfeiture of $10,989,972 after disaggregation, prepayment, and amnesty options
offered by the FCC.
Expenses for the year ended December 31, 1997 totaled $13,439,921. This
amount included an accrual for $369,643 of expenses to be reimbursed to the
General Partner, including its management fee. Also 1997 expenses include the
$6,511,250 classified in the 1996 financial statements as Restricted Cash
expensed in 1997 and advanced to Romulus under its agreement with the
Partnership.
16
<PAGE>
Expenses for the year ended on December 31, 1998 were lower than the
expenses for the same period of 1997 because the 1998 expenses include a
$2,090,876 credit in connection with the Settlement Agreement pursuant to which
the Partnership settled a variety of litigation and claims arising out of a
bidding error made by its bidding agent in 1996. In addition, expenses in 1998
also included a $2,848,374 credit in connection with the Norfolk bid withdrawal
penalty.
Liquidity and Capital Resources
As of December 31, 1998, the Partnership had assets totaling
$70,780,381, consisting of $4,246,412 in cash and cash equivalents, $1,630,024
in accounts receivable, $125,388 in prepaid expenses, $64,757,512 in PCS
Licenses including $8,782,000 in capitalized interest, $18,495 in other assets,
and current liabilities of $2,317,681. As of December 31, 1997, the Partnership
had assets totaling $280,220,826, consisting of $9,761,729 in cash and cash
equivalents, $108,700 in prepaid expenses, $270,245,139 in PCS Licenses
including $25,672,000 in capitalized interest, $25,000 in deposits, $80,258 in
other assets and current liabilities of $6,469,357 and long-term liabilities due
to the FCC including accrued interest of $231,415,989. The Partnership assets
decreased during 1998 because of return of certain PCS licenses pursuant to the
Reconsideration Order.
Results of Operations - 1997 Compared to 1996
Revenues
The Partnership's sole source of revenue was interest income for the
year ended December 31, 1997. Interest income for this year was $495,614. In
1996, the Partnership had interest earnings of $66,767. The increase in interest
earnings is primarily due to the FCC refunding to the Partnership approximately
$11,039,543, which the Partnership had placed on deposit with the FCC in
connection with the acquisition of its PCS licenses and the interest earned by
the additional capital invested by the limited partners during 1997.
Expenses
Expenses for the year ended December 31, 1997 totaled $13,439,921. This
amount included an accrual for $369,643 of expenses to be reimbursed to the
General Partner, including its management fee. Also 1997 expenses includes the
$6,511,250 classified in the 1996 financial statements as Restricted Cash
expensed in 1997 under the Services Agreement and advanced to Romulus. General
and administrative expenses for the period ended December 31, 1996 were
$9,141,614. 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 the management fee of the General Partner. Expenses for the year
ended on December 31, 1997 are higher than the expenses for the same period of
1996 because the 1997 expenses include the amount expensed under the Services
Agreement advanced to Romulus.
Liquidity and Capital Resources
As of December 31, 1997, the Partnership had assets totaling
$280,220,826, consisting of $9,761,729 in cash and cash equivalents, $108,700 in
prepaid expenses, $270,245,139 in PCS
17
<PAGE>
Licenses including $25,672,000 in capitalized interest, $25,000 in deposits,
$80,258 in other assets and current liabilities of $6,469,357 and long-term
liabilities due to the FCC including accrued interest of $231,415,989. 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 on deposit with the FCC,
prepaid expenses of $100,538, other assets of $14,535, $6,511,250 in restricted
cash and current liabilities of $2,287,242. The Partnership assets increased
during 1997 because of the issuance of PCS licenses on January 22, 1997 and
additional capital invested by its existing investors.
During the year ended on December 31, 1997 the Partnership raised
$2,979,000 of additional capital from two capital offerings the first one
commenced September 30, 1996 and ended on January 22, 1997 the amount raised in
1997 was $1,050,000. In addition on March 26, 1997, the Partnership commenced a
second capital offering to its existing Investors of one-fifth units at a price
of $6,000 per one fifth-unit. This offering ended on October 30, 1997 and the
Partnership sold 323.5 one-fifth Units for an aggregate price of $1,929,000.
Three Units were repurchased during the second quarter 1996 from Mr. Breen
following the Bidding Error.
Year 2000 Compliance
The Partnership believes that it has successfully rendered its internal
management and other administrative systems and external information systems
year 2000 compliant. In addition, the Partnership surveyed vendors of
third-party technologies it utilizes in its business and applied updates or made
arrangements to correct potential year 2000 compliance problems. Since January
1, 2000, the Partnership has not experienced significant disruptions in its
business operations as a result of year 2000 compliance problems or otherwise,
and it has received no reports of any material year 2000 compliance problems.
The Partnership continues to monitor its third-party vendors for additional
recommended year 2000 upgrades, which it will apply as soon as they become
available. To date, the total cost of the Partnership's efforts to address year
2000 compliance has not been material. Nonetheless, some problems related to
year 2000 risks may not appear until several months after January 1, 2000. Year
2000 issues could include problems with the Partnership's systems or with
third-party products or technology that it uses or with which its systems
exchange data. Any problems that are not identified and corrected successfully
and completely could adversely affect the Partnership's business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership's exposure to market risk through derivative financial
instruments and other financial instruments is not material because the
Partnership does not use derivative financial instruments and does not have
foreign currency exchange risks. The Partnership invests cash balances in excess
of operating requirements in short-term money market account. As of December 31,
1999, the Partnership had cash equivalents and short-term investments of
approximately $6,546,305 consisting of cash and highly liquid, short-term
investments in a money market account.
18
<PAGE>
The Partnership's cash and cash equivalents will increase or decrease
by an immaterial amount if market interest rates increase or decrease, and
therefore, its exposure to interest rate changes has been immaterial. The
Partnership's loans payable to the FCC have a fixed interest rate of 6.5% and
therefore are not exposed to interest rate risks. The TLD Note relating to
indebtedness of NewComm bears interest at the floating rate of the 90 days LIBOR
plus 1.5% (6.79% at December 31, 1999 and is due on March 2004. The amounts owed
to Lucent in connection with its build out of the Puerto Rico Network consists
of a deferred price and therefore are not subject to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Financial Statements Page
- -------------------- ----
<S> <C>
ClearComm, L.P.
Report of Independent Accountants 20
Consolidated Statements of Assets, Liabilities and Partners' Capital as
of December 31, 1998 and 1999 21
Consolidated Statement of Revenues and Expenses for years ended
December 31, 1997, 1998 and 1999 22
Consolidated Statement of Cash Flows for years ended December 31, 1997,
1998 and 1999 23
Consolidated Statement of Changes in Partners' Capital Accounts from
inception to December 31, 1999 24
Notes to Consolidated Financial Statements 25
SuperTel Communications Corp.
- -----------------------------
Report of Independent Accountants 42
Balance Sheet for December 31, 1998 and 1999 43
Statement of Revenues and Expenses and deficit for the years ended
December 31, 1998 and 1999 44
Statement of Cash Flows for the years ended December 31, 1998 and 1999 45
Notes to Financial Statements 46
</TABLE>
All financial schedules have been omitted because they are not
applicable or because the information required is included in the
financial statements or notes thereto.
19
<PAGE>
Report of Independent Accountants
To the Partners of ClearComm, L.P.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
ClearComm, L.P. and its subsidiaries (the Partnership) at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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.
The accompanying financial statements have been prepared assuming that
the Partnership will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Partnership has not yet obtained the
permanent financing required for paying the cost of its network which raises
substantial doubt about its ability to continue as a going concern. The
Partnership has received proposals from banks to provide short term and long
term financing. Such financing is subject to certain conditions, among others,
additional contributions by its partners in the amount of $50 million.
Management's plans in regard to this matter are further described in Note 3 to
the consolidated financial statements. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
March 29, 2000
Stamp 1603293 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
20
<PAGE>
CLEARCOMM, L.P.
Consolidated Statements of Assets, Liabilities and Partners' Capital
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 6,546,305 $ 4,246,412
Accounts receivable, net of allowance for
doubtful accounts of $425,000 in 1999 3,244,067 81,662
Subscription receivable from limited partners 981,000
Accounts receivable from related parties -- 1,551,362
Inventories 9,201,823 --
Prepaid expenses 425,684 125,388
------------ -----------
Total current assets 20,398,879 6,004,824
------------ -----------
Licenses, including capitalized interest of
$12,174,000 (1998 - $8,782,000) 67,543,320 64,757,512
Property and equipment, net 89,200,611 18,495
------------ -----------
$177,142,810 $70,780,831
============ ===========
Liabilities and Partners' Capital
Current Liabilities
Accounts payable and accrued liabilities $103,178,841 $ 985,691
Accounts payable to related parties 2,815,302 412,540
Accrued interest 2,381,545 919,450
------------ -----------
Total current liabilities 108,375,688 2,317,681
------------ -----------
Long-term liabilities:
Notes payable 57,984,462 37,126,985
Accrued interest -- 423,363
------------ -----------
Total long-term liabilities 57,984,462 37,550,348
------------ -----------
Commitments and contingencies (Notes 15 and 16)
------------ -----------
------------ -----------
Partners' Capital
Limited partners' capital (2903.1 units issued
and outstanding in 1999 and 2,826.1 in 1998) 73,039,616 70,975,000
General partner's capital 100,000 100,000
Undistributed losses
Accumulated during development stage (48,704,525 (40,162,198)
Operations (13,652,431 --
------------ -----------
Total partners' capital 10,782,660 30,912,802
------------ -----------
Total liabilities and partners' capital $177,142,810 $70,780,831
============ ===========
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
CLEARCOMM, L.P.
Consolidated Statement of Revenues and Expenses
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------
Year ended Year ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Service revenues $ 4,950,769
Handset and accesories sales 2,357,790
Interest income 832,006 $ 324,232 $ 495,614
----------- ------------- -------------
8,140,565 324,232 495,614
----------- ------------- -------------
Operating cost and expenses:
Cost of handset and accesories 4,430,637
Interconnection expense 444,285
Sales and dealers commissions 1,646,827
Salaries and benefits 5,128,280 1,331,605 730,828
Advertising expense 3,809,056 24,514 7,350
Legal and professional services 2,144,349 2,088,128 3,053,197
Depreciation and amortization 2,957,683 71,625 26,192
Interest expenses 2,263,002 5,749 2,948
Rent expense 1,824,026 225,115 102,329
Other expenses 2,564,352 837,215 855,942
Management fee to General Partner 142,108 360,452 369,643
Consulting and legal services rendered
by related parties 2,980,718 757,785 8,291,492
Settlement credit on legal disputes with
related parties -- (2,090,876) --
Bid withdrawl penalty credit (Norfolk, Virginia) -- (2,848,374)
License cost forfeiture after
disaggregation, prepayment
and amnesty options offered
by the FCC -- 10,989,972
------------ ------------ ------------
30,335,323 11,752,910 13,439,921
------------ ------------ ------------
Net loss $(22,194,758) $(11,428,678) $(12,944,307)
============ ============ ============
Net loss attributable to General partner $ (5,548,689) $ (2,857,169) $ (3,236,077)
============ ============ ============
Net loss attributable to Limited partners
($5,888.24, $3,033.08 and $3,495.95 per limited
partnership unit in 1999, 1998 and 1997
respectively) $(16,646,069) $ (8,571,509) $ (9,708,230)
============ ============ ============
</TABLE>
The accompany notes are in integral part of these financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
CLEARCOMM, L.P.
Consolidated Statement of Cash Flows
December 31, 1999, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(22,194,758) $(11,428,678) $(12,944,307)
------------ ------------ ------------
Adjustments to reconcile net loss for the period
to net cash used by operating activities:
Depreciation and amortization 2,957,683 71,625 26,192
Bad debt expense 625,000
License cost forfeited after disaggregation, prepayment
and amnesty options offered by the FCC 10,989,972
Increase in accounts receivable (2,236,043) (1,633,024)
Increase in inventories (9,201,823)
(Increase) decrease in prepaid expenses (300,296) 8,312 (8,163)
Increase in deposits (25,000)
(Decrease) in payable to FCC (1,000,000)
Increase (decrease) in accounts payable
and accrued liabilities 14,145,643 (393,711) 733,628
Increase in accrued interest 1,038,732
Increase (decrease) in accunts payable to related parties 2,402,762 (277,578) 48,650
------------ ------------ ------------
Total adjustments 9,006,658 8,765,596 (224,693)
------------ ------------ ------------
Net cash used by operating activities (12,763,100) (2,663,082) (13,169,000)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of fixed assets (3,486,128)
Increase in license cost (2,494,495)
FCC auction deposit returned 11,039,543
Bid withdrawal payment (2,848,374)
Other assets (9,861) (91,915)
------------ ------------ ------------
Net cash (used) provided by investing activities (5,980,623) (2,858,235) 10,947,628
------------ ------------ ------------
Cash flows from financing activities:
Capital investment by partners 1,083,616 6,000 2,979,000
Proceeds from issuance of note payable 19,960,000
Decrease in restricted cash 6,511,250
------------ ------------ ------------
Net cash provided by financing activities 21,043,616 6,000 9,490,250
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,299,893 (5,515,317) 7,268,878
Cash and cash equivalents at beginning of period 4,246,412 9,761,729 2,492,851
------------ ------------ ------------
Cash and cash equivalents at end of period $ 6,546,305 $ 4,246,412 $ 9,761,729
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
CLEARCOMM, L.P.
Consolidated Statement of Changes in Partners' Capital Accounts
December 31, 1999, 1998 and 1997
- -----------------------------------------------------------------------------------------------------
Limited Partners
--------------------- General
Units Amount Partner Total
----- ------ ------- -----
<S> <C> <C> <C> <C>
Balance (deficit) at December 31, 1996 2,719.6 $56,148,091 $(3,847,304) $52,300,787
Capital invested in 1997 106.3 2,979,000 2,979,000
Share of undistributed losses (9,708,230) (3,236,077) (12,944,307)
------- ----------- ------------ -----------
Balance (deficit) at Decmeber 31, 1997 2,825.9 49,418,861 (7,083,381) 42,335,480
Capital invested in 1998 0.2 6,000 6,000
Share of undistributed losses (8,571,509) (2,857,169) (11,428,678)
------- ----------- ------------ -----------
Balance (deficit) at December 31, 1998 2,826.1 40,853,352 (9,940,550) 30,912,802
Capital invested in 1999 77.0 2,065,616 -- 2,064,616
Share of undistributed losses - (16,646,069) (5,548,689) (22,194,758)
------- ----------- ------------ -----------
Balance (deficit) at December 31, 1999 2,903.1 $27,271,899 $(15,489,239) $10,782,660
======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
CLEARCOMM, L.P.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. Reporting Entity
ClearComm, L.P. (the "Partnership") 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. The Partnership will terminate on December 31, 2005,
or earlier upon the occurrence of certain specified events as detailed in the
Partnership Agreement.
SuperTel Communications Corp. ("SuperTel"), a Puerto Rico corporation, is the
General Partner. It total shares 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.
As discussed in Note 10, on January 22, 1997, the Partnership was granted the
PCS Block C licenses for Puerto Rico and certain western states of the United
States.
During 1997 the Partnership organized the following wholly-owned subsidiaries:
ClearComm West, LLC, ClearCorp., LLC, CommClear, LLC and ClearComm de Puerto
Rico. These companies are inactive.
On March 3, 1999, the Partnership entered into an agreement with Telefonica
Larga Distancia De Puerto Rico, Inc. ("TLD"). Among the most important
provisions of this agreement are the following:
o The Partnership transfered all of its Puerto Rico Licenses,
including its related FCC debt to NewComm Wireless Services, Inc.
("NewComm"), a newly organized company owned by the Partnership.
o TLD contributed approximately $20 million dollar to NewComm by
means of a secured convertible promissory note payable
("promissory note"). The promissory note is secured by a security
agreement pursuant to which a security interest is imposed upon
NewComm assets, a Partnership guarantee and a pledge agreement.
o Once certain regulatory and other requirements are met, the note
will be exchanged for NewComm's common stock shares representing
approximately 49.9% of NewComm equity. TLD has the option to buy
an additional .2% which would bring its ownership to 50.1%
subject to certain conditions.
o Entered into certain management and technology transfer
agreements.
In September 1999 NewComm commenced providing PCS services in Puerto Rico.
25
<PAGE>
The accompanying consolidated financial statements include the accounts of the
Partnership and all of its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
The following summarizes the most significant accounting policies
followed in the preparation of the accompanying consolidated financial
statements:
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. Cash equivalents at December 31, 1999 consists of shares
in a money market account of $5,413,000 (1998 - $4,217,000).
Inventories
Inventory is recorded at the lower of cost on market on the basis of
average cost. Inventories consist of handsets, accessories and prepaid
cards for sale to subscribers. Handsets are transferred to property and
equipment at cost at the time these are rented.
PCS Licenses
PCS licenses are recorded at cost. PCS licenses currently in use are
being amortized over their estimated life of twenty-years while PCS
licenses not yet in use will be amortized over the estimated life of
the licenses once the related PCS network is ready for its intended
use. The Partnership capitalized the interest related to the debt
pertaining to the PCS licenses during the network construction period.
Such capitalization was discontinued at the time NewComm's commercial
operations began in September 1999.
26
<PAGE>
The licenses expire in January 2007, however, FCC rules provide for
renewal expectancy provisions. The Partnership expects to exercise the
renewal provisions.
Accounting for Impairment of Long-lived Assets
The Partnership continually evaluates its long-lived assets to
determine whether current events and circumstances warrant adjustment
to the carrying values or amortization periods. The Partnership
measures impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
In performing the review for recoverability, an estimate of the future
cash flows expected to result from the use of the asset and its
eventual disposition must be made. If the sum of the future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss is recognized.
Property and Equipment
Property and equipment are recorded at cost. Major replacements and
improvements are capitalized while general repairs and maintenance are
charged to expense as incurred.
Depreciation is computed using the straight-line method over the
estimated useful life of the asset commencing from the time they are
placed into service or the terms of the lease, if shorter, for
leasehold improvements. Upon retirement or sale, the cost of the asset
disposed of and the related accumulated depreciation are removed from
the accounts and any resulting gain or loss is credited or charged to
income.
Estimated useful lives are as follows:
Years
Network infrastructure equipment 10
Handsets held by customer 1
Computer and office equipment 5
Leasehold improvements 5-10
Vehicles 5
Revenue Recognition
Usage and access charges are recorded as revenue based on the amount of
communications services rendered. Communications services are measured
by subscriber usage and fees less collectiblity allowances and
discounts. Sale of handsets and accessories are recognized upon
shipment or point-of-sale. Rental revenue is billed and recognized on a
monthly basis.
27
<PAGE>
Allowance for Doubtful Accounts
Allowance for doubtful accounts provides for estimated losses on
accounts receivable. The allowance is established based upon a review
of the aggregate accounts, loss experience, economic condition and
other pertinent factors. Account losses are charged and recoveries are
credited to the allowance for doubtful accounts.
Advertising Costs
The Partnership expenses production costs of print, radio and
television advertisements and other advertising costs as such costs are
incurred.
Income Taxes
In accounting for income taxes the Partnership uses an asset and
liability approach that requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of
assets and liabilities. A valuation allowance is recognized for any
deferred tax asset for which, based on management' s evaluation, it is
more likely than not (a likelihood of more than 50%) than some portion
or all the deferred tax asset will not be realized.
Net Loss Per Limited Partnership Unit
Net loss per limited partnership unit is computed by dividing net loss
for the period by the weighted-average number of limited partnership
units outstanding during the period which for 1999 was 2,827 (2,826 and
2,777 in 1998 and 1997, respectively).
Fair Value of Financial Instruments
The carrying amount of the Partnership's financial instruments (cash
and cash equivalents, accounts payable and accrued liabilities) are
considered reasonable estimates of fair value due to the short period
to maturity.
Management believes, based on current interest rates, that the fair
value of its notes payable approximates the carrying amount.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform with the 1999 presentation.
28
<PAGE>
3. Financing Requirements
The Partnership commenced operations in September 1999 and is likely to
incur operating losses 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.
As part of the agreement with TLD, NewComm entered into contracts with
Lucent Technologies, Inc. ("Lucent") which requires them and other
parties to build a network that uses Code Division Multiple Access
("CDMA") protocol. It is expected that the total cost will approximate
$125 million.
Management has evaluated several alternatives for obtaining permanent
financing for paying the cost of the network and is considering
accepting one of the alternatives offered by two banks that provide for
a bridge financing of approximately $60 million and a permanent
financing of approximately $150 million. The financing agreement for
the permanent financing requires that the Partnership and TLD
contribute approximately $25 million each in equity, respectively.
Management believes that the Partnership will comply with all the
requirements for obtaining the permanent financing and believes that
cash and cash equivalents on hand, anticipated growth in revenues,
vendor financing and the permanent financing will be adequate to fund
its operations through the end of 2000.
Each of the Partnership's C-Block licenses is subject to an FCC
requirement that the Partnership construct network facilities that
offer coverage to at least one-third of the population in the market
covered by such license within five years following the grant of the
applicable license and to at least two-third of the population within
ten years following the grant. Although the Partnership's buildout plan
calls for to exceed these minimum requirements, failure to comply with
these requirements could result in the revocation of the related
licenses or the imposition of fines on the Partnership by the FCC.
Therefore, delays in constructing its PCS network for licenses granted
for markets outside Puerto Rico could have a material adverse effect on
the Partnership's financial conditions and results of operations.
4. Allowance for Doubtful Accounts
The movement for the allowance for doubtful accounts follows:
Balance at December 31, 1998 $ --
Bad debt provision for 1999 625,000
--------
$625,000
========
29
<PAGE>
5. Inventories
At December 31, 1999, inventories consist of:
CDMA handsets $8,957,797
Accessories and other 244,026
----------
$9,201,823
==========
6. Licenses
At December 31, licenses consist of:
1999 1998
---- -----
PCS licenses in use $52,696,295
Current amortization (606,164)
-----------
52,090,131
PCS licenses not yet in use 15,453,189 $64,757,512
----------- -----------
$67,543,320 $64,757,512
=========== ===========
7. Property and Equipment
At December 31, property and equipment consist of:
1999 1998
---- -----
Network infrastructure equipment $53,649,250
Leasehold improvements 2,332,650
Handsets rented to customers 6,118,149
Computer and office equipment 3,883,247 $81,465
Vehicles 497,527
----------- -------
66,580,823 81,465
Accumulated depreciation and amortization (2,333,024) (62,970)
----------- -------
64,247,799 18,495
Network under construction 24,952,812 --
----------- -------
$89,200,611 $18,495
=========== =======
30
<PAGE>
8. Accounts Payable and Accrued Liabilities
At December 31, accounts payable and accrued liabilities consist of:
1999 1998
---- -----
Accounts payable - Network construction costs $ 82,919,119
Accounts payable trade 13,190,324
Other accounts payable and accrued liabilities 7,069,398 $985,691
------------ --------
$103,178,841 $985,691
============ ========
The payment terms with Lucent require payment on due dates ranging from
60 to 365 days after invoice has been submitted to the Partnership.
Amount payable at December 31, 1999 is presented as accounts payable
network construction costs.
9. Long-Term Notes Payable
Long-term notes payable consist of:
1999 1998
---- -----
Notes payable -- FCC $38,024,462 $37,126,985
Notes payable -- TLD 19,960,000 --
----------- -----------
$57,984,462 $37,126,985
=========== ===========
FCC Notes
On January 22, 1997, the Partnership was granted the PCS Block C
licenses for $344,293,125. A down payment, or 10% of the bid amount,
was deducted by the FCC from the deposit held.
The remaining balance or $309,863,813 consisted of 10 year notes due to
the FCC bearing interest at 6.5% and guaranteed by the licenses
obtained. In accordance with industry practice, the Partnership
recorded the licenses and the related debt at a net present value of
$210,143,476. Based on the Partnership's estimates of borrowing costs
for debt similar to that issued by the FCC, the Partnership used a 13%
discount rate. At December 31, 1997, the notes payable to the FCC were
presented net of a discount of approximately $93,007,000.
31
<PAGE>
The original payment term provided for paying interest only for the
first six years starting in April 1997 and both interest and principal
for the remaining four years starting in April 2003. Although in March
1997 the FCC suspended the deadline for commencing the payments, the
Partnership accrued the interest on the notes.
In September 1997, the FCC ended the suspension and established March
31, 1998 as the deadline to resume payments. The FCC also adopted
certain options designed to assist Block C licensees in obtaining
financing and building their systems. On March 24, 1998, the FCC issued
a new order (the "March FCC Order") establishing new options and June
8, 1998 and July 31, 1998, as the dates for making an election on the
options and the deadline to resume payments, respectively.
On June 8, 1998, the Partnership elected the following options:
1. Returned eight licenses the Partnership held in the western states
of the United States with an approximately undiscounted cost of
$199,299,000 and the FCC forgave the undiscounted debt related to
these licenses amounting to approximately $179,369,000. A credit
of approximately $17,000,000 resulting from this election was used
by the Partnership to prepay the debt of other licenses the
Partnership held in the western states of the United States.
2. Disaggregated and prepaid the remaining five licenses the
Partnership held in the western states of the United States. As a
result, the Partnership returned 15 MHz in Licenses with an
approximately undiscounted cost of $15,453,000 and the FCC forgave
fifty percent of the related undiscounted debt or $13,908,000. The
outstanding undiscounted debt on the 15 MHz licenses retained of
approximately $13,908,000 was prepaid with the credit received on
the licenses returned in (1) above.
3. Disaggregated the Puerto Rico licenses. As a result, the
Partnership returned 15 MHz in licenses with an approximately
undiscounted cost of $57,044,000 and the FCC forgave fifty percent
of the related undiscounted debt or approximately $51,340,000. A
credit of approximately $2,282,000 resulting from this election
was applied by the FCC to the interest accrued.
As result of the elections made by the Partnership, the FCC
forfeited approximately $10,990,000 which has were charged to
operations in 1998.
The notes payable to the FCC are payable as follows:
o Quarterly interest payments of $834,268 through April 2003.
o Quarterly principal and interest payments of $3,669,768 from
April 2003 through January 2007.
32
<PAGE>
TLD Notes
The secured promissory note ("Promissory Note") payable to TLD bears
interest at the floating rate of the 90 days London Interbank Offer
Rate (LIBOR) plus 1-1/2% (6.79% at December 31, 1999) and is due in
March 2004. The principal amount of the Promissory Note is convertible
into NewComm's shares of common stock, as follows: (i) shares of the
NewComm's Class A Common Stock in an amount equal to thirty-three and
one third percent (33-1/3%) of NewComm's issued and outstanding Class A
Common Stock held by the Partnerhip, and (ii) shares of NewComm's Class
B Common Stock in an amount equal to forty-nine point seven percent
(49.7%) of all issued and outstanding shares of Class A Common Stock of
NewComm (including the Class A Common Stock issued to TLD upon
conversion of the Promissory Note). Upon the issuance of the FCC
approval, TLD shall surrender the Promissory Note to NewComm, duly
endorsed for cancellation, and NewComm shall issue (i) the certificates
evidencing the number of shares of Class A Common Stock and Class B
Common Stock into which the Promissory Note is convertible, as set
forth herein, and (ii) a promissory note in a principal amount equal to
the accrued interest on the Promissory Note as of such date)(the
Interest Note). The Interest Note will be non-interest bearing and the
principal amount may be converted into additional shares of NewComm's
stock. Because of restrictions on the PCS licenses, the Promissory Note
cannot be converted until the FCC authorizes TLD to hold more than a
25% equity interest in NewComm.
The Partnership has the option to buy out TLD in the last year before
the restrictions on the Puerto Rico licenses lapse at an amount equal
to the higher of 150% of the principal plus accrued interest on the
Promissory Note at the time of the transaction, or 125% of the fair
market value of NewComm's shares.
At December 31, 1999, future principal installments due on the FCC and
TLD notes payable are as follows:
Year Amount
---- ------
2003 $ 8,655,000
2004 32,154,000
Thereafter 30,201,623
-----------
71,010,623
Less - Discount on FCC notes (13,026,161)
-----------
$57,984,462
-----------
On January 31, 2000 the agreement with TLD discussed in Note 1 was
amended. Under the amendment, TLD provided NewComm a revolving line of
credit of approximately $30 million for working capital.
33
<PAGE>
The amounts advanced under such line of credit will bear interest of 3%
over the LIBOR rate, are secured under the same terms of the original
note of $20 million and will mature on July 31, 2000.
10. 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 request for waiver of the related bid withdrawal payment for the
license applicable to Round 11 of the Broad Band PCS Block C 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 Block C 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 FCC Commission by its bidding agent.
These amounts were charged to operations in 1996.
On May 19, 1998, the Partnership filed a request with the FCC for
further reduction in the penalty amount. On June 12, 1998, the FCC
granted the Partnership's request for reduction of the penalty payment
to $425,000. The reduction in the penalty of approximately $2,850,000
was credited to operations in 1998.
The Partnership and its General Partner filed several actions in court
to recover from the bidding agent the FCC assessments made in
connection with the bidding error as well as other related expenses
incurred. One of the actions filed resulted in the attachment by the
Partnership 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.
On November 16, 1998 (the "Effective Date"), the Partnership, SuperTel,
Romulus and other parties signed a Settlement Agreement (the
"Settlement Agreement") which seeked to resolve certain legal actions,
claims and controversies among the parties. On January 11, 1999, the
FCC approved the Settlement Agreement which provided, among other
things, for the following:
34
<PAGE>
1. At closing date, Romulus and all other appropriate parties
shall cause to pay the Partnership from the escrow trust
account maintained in Romulus' name the amount of $1,500,000.
2. Issuance of certain shares by SuperTel, the General Partner.
3. From the Effective Date, no additional shares of stock of
SuperTell shall be issued except with the written consent of
at least 60% of the voting securities of SuperTel.
4. SuperTel shall not enter into any contract, whether written or
oral, providing for the employment of any person or the
engagement of any person as a consultant for an amount in
excess of $100,000 per year, except that two such contracts
may provide for payment up to $150,000 per year, without first
obtaining a super majority consent; provided however that this
limitation shall not apply to officers and employees of
SuperTel as of September 1, 1998.
5. The parties and other signatories to the Settlement Agreement
release each other from various claims and causes of action.
On February 23, 1999, the Partnership collected the $1,500,000 from
Romulus. This amount plus certain accounts payable to Romulus deemed
settled have been recorded as a settlement credit in the accompanying
statement of revenues and expenses for the year ended December 31,
1998.
11. Partners' Capital
At December 31, 1999, the limited partners' capital consisted of
2,903.1 units (consisting of 2,601.5 units and 1,508 one-fifth units)
(1998 - 2,826.1 units, consisting of 2,601.5 units and 1,123 one-fifth
units) distributed among approximately 1,600 limited partners.
The Partnership raised $2,064,616, net of related expense of $245,384,
in an offering that ended on December 31, 1999. The Partnership issued
77 units (consisting of 385 units of one-fifth units). The suscription
receivable balance outstanding at December 31, 1999 was collected in
early January 2000.
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,
35
<PAGE>
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.
12. Related Party Transactions
In 1999, the Partnership incurred legal and consulting expenses paid to
limited partners and members of the Board of Directors and shareholders
of the General Partner amounting to approximately $1,720,000 (1998 -
$758,000; 1997 - $8,291,000, including $6.5 million recognized as a
result of obtaining the PCS licenses).
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 approximately $142,000 in
1999 (1998 - $360,000; 1997 - $379,000) for these services.
During the year ended December 31, 1997, the General Partner issued
5,600 shares of its restricted voting common stock to certain employees
and consultants of the Partnership at no cost. The shares were issued
by the General Partner in consideration of their valuable collaboration
in obtaining the Partnership's PCS licenses. These individuals were not
employees of the General Partner at the time the services were
provided. The fair value, of the shares granted is deemed insignificant
and, therefore, has not been recognized.
During the year ended December 31, 1998 approximately $670,000 of
severance charges related to certain terminated employees were charged
to operations. This amount is included in salaries and bonuses in the
accompanying statement of revenues and expenses.
13. Agreements with TLD
Besides the transactions and commitments entered with TLD, as disclosed
in the previous notes to financial statements, NewComm entered into a
management agreement with TLD whereby TLD has agreed to combine its
experience, know-how, synergies and resources in the development,
preparation and implementation of NewComm business policies and
organization in all major areas of operations. As part of this
management agreement, TLD agrees to advice NewComm in establishing and
developing the NewComm's strategic business policies, technical
consultation in connection with the design and development of networks,
equipment selection, quality controls, billing
36
<PAGE>
platforms, customer service and in new services and products. NewComm
is responsible for all salaries, wages, benefits, expenses and any
other compensation of the officers, employees or agents selected by TLD
in connection with its management services. This management agreement
calls for NewComm to pay an annual fee (payable quarterly in arrears)
based on the higher of 9% of the NewComm's earnings before interest,
taxes, depreciation and amortization ("EBITDA") or $750,000. The
initial term of this management agreement is five years and is
automatically renewable.
Also, NewComm entered into a services agreement with TLD, whereby TLD
will provide support to NewComm in the areas of legal consultation,
public relations, management informations systems and general services.
The services agreement is for one year and calls for monthly payments
to TLD in the amount of $116,014.
Simultaneously with the agreement mentioned above, NewComm entered into
a technology transfer agreement with Telefonica Internacional, S.A.
("TISA"), an affiliate of TLD, whereby TISA granted NewComm the right
to use, during the term of this agreement, all patents, trademarks,
processes, planning resources, models, designs and, in general, all
other intellectual property belonging to TISA (collectively, the
Technology), which is deemed necessary for the efficient operation and
development of the business of NewComm. NewComm shall pay TISA all
costs incurred, directly, or indirectly by virtue of granting NewComm
the right to utilize the Technology. In consideration for the right to
use the Technology, NewComm shall pay an annual fee (payable quarterly
in arrears) equal to one percent (1%) of the NewComm's gross revenue as
of the end of the previous year. NewComm shall be responsible for all
taxes, withholdings or similar deductions due on the fee. The initial
term of this agreement is five years and is automatically renewable.
Total amount charged by TLD and its affiliates during the year ended
December 31, 1999 for the above agreements and other charges amounted
to approximately $2,410,000.
14. 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. NewComm,
as a regular corporation is subject to income tax on its operations.
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 since inception
for tax and book purposes and to NewComm's losses. The Partnership's
operating expenses were deferred for tax purposes creating a temporary
difference for the partners.
37
<PAGE>
Some of these expenses will be amortized over a period not exceeding 5
years. The taxable income for the partners is determined as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss per books $(22,194,758) $(11,428,678) $(12,944,307)
Add:
Operating expenses deferred until the
Partnership began operations -- 11,752,910 13,439,921
NewComm's losses 20,914,122
------------ ------------ ------------
Taxable (loss) income $ (1,280,636) $ 324,232 $ 495,614
------------ ------------ ------------
</TABLE>
Total operating expenses deferred through December 31, 1999 amounted to
approximately $42.3 million. There are no other significant differences between
taxable income (loss) for the partners and the net loss reported in the
statement of revenues and expenses.
At December 31, 1999, NewComm has an operating loss carryforward amounting to
approximately $20,300,000. This loss is available to offset future Puerto Rico
taxable income and expires in 2006. Due to the uncertainty surrounding the
realization of the related deferred tax asset, the Partnership has provided a
valuation allowance against, its otherwise recognizable deferred tax asset.
15. Contingency
In November 1996, certain limited partners of the Partnership filed a suit in
the Circuit Court of the State of Oregon against the Partnership, the General
Partner, certain of their 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. In August 1997 a suit brought by
approximately 30 additional plaintiffs was filed. The two suits contain
virtually identical allegations and were consolidated for all purposes.
On April 1998, the Court entered an order dismissing both cases. In one
pre-trial ruling, a judge dismissed plaintiffs' racketeering claims. Plaintiffs
have filed a notice of appeal to the Oregon Court of Appeals. In addition,
plaintiffs have filed a demand for arbitration with the American Arbitration
Association ("AAA"). The AAA has ruled, over plaintiffs' objections, that the
arbitration should proceed in Puerto Rico.
The Partnership intends to resist vigorously plaintiffs' arbitration claims. The
Partnership's insurance carrier has assumed responsibility for the expenses
associated with these cases. Management believes, based on the opinion of legal
counsel, that the final outcome of the above legal actions will not have a
material adverse effect on the Partnership's financial statements.
38
<PAGE>
A company that also provides PCS services in Puerto Rico has filed a petition
with the FCC challenging the agreement with TLD. The company alleges that the
agreement with TLD violates the current FCC regulatory requirements regarding
foreign ownership of telecommunications companies. The FCC has not issued a
final determination. Management believes that the final disposition of this
matter will not have a material adverse effect on the Partnership's financial
position or results of operations.
16. Commitments
The Partnership thru NewComm is committed under various operating lease
agreements for its office space as well as various sites for
communication equipment and stores under different terms and
conditions. Minimum annual rental commitments at December 31, 1999, are
as follows:
Year Amount
2000 $ 2,426,000
2001 2,383,000
2002 2,388,000
2003 2,392,000
2004 2,320,000
Thereafter 921,000
-----------
$12,830,000
-----------
Rent expense for the year ended December 31, 1999 was approximately
$1,825,000 (1998 - $225,000, 1997 - $100,000).
At December 31, 1999, the Partnership had commitments relating to the
construction of its network amounting to approximately $5,100,000.
17. Supplementary Cash Flows Information
Interest paid during the year ended December 31, 1999 was approximately
$3,700,000. No interest was paid in 1998 or 1997.
Non-cash investing and financing activities include the following:
1999
>> Network construction costs not yet paid $88,047,000.
>> Limited partners capital contribution not yet collected $981,000.
39
<PAGE>
1998
>> Capitalization of interest paid with FCC disaggregation and bid
withdrawal credit of approximately $3,335,000.
>> Capitalization of interest not yet paid of approximately
$1,191,000.
>> Forgiven FCC notes payable and accrued interest after
disaggregation, prepayment and amnesty options elected for
approximately $160,301,000 and $15,826,000, respectively.
>> Payment of FCC notes payable with FCC amnesty credit of
approximately $13,908,000.
1997
>> The Partnership acquired licenses with notes payable amounting to
$210,143,476 and capitalized interest not yet paid of
approximately $25,672,000.
40
<PAGE>
SUPERTEL COMMUNICATIONS CORP.
Report and Financial Statements
December 31, 1999 and 1998
41
<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
revenues and expenses and deficit and of cash flows present fairly, in all
material respects, the financial position of SuperTel Communications Corp. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States. 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 audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, 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.
PRICEWATERHOUSECOOPERS LLP
San Juan, Puerto Rico
March 29, 2000
Stamp 1603294 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
42
<PAGE>
<TABLE>
<CAPTION>
SUPERTEL COMMUNICATIONS CORP.
Balance Sheet
December 31, 1999 and 1998
- -------------------------------------------------------------------------------------------------
1999 1998
---- ----
Assets
<S> <C> <C>
Assets:
Cash 1,933 $ 4,143
Accounts receivable from affiliated company 106,905 103,057
Prepaid income tax 2,760
-------- --------
Total assets $111,598 $107,200
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable to officers and directors $ 29,744 $ 369
Accounts payable to affiliate -- 30,997
Income tax payable -- 5,090
Note payable to affiliate, including accrued
interest of $17,749 in 1998 -- 117,749
-------- --------
Total liabilities 29,744 154,205
-------- --------
Contingencies (Note 9)
Stockholders' equity:
Common stock, no par value, 100,000 shares authorized in 1999
and 1998, 100,000 shares issued and outstanding in 1999
(1998 - 86,000 shares) 1,000 1,000
Paid in capital 148,746
Accumulated deficit (67,892) (48,005)
-------- --------
Total stockholders' equity (deficiency) 81,854 (47,005)
-------- --------
Total liabilities and stockholders' equity $111,598 $107,200
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
<TABLE>
<CAPTION>
SUPERTEL COMMUNICATIONS CORP.
Statement of Revenues and Expenses and Deficit
Years Ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Revenues:
Management fees $141,898 $360,452
-------- --------
Expenses:
Directors' fees 156,250 278,680
Travel expenses -- 40,970
Interest expense -- 7,000
Other general and administrative expenses 5,535 8,033
-------- --------
Total expenses 161,785 334,683
-------- --------
(Loss) income before income taxes (19,887) 25,769
Provision for income taxes -- (6,590)
-------- --------
Net (loss) income (19,887) 19,179
Deficit at beginning of period (48,005) (67,184)
-------- --------
Deficit at end of period $(67,892) $(48,005)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
<TABLE>
<CAPTION>
SUPERTEL COMMUNICATIONS CORP.
Statement of Cash Flows
Years Ended December 31, 1999 and 1998
- ----------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(19,887) $ 19,179
-------- --------
Adjustments to reconcile net (loss) income to
net cash provided (used) by operating activities:
(Increase) decrease in accounts receivable
from affiliated Company (3,848) 47,547
Increase (decrease) in accounts and interest payable 29,375 (64,250)
(Decrease) increase in income tax payable (7,850) 1,376
-------- --------
Total adjustments 17,677 (15,327)
-------- --------
Net cash (used) provided by operating activities and
net (decrease) increase in cash (2,210) 3,852
Cash at beginning of period 4,143 291
-------- --------
Cash at end of period $ 1,933 $ 4,143
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
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. (the "Partnership").
Most of the Company's transactions are 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 serves
as the general partner since June 18, 1996. On January 22, 1997, the
Partnership was granted the PCS Block C licenses for Puerto Rico and
certain western states of the United States. On March 3, 1999, the
Partnership entered into an agreement with Telefonica Larga Distancia
Puerto Rico, Inc. ("TLD"). Among the most important provisions of this
agreement are the following:
o The Partnership transfered all of its Puerto Rico licenses,
including its related FCC debt to NewComm Wireless Services, Inc.
("NewComm"), a newly organized company owned by the Partnership.
o TLD contributed approximately $20 million to NewComm by means of
a secured convertible promissory note payable ("promissory
note"). The promissory note is secured by a security agreement
pursuant to which a security interest is imposed upon NewComm
assets, a Partnership guarantee and a pledge agreement.
o Once certain regulatory and other requirements are met, TLD will
own approximately 49.9% of NewComm equity. TLD has the option to
buy an additional .2% which would bring its ownership to 50.1%
subject to certain conditions.
o Entered into certain management and technology transfer
agreements.
In September 1999 NewComm commenced providing PCS services in Puerto
Rico.
The Company is entitled to 25% of all distributions made by the
Partnership.
The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States. 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.
46
<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, 1999 and
1998.
Income Taxes
Income taxes are reported under the liability method of accounting for
income taxes. Deferred tax assets and liabilities are recorded for the
expected future tax consequences of temporary differences that have
been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, all expected future events other
than enactments of changes in law or rates are considered. A valuation
allowance is recognized for any deferred tax asset for which, based on
management's evaluation, it is more likely than not (a likelihood of
more than 50%) that some portion or all the deferred tax asset will not
be realized.
2. Investment in Partnership
Originally the Company acquired its investment in the Partnership for
$100,000. Such investment is carried at equity and was written-down to
zero in 1996. As of December 31, 1999, the Company's investment in the
undistributed losses of the Partnership amounted to approximately
$15,489,000 (1998 -$9,940,000).
3. Related Party Transactions
The partnership agreement with ClearComm, L. P., 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 1999, fees billed amounted to approximately $142,000 (1998 -
$360,000).
All other related party transactions are advances from/to affiliated
companies made in the ordinary course of business.
4. Note Payable
At December 31, 1998, note payable consists of a nonrecourse promissory
note due to an affiliate amounting to $100,000, bearing interest at 7%.
5. 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
47
<PAGE>
for tax purposes. No deferred tax asset has been recognized for this
loss due to its uncertainty.
6. Capital
The Company is authorized to issue 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, 1999, none of
the preferred shares had been issued.
On January 25, 1999, the Company's certificate of incorporation was
amended to divide its 100,000 restricted voting common stock authorized
shares into (i) 84,100 shares of restricted voting common stock (the
"Common Stock") without par value and (ii) 15,900 shares of restricted
non-voting shares without par value, designated Class A-1 shares (the
"Class A-1 shares"). The Class A-1 shares shall be identical in all
respects to the rights, restrictions and limitations of the Common
Stock, except that the Class A-1 shares shall not vote on any matters
which are submitted by shareholder vote.
At December 31, 1998 and 1997, the Company had 19,600 warrants
outstanding. Each warrant had the right to buy a share of the Company's
restricted voting common stock at the nominal value of ten cents. Such
warrants were converted to common stock in 1999 as part of the
settlement mentioned in Note 8.
7. Supplemental Cash Flow Information
During the year ended December 31, 1999, the Company paid income tax
amounting to approximately $7,850 (1998 - $5,200).
As part of the settlement discussed in Note 8, note payable and
accounts payable to affiliate of $148,746 were deemed to be settled.
8. 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 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 request for waiver of the related bid withdrawal payment for the
license applicable to Round 11 of
48
<PAGE>
the Broad Band PCS Block C 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 Block C 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
FCC Commission by its bidding agent. These amounts were charged to
operations by the Partnership in 1996.
On May 19, 1998, the Partnership filed a request with the FCC for
further reduction in the penalty amount. On June 12, 1998, the FCC
granted the Partnership's request for reduction of the penalty payment
to $425,000. The reduction in the penalty of approximately $2,850,000
was credited to operations by the Partnership in 1998.
The Partnership and its General Partner filed several actions in court
to recover from the bidding agent the FCC assessments made in
connection with the bidding error as well as other related expenses
incurred. One of the actions filed resulted in the attachment by the
Partnership 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.
On November 16, 1998 (the "Effective Date"), the Company, the
Partnership, Romulus and other parties signed a Settlement Agreement
(the "Settlement Agreement"). The Settlement Agreement seeks to resolve
certain legal actions, claims and controversies among the parties. On
January 11, 1999, the FCC approved the Settlement Agreement which
provided, among other things, for the following:
1. At closing date, Romulus and all other appropriate parties shall
cause to pay to the Partnership, from the escrow trust account
maintained in Romulus' name the amount of $1,500,000.
2. Issuance by SuperTel of certain shares and settlement of note and
accounts payable to affiliate.
3. From the Effective Date, no additional shares of stock of the
Company shall be issued except with the written consent of at
least 60% of the voting securities of the Company.
4. The Company shall not enter into any contract, whether written or
oral, providing for the employment of any person or the engagement
of any person as a consultant for an amount in excess of $100,000
per year, except that two such contracts may provide for payment
up to $150,000 per year, without first obtaining a super majority
consent; provided however that this limitation shall not apply to
officers and employees of the Company as of September 1, 1998.
49
<PAGE>
5. The parties and other signatories to the Settlement Agreement
release each other from various claims and causes of action.
On February 23, 1999, the Partnership collected the $1,500,000 from
Romulus.
9. Contingencies
In November 1996, certain limited partners of the Partnership filed a
suit in the Circuit Court of the State of Oregon against the Company,
the Partnership and certain of their 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. In August 1997 a suit brought by
approximately 30 additional plaintiffs was filed. The two suits contain
virtually identical allegations and were consolidated for all purposes.
On April 1998, the Court entered an order dismissing both cases. In one
pre-trial ruling, a judge dismissed plaintiffs' racketeering claims.
Plaintiffs have filed a notice of appeal to the Oregon Court of
Appeals. In addition, plaintiffs have filed a demand for arbitration
with the American Arbitration Association ("AAA"). The AAA has ruled,
over plaintiffs' objections, that the arbitration should proceed in
Puerto Rico.
The Company intends to resist vigorously plaintiffs' arbitration
claims. The Partnership's insurance carrier has assumed responsibility
for the expenses associated with these cases. Management believes,
based on the opinion of legal counsel, that the final outcome of the
above legal actions will not have a material adverse effect on the
Company's financial statements.
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
SuperTel Communications Corp. was incorporated in Puerto Rico in June
1996 for the purpose of acting as the general partner of the Partnership (the
"General Partner"). SuperTel was structured to ensure that the Partnership would
receive the maximum benefits eligible to Entrepreneurs. The Partnership has no
employees and is managed and controlled by the Board of Directors and executive
officers of the General Partner.
Fred H. Martinez, Director and Chairman of the Board, age 55, has been chairman
of the board of trustees of the University of Puerto Rico from 1993 to 1999. Mr.
Martinez is co-managing partner of Puerto Rico's third largest law firm. 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).
Javier O. Lamoso, President, age 35, 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 1994, 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 the 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).
Gary H. Arizala, Director, age 61, is an entrepreneur and successful
businessman. Mr. Arizala has 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 350 to 400 families annually
through four child care centers located on Oahu, Hawaii,
51
<PAGE>
and employs approximately 60 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 agencies. He is
on the Guardian Advisory Council of the National Federation of Independent
Businesses Hawaii Chapter, 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 45, has held management and supervisory
positions in finance and accounting over a 15-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 eight years.
From 1992 to the present, she has worked for The California Wellness Foundation
and since December 1997 is serving as Treasurer and Chief Financial Officer, and
is responsible for all financial reporting, accounting, budgeting and tax
functions including investment performance and asset allocation review of a $1
billion investment portfolio, and managing cash flow for an annual budget
exceeding $45 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 51, 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).
James T. Perry, Director, age 67, is a successful entrepreneur and businessman
with substantial experience in the real estate and retail foods industries.
Since 1993, Mr. Perry has purchased and sold a two-way radio license, and has
been involved in several wireless communication partnerships. From 1987 to 1993,
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
52
<PAGE>
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon review of Forms 3, 4 and 5 and any amendments thereto
furnished to the Registrant pursuant to Rule 16a-3(e) of the Rules of the
Securities and Exchange Commission, the Registrant is not aware of any failure
of any officer or director of the General Partner or beneficial owner of more
than ten percent of the Units to timely file with the Securities and Exchange
Commission any Form 3, 4 or 5 relating to the Registrant for 1999 except that
Messrs. Martinez and Odell did not report, on a timely basis, a transaction on
Form 4 in which the Martinez Odell & Calabria Pension Fund purchased a Unit.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership is managed by the General Partner's Board of Directors
and executive officers of the General Partner. 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. Other than the chief
executive officer, no executive officer of the General Partner received
compensation of $100,000 or more in 1999.
53
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
-------------------------------------------------- Compensation
Awards
------------
Name & Principal Position Fiscal Salary($) Bonus($) Other Annual Securities All Other
Year Compensation ($) Underlying Compensations ($)
Options/SAR's
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Javier Lamoso, President and Director 1999 $75,000 0 $18,750(1) 0 $155,000(2)
1998 $85,000 $0 $25,000(1) 0 $112,900(3)
1997 $125,000 $0 $25,000(1) 0 $25,000(4)
</TABLE>
(1) Consists of director's fee.
(2) Consists of $155,000 paid in 1999 in connection with the termination of his
employment agreement.
(3) Consists of $70,000 paid in 1998 in connection with the termination of his
employment agreement, $15,000 car allowance and other compensation.
(4) Consists of car allowance and other compensation.
Effective the second quarter of 1999, the director fees were reduced by
half so that directors receive an annual fee of $12,500 each, other than the
Chairman of the Board, Mr. Martinez, who receives an annual fee of $50,000 and
Mr. Odell, who receives an annual fee of $17,500. Directors are reimbursed for
their reasonable expenses in attending board meetings.
ITEM 12. 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 individuals and
Puerto Rico trusts.
The following table sets forth, as of March 30, 2000, 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.
54
<PAGE>
<TABLE>
<CAPTION>
Name of Beneficial Owner Units Beneficially Owned Percentage Ownership
- ------------------------ ------------------------ --------------------
<S> <C> <C>
Fred H. Martinez(1) 2.4 *
Javier O. Lamoso(2) 0 *
Gary H. Arizala(3) 2.4 *
Margaret W. Minnich(4) 0 *
James T. Perry(5) 2.4 *
Lawrence Odell(6) 2.4 *
All executive officers and directors of the 7.2 *
General Partner as a group (6 persons)
</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. Lamoso is President and acting Chief Executive Officer of the General
Partner and a member of the Board of Directors.
(3) Mr. Arizala is a Director.
(4) 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
4.0 Units held by J.B. Wharton, Jr. Residual Trust, of which Ms. Minnich is
co-trustee and a contingent beneficiary.
(5) Mr. Perry is a Director.
(6) 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 Units reflected in the table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General Partnership Interest
SuperTel contributed $100,000, which entitled it to receive 100% of the
Partnership's general partner interest. The general partner interest entitles
the General Partner to 25% of the equity of the Partnership.
See "Item 5."
Management Fee
The Partnership Agreement provides that the General Partner is entitled
to a management fee for all reasonable operating expenses, plus 10% of such
expenses. The total management fee for 1999 was approximately $142,000. The
management fee is paid on a monthly basis.
55
<PAGE>
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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements (See Item 8 hereof)
ClearComm, L.P.
Report of Independent Accountants
Consolidated Statements of Assets, Liabilities and Partners' Capital as
of December 31, 1998 and 1999
Consolidated Statement of Revenues and Expenses for years ended
December 31, 1997, 1998 and 1999
Consolidated Statement of Cash Flows for years ended December 31, 1997,
1998 and 1999
Consolidated Statement of Changes in Partners' Capital Accounts from
inception to December 31, 1999
Notes to Consolidated Financial Statements
SuperTel Communications Corp.
Report of Independent Accountants
Balance Sheet for December 31, 1998 and 1999
Statement of Revenues and Expenses and deficit for the years ended
December 31, 1998 and 1999
Statement of Cash Flows for the years ended December 31, 1998 and 1999
Notes to Financial Statements
56
<PAGE>
(2) Financial Statement Schedules
(3) Exhibits
Exhibit Number
3.1 Agreement of Limited Partnership (Exhibit 3.1 of the Registrant'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 Registrant'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 an
between SuperTel Communications Corp. and Unicom Corporation
(Exhibit 10.2 of the Registrant's Registration Statement on Form
10 (File No. 0-28362), effective June 28, 1996, is hereby
incorporated by reference)
10.3 Joint Venture Agreement, dated as of February 4, 1999, by and
between Telefonica Larga Distancia de Puerto Rico, Inc. and
ClearComm, L.P. (Exhibit 10.3 of the Registrant's Form 10-K for
the year ended December 31, 1998 is hereby incorporated by
reference)
21 Subsidiaries of Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1999
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ClearComm, L.P.
By: SuperTel Communications Corp. General
Partner
By: /s/ Javier Lamoso
---------------------------
Name: Javier Lamoso
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Capacity in
Signature Which Signed Date
--------- ------------ ----
<S> <C> <C>
/s/ Fred H. Martinez Director and Chairman of the Board March 30, 2000
- --------------------
Fred H. Martinez
/s/ Javier O. Lamoso Director and President March 30, 2000
- --------------------
Javier O. Lamoso
/s/ Gary H. Arizala Director March 30, 2000
- -------------------
Gary H. Arizala
/s/ Margaret W. Minnich Director March 30, 2000
- -----------------------
Margaret W. Minnich
/s/ Lawrence Odell Director March 30, 2000
- ------------------
Lawrence Odell
/s/ James T. Perry Director March 30, 2000
- ------------------
James T. Perry
</TABLE>
58
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Agreement of Limited Partnership (Exhibit 3.1 of the Registrant'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 Registrant'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 Registrant's Registration Statement on Form 10 (File No.
0-28362), effective June 28, 1996, is hereby incorporated by
reference)
10.3 Joint Venture Agreement, dated as of February 4, 1999, by and
between Telefonica Larga Distancia de Puerto Rico, Inc. and
ClearComm, L.P. (Exhibit 10.3 of the Registrant's Form 10-K for the
year ended December 31, 1998 is hereby incorporated by reference)
21 Subsidiaries of Registrant
27 Financial Data Schedule
59
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 1013267
<NAME> Clearcomm, L.P.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1,000
<CASH> 6,545,305
<SECURITIES> 0
<RECEIVABLES> 4,650,067
<ALLOWANCES> 425,000
<INVENTORY> 9,201,823
<CURRENT-ASSETS> 20,398,879
<PP&E> 92,158,294
<DEPRECIATION> 2,957,683
<TOTAL-ASSETS> 177,142,810
<CURRENT-LIABILITIES> 108,375,686
<BONDS> 0
0
0
<COMMON> 73,139,616
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 177,142,810
<SALES> 7,308,559
<TOTAL-REVENUES> 8,140,565
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,335,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (22,194,758)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,194,758)
<EPS-BASIC> (7,848)
<EPS-DILUTED> (7,848)
</TABLE>
