**UNITEDSTATES**

**Securitiesand Exchange Commission**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                   |   |   |
| **For the  quarterly period ended September 30, 2005**                                                                            |
|                                                                                                                                   |   |   |
| **o**                                                                                                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                             | ** ** | ** ** |
| **For the  transition period  from        to        ** |
|                                                                                                                                   |   |   |
| **Commission  file number 0-28362**                                                                                                    |

 

**ClearComm,L.P.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                                 | ** ** | **66-0514434**                        |
|------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)             |       | (I.R.S. Employer  Identification No.) |
|                                                                         |       |                                  |
| **City  View Plaza-Suite 700****No. 48 of Road 165**               | ** ** | **00968**                             |
| **Guaynabo,  Puerto Rico**                                                   |       | (Zip Code)                            |
|                                                                         |       |                                  |
| Registrant’s  telephone number, including area code: **(787) 810-5757** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months and (2) has been subject to such filing requirements for the past90 days.

Yesý   Noo

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

Yes o  No ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes o  No ý

 

 

----

 

ClearComm, L.P.

INDEX

 
| PART I  FINANCIAL INFORMATION |                                                                                                                                                       |
|------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                                                       |
| Item 1.                            | Financial Statements                                                                                                                                       |   |
|                               |                                                                                                                                                       |   |
|                               | Consolidated Statements of  Assets, Liabilities and Partners’ Deficit as of September 30, 2005  (unaudited) and December 31, 2004 (audited) |   |
|                               |                                                                                                                                                       |   |
|                               | Consolidated Statements of  Revenues and Expenses for the three-month and nine-month period ended  September 30, 2005 and 2004 (unaudited)            |   |
|                               |                                                                                                                                                       |   |
|                               | Consolidated Statements of  Changes in Partners’ Deficit for the nine-month period ended September 30,  2005 (unaudited)                         |   |
|                               |                                                                                                                                                       |   |
|                               | Consolidated  Statements of Cash Flows for the nine-month period ended September 30,  2005 and 2004 (unaudited)                                       |   |
|                               |                                                                                                                                                       |   |
|                               | Notes  to Interim Consolidated Financial Statements (unaudited)                                                                                            |   |
|                               |                                                                                                                                                       |   |
| Item  2                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                |   |
|                               |                                                                                                                                                       |   |
| Item 3                             | Quantitative and Qualitative  Disclosure About Market Risk                                                                                                 |   |
|                               |                                                                                                                                                       |   |
| Item 4                             | Control and Procedures                                                                                                                                     |   |
|                               |                                                                                                                                                       |   |
|                               |                                                                                                                                                       |   |
| PART II                       | OTHER INFORMATION                                                                                                                                          |   |
|                               |                                                                                                                                                       |   |
| Item 1.                            | Legal Proceedings                                                                                                                                          |   |
|                               |                                                                                                                                                       |   |
| Item 6.                            | Exhibits and Reports on Form 8-K                                                                                                                      |   |
|                               |                                                                                                                                                       |
| Signatures                         |                                                                                                                                                       |
|                               |                                                                                                                                                       |
| Exhibit Index                 |                                                                                                                                                       |

 

2

----

 

PART I             FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF ASSETS, LIABILITIESAND PARTNERS’ DEFICIT

 
| ** **                                                                                                                 | ** ** | **September 30,  2005** | ** **      | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-----------------|-----------------------------|------------|
| ** **                                                                                                                 | ** ** | **(Unaudited)**              | ** **      | **(Restated)**              | ** ** |
| **ASSETS:**                                                                                                                | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| **Cash and cash equivalents**                                                                                              | ** ** | **$**                        | **9,780,090**   | ** **                  | **$**      | **10,612,430** | ** ** |
| **Accounts receivable, net**                                                                                               | ** ** | **7,385,408**                | ** **      | **7,909,573**               | ** ** |
| **Accounts receivable, other**                                                                                             | ** ** | **4,854,239**                | ** **      | **4,204,524**               | ** ** |
| **Insurance claim receivable**                                                                                             | ** ** | **—**                   | ** **      | **403,657**                 | ** ** |
| **Interest receivable**                                                                                                    | ** ** | **—**                   | ** **      | **20,000**                  | ** ** |
| **Inventories, net**                                                                                                       | ** ** | **2,756,211**                | ** **      | **4,341,975**               | ** ** |
| **Prepaid expenses**                                                                                                       | ** ** | **1,869,425**                | ** **      | **841,750**                 | ** ** |
| **Leasehold rights, net**                                                                                                  | ** ** | **3,563,091**                | ** **      | **3,314,144**               | ** ** |
| **Investment in “unconsolidated”  subsidiary**                                                                   | ** ** | **217,959**                  | ** **      | **247,959**                 | ** ** |
| **PCS licenses, net**                                                                                                      | ** ** | **46,750,449**               | ** **      | **46,750,449**              | ** ** |
| **Deferred financing costs**                                                                                               | ** ** | **1,306,275**                | ** **      | **635,824**                 | ** ** |
| **Note receivable from officer**                                                                                           | ** ** | **—**                   | ** **      | **100,000**                 | ** ** |
| **Property and equipment, net**                                                                                            | ** ** | **71,122,295**               | ** **      | **80,546,773**              | ** ** |
| ** **                                                                                                                 | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| ** **                                                                                                                 | ** ** | **$**                        | **149,605,442** | ** **                  | **$**      | **159,929,058** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| **LIABILITIES AND PARTNERS’  DEFICIT:**                                                                               | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| **Accounts payable and accrued  liabilities**                                                                              | ** ** | **$**                        | **25,096,666**  | ** **                  | **$**      | **48,810,130** | ** ** |
| **Notes payable — short-term**                                                                                        | ** ** | **83,185,105**               | ** **      | **136,836,778**             | ** ** |
| **Notes payable — long-term**                                                                                         | ** ** | **89,389,794**               | ** **      | **90,226,258**              | ** ** |
| ** **                                                                                                                 | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| **Unitholders’ capital (deficit) 2,765.20 Units in  2005, 2906.1 Units in 2004, and 1 general partnership interest.** | ** ** | **(48,066,123**              | **)**           | **(115,944,108**            | **)**      |
| ** **                                                                                                                 | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| **Total liabilities and partner’s  deficit**                                                                          | ** ** | **$**                        | **149,605,442** | ** **                  | **$**      | **159,929,058** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| **BOOK VALUE(DEFICIT) PER UNIT**                                                                                           | ** ** | **$**                        | **(17,383**     | **)**                       | **$**      | **(41,930** | **)** |

 

The accompanying notesare an integral part of these consolidated statements.

 

3

----

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF REVENUES AND EXPENSES (UNAUDITED)

 
| ** **                                              | ** ** | **Three-Month Periods Ended September 30** | ** ** | **Nine-Month Periods Ended September 30** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                        | ** ** | **2004**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | ** **                                      | ** ** | **(Restated)**                                 | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Revenues:**                                           |       |                                            |       |                                           |       |   |   |   |   |
| Service  revenues                                       |       | $                                               | 21,016,249 |                                           | $          | 24,156,171 |   | $ | 66,581,737 |   | $ | 76,940,544 |   |
| Handset and accessories  sales                          |       | 1,436,425                                       |       | 975,313                                        |       | 3,343,509 |   | 3,640,103 |   |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
|                                                    |       | 22,452,674                                      |       | 25,131,484                                     |       | 69,925,246 |   | 80,580,647 |   |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
| **Operating Cost and Expenses:**                        |       |                                            |       |                                           |       |   |   |   |   |
| Cost of handset and  accessories                        |       | 3,527,856                                       |       | 5,643,781                                      |       | 12,575,492 |   | 16,753,699 |   |
| Interconnection expense                                 |       | 799,737                                         |       | 694,166                                        |       | 2,403,221 |   | 2,735,145 |   |
| Sales and dealers  commissions                          |       | 1,168,744                                       |       | 2,731,291                                      |       | 5,094,668 |   | 8,111,674 |   |
| Salaries and benefits                                   |       | 3,657,896                                       |       | 4,018,377                                      |       | 11,431,591 |   | 12,008,249 |   |
| Depreciation                                            |       | 4,648,615                                       |       | 4,565,310                                      |       | 13,744,283 |   | 13,258,655 |   |
| Advertising expense                                     |       | 337,457                                         |       | 1,539,925                                      |       | 2,430,059 |   | 4,854,071 |   |
| Legal and professional  services                        |       | 564,965                                         |       | 435,118                                        |       | 1,244,267 |   | 1,999,861 |   |
| Provision for doubtful  accounts                        |       | 3,357,054                                       |       | 2,168,272                                      |       | 8,839,180 |   | 6,880,222 |   |
| Rent expense                                            |       | 1,893,517                                       |       | 1,735,119                                      |       | 5,511,480 |   | 5,102,491 |   |
| Taxes other than income                                 |       | 1,044,220                                       |       | 1,048,121                                      |       | 2,616,326 |   | 2,897,768 |   |
| Network Operation and  Maintenance                      |       | 2,093,366                                       |       | 1,628,648                                      |       | 6,045,603 |   | 4,921,585 |   |
| Other expenses                                          |       | 1,678,100                                       |       | 1,946,573                                      |       | 3,009,706 |   | 6,723,642 |   |
| Management fee to  General Partner                      |       | 89,420                                          |       | 68,750                                         |       | 291,888 |   | 206,250 |   |
| Services rendered by  related parties                   |       | 347,867                                         |       | 1,245,169                                      |       | 1,766,718 |   | 3,831,389 |   |
| Gain on Sale of  California License                     |       | —                                          |       | (30,000                                        | )          | — |   | (4,168 | ) |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
|                                                    |       | 25,208,814                                      |       | 29,438,620                                     |       | 77,004,482 |   | 90,280,533 |   |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
| **Income (Loss) from Operations**                       |       | (2,756,140                                      | )          | (4,307,136                                     | )          | (7,079,236 | ) | -9,699,886 |   |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
| **Other Income (Expense)**                              |       |                                            |       |                                           |       |   |   |   |   |
| Interest income                                         |       | 61,102                                          |       | 119,309                                        |       | 469,262 |   | 236,281 |   |
| Other Income                                            |       | —                                          |       | —                                         |       | 32,644 |   | (57,720 | ) |
| Interest expense                                        |       | (3,042,508                                      | )          | (2,464,093                                     | )          | (9,010,629 | ) | (7,151,892 | ) |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
|                                                    |       | (2,981,406                                      | )          | (2,344,784                                     | )          | (8,508,723 | ) | (6,973,331 | ) |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
| **Net Income (Loss)**                                   |       | $                                               | (5,737,546 | )                                              | $          | (6,651,920 | ) | $ | (15,587,959 | ) | $ | (16,673,217 | ) |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
| **Net Income (Loss) Attributable to General  Partner**  |       | $                                               | (5,737,546 | )                                              | $          | (6,651,920 | ) | $ | (15,587,959 | ) | $ | (16,673,217 | ) |
|                                                    |       |                                            |       |                                           |       |   |   |   |   |
| **Net Income (Loss) Attributable to Limited  Partners** |       | $                                               | —     |                                           | $          | — |   | $ | — |   | $ | — |   |

 

The accompanying notesare integral part of these consolidated financial statements.

 

4

----

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF CHANGES IN PARTNERS’ DEFICIT(Unaudited)

FOR THE NINE-MONTHPERIOD ENDED SEPTEMBER 30, 2005

 
| ** **                                                                                                          | ** ** | **Limited Partners** | ** ** | **General** | ** ** | ** **  | ** **   |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|-------------|--------------|
| ** **                                                                                                          | ** ** | **Units**            | ** ** | **Amount**  | ** ** | **Partner** | ** **   | **Total** | ** ** |
| ** **                                                                                                          | ** ** | ** **           | ** ** | ** **  | ** ** | ** **  | ** **   | ** ** | ** ** |
| **BALANCES,**December 31, 2004                                                                                 |       | 2,765.2              |       | —      |       | $           | (115,944,108 | ) | $ | (115,944,108 | ) |
|                                                                                                                |       |                 |       |        |       |        |         |   |   |
| **Net loss for the three-months period ended March 31,  2005**                                                 |       |                 |       |        |       | (5,535,069  | )            | (5,535,069 | ) |
|                                                                                                                |       |                 |       |        |       |        |         |   |   |
| **Net loss for the three-months period ended June 30,  2005**                                                  |       | —               |       | —      |       | (4,315,344  | )            | (4,315,344 | ) |
|                                                                                                                |       |                 |       |        |       |        |         |   |   |
| **Net loss for the three-months period ended September 30,  2005**                                             |       |                 |       |        |       | (5,737,546  | )            | (5,737,546 | ) |
|                                                                                                                |       |                 |       |        |       |        |         |   |   |
| **Capital Contribution during the three months  period ended September 30, 2005**                              |       |                 |       |        |       | 2,450,000   |         | 2,450,000 |   |
|                                                                                                                |       |                 |       |        |       |        |         |   |   |
| **Additional Capital Contribution from conversion  pursuant to the settlement agreement dated April 20, 2005** |       |                 |       |        |       | 81,015,944  |         | 81,015,944 |   |
|                                                                                                                |       |                 |       |        |       |        |         |   |   |
| **BALANCES,**September 30, 2005                                                                                |       | 2,765.2              |       | —      |       | $           | (48,066,123  | ) | $ | (48,066,123 | ) |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

5

----

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

 
| ** **                                                                       | ** ** | **Nine-Month Periods Ended** | ** **  |
|----------------------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                                       | ** ** | **September 30,**       | ** **  | **September 30,** | ** ** |
| ** **                                                                       | ** ** | **2005**                     | ** **  | **2004** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                       |       |                         |        |   |   |
| Net  loss                                                                        |       | $                            | (15,587,959 | ) | $ | (16,673,217 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities- |       |                         |        |   |   |
| Depreciation  and amortization                                                   |       | 13,744,283                   |        | 13,122,667 |   |
| Equity  in losses of unconsolidated subsidiary                                   |       | 30,000                       |        | 38,206 |   |
| Amortization  of loan origination fees                                           |       |                         |        | 135,988 |   |
| Inventory  Reserve                                                               |       | 172,033                      |        | 910,427 |   |
| Bad  debt expense                                                                |       | 8,839,180                    |        | 6,880,222 |   |
| Loss  on sale of California Licenses                                             |       |                         |        | 25,822 |   |
| Gain  from sale of vehicles                                                      |       | (527,457                     | )           | (28,327 | ) |
| Capitalized  interest                                                            |       | 102,919                      |        | 632,649 |   |
| Changes  in operating assets and liabilities-                                    |       |                         |        |   |   |
| Increase  in interest receivable                                                 |       | —                       |        | (1,500 | ) |
| Increase  in accounts receivable, before write-offs                              |       | (9,244,550                   | )           | (5,761,469 | ) |
| Decrease  in insurance claim receivable                                          |       | 403,657                      |        | (403,657 | ) |
| Decrease  (increase) in inventories                                              |       | 1,891,425                    |        | 995,114 |   |
| Increase  overdraft                                                              |       | —                       |        | (82,469 | ) |
| Increase  in prepaid expenses                                                    |       | (1,039,687                   | )           | (941,009 | ) |
| Decrease  in accounts payable and accrued liabilities                            |       | (2,123,735                   | )           | 4,259,771 |   |
| Decrease  in accounts payable to related parties                                 |       | (2,831,084                   | )           | 453,976 |   |
| (Decrease)  Increase in accrued interest                                         |       | 1,692,243                    |        | 19,207 |   |
| (Decrease)  increase in deferred income                                          |       | (25,424                      | )           | (643,900 | ) |
| Total  adjustments                                                               |       | 11,083,803                   |        | 19,611,718 |   |
| Net  cash provided by operating activities                                       |       | (4,504,156                   | )           | 2,938,501 |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                       |       |                         |        | — |   |
| Redemption  of investment securities                                             |       |                         |        | 7,681,018 |   |
| Proceeds  from the sale of vehicle                                               |       | 483,161                      |        | 184,000 |   |
| Proceeds  from sale of accounts receivable                                       |       | 455,890                      |        | — |   |
| Payment  for deferred financing costs                                            |       | (1,217,334                   | )           | — |   |
| Acquisition  of property and equipment                                           |       | (2,941,798                   | )           | (2,705,647 | ) |
| Payment  for the investment in subsidiary                                        |       |                         |        | (130,667 | ) |
| Proceeds  from the sale of California License                                    |       |                         |        | 9,400,000 |   |
| Net  cash provided by (used in) investing activities                             |       | (3,220,081                   | )           | 14,428,704 |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                       |       |                         |        |   |   |
| Principal  payments of capital leases                                            |       | (95,226                      | )           | — |   |
| Proceeds  from issuance of note payable to Tmobiles                              |       |                         |        | 5,493,642 |   |
| Proceeds  of issuance of subordinated loan                                       |       | 19,413,024                   |        | — |   |
| Cash  received from issuance of preferred stock                                  |       | 2,254,998                    |        |   |   |
| Principal  payments of long term debt                                            |       | (14,680,899                  | )           | (13,623,832 | ) |
| Net  cash used in financing activities                                           |       | 6,891,897                    |        | (8,130,190 | ) |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                   |       | (832,340                     | )           | 9,237,015 |   |
| **CASH AND CASH EQUIVALENTS,**beginning  of period                               |       | 10,612,430                   |        | 1,007,353 |   |
| **CASH AND CASH EQUIVALENTS,**end  of period                                     |       | $                            | 9,780,090   |   | $ | 10,244,368 |   |
| **SUPPLEMENTAL DISCLOSURES OF  CASH FLOWS INFORMATION:**                         |       |                         |        |   |   |
| **INTEREST PAID**                                                                |       | $                            | 7,391,526   |   | $ | 6,566,973 |   |

 

6

----

 

**SUPPLEMENTAL SCHEDULE OFNON-CASH INVESTING AND FINANCING TRANSACTIONS:**

 

Non-Cash investing andfinancing activities during the period ended September 30, 2005 are asfollows:

 
| (a) | Notes, interest payable  and accrued expenses payable to TEM PR and T Moviles, S.A. were converted  into additional capital contributions.   Total amount converted is composed of the following: |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Notes  payable balance to T Moviles, S.A. (including accrued interest) |   | $          | 11,396,339 |   |
|------------------------------------------------------------------------|--------|------------|------------|--------|
| Notes payable balance  to TEM PR (including accrued interest)          |   | 62,487,125 |       |
| Accrued expenses to T  Moviles, S.A,                                   |   | 6,632,471  |       |

 
| (b) | The Partnership’s  subsidiary acquired equipment with a cost of $511,785 under a capital lease  financing agreement.                                                |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (c) | The Partnership  amortized $60,632 pertaining to the sales and leaseback transaction deferred  gain.                                                                     |
| (d) | The Partnership sold property  and equipment with a cost of $216,383 and accumulated depreciation of  $131,831 for the amount of $8,000; resulting in a loss of $76,552. |
| (e) | The Partnership through  its subsidiary wrote-off an account payable of $207,300.                                                                                        |
| (f) | Interest expense of $2,010,281  from the restructured Lucent debt which now holds D.B. Zwirn was capitalized  into short-term debt.                                      |

 

During the period ended September 30,2004, interest expense from TEM-PR totaling $395,588 was capitalized intolong-term debt.

 

The accompanying notesare an integral part of these consolidated financial statements.

 

7

----

 

CLEARCOMM, L.P.

NOTES TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2005 (UNAUDITED)

 

1.                                       BASISOF PRESENTATION AND INTRODUCTION

 

The unaudited interimconsolidated financial statements presented herein have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial statements and with the instructions to Form 10-Qand Regulation S-X pertaining to interim financial statements.  Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The unaudited interim consolidated financialstatements reflect all adjustments, consisting of normal recurring adjustmentsand accruals which, in the opinion of management, are considered necessary fora fair presentation of the Partnership’s financial position at September 30,2005 and results of operations and cash flows for the three and nine-monthperiods ended September 30, 2005 and 2004. The unaudited interim consolidated financial statements should be readin conjunction with the summary of significant accounting policies and notes toconsolidated financial statements included in the Partnership’s Annual Reporton Form 10-K for the year ended December 31, 2004.  Results of operations for interim periods arenot necessarily indicative of the results that may be expected for the fullyear.

 

ClearComm, L.P. (the “Partnership”)is a limited partnership organized on January 24, 1995 under the laws ofthe State of Delaware.  The Partnershipwas formed to file applications with the Federal Communications Commission (“FCC”)under personal communications service (“PCS”) frequency Block C, originallyrestricted to minorities, small businesses and designated entities, to become aprovider of broadband PCS.  ThePartnership will terminate on December 31, 2005, or earlier upon theoccurrence of certain specified events as detailed in the PartnershipAgreement.

 

SuperTel CommunicationsCorp. (“SuperTel”), a Puerto Rico corporation, is the General Partner.  Its total share of the income and losses ofthe Partnership is 25% in accordance with the Partnership Agreement.  Approximately 1,600 limited partners alsoinvested in the Partnership through a private placement.

 

On January 22, 1997,the Partnership was granted the PCS Block C licenses for Puerto Rico andcertain cities in California.

 

NewComm Wireless Services, Inc.(“NewComm”)

 

The Partnershipestablished its Puerto Rico network by forming a wholly owned subsidiary,NewComm, on January 29, 1999. NewComm commenced providing PCS services in Puerto Rico in September 1999.

 

On February 4, 1999,the Partnership and NewComm entered into an agreement with Telefónica Móviles,S.A. (“TEM”), whereby the Partnership contributed its two Puerto Rico Licensesto NewComm and TEM provided NewComm a $19,960,000 loan to develop the PuertoRico Licenses.  TEM’s loan was madepursuant to a secured convertible promissory note (the “Note”) which wasconvertible into 49.9% of NewComm’s equity. The Note was converted to equity by a successor and affiliate of TEM,Telefónica Móviles Puerto Rico, Inc. (“TEM Puerto Rico”), on April 20,2005 pursuant to the Settlement Agreement described below in Part I, Item2.

 

The Partnership hasagreed to sell to TEM Puerto Rico such number of shares of NewComm as shall benecessary to enable TEM Puerto Rico to have a total of 50.1% interest inNewComm.  The transaction, which isdescribed in the Settlement Agreement, involves in addition amendments to theStock Purchase Agreement, a Shareholders Agreement, and a Sale Agreement.  A summary of the terms of these agreements isincluded in the Partnership’s Annual Report on Form 10-K for the yearended December 31, 2004.  Theforegoing transaction is described in greater detail below in Part I, Item2, and the Settlement Agreement and the amendments to the other agreementsdescribed above were attached at exhibits to the March 31, 2005 QuarterlyReport on Form 10-Q.

 

In each of November 2000,December 2000, and March 2001, NewComm received $5,000,000, fromSyndicated Communications Venture Partners IV, L.P. (“Syncom”), a third party,in exchange for approximately 4.92% ownership in NewComm. Syncom hascontributed $25 million to NewComm in exchange for approximately 8.2% ownershipinterest in NewComm.  The last $10million installment was contributed in November 2002.

 

On March 2, 2002,the Partnership sold approximately 4.08% of NewComm to a group of investors ledby Fleet Development Ventures (“The Fleet Group”) for $13 million.  The Partnership and TEM contributedapproximately $9 million each to NewComm in the form of equity and convertibledebt, respectively. The Partnership and TEM have committed an additional$10 million each to close the Long-Term Financing (as hereinafter defined).  The Partnership believes it has obtainedfinancing alternatives, together with TEM, to provide NewComm with the capitalnecessary for the Long-Term Financing and to fund NewComm’s operations.

 

8

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As a result of theSettlement Agreement, the Partnership has obtained the appropriate financing sourcesto provide NewComm with the capital necessary for the Long-Term Financing andto fund NewComm’s operations.  Inaddition, NewComm’s Shareholders possess the following common ownershipinterests in NewComm:

 

| **SHAREHOLDER** | ** ** | **INTEREST** | ** ** |
|-----------------|------------|--------------|------------|
|            |       |         |       |
| ClearComm, L.P. |       | 39.27        | %          |
| Syncom          |       | 7.21         | %          |
| Fleet Group     |       | 3.62         | %          |
| TEM Puerto Rico |       | 49.90        | %          |
|            |       |         |       |
|            |       | 100.00       | %          |

 

On August 5, 2005, NewComm issued 24 convertiblepreferred shares for an additional contribution of $4.4 million from itsinvestors, not including TEM Puerto Rico.

 

California Licenses

 

On August 28, 2000,the Partnership entered into a Purchase and Sale Agreement with Leap WirelessInternational (“Leap Wireless”), pursuant to which the Partnership sold theVisalia-Porterville license to Leap Wireless in exchange for a $9,500,000 cashpayment.  The sale was approved by theFCC and closed on June 8, 2001.

 

On November 26, 2003the Partnership entered into a Purchase and Sale Agreement with Metro PCSpursuant to which the Partnership sold all of its remaining CaliforniaLicenses.  The sale was approved by theFCC and the licenses were transferred to Metro PCS on April 15, 2004 for a$10,900,000 cash payment.  ThePartnership has no other licenses in California,

 

Internet Surfing Storesof P.R., Inc. - (eMilios)

 

On April 16, 2002,ClearComm, L.P. entered into a Shareholders’ Agreement to form a joint venturewith eMilios International, L.L.C., a Florida limited liability company, topromote and establish in Puerto Rico the eMilios concept (describedbelow).  The joint venture was formedunder a Puerto Rico corporation named Internet Surfing Stores of Puerto Rico, Inc.(“ISS”).  The Partnership owns 49% andeMilios International owns 51% of ISS.

 

The eMilios conceptinvolves internet communication galleries that are geared towards educatingpeople in the use of computers and the internet, and acts as a communicationand recreational center as well.  Thebroadband connectivity that is offered at eMilios allows the stores toefficiently offer internet communications and also access to a great variety ofinteractive content, such as cyber games, as well as software and tools forfree lancers and small business entities. The service is provided and collected with a proprietary smart card andsoftware application.  The commitment ofthe Partnership to ISS is $1 million and eMilios International has committed$500,000 in cash plus trade-name, systems, software, and technology know-howequivalent to $500,000.  The Partnershipis responsible for the management and day to day operations of ISS.  ISS opened its first store with 48 computerstations on October 23, 2002.  Asecond store with 40 computer stations was inaugurated on January 11, 2003to serve the western part of Puerto Rico. That second store was closed on December 2004 due to unfavorablemarket conditions in the area.  As aresult, the Partnership has written down its Investment in the subsidiary by$165,306 to reflect the change.  Theinvestment has an exit mechanism whereby at any time after 2003, ClearComm canforce the acquisition of its shares in ISS or the sale of the whole company.

 

2.                                       FINANCINGREQUIREMENTS

 

The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. The Partnership commenced operations in September 1999 and hasincurred losses amounting to $5.7 million for the three-month period ended September 30,2005 and incurred operating losses of $6.6 million for the three month periodended September 30, 2004.  It alsohas working capital deficit of $81.6 million (a deficit of $131.3 million in2004) and partners’ capital deficit of $48.0 million in 2005 compared to $105.5million in 2004. The increase in the Partner’s capital deficit is due thereclassification of the network construction debt from a long term note payableto short term status as explained below.  The Partnership is likely tocontinue incurring losses until such time as its subscriber base generatesrevenue in excess of the Partnership’s expenses.  Development of a significant subscriber baseis likely to take time, during which the Partnership must finance itsoperations by means other than its revenues.

 

As part of an agreementwith TEM, NewComm entered into a contract with Lucent Technologies, Inc. (“Lucent”)that required Lucent to build a network that uses the Code Division MultipleAccess (“CDMA”) protocol.  The total costof the network

 

9

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was approximately $125million.  During 2000, NewComm’smanagement and Lucent agreed on formally extending the payment of up to $61.0million of the total amount due under the contract under a formal financingagreement. On June 4, 2003, NewComm entered into a Senior Credit Agreementwith Lucent, which extended the maturity date of the $51.5 million remaining onthe credit facility to September 30, 2009, with interest at 8%annually.  In July 2005, Lucent sold the Note, which at the time hada principal balance of $48.5 million, to D.B. Zwirn & Co. (“D.B. Zwirn”). The Partnership signed a Forbearance Agreement with D.B Zwirn on July 14,2005. NewComm negotiated a new credit facility with D.B. Zwirn withthe principal balance of $54.5 million, with a term expiring on January 31,2006 and a floating interest rate of LIBOR plus 700 basis points. The facilityincludes $48.5 million of principal, $2.0 million of accrued interest and $4.0million additional funding for working capital and general purpose needs. On June 20,2003, an agreement restructuring Alcatel’s debt was executed.  Alcatel’s balance due is $686,000 as of thedate of this September 30, 2005 report and is due over a three year periodexpiring on June 2006.

 

Pursuant to theSettlement Agreement,  TEM agrees toundertake all commercially reasonable actions necessary to refinance the BridgeLoan on or before April 20, 2008, with a two-year term loan maturing on orbefore April 20, 2010 (“The Long-Term Financing”) and to cause TelefónicaS.A., its parent company (“TEF”), subject to the satisfaction of certainconditions, to guarantee the prompt and complete payment and performance byNewComm when due of the Long-Term Financing. The Long-Term Financing guarantee will be jointly and severallyguaranteed by the Partnership.

 

With respect to the FCCdebt which originated when the Partnership acquired its PCS licenses, and forwhich the Partnership owes the United States federal government approximately $20.7million plus accrued interest at 6.5% as of September 30, 2005, TEM hassecured the repayment of this debt by means of a subordinated line of creditguaranteed as described on the Settlement Agreement.

 

TEM has agreed toundertake all commercially reasonable actions necessary to arrange asubordinated line of credit from a commercial bank for NewComm, the proceeds ofwhich shall be available solely to pay the balance of the FCC debt as currentlyscheduled or as extended.

 

A total of $73.8 millionin accounts payable to TEM and T-Moviles was converted into equity as a resultof the Settlement Agreement on April 20, 2005.  This conversion has significantly decreasedthe Partnership’s accounts payable by said amount and reduced the Partnership’spartner’s capital deficit from $118 million to $44.5 million.

 

Management believes thatthe Partnership will comply with all the requirements for obtaining thefinancing and believes that cash and cash equivalents on hand, anticipatedgrowth in revenues, vendor financing and the Long-Term Financing will beadequate to fund its operations during such period.  However, in the absence of improved operatingresults and cash flows, and without the closing of its contemplated Long-TermFinancing, the Partnership may face liquidity problems to fund its operationsand meet its obligations.  As a result ofthese matters, substantial doubt exists about the Partnership’s ability tocontinue as a going concern.  Theaccompanying consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

3.                                       RECENTACCOUNTING PRONOUNCEMENTS:

 

a)              In May 2005, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards No. 154(FAS-154), Accounting Changes and Error Corrections —a replacement of APB Opinion No. 20 and FASB Statement No. 3.  FAS 154 replaces APB Opinion No. 20,Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changesin Interim Financial Statements, and changes the requirements for theaccounting for and reporting of a change in accounting principle. ThisStatement applies to all voluntary changes in accounting principle ThisStatement defines retrospective application as the application of a differentaccounting principle to prior accounting periods as if that principle had alwaysbeen used or as the adjustment of previously issued financial statements toreflect a change in the reporting entity. This Statement also redefinesrestatement as the revising of previously issued financial statements toreflect the correction of an error.  ThisStatement requires that retrospective application of a change in accountingprinciple be limited to the direct effects of the change. Indirect effects of achange in accounting principle, such as a change in nondiscretionaryprofit-sharing payments resulting from an accounting change, should berecognized in the period of the accounting change.  ThisStatement also requires that a change in depreciation, amortization, ordepletion method for long-lived, nonfinancial assets be accounted for as a changein accounting estimate effected by a change in accounting principle.

 

## ***b)***             In December 2004,the Financial Accounting Standards Board revised Statement of FinancialAccounting Standards No. 123 Accounting for Stock-Based Compensation (FAS123).  The revised FAS 123 supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and its relatedimplementation guidance. This Statement establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services. It also addresses transactions in which an entity incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments. This Statement focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions.

 

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c)              In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 153Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29 (FAS153).  FAS153 is based on the principlethat exchanges of nonmonetary assets should be measured based on the fair valueof the assets exchanged. The guidance in that Opinion, however, includedcertain exceptions to that principle. This Statement amends Opinion 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange.

 

d)             In March 2005, the Financial Accounting StandardsBoard issued interpretation 47 Accounting for Conditional Asset RetirementObligations—an interpretation of FASB Statement No. 143.  This interpretation clarifies that the termconditional asset retirement obligation as used in FASB Statement No. 143,Accounting for Asset Retirement Obligations, refers to a legal obligation toperform an asset retirement activity in which the timing and (or) method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity. The obligation to perform the asset retirement activityis unconditional even though uncertainty exists about the timing and (or)method of settlement. Thus, the timing and (or) method of settlement may beconditional on a future event. Accordingly, an entity is required to recognizea liability for the fair value of a conditional asset retirement obligation ifthe fair value of the liability can be reasonably estimated. The fair value ofa liability for the conditional asset retirement obligation should berecognized when incurred—generally upon acquisition, construction, ordevelopment and (or) through the normal operation of the asset. Uncertaintyabout the timing and (or) method of settlement of a conditional asset retirementobligation should be factored into the measurement of the liability whensufficient information exists. Statement 143 acknowledges that in some cases,sufficient information may not be available to reasonably estimate the fairvalue of an asset retirement obligation. This Interpretation also clarifieswhen an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation.

 

The adoption of any of the aforementionedpronouncements did not have a material effect on the Partnership’s consolidatedfinancial position or result from operations.

 

4.                                       LEGALPROCEEDINGS

 

##### From time to time thePartnership is involved in litigation arising from the ordinary course ofbusiness, some of which is ongoing.  TheGeneral Partner does not believe that any litigation involving the Partnershipwill have a material adverse effect on the Partnership’s business or financialcondition.

#####  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-lookingStatements

 

This Quarterly Report on Form 10-Qand future filings by the Partnership on Form 10-Q and Form 8-K andfuture oral and written statements by the Partnership may include certainforward-looking statements, including (without limitation) statements withrespect to anticipated future operating and financial performance, growthopportunities and growth rates, acquisition and divestitive opportunities, andother similar forecasts and statements of expectation.  Words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates,” and “should,” and variations ofthese words and similar expressions, are intended to identify theseforward-looking statements. Forward-looking statements by the Partnership are based on estimates,projections, beliefs and assumptions of management and are not guarantees offuture performance.  The Partnershipdisclaims any obligation to update or revise any forward-looking statementbased on the occurrence of future events, the receipt of new information, orotherwise.

 

Actual futureperformance, outcomes and results may differ materially from those expressed inforward-looking statements made by the Partnership as a result of a number ofimportant factors.  Examples of thesefactors include, without limitation: rapid technological developments andchanges in the telecommunications industry; ongoing deregulation (and theresulting likelihood of significantly increased price and product/servicecompetition) in the telecommunications industry as a result of theTelecommunications Act of 1996 and other similar federal and state legislationand the federal and state rules and regulations enacted pursuant to thatlegislation; regulatory limitations on the Partnership’s ability to compete inthe telecommunications services industry; and continuing consolidation in thetelecommunications services industry.  Inaddition to these factors, actual future performance, outcomes and results maydiffer materially because of other, more general factors including, withoutlimitation, general industry and market conditions and growth rates, domesticand international economic conditions, governmental and public policy changesand the continued availability of financing in the amounts, at the terms and onthe conditions necessary to support the Partnership’s future business.

 

Introduction

 

The information containedin 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 Partnership’s AnnualReport on Form 10-K for the year ended December 31, 2004, in additionto the interim consolidated financial statements and accompanying notespresented in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

 

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The Partnership wasformed in January 1995 and is managed by its General Partner, SuperTelCommunications Corp.  The Partnership wasorganized to acquire, own, consult and operate personal communication servicesPCS licenses in the Block C band and to take advantage of the benefits that theFCC has set aside for entrepreneurs.  ThePartnership owns the Puerto Rico Licenses, which consist of two 15 MHz PCSlicenses covering Puerto Rico. The California Licenses, which consist of four15 MHz PCS licenses covering the California cities of Eureka, Redding, Modesto,and Merced were sold and transferred to Metro PCS on April 15, 2004 for$10,900,000 cash payment. The license covering Visalia-Porterville, California,had been previously sold and transferred to Leap Wireless on June 8, 2001in exchange for $9,500,000 cash payment.

 

The Partnership commencedcommercial operations of its PCS network in Puerto Rico on September 24,1999 when it began offering wireless services in Puerto Rico to thepublic.  Prior to that date, its incomehad consisted of interest earnings only.

 

The Partnershipestablished 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 TEM, wherebythe Partnership contributed its two Puerto Rico Licenses to NewComm and TEMprovided NewComm a $19,960,000 loan to develop the Puerto Rico Licenses.  TEM’s loan was made pursuant to a securedconvertible promissory note (the “Note”) which would be convertible into 49.9%of NewComm’s equity.  The Note, however,could not be converted until the FCC authorized TEM to hold more than a 25%equity interest in NewComm.  By means ofa Stock Purchase Agreement executed on March 12, 2002 (the “Stock PurchaseAgreement”), the Partnership agreed to sell shares equal to 0.2% in NewComm toTEM conditioned to obtaining Long-Term Financing and a clear exit path for thePartnership.  This transaction wassubsequently approved by the Department of Homeland Security and the FCC.

 

Restatement of prior year’sfinancial statements

 

The Partnership’spreviously issued financial statements as of and for the years ended December 31,2004 and 2003 have been restated to correct the accounting for the method usedto record the amount of loss incurred on the sale of handsets tocustomers.  Effective January 1,2003, the Partnership changed its method of accounting for the loss on thesales of handsets to customers, from the recognition of such anticipated futureloss at the time of sale, to the establishment of an inventory reserve accountfor that loss at the end of each accounting period.  After discussions with staff members from theSecurities and Exchange Commission (SEC) of their interpretation of correctaccounting treatment of the inherent losses in the value of the Partnership’shandset inventory at the end of an accounting period, the Partnership’smanagement has decided to re-establish the previous method for inventorypricing.  Under the reestablished method,the loss on handset sales is recognized at the time of sale.

 

Entry into MaterialDefinitive Agreements

 

The transaction among thePartnership, NewComm, and TEM Puerto Rico was consummated on April 20,2005 pursuant to the terms of the Settlement Agreement.  Some of the most important provisions of theSettlement Agreement are summarized below:

 

•                  ThePartnership, NewComm, and NewComm’s shareholders, on the one hand, and TEM, onthe other hand, agreed to release certain claims each may have against theother in connection with the performance of certain contracts previouslyentered into by the parties.

 

•                  NewCommwill capitalize the $73.8 million loan (including interest) previously made toit by TEM and Telefónica Móviles S.A. and will issue a convertiblepromissory note to the Partnership in the amount of the loan.

 

•                  Theeffectiveness of the Settlement Agreement was conditioned upon the satisfactionof certain events, including the following: TEM Puerto Rico becoming the holderof 49.9% of NewComm’s capital stock; the termination of the Joint VentureAgreement, the Management Agreement, and the Technology Transfer Agreement,each of which involved NewComm and included TEM as a party; the amendment ofthe Stock Purchase Agreement, the Sale Agreement, dated March 12, 2002(the “Sale Agreement”), among NewComm, TEM Puerto Rico, the Partnership, andthe other shareholders of NewComm, and the Shareholders Agreement, dated March 12,2002 (the “Shareholders Agreement”), among the Partnership, NewComm, TEM PuertoRico, and the other shareholders of NewComm; TEM’s entry into a line of creditto be used to pay the balance of NewComm’s indebtedness to the FCC; and anextension or refinancing of NewComm’s bridge loan from ABN Amro Bank, N.V.

 

•                  Inthe event that as of September 30, 2006, NewComm’s net income, asdetermined in accordance with U.S. generally accepted accounting principles (“GAAP”)and measured on the basis of EBITDA for the twelve-month period then ended, isless than $10,970,000, TEM may require that the Partnership, and NewComm’sshareholders, together with TEM Puerto Rico, sell their respective interests inNewComm to a third party.

 

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•                  Uponthe earlier to occur of a liquidation or sale of NewComm, TEM Puerto Rico’sacquisition of 50.1% of NewComm stock pursuant to the Stock Purchase Agreement,or the fifth anniversary of the Settlement Agreement’s effective date, TEMPuerto Rico will be required to pay a premium to the Partnership and NewComm’s othershareholders.  The amount of the premiumpayment will be calculated pursuant to the terms set forth in the SettlementAgreement, but will not exceed 16.6% of the resulting proceeds, net of certaincosts, fees, and expenses and minus NewComm’s indebtedness existing at suchtime.

 

 On April 20, 2005, the Stock PurchaseAgreement was amended in order to, among other things, extend by 31⁄2 years, toapproximately October 2008, TEM Puerto Rico’s option to buy a majorityinterest in NewComm. In addition, the Sale Agreement was amended in order toclarify the procedures that would apply upon the sale of NewComm to athird-party purchaser in the event that neither TEM Puerto Rico, nor thePartnership exercised its rights under the Sale Agreement to purchase NewComm.

 

Also, the ShareholdersAgreement was amended and restated on April 20, 2005, and provides amongother things that once TEM Puerto Rico becomes the holder of more than 50% ofNewComm’s capital stock, TEM Puerto Rico will have the right to designate fourdirectors to NewComm’s board (two more directors than it currently has theright to designate), and the Partnership will have the right to designate threedirectors to NewComm’s board (one less director than it currently has the rightto designate).  It also provides that ifNewComm proposes to issue additional shares at a price that is deemed fair byTEM Puerto Rico on the basis of an equity valuation, and TEM Puerto Rico doesnot exercise its preemptive rights under the agreement, then TEM Puerto Rico willbe obligated to transfer to NewComm’s other shareholders the number of itsshares needed to prevent the other shareholders from being diluted as a resultof NewComm’s proposed issuance.

 

Results of Operations

 

Set forth below is asummary of the results of operations before other income and expenses for the three-monthperiod ended September 30, 2005 compared with three-month period ended September 30,2004:

 
| ** **                                              | ** ** | **Three-Month Periods Ended** | ** **     | ** **     | ** ** |
|---------------------------------------------------------|------------|-------------------------------|----------------|----------------|------------|
| ** **                                              | ** ** | **September 30,**        | ** **     | ** **     | ** ** |
| ** **                                              | ** ** | **2005**                      | ** **     | **2004**       | ** ** | **Change** | ** ** |
| **Revenues:**                                           |       |                          |           |           |       |   |   |
| **Service revenues**                                    | ** ** | **$**                         | **21,016,249** | ** **     | **$**      | **24,156,171** | ** ** | **-13** | **%** |
| **Handsets and accessories sales**                      | ** ** | **1,436,425**                 | ** **     | **975,313**    | ** ** | **47** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Total Revenues**                                      | ** ** | **22,452,674**                | ** **     | **25,131,484** | ** ** | **-11** | **%** |
| **Expenses:**                                           |       |                          |           |           |       |   |   |
| **Operating expenses, excluding depreciation  expense** | ** ** | **20,560,198**                | ** **     | **24,873,310** | ** ** | **-17** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Income (loss) from operations**                       | ** ** | **1,892,476**                 | ** **     | **258,174**    | ** ** | **633** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Interest expense**                                    | ** ** | **(3,042,508**                | **)**          | **(2,464,093** | **)**      | **23** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Income (loss) before other  income (expense)**        | ** ** | **$**                         | **(1,150,032** | **)**          | **$**      | **(2,205,919** | **)** | **-48** | **%** |

 

Revenues

 

The Partnership’srevenues for the three-month period ended September 30, 2005 decreased by11% from $25.1 million to $22.5 million as compared to the same period in 2004.Total revenues include service as well as handset and accessories revenues.  Service revenues for the three-month periodended September 30, 2005 decreased by 13% when compared to the same periodin 2004 while handset and accessories sales increased by 47%.  The increase in handsets and accessoriesrevenues is mainly due to handset units pricing adjustments and a significantreduction of the handset subsidy related to new offers established in the thirdquarter of the current year.  Thedecrease in service revenues is related to tighter credit policies and areduction in the Partnership’s customer base during the third quarter of 2005.

 

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Expenses

 

The following table showsthe variances for the three month period ended September 30, 2005 ascompared to the same period in 2004

 

| ** **                            | ** ** | **Three-months ended September 30,** | ** ** | **%**      | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|------------|------------|
| **Expenses**                          | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of handset and  accessories      |       | 3,527,856                                 |       | 5,643,781  |       | -37 | % |
| Interconnection  expense              |       | 799,737                                   |       | 694,166    |       | 15 | % |
| Sales  and dealers commissions        |       | 1,168,744                                 |       | 2,731,291  |       | -57 | % |
| Salaries  and benefits                |       | 3,657,896                                 |       | 4,018,377  |       | -9 | % |
| Advertising  expense                  |       | 4,648,615                                 |       | 4,565,310  |       | 2 | % |
| Depreciation                          |       | 337,457                                   |       | 1,539,925  |       | -78 | % |
| Legal  and professional services      |       | 564,965                                   |       | 435,118    |       | 30 | % |
| Provision  for doubtful accounts      |       | 3,357,054                                 |       | 2,168,272  |       | 55 | % |
| Rent  expense                         |       | 1,893,517                                 |       | 1,735,119  |       | 9 | % |
| Taxes  other than income              |       | 1,044,220                                 |       | 1,048,121  |       | 0 | % |
| Network  Operation and Maintenance    |       | 2,093,366                                 |       | 1,628,648  |       | 29 | % |
| Other  expenses                       |       | 1,678,100                                 |       | 1,946,573  |       | -14 | % |
| Management  fee to General Partner    |       | 89,420                                    |       | 68,750     |       | 30 | % |
| Services  rendered by related parties |       | 347,867                                   |       | 1,245,169  |       | -72 | % |
| Loss  on Sale of California License   |       | —                                    |       | (30,000    | )          | -100 | % |
|                                  |       |                                      |       |       |       |   |   |
| Total  expenses                       |       | $                                         | 25,208,814 |       | $          | 29,438,620 |   | -14 | % |
|                                       |            |                                           |            |            |            |  |  |  |  |

 

Expenses for thethree-month period ended September 30, 2005 totaled $25,208,814 ascompared to $29,438,620 for the same period in 2004.  There was an overall reduction of 14% in operatingexpenses or $5.4 million during the third quarter of 2005.

 

The overall decrease inexpenses is mainly due to decreases in the cost of handsets and accessoriessold,  sales and dealers commissions,services rendered by related parties, and depreciation expense.

 

Income from Operations

 

Income from operationsreflects the ability of the Partnership to generate positive cash flows fromits operations, which does not take into consideration expenses such asamortization, depreciation and interest that must be reported for GAAP toarrive at the net income or loss.

 

Income from operationsfor the three month period ended September 30, 2005 of $1,892,476 shows asignificant increase of 633% or $1.2 million as compared to the income fromoperations for the same period in 2004. This increase in income from operations is related to an overall 11%decrease in expenses excluding depreciation which resulted in $3 million lessin expenses.

 

Interest expense for thethree month period ended September 30, 2005 of $3.0 million ($2.5 millionin 2004) reduce the income from operations and result in a net loss beforeother income and expenses of $1,150,032 for the third quarter of 2005 and aloss of $2,205,919 for the same period in 2004; an overall reduction in netloss of 48% when compared to 2004.  Depreciationexpense of $4.6million ($4.6 million in 2004), a non-cash item further reducesthe book income resulting in an overall loss of $5.7 million in 2005 ($6.7million in 2004).

 

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The following tablesummarizes changes in certain financial information for the nine-month period endedSeptember 30, 2005 compared with nine-month period ended September 30,2004:

 

| ** **                                                                       | ** ** | **Nine-Month Periods Ended** | ** **     | ** **     | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|----------------|----------------|------------|
| ** **                                                                       | ** ** | **September 30,**       | ** **     | ** **     | ** ** |
| ** **                                                                       | ** ** | **2005**                     | ** **     | **2004**       | ** ** | **Change** | ** ** |
| **Revenues:**                                                                    |       |                         |           |           |       |   |   |
| **Service revenues**                                                             | ** ** | **$**                        | **66,581,737** | ** **     | **$**      | **76,940,544** | ** ** | **-13** | **%** |
| **Handsets and accessories sales**                                               | ** ** | **3,343,509**                | ** **     | **3,640,103**  | ** ** | **-8** | **%** |
|                                                                             |       |                         |           |           |       |   |   |
| **Total Revenues**                                                               | ** ** | **69,925,246**               | ** **     | **80,580,647** | ** ** | **-13** | **%** |
| **Expenses:**                                                                    |       |                         |           |           |       |   |   |
| **Operating expenses, excluding depreciation  expense**                          | ** ** | **62,980,500**               | ** **     | **77,021,878** | ** ** | **-18** | **%** |
|                                                                             |       |                         |           |           |       |   |   |
| **Income (loss) from operations**                                                | ** ** | **6,944,746**                | ** **     | **3,558,769**  | ** ** | **95** | **%** |
|                                                                             |       |                         |           |           |       |   |   |
| **Interest expense**                                                             | ** ** | **(9,010,629**               | **)**          | **(7,151,892** | **)**      | **26** | **%** |
|                                                                             |       |                         |           |           |       |   |   |
| **Income (loss) before other income (expense),  excluding depreciation expense** | ** ** | **$**                        | **(2,065,883** | **)**          | **$**      | **(3,593,123** | **)** | **-43** | **%** |
|                                                                                  |            |                              |                |                |            |  |  |  |  |  |  |

 

Revenues

 

ThePartnership’s revenues for the nine-month period ended September 30, 2005totaled $69.9 million as compared to $80.5 million for the same period in 2004. Revenues for the nine-month period ended September 30, 2005 included $66,581,737in service revenues and $3,343,509 in handset and accessories sales generatedfrom NewComm’s wireless operations, as compared to $76,940,544 and $3,640,103 respectively,for the same period in 2004.  The 13% decreasein service revenues is consistent with a decrease in the Partnership’s customerbase which was offset by an increase in airtime on contract subscribers.  The decrease in handset and accessories salesis related to pricing adjustments and a reduction on the handset subsidy on thehandsets sold.

 

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Expenses

 

The following table showsthe variances for the nine month period ended September 30, 2005 ascompared to the same period in 2004:

 

 

| ** **                            | ** ** | **Nine-months ended September 30,** | ** ** | **%**      | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|------------|------------|
| **Expenses**                          | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Variances** | ** ** |
| ** **                            | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of handset and  accessories      |       | $                                        | 12,575,492 |       | $          | 16,753,699 |   | -25 | % |
| Interconnection expense               |       | 2,403,221                                |       | 2,735,145  |       | -12 | % |
| Sales and dealers  commissions        |       | 5,094,668                                |       | 8,111,674  |       | -37 | % |
| Salaries and benefits                 |       | 11,431,591                               |       | 12,008,249 |       | -5 | % |
| Depreciation                          |       | 13,744,283                               |       | 13,258,655 |       | 4 | % |
| Advertising expense                   |       | 2,430,059                                |       | 4,854,071  |       | -50 | % |
| Legal and professional  services      |       | 1,244,267                                |       | 1,999,861  |       | -38 | % |
| Provision for doubtful  accounts      |       | 8,839,180                                |       | 6,880,222  |       | 28 | % |
| Rent expense                          |       | 5,511,480                                |       | 5,102,491  |       | 8 | % |
| Taxes other than income               |       | 2,616,326                                |       | 2,897,768  |       | -10 | % |
| Network Operation and  Maintenance    |       | 6,045,603                                |       | 4,921,585  |       | 23 | % |
| Other expenses                        |       | 2,730,008                                |       | 6,723,642  |       | -59 | % |
| Management fee to  General Partner    |       | 291,888                                  |       | 206,250    |       | 42 | % |
| Services rendered by  related parties |       | 1,766,718                                |       | 3,831,389  |       | -54 | % |
| Loss on Sale of  California License   |       | —                                   |       | (4,168     | )          | -100 | % |
|                                  |       |                                     |       |       |       |   |   |
| Total expenses                        |       | $                                        | 76,724,784 |       | $          | 90,280,533 |   | -15 | % |

 

Expenses for the nine-monthperiod ended September 30, 2005 totaled $76.7 million as compared to $90.3million for the same period in 2004.  During the nine-month period ended September 30,2005, the Partnership’s expenses decreased by 15% or $13 million due to pricingadjustments which reduced the handset subsidy on the purchase of handsets andcontributed to the 25% reduction in cost of handsets and accessories and by theimplementation of new sales and dealers commission structure that resulted inan additional $3 million reduction.  ThePartnership managed to reduce overall expenses by implementing new operationsprocedures and eliminating various outsourcing contracts related to inventorymanagement and customer service.

 

Income from Operations

 

Income from operationsreflects the ability of the Partnership to generate positive cash flows fromits operations, which does not take into consideration expenses such asamortization, depreciation and interest that must be reported for GAAP toarrive to the net income or loss.

 

Income from operationsfor the nine month period ended September 30, 2005 of $6.9 millionshows an increase of 95% as compared to the income from operations for the sameperiod in 2004.  This increase in incomefrom operations is mainly due to the overall decrease in expenses and to thereduction in the cost of acquiring new customers.

 

Interest expense for the nine-monthperiod ended September 30, 2005 of $9.0 million ($7.2 million in 2004)reduce income from operations and result in a net loss before other income(expense) of $2.1 million for the third quarter of 2005 ($3.5 million in 2004);an overall reduction in net loss before other income (expense) of 39% whencompared to 2004.  Depreciation expenseof $13.7 million ($13.2 million in 2004) reduces the Partnership’s book incomebut as a non-cash item it does not represent additional disbursements foroperations.

 

The increase indepreciation expense is related to the increase in the depreciable assetsplaced in service during the period.

 

Liquidity and CapitalResources

 

Asof September 30, 2005, the Partnership had cash and cash equivalentsamounting to $9.8 million which are mostly related to proceeds from the sale ofthe California licenses to Metro PCS in the second quarter of 2004 for a cashpayment of $10.9 million.

 

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As part of the agreementwith TEM, NewComm entered into a contract with Lucent Technologies, Inc. (“Lucent”)that required Lucent to build a network that uses the Code Division MultipleAccess (“CDMA”) protocol.  The total costof the original network was approximately $125 million.  During 2000, NewComm’s management and Lucentagreed on formally extending the payment of up to $61.0 million of the totalamount of network construction payable, at the time, under a formal financingagreement.  On June 4, 2003, NewCommentered into a Senior Credit Agreement with Lucent, which extended the maturitydate of the $51.5 million remaining on the credit facility to September 30,2009, with interest at 8% annually.  In July 2005, Lucent sold theNote, which at the time had a principal balance of $48.5 million, to D.B. Zwirn &Co. (“D.B. Zwirn”).  The Partnership signed a Forbearance Agreement withD.B Zwirn on July 14, 2005 and was later extended until August 22,2005. NewComm negotiated a new credit facility with D.B. Zwirn with aprincipal balance due of $54.5 million, with a term until January 31,2006 and a floating interest rate of LIBOR plus 700 basis points. The facilityincludes $48.5 million of principal, $2.0 million of accrued interest and $4.0million additional funding for working capital and general purpose needs.  On June 20, 2003, an agreementrestructuring Alcatel’s debt was executed. Alcatel’s balance due is $686,000 as of the date of this September 30,2005 report and is due over a three year period expiring on June 2006.

 

Pursuant to theSettlement Agreement,  TEM agrees toundertake all commercially reasonable actions necessary to refinance the BridgeLoan on or before April 20, 2008, with a two-year term loan maturing on orbefore April 20, 2010 (“The Long-Term Financing”) and to cause TelefónicaS.A., its parent company (“TEF”), subject to the satisfaction of certainconditions, to guarantee the prompt and complete payment and performance byNewComm when due of the Long-Term Financing. The Long-Term Financing guarantee will be jointly and severallyguaranteed by the Partnership.

 

With respect to the FCCdebt which originated when the Partnership acquired its PCS licenses, and forwhich the Partnership owes the United States federal government approximately$20.7 million plus accrued interest at 6.5% as of September 30, 2005, TEMhas secured the repayment of this debt by means of a subordinated line ofcredit guaranteed as described on the Settlement Agreement.

 

TEM has agreed toundertake all commercially reasonable actions necessary to arrange asubordinated line of credit from a commercial bank for NewComm, the proceeds ofwhich shall be available solely to pay the balance of the FCC debt as currentlyscheduled or as extended.

 

A total of $73.8 millionin accounts payable to TEM and T-Moviles was converted into equity as a resultof the Settlement Agreement on April 20, 2005.  This conversion has significantly decreasedthe Partnership’s accounts payable by said amount and reduced the Partnership’spartner’s capital deficit from $118 million to $44.5 million.

 

On March 2, 2002,the Partnership sold 4.08% of NewComm to a group of investors led by FleetDevelopment Ventures for $13 million. During the second quarter of 2002, the Partnership and TLD contributedapproximately $9 million each to NewComm in the form of equity and convertibledebt, respectively.  The Partnershipbelieves it has obtained sufficient funds, together with TLD, to provideNewComm with the capital necessary for the Long-Term Financing and to fullyfund NewComm’s operations.

 

The Partnershipanticipates that earnings and cash distributions derived from its Puerto RicoNetwork, interim and permanent financing and, if necessary, additional capitalcalls from its Investors or accessing the public capital markets, shouldprovide it with the liquidity to meet its obligations.

 

ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Partnership’sexposure to market risk through derivative financial instruments and otherfinancial instruments is not material because the Partnership does not usederivative financial instruments and does not have foreign currency exchangerisks.  The Partnership invests cashbalances in excess of operating requirements in short-term money marketfunds.  As of September 30, 2005,the Partnership had cash equivalents and short-term investments ofapproximately $10,000,000 consisting of cash and highly liquid, short-terminvestments in money market funds.

 

ThePartnership’s cash and cash equivalents will increase or decrease by animmaterial 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 FCChave a fixed interest rate of 6.5% and therefore are not exposed to interestrate risks.  The TEM Note relating toindebtedness of NewComm bears interest at the floating rate of the 90-day LIBORplus 1.5% and has been extended to December 2004.

 

Anagreement restructuring Lucent’s outstanding debt was executed on June 4,2003.  In July 2005, Lucent sold the Note, which at thetime had a principal balance of $48.5 million, to D.B. Zwirn & Co. (“D.B.Zwirn”).  The Partnership signed a Forbearance Agreement with D.B Zwirn onJuly 14, 2005 and was later extended until August 22, 2005. NewComm negotiateda new credit facility with D.B. Zwirn which is due on January 2006.

 

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ITEM 4.CONTROLS AND PROCEDURES

 

The Partnership’s ChiefExecutive Officer, Javier O. Lamoso, and the Partnership’s Chief FinancialOfficer, Edileen Salicrup, have evaluated the Partnership’s disclosure controlsand procedures within 90 days of the filing of this report.

 

Mr. Lamoso and Ms. Salicruphave concluded that the Partnership’s disclosure controls and proceduresprovide reasonable assurance that the Partnership can meet its disclosureobligations.  The Partnership’sdisclosure controls and procedures are based upon a roll-up of financial andnon-financial reporting that is consolidated by NewComm’s management.  The reporting process is designed to ensurethat information required to be disclosed by the Partnership in the reportsthat it files or submits with the Commission is recorded, processed, summarizedand reported within the time periods specified in the Commission’s rules andforms.

 

There have beensignificant changes in the Partnership’s internal controls that have affectedthese controls subsequent to the date of their evaluation.  The Partnership is currently improvinginternal controls on its billings and collections procedures and continues toassess other areas in which internal controls may be extended or modified.

 

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PART II: OTHERINFORMATION

 

ITEM 1.  LEGALPROCEEDINGS

 

Informationregarding legal proceedings is disclosed in Part I, Item 1, Notes toInterim Consolidated Financial Statements (unaudited), Section 4, and ishereby incorporated into Part II, Item 1 by this reference.

 

ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                  Listof Exhibits

 

Exhibit 31.1:  Certification of Chief Executive Officer

 

Exhibit 31.2:  Certification of Chief Financial Officer

 

Exhibit 32.1:  Certification Pursuant to Section 1350of Chapter 63 of Title 18 of the United States Code

 

Exhibit 32.2:  Certification Pursuant to Section 1350of Chapter 63 of Title 18 of the United States Code

 

(b)                               ThePartnership filed a Form 8-K on July 18, 2005 for the purpose ofmaking a report under Item 5.02.

 

(c)                                ThePartnership filed a Form 8-K on August 30, 2005 for the purpose of makinga report under Item 4.02.

 

ITEMS 2, 3, 4 and 5 arenot applicable and have been omitted.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                          |   | ClearComm, L.P.        |
|-------------------------------|--------|------------------------|
|                          |   |                   |
|                          |   |                   |
|                          |   | By:                    | SuperTel Communications  Corp. |
|                          |   |                   |
|                          |   |                   |
| Date: November 14,  2005 |   | By:                    | /s/ Javier O. Lamoso |
|                          |   | Name: Javier O. Lamoso |
|                          |   | Title: President       |

 

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