Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
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(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF |
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THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2002
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF |
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THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-28362
ClearComm, L.P.
(Exact name of registrant as specified in its charter)
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Delaware |
66-0514434 |
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(State or other jurisdiction of |
(I.R.S. Employer |
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incorporation or organization) |
Identification No.) |
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268
Muñoz Rivera Ave. Suite 2206 |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (787) 620-0140
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 and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
ClearComm, L.P.
INDEX
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Notes to Interim Consolidated Financial Statements (unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Exhibit Index. |
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2
ClearComm, L.P.
CONSOLIDATED STATEMENTS
OF ASSETS, LIABILITIES
AND PARTNERS’ DEFICIT
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September 30, |
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December 31, |
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2002 |
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2001 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
15,732,595 |
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$ |
10,241,902 |
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Accounts receivable, net of allowance for doubtful accounts |
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19,225,585 |
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19,099,986 |
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Accounts receivable due from officer |
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106,500 |
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102,000 |
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Insurance claim receivable |
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0 |
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1,496,324 |
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Investment in eMilios |
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205,962 |
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— |
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Inventories |
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10,974,536 |
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10,305,254 |
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Prepaid expenses |
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839,629 |
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652,279 |
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Total current assets |
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47,084,807 |
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41,897,745 |
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DEFERRED FINANCING COSTS, net |
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— |
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906,731 |
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PCS LICENSES, net |
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55,541,863 |
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57,517,974 |
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PROPERTY AND EQUIPMENT, net |
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100,504,507 |
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102,095,953 |
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$ |
203,131,177 |
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$ |
202,418,403 |
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LIABILITIES AND PARTNER’S DEFICIT |
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CURRENT LIABILITIES: |
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Accounts payable and accrued liabilities |
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$ |
27,939,654 |
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$ |
27,868,716 |
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Note payable to Lucent Technologies |
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60,531,697 |
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60,531,697 |
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Bridge Loan Facility |
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60,000,000 |
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60,000,000 |
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Accounts payable to related parties |
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10,815,708 |
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8,705,353 |
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Note Payable to Alcatel |
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7,436,029 |
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12,790,140 |
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Accrued interest |
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3,531,546 |
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3,517,319 |
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Deferred income |
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1,053,620 |
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1,550,665 |
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Total current liabilities |
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171,308,253 |
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174,963,890 |
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LONG-TERM NOTES PAYABLE |
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92,035,349 |
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81,723,962 |
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MINORITY INTEREST |
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12,198,869 |
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13,362,939 |
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PARTNER’S DEFICIT |
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Limited partners’ capital (2,907.7 units, issued and outstanding) |
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73,039,616 |
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73,039,616 |
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General partner’s capital |
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100,000 |
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100,000 |
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Undistributed losses— |
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Accumulated during development stage |
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(48,704,525 |
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(48,704,525 |
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Operations |
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(96,846,385 |
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(92,067,478 |
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Total partners’ deficit |
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(72,411,295 |
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(67,632,388 |
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$ |
203,131,177 |
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$ |
202,418,403 |
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The accompanying notes are integral part of these consolidated statements.
3
ClearComm, L.P.
CONSOLIDATED STATEMENTS
OF REVENUES AND EXPENSES
(UNAUDITED)
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Three-Month Periods Ended September 30 |
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Nine-Month Periods Ended September 30 |
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2002 |
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2001 |
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2002 |
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2001 |
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Revenues: |
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Service revenues |
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$ |
20,340,849 |
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$ |
27,920,018 |
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$ |
72,411,264 |
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$ |
80,295,479 |
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Handset and accessories sales |
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5,868,471 |
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2,924,974 |
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9,581,532 |
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12,081,137 |
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26,209,320 |
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30,844,992 |
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81,992,796 |
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92,376,616 |
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Operating Cost and Expenses: |
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Cost of handset and accessories |
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1,346,332 |
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6,906,803 |
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13,778,576 |
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24,712,623 |
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Interconnection expense |
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754,137 |
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1,079,937 |
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3,734,885 |
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3,493,079 |
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Sales and dealers commissions |
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1,364,697 |
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2,258,949 |
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3,624,206 |
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6,503,361 |
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Salaries and benefits |
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4,486,661 |
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4,032,313 |
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11,822,554 |
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11,623,493 |
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Advertising expense |
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1,398,567 |
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2,047,188 |
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6,289,900 |
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6,071,154 |
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Legal and professional services |
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2,917,803 |
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3,160,410 |
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7,615,695 |
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7,965,526 |
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Depreciation and amortization |
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4,203,439 |
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3,821,063 |
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12,223,068 |
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13,715,283 |
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Provision for doubtful accounts |
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2,143,788 |
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1,969,556 |
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7,598,802 |
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7,873,389 |
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Rent expense |
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7,269,060 |
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3,212,212 |
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11,440,856 |
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9,169,892 |
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Taxes other than income |
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1,024,724 |
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(481,365 |
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2,949,949 |
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2,952,565 |
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Other expenses |
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1,468,339 |
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1,942,305 |
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3,951,991 |
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5,572,785 |
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Management fee to General Partner |
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34,000 |
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32,000 |
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96,000 |
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96,000 |
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Services rendered by related parties |
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1,309,270 |
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1,533,073 |
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4,330,612 |
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4,013,584 |
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Gain on sale of Visalia-Porterville license |
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— |
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— |
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— |
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(4,814,337 |
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Gain on sale of NewComm’s Stock to Fleet |
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(12,569,784 |
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29,720,818 |
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31,514,444 |
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76,887,311 |
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98,948,397 |
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Income (Loss) from Operations |
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(3,511,498 |
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(669,452 |
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5,105,485 |
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(6,571,781 |
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Other Income (Expense) |
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Interest income |
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12,737 |
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154,327 |
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318,199 |
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489,553 |
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Interest expense |
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(3,062,518 |
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(3,627,182 |
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(11,796,876 |
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(11,719,876 |
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(3,049,781 |
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(3,472,855 |
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(11,478,677 |
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(11,230,323 |
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Net Income (Loss) before Minority Interest |
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(6,561,279 |
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(4,142,306 |
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(6,373,192 |
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(17,802,104 |
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Minority Interest |
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561,202 |
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187,873 |
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1,594,285 |
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894,565 |
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Net Income (Loss) |
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$ |
(6,000,077 |
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$ |
(3,954,433 |
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$ |
(4,778,907 |
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$ |
(16,907,539 |
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Net Income (Loss) Attributable to General Partner |
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$ |
(1,500,019 |
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$ |
(988,608 |
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$ |
(1,194,727 |
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$ |
(4,226,885 |
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Net Income (Loss) Attributable to Limited Partners |
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$ |
(4,500,058 |
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$ |
(2,965,825 |
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$ |
(3,584,180 |
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$ |
(12,680,654 |
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The accompanying notes are integral part of these consolidated financial statements.
4
ClearComm, L.P.
CONSOLIDATED STATEMENTS
OF CHANGES IN PARTNERS’ DEFICIT
(Unaudited)
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002
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Limited Partners |
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General |
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Units |
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Amount |
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Partner |
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Total |
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Balance (deficit) at December 31, 2001 |
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2,907.7 |
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$ |
(50,724,291 |
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(16,908,097 |
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(67,632,388 |
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Nine-month period ended September 30, 2002 |
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Net loss |
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(3,584,180 |
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(1,194,727 |
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(4,778,907 |
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Balance (deficit) at June 30, 2002 |
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2,907.7 |
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$ |
(54,308,471 |
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(18,102,824 |
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(72,411,295 |
) |
The accompanying notes are integral part of these consolidated financial statements.
5
ClearComm, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Nine-Month Periods Ended |
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September 30, |
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September 30, |
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2002 |
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2001 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net (Income) |
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$ |
(4,778,907 |
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$ |
(16,907,539 |
) |
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Adjustments to reconcile net (income) for the period to net cash used in operating activities |
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Depreciation and amortization |
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12,223,068 |
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13,715,283 |
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Provision for doubtful accounts |
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7,598,802 |
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7,873,389 |
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Minority interest |
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(1,594,285 |
) |
(894,565 |
) |
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Gain from sale of Visalia-Porterville license |
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— |
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(4,814,337 |
) |
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Increase in accounts receivable |
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(7,724,401 |
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(5,710,904 |
) |
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Increase in accounts receivable due from officer |
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(4,500 |
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(101,000 |
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Increase (decrease) in insurance claim receivable |
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1,496,320 |
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(234,673 |
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Increase in inventories |
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(669,282 |
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(2,171,388 |
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Increase in prepaid expenses and deferred financing cost |
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719,381 |
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787,285 |
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(Decrease) increase in accounts payable and accrued liabilities |
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70,942 |
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1,133,906 |
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Increase in accounts payable to related parties |
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2,110,356 |
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3,287,410 |
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Increase (decrease) in accrued interest |
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(3,670,797 |
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1,700,143 |
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(Decrease) increase in deferred income |
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(497,045 |
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(368,209 |
) |
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Total adjustments |
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10,058,558 |
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16,277,304 |
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Net cash provided by operating activities |
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5,279,651 |
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(630,235 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisition of property and equipment |
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(8,655,511 |
) |
(7,544,445 |
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Gain on Sale of Stock to Fleet |
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(12,569,784 |
) |
— |
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Investment in eMilios |
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(205,962 |
) |
— |
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Net cash (used in) operating activities |
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(21,431,257 |
) |
(4,841,232 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from sale of Visalia-Porterville license |
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— |
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9,500,000 |
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Proceeds from the sale Stock to NewComm |
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13,000,000 |
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— |
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Capital contribution from minority interest |
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— |
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5,000,000 |
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Proceeds from issuance of notes payable to TLD |
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13,996,410 |
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4,990,000 |
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Payment of Note Payable to Lucent |
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— |
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(8,298,808 |
) |
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Payment of Note Payable to Alcatel |
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(5,354,111 |
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Net cash provided by financing activities |
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21,642,299 |
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11,191,192 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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5,490,693 |
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3,016,512 |
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CASH AND CASH EQUIVALENTS, beginning of period |
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10,241,902 |
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9,338,798 |
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CASH AND CASH EQUIVALENTS, end of period |
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$ |
15,732,595 |
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$ |
12,355,310 |
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SUPPLEMENTAL CASH FLOWS INFORMATION: |
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Network construction costs financed through note payable to Lucent and accounts payable |
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$ |
— |
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$ |
14,233,744 |
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Accounts receivable written-off against the allowance for doubtful accounts |
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$ |
9,227,981 |
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$ |
9,143,191 |
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Interest paid |
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$ |
11,796,876 |
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$ |
9,876,260 |
|
The accompanying notes are integral part of these consolidated financial statements.
6
CLEARCOMM, L.P.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND INTRODUCTION
The unaudited interim consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals which, in the opinion of management, are considered necessary for a fair presentation of the Partnership’s financial position at September 30, 2002 and results of operations and cash flows for the three-month periods ended September 30, 2002 and 2001. The unaudited interim consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2001. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.
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. Its total share of the income and losses of the Partnership is 25% in accordance with the Partnership Agreement. Approximately 1,600 limited partners also invested in the Partnership through a private placement.
On January 22, 1997, the Partnership was granted the PCS Block C licenses for Puerto Rico and certain cities in California.
NewComm Wireless Services, Inc.
On February 4, 1999, the Partnership entered into a joint venture agreement (the “Joint Venture Agreement”) with Telefónica Larga Distancia De Puerto Rico, Inc. (“TLD”) to jointly develop and operate certain PCS licenses in Puerto Rico. Among the most important provisions of the Joint Venture Agreement are the following:
• The Partnership transferred all of its Puerto Rico PCS licenses including its related debt with the FCC to NewComm Wireless Services, Inc. (“NewComm”), a newly organized Puerto Rico corporation, in exchange for all of NewComm’s issued and outstanding common stock.
• TLD loaned approximately $20 million to NewComm by means of a secured convertible promissory note payable (the “Promissory Note”). The Promissory Note is secured by a security agreement pursuant to which a security interest is imposed upon NewComm’s assets, a Partnership guarantee and a pledge agreement, as defined.
• Once certain regulatory and other requirements are met, the Promissory Note will be converted to NewComm’s common stock representing approximately 49.9% of NewComm’s equity at the time of the exchange. Originally, TLD had the option to buy an additional .2%, which would have brought its ownership to 50.1%, subject to a third party valuation of NewComm’s stock and approval by the FCC. On June 26, 2001, the Joint Venture Agreement was amended eliminating the TLD Option to buy the additional ..2%. However, by means of a Stock Purchase Agreement dated as of March 12, 2002, and subject to certain conditions, the Partnership has agreed to sell an amount of shares equal to 0.2% of NewComm to TLD.
• The new Sale Agreement provides that at any time after 14 months from the signing of the Stock Purchase Agreement with TLD, that is, any time after May 2003, ClearComm (or TLD), as the case may be, may trigger a shareholder obligation to sell NewComm. Within 30 days of a notice of sale, TLD (or ClearComm as the case may be) would have the right to purchase ClearComm’s (or TLD’s) interest. The purchase price to be paid at that time would be based on a valuation performed by the investment banking firm that prepared the one under the Stock Purchase Agreement. If TLD does not exercise its right to buy out ClearComm’s interest, the shareholders will be bound to proceed with the sales
7
process to attempt a sale of NewComm. All shareholders are bound to cooperate and undertake all that is
necessary in that effort. Further, the shareholders are bound to accept the highest price proposed by an
interested buyer, which price must be payable in cash or freely tradable securities, or a combination
thereof, and which must be for a price not less than the valuation prepared by the investment banker.
• Some additional points are that at the closing of the sale of NewComm the Management Agreement and the Technology Transfer Agreement held by TLD will terminate. Also, no premium for controlling interest or discount for holding a minority interest in NewComm will apply. The Sale Agreement shall continue in full force and effect even if the Stock Purchase Agreement with TLD, for whatever reason, does not close.
In September 1999, NewComm commenced providing PCS services in Puerto Rico.
In each of November 2000, December 2000, and March 2001, NewComm received $5,000,000, from Syndicated Communications Venture Partners IV, L.P. (Syncom), a third party, in exchange for approximately 4.92% ownership in NewComm. Syncom has contributed $25 million to NewComm in exchange for an approximately 8.2% ownership interest in NewComm. The last $10 million trench was contributed in November 2002.
On March 2, 2002, the Partnership sold approximately 4.08% of NewComm to a group of investors led by Fleet Development Ventures for $13 million. The Partnership and TLD contributed approximately $9 million each to NewComm in the form of equity and convertible debt, respectively. The Partnership and TLD have committed an additional $10M each to close the Project Finance Facility. The Partnership believes it has obtained sufficient funds, together with TLD, to provide NewComm with the capital necessary for the Project Finance Facility and to fully fund NewComm’s operations.
Internet Surfing Stores of P.R., Inc. - (eMilios)
On April 16, 2002, ClearComm, L.P. entered into a Shareholders’ Agreement to form a joint venture with eMilios International, L.L.C., a Florida limited liability company, to promote and establish in Puerto Rico the eMilios concept. The joint venture was formed under a Puerto Rico corporation named Internet Surfing Stores of Puerto Rico, Inc. (“ISS”). The Partnership owns 49% and eMilios International owns 51% of ISS.
The eMilios concept involves internet communication galleries that are geared towards educating people in the use of computers and the internet, and acts as a communication and recreational center as well. The broadband connectivity that is offered at eMilios allows the stores to efficiently offer internet communications and also access to a great variety of interactive content, such as cyber games, as well as software and tools for free lancers and small business entities. The service is provided and collected with a proprietary smart card and software application. The commitment of the Partnership to ISS is $1 million and eMilios International has committed $500,000 in cash plus trade-name, systems, software, and technology know-how equivalent to $500,000. The Partnership is responsible for the management and day-to-day operations of ISS. ISS opened its first store with 48 stations on October 23, 2002. A second store of similar size is scheduled to open during the month of December. The investment has the benefit of an exit mechanism. At any time after 2003, ClearComm can force the acquisitions of its shares in ISS or the sale of the whole company.
2. FINANCING REQUIREMENTS
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Partnership commenced operations in September 1999 and has incurred operating losses amounting to $4.8 million for the nine-month period ended September 30, 2002 and incurred operating losses of $16.9 million for the nine month period ended September 30, 2001. It also has working capital defining and partners’ capital deficits of $124.3 million and $72.4 million, respectively, as of September 30, 2002. The Partnership is likely to continue incurring 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 means other than its revenues.
As part of the agreement with TLD, NewComm entered into a contract with Lucent Technologies, Inc. (“Lucent”) that required Lucent to build a network that uses the Code Division Multiple Access (“CDMA”) protocol. The total cost of the network was approximately $125 million. During 2000, NewComm’s management and Lucent agreed on formally extending the
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payment of up to $61.0 million of the total amount due under the contract under a formal financing agreement. The financing agreement extended payments for an eight-month period (through June 2001) at an annual interest rate of 1.5% over 90-day LIBOR. NewComm’s management and Lucent restructured this financing agreement, by means of a Promissory Note issued on September 26, 2001 for the principal sum of $60.5 million plus 8% interest. The parties are currently negotiating to make this part of a permanent debt facility.
During November 2000, NewComm entered into a $60 million bridge loan agreement (the “Bridge Loan Facility”) with ABN-AMRO and BBVA (the “Banks”) with interest at 1.5% over 90-day LIBOR, which expired on March 15, 2001, and was extended until March 13, 2002, with an interest rate at .75% over 90-day LIBOR. The Bridge Loan is now guaranteed by Telefónica Internacional, S.A. (TISA), an affiliate of TLD. On September 26, 2002, the maturity date of the Bridge Loan Facility was extended to November 29, 2002, and the Banks have agreed to extend it again until December 31, 2002. ClearComm and TLD continue to work towards securing a permanent financing facility, which will require the Partnership, through Syncom and TLD, to each contribute a total of approximately $25 million in equity and convertible debt. As part of this commitment, during the second half of 2000, the first half of 2001, and second quarter of 2002, the Partnership, Syncom and TLD have contributed a total of $24 million in the form of equity and convertible debt, respectively.
Each of the Partnership’s C-Block licenses is subject to a FCC requirement that the Partnership constructs 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-thirds of the population within ten years following the grant. The Partnership is in compliance with the FCC coverage requirements in Puerto Rico and the California Licenses.
Management believes that the Partnership will comply with all the requirements for obtaining the 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, at a minimum, through the end of 2002. However, in the absence of improved operating results and cash flows, and without the closing of its contemplated permanent financing, the Partnership may face liquidity problems to fund its operations and meet its obligations. As a result of these matters, substantial doubt exists about the Partnership’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
3. OTHER ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138 (“SFAS 138”) which amends SFAS 133 for certain derivative instruments and certain hedging activities. SFAS 133, as amended, is effective for fiscal years beginning after June 15, 2000. The Partnership adopted SFAS 133 beginning January 1, 2001, but did not have any derivatives.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” (effective July 1, 2001) and SFAS No. 142, “Goodwill and Other Intangible Assets” (effective for the Company on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The Company is in the process of evaluating the financial statement impact of adoption of SFAS No. 142.
4. LEGAL PROCEEDINGS
The Partnership is subject to certain legal proceedings and an FCC proceeding, which were described in the Partnership’s Form 10-K for the year ended December 31, 2001.
Sprint/Centennial
On September 21, 2001, NewComm Wireless Services, Inc. d/b/a MoviStar (“MoviStar”) filed a Complaint and Motion and Memorandum of Law Requesting Temporary Restraining Order and Preliminary Injunction in the Federal District Court for the District of Puerto Rico, which alleged serious and unlawful interruptions, interferences and irreparable damages to MoviStar’s
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operations arising out of Sprint’s refusal to broadcast an SID for the Puerto Rico market that will not interfere with the services presently being offered by MoviStar to its subscribers. During October 15th to 18th, 2001, the District Court held an evidentiary hearing related to the injunctive relief sought. In its Opinion and Order of October 29, 2001, the District Court ordered Sprint to “immediately cease and desist from using SID 5142 and/or any other SID which similarly interferes with plaintiff’s operations in Puerto Rico.”
On October 30, 2001, Centennial filed a Motion of Intervention of Right in which it requested leave from the District Court to join the Sprint litigation. Despite MoviStar’s opposition, the District Court granted Centennial’s motion on November 5, 2001. Both Sprint and Centennial are currently appealing, in the First Circuit Court of Appeals, the injunctive relief granted by the DistrictCourt of Puerto Rico. On April 6, 2002, the First Circuit Court of Appeals issued an order reversing the injunction release. On or about April 20, 2002, MoviStar filed a Petition for a Re-Hearing and the petition was denied. However, MoviStar is continuing to pursue its damage claims and has now entered into a formal discovery of evidence period.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q 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 capital; 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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Introduction
The information contained in this Part I, Item 2 updates, and should be read in conjunction with, information set forth in Part II, Items 7 and 8, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, in addition to the interim consolidated financial statements and accompanying notes presented in Part 1, Item 1 of this Form 10-Q.
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 four 15 MHz PCS licenses covering the California cities of Eureka, Redding, Modesto, and Merced. The license covering Visalia-Porterville, California, was sold and transferred to Leap Wireless on June 8, 2001 for $9,500,000.
The Partnership commenced commercial operations of its PCS network in Puerto Rico on September 24, 1999 when it began offering wireless services in Puerto Rico to the public. Prior to that date, its income had consisted of interest earnings only. Since the Partnership commenced commercial operations in 1999 and during 2000 was still in the start-up process, the comparisons presented below may not be indicative of future operations.
The Partnership established its Puerto Rico network by forming a wholly owned subsidiary, NewComm, on January 29, 1999. On February 4, 1999, the Partnership and NewComm entered into an agreement with TLD, whereby the Partnership contributed its two Puerto Rico Licenses to NewComm and TLD provided NewComm a $19,960,000 loan to develop the Puerto Rico Licenses. TLD’s loan is pursuant to a secured convertible promissory note (the “Note”) which is convertible into 49.9% of NewComm’s equity. The Note however, cannot be converted until the FCC authorizes TLD to hold more than a 25% equity interest in NewComm. By means of a Stock Purchase Agreement executed on March 12, 2002, the Partnership has agreed to sell shares equal to 0.2% in NewComm to TLD conditioned to obtaining permanent financing and a clear exit path for the Partnership. The transaction is subject to FCC approval also.
Since January 2002 the Partnership has been offering wireless DSL service in certain areas within the California Licenses in compliance with the FCC build out requirements.
Results of Operations
Three-month period ended September 30, 2002 compared with three-month period ended September 30, 2001.
Revenues
The Partnership’s revenues for the three-month period ended September 30, 2002 totaled $26,209,320 as compared to $30,844,992 for the same period in 2001. Revenues for the three-month period ended September 30, 2002 included $20,340,849 in service revenues and $5,868,471 in handset and accessories sales generated from NewComm’s wireless operations, as compared to $27,920,018 and $2,924,974 respectively, for the same period in 2001. The decrease in total revenues is mainly due to lesser handset and accessories sales which were affected by handset units pricing adjustments. Handset and accessories sales for the three month period ended September 30, 2002 includes customer contract base with total sales of $3.2 million, where as such account was included in service revenues in the same period in 2001. This reclassification entry accounts for the apparent increase in handset and accessories sales as compared to the same period in 2001.
Expenses
Expenses for the three-month period ended September 30, 2002 totaled $29,720,818 as compared to $31,514,444 for the same period in 2001. During the third quarter of 2002, the Partnership’s expenses included $1,346,332 ($6,906,803 as of September 30, 2001) in costs of handset and accessories, $4,486,661 ($4,032,313 as of September 30, 2001) for salaries and benefits, $2,917,803 ($3,160,410 as of September 30, 2001) for legal and professional services, $4,203,439 ($3,821,063 as of September 30, 2001) in depreciation and amortization, $ 2,143,788 ($1,969,556 as of September 30, 2001) in provision for doubtful accounts, $13,313,524 ($10,091,227 as of September 30, 2001) in interconnection, sales and dealers commissions, advertising, rent, taxes other than income, other expenses and management fee to General Partner, and $1,309,270 ($1,533,073 as of September 30, 2001) for services rendered by related parties. However, the Arthur Andersen firm closed in the month of June of 2002 and the firm’s local office closed at approximately the same time. Efforts by Deloitte & Touche to contact former account managers and responsible partner have been unsuccessful. Therefore, Deloitte & Touche has been unable to complete their review of the Partnership’s financial statements presented herein. Furthermore, without notes and documents of the former auditors, new expenses groupings have been created for this report. Thus, a line by line comparison of the expenses for the three-month period that ended September 30, 2002 with the same period of expenses of 2001 may seem unclear.
The overall decrease in expenses of $1.8 million dollars is mainly due to a reduction in the cost of handsets and accessories combined with an increase in rent expense and taxes other than income. The $29.7 million total expenses for the three months period September 30, 2002 included rent expense of $7.3 million which resulted in an increase as compared to the same period in 2001 due to additional stores opened in a chain of local supermarkets and an increase in site rent for new antennas located throughout the Island.
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The decrease in interest expense ($3,062,518 and $3,627,182 for the quarter ended September 30, 2002 and 2001, respectively) is attributable to the reduction of debt outstanding related to the Note Payable to Alcatel.
Nine-month period ended September 30, 2002 compared with nine-month period ended September 30, 2001
Revenues
The Partnership’s revenues for the nine-month period ended September 30, 2002 totaled $81,992,796 as compared to $$92,376,616 for the same period in 2001. Revenues for the nine-month period ended September 30, 2002 included $72,411,264 in service revenues and $9,581,532 in handset and accessories sales generated from NewComm’s wireless operations, as compared to $80,295,479 and $12,081,137 respectively, for the same period in 2001. The decrease in revenues is mainly due the reduction in handset and accessories sales and a pricing adjustment to the handsets.
Expenses
Expenses for the nine-month period ended September 30, 2002 totaled $76,887,311 as compared to $98,948,397 for the same period in 2001. During the nine-month period ended September 30, 2002, the Partnership’s expenses included $13,778,576 ($24,712,623 as of September 30, 2001) in costs of handset and accessories, $11,822,554 ($11,623,493 as of September 30, 2001) for salaries and benefits, $7,615,695 ($7,965,526 as of September 30, 2001) for legal and professional services, $12,223,068 ($13,715,283 as of September 30, 2001) in depreciation and amortization, $7,598,802 ($7,873,389 as of September 30, 2001) in provision for doubtful accounts, $32,087,787 ($33,858,836 as of September 30, 2001) in interconnection, sales and dealers commissions, advertising, rent, taxes other than income, other expenses and management fee to General Partner, $4,330,612 ($4,013,584 as of 30, 2001) for services rendered by related parties and a one time gain of $12,569,788 on the sale of stock to Fleet for the six month period ended in June 2002 and a one time gain of $4,814,337 from the sale of the Visalia-Porterville, California, license. However, the Arthur Andersen firm closed in the month of June of 2002 and the firm’s local office closed at approximately the same time. Efforts by Deloitte & Touche to contact former account managers and responsible partner have been unsuccessful. Therefore, Deloitte & Touche has been unable to complete their review of the Partnership’s financial statements presented herein. Furthermore, without notes and documents of the former auditors, new expenses groupings have been created for this report. And, a line by line comparison of the expenses for the nine-month period that ended September 30, 2002 with the same period of expenses of 2001 may seem unclear.
Net loss of $4,778,907 for the nine-month period ended September 30, 2002 includes a $12.6 million gain on the sale of the Partnership’s stock on NewComm to Fleet. Without such gain the Partnership incurred in operating losses of $ 17.4 million as compared to a net loss of $21.7 for the same period in 2001; the decrease in operating losses of $4.3 million is directly related to the reduction in the ongoing costs of meeting the competition of existing cellular and PCS operators in order to develop and maintain a subscriber base. To meet competition, a subsidy is granted in the sale of handsets and accessories, on which a negative margin is generated. Such subsidy has been significantly reduced with the increase of amounts charged to customers for handsets combined with a reduction of the cost of acquisition of such handsets during the nine-month period ended September 30, 2002. The Partnership’s net loss for the first half of 2001 was offset by the, one time, $4,814,337 gain on sale of Visalia-Porterville, California, license.
Liquidity and Capital Resources
As of September 30, 2002, the Partnership had cash and cash equivalents amounting to $15,732,595, which are mostly related to proceeds from the sale of the Visalia-Porterville, California, license in the second quarter, 2001, and the Fleet Transaction.
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As part of the agreement with TLD, NewComm entered into a contract with Lucent Technologies, Inc. (“Lucent”) that required Lucent to build a network that uses the Code Division Multiple Access (“CDMA”) protocol. The total cost of the original network was approximately $125 million. During 2000, NewComm’s management and Lucent agreed on formally extending the payment of up to $61.0 million of the total amount of network construction payable, at the time, under a formal financing agreement. The financing agreement was restructured as a Promissory Note on September 26, 2001, with a principal sum of $60.5 million plus 8% interest, and NewComm is at present negotiating a restructuring of this debt to a permanent facility.
In addition, the Partnership owes the United States federal government approximately $51,339,555 (undiscounted) plus accrued interest at 6.5% in connection with the acquisition of its PCS licenses. As of September 30, 2002, the notes payable to FCC are presented net of a discount.
The Partnership has a secured promissory note payable to TLD, which bears interest at the floating rate of 90-day LIBOR plus 1.5% and is due in March, 2004.
The Partnership estimates that the total cost to implement NewComm’s business plan will be approximately $200 million. This consists of approximately $125 million in costs associated with building-out the Puerto Rico Network, and approximately $75 million to fund NewComm’s operations until these become profitable. NewComm obtained a short term financing (“Bridge Loan”) of $60 million which has been extended until November 29, 2002, with an interest rate of .75% over 90-day LIBOR. The Bridge Loan is now guaranteed by Telefónica Internacional, S.A. (TISA), an affiliate of TLD. ClearComm and TLD continue to work towards securing a permanent financing facility. The Partnership anticipates that banks, together with Lucent, will be willing to provide long term financing of approximately $150 million, provided that the Partnership and TLD contribute additional capital or convertible debt to NewComm. The Partnership, through Syncom and TLD, contributed a total of $30 million of additional capital or convertible debt during the second half of 2000 and first half of 2001. In the second quarter the Partnership and TLD each contributed an additional $9 million convertible debt and capital, respectively. Syncom invested $15 million in NewComm in exchange for 4.92% of NewComm. ClearComm sold approximately 4.08% of its interest in NewComm in exchange of $13 Million during the first quarter of 2002. The Partnership believes that the capital or convertible debt contributed by Syncom and TLD, along with the extended interim financing, will fully fund NewComm’s operations through the end of 2002.
On March 2, 2002, the Partnership sold 4.08% of NewComm to a group of investors led by Fleet Development Ventures for $13 million. During the second quarter of 2002, the Partnership and TLD contributed approximately $9 million each to NewComm in the form of equity and convertible debt, respectively. The Partnership believes it has obtained sufficient funds, together with TLD, to provide NewComm with the capital necessary for the Project Finance Facility and to 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 1.1 million people in Eureka, Redding, Merced, and Modesto, all within the state of California. Holders of major C Block licenses covering areas surrounding the areas covered by the California Licenses are currently under bankruptcy court proceedings, which adversely affect 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 was concluded on April 16, 1999. Another re-auction was concluded in January 2001. However, this re-auction was set aside by the Washington D.C. Court of Appeals on June 22, 2001. The FCC has filed for an appeal of this ruling before the United States Supreme Court, and the Court has accepted to review the case. Accordingly, there continues to be uncertainty regarding the ownership of the licenses surrounding the California Licenses. 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, interim and permanent financing and, if necessary, additional capital calls from its Investors or accessing the public capital markets, should provide it with the liquidity to meet its obligations. The Partnership also expects that once it is able to develop its California Licenses, it will have additional sources of revenues and profits.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Partnership’s exposure to market risk through derivative financial instruments and other financial instruments is not material because the Partnership does not use derivative financial instruments and does not have foreign currency exchange risks. The Partnership invests cash balances in excess of operating requirements in short-term money market funds. As of September 30, 2002, the
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Partnership had cash equivalents and short-term investments of approximately $15,732,595 consisting of cash and highly liquid, short-term investments in money market funds.
The Partnership’s cash and cash equivalents will increase or decrease by an immaterial amount if market interest rates increase or decrease, and therefore, its exposure to interest rate changes has been immaterial. The Partnership’s loans payable to the FCC have a fixed interest rate of 6.5% and therefore are not exposed to interest rate risks. The TLD Note relating to indebtedness of NewComm bears interest at the floating rate of the 90-day LIBOR plus 1.5% and is due in March 2004. The Partnership, TLD, and Lucent are currently under negotiations to restructure the approximately $61 million debt owed to Lucent.
Controls and Procedures
The Partnership’s Chief Executive Officer, Javier O. Lamoso, and the Partnership’s Chief Financial Officer, Edileen Salicrup, have evaluated the Partnership’s disclosure controls and procedures within 90 days of the filing of this report.
Mr. Lamoso and Ms. Salicrup have concluded that the Partnership’s disclosure controls and procedures provide reasonable assurance that the Partnership can meet its disclosure obligations. The Partnership’s disclosure controls and procedures are based upon a roll-up of financial and non-financial reporting that is consolidated by TLE pursuant to the Partnership’s Management Agreement with TLD. The reporting process is designed to ensure that information required to be disclosed by the Partnership in the reports that it files or submits with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
There have been no significant changes in the Partnership’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Information regarding legal proceedings is disclosed in Part I, Item 1, Notes to Interim Consolidated Financial Statements (unaudited), Section 4, and is hereby incorporated into Part II, Item 1 by this reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
Exhibit 99: Certifications by the Chief Executive Office and Chief Financial Officer pursuant to Section 1350 of Chapter b3 of Title 18 of the United States Code.
ITEMS 2, 3, 4 and 5 are not applicable and have been omitted.
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Pursuant to the requirements 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.
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ClearComm, L.P. |
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By: |
SuperTel Communications Corp. |
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Date: December 23, 2002 |
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By: /s/ Javier O. Lamoso |
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Name: Javier O. Lamoso |
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Title: President |
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Javier O. Lamoso, Chief Executive Officer of ClearComm, L.P., certify that:
Date: December 23, 2002
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/s/ Javier O. Lamoso |
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Javier O. Lamoso |
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Chief Executive Officer |
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Edileen Salicrup, Chief Financial Officer of ClearComm, L.P., certify that:
Date: December 23, 2002
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/s/Edileen Salicrup |
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Edileen Salicrup |
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Chief Financial Officer |