**Securities and 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  June 30, 2004**                                                                                |
|                                                                                                                                  |   |   |
| **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 of registrant as specified in itscharter)

 

| **Delaware**                                                                       | ** ** | **66-0514434**                        |
|------------------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                    |       | (I.R.S. Employer  Identification No.) |
|                                                                               |       |                                  |
| **268  Muñoz Rivera Ave. Suite 2206  Hato Rey, Puerto Rico**                  | ** ** | **00918-1929**                        |
| (Address of principal executive offices)                                           |       | (Zip Code)                            |
|                                                                               |       |                                  |
| Registrant’s telephone number, including  area code: **(787) 620-0140**  |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months and (2) has been subject to suchfiling requirements for the past 90 days.

Yes o  No ý

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of 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 June 30, 2004 (unaudited) and  December 31, 2003 (audited) |   |
|                          |                                                                                                                                                  |   |
|                          | Consolidated Statements of Revenues and  Expenses for the three-month and six-month periods ended June 30, 2004  and 2003 (unaudited).           |   |
|                          |                                                                                                                                                  |   |
|                          | Consolidated Statements of Changes in  Partners’ Deficit for the six-month period ended June 30, 2004  (unaudited)                          |   |
|                          |                                                                                                                                                  |   |
|                          | Consolidated  Statements of Cash Flows for the six-month periods ended June 30, 2004  and 2003 (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  Disclosure About Market Risk.                                                                                                           |   |
|                          |                                                                                                                                                  |   |
| PART II                       | OTHER  INFORMATION                                                                                                                                    |   |
|                          |                                                                                                                                                  |   |
| Item 1.                       | Legal Proceedings                                                                                                                                     |   |
|                          |                                                                                                                                                  |   |
| Item 6.                       | Exhibits and Reports on Form 8-K                                                                                                                      |   |
|                          |                                                                                                                                                  |
| Signatures.                   |                                                                                                                                                  |
|                          |                                                                                                                                                  |
| Exhibit Index.                |                                                                                                                                                  |

 

2

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PART I    FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

 

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF ASSETS, LIABILITIESAND PARTNERS’ DEFICIT

 
| ** **                                                                                                          | ** ** | **June 30,  2004** | ** **      | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-----------------|-----------------------------|------------|
| ** **                                                                                                          | ** ** | **(Unaudited)**         | ** **      | **(Audited)**               | ** ** |
| **ASSETS:**                                                                                                         |       |                    |            |                        |       |
| **Cash and cash equivalents**                                                                                       | ** ** | **$**                   | **11,895,998**  | ** **                  | **$**      | **1,007,353** | ** ** |
| **Cash in escrow account**                                                                                          | ** ** | **—**              | ** **      | **1,500,000**               | ** ** |
| **Accounts receivable, net**                                                                                        | ** ** | **11,391,423**          | ** **      | **12,297,162**              | ** ** |
| **Accounts receivable, other**                                                                                      | ** ** | **7,261,733**           | ** **      | **7,457,028**               | ** ** |
| **Interest receivable**                                                                                             | ** ** | **17,000**              | ** **      | **14,000**                  | ** ** |
| **Inventories, net**                                                                                                | ** ** | **4,728,882**           | ** **      | **3,908,736**               | ** ** |
| **Prepaid expenses**                                                                                                | ** ** | **932,966**             | ** **      | **672,406**                 | ** ** |
| **Investment in securities**                                                                                        | ** ** | **—**              | ** **      | **7,338,288**               | ** ** |
| **Investment in subsidiary**                                                                                        | ** ** | **516,469**             | ** **      | **397,980**                 | ** ** |
| **PCS licenses, net**                                                                                               | ** ** | **46,750,449**          | ** **      | **57,517,974**              | ** ** |
| **Deferred financing costs**                                                                                        | ** ** | **675,927**             | ** **      | **774,363**                 | ** ** |
| **Note receivable from officer**                                                                                    | ** ** | **100,000**             | ** **      | **100,000**                 | ** ** |
| **Property and equipment, net**                                                                                     | ** ** | **84,137,485**          | ** **      | **90,753,422**              | ** ** |
| ** **                                                                                                          | ** ** | ** **              | ** **      | ** **                  | ** ** |
| ** **                                                                                                          | ** ** | **$**                   | **168,408,332** | ** **                  | **$**      | **183,738,712** | ** ** |
| ** **                                                                                                          | ** ** | ** **              | ** **      | ** **                  | ** ** |
| **LIABILITIES AND PARTNERS’ DEFICIT:**                                                                         | ** ** | ** **              | ** **      | ** **                  | ** ** |
| **Accounts payable and accrued  liabilities**                                                                       | ** ** | **$**                   | **42,571,185**  | ** **                  | **$**      | **40,224,333** | ** ** |
| **Notes payable — short-term**                                                                                 | ** ** | **117,572,704**         | ** **      | **113,816,297**             | ** ** |
| **Notes payable — long-term**                                                                                  | ** ** | **107,129,790**         | ** **      | **117,390,809**             | ** ** |
| ** **                                                                                                          | ** ** | ** **              | ** **      | ** **                  | ** ** |
| **Unitholders’ capital (deficit)  2,766.2 units in 2004 (2,906.1 in 2003) and 1 general partnership interest** | ** ** | ** **              | ** **      | ** **                  | ** ** |
| ** **                                                                                                          | ** ** | ** **              | ** **      | ** **                  | ** ** |
| ** **                                                                                                          | ** ** | **(98,865,347**         | **)**           | **(87,692,727**             | **)**      |
| ** **                                                                                                          | ** ** | ** **              | ** **      | ** **                  | ** ** |
| **Total liabilities and partner’s  deficit**                                                                   | ** ** | **$**                   | **168,408,332** | ** **                  | **$**      | **183,738,712** | ** ** |
| ** **                                                                                                          | ** ** | ** **              | ** **      | ** **                  | ** ** |
| **BOOK VALUE(DEFICIT) PER UNIT**                                                                                    | ** ** | **$**                   | **(35,728**     | **)**                       | **$**      | **(30,165** | **)** |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

3

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ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF REVENUES AND EXPENSES (UNAUDITED)

 
| ** **                                             | ** ** | **Three-Month Periods Ended June 30** | ** ** | **Six-Month Periods Ended June 30** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                   | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues:**                                          |       |                                       |       |                                     |       |   |   |   |   |
| Service revenues                                       |       | $                                          | 25,906,148 |                                     | $          | 25,760,778 |   | $ | 52,784,373 |   | $ | 50,160,175 |   |
| Handset and accessories sales                          |       | 1,228,194                                  |       | 2,035,527                                |       | 2,664,790 |   | 3,931,011 |   |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
|                                                   |       | 27,134,342                                 |       | 27,796,305                               |       | 55,449,163 |   | 54,091,186 |   |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
| **Operating Cost and Expenses:**                       |       |                                       |       |                                     |       |   |   |   |   |
| Cost of handset and accessories                        |       | 5,170,954                                  |       | 6,032,883                                |       | 11,109,918 |   | 10,917,429 |   |
| Interconnection expense                                |       | 1,065,425                                  |       | 1,215,333                                |       | 2,040,979 |   | 2,341,685 |   |
| Sales and dealers commissions                          |       | 2,533,551                                  |       | 1,575,700                                |       | 5,380,383 |   | 2,963,205 |   |
| Salaries and benefits                                  |       | 3,955,461                                  |       | 4,046,478                                |       | 7,989,871 |   | 8,281,186 |   |
| Advertising expense                                    |       | 1,857,480                                  |       | 1,443,163                                |       | 3,314,146 |   | 2,998,361 |   |
| Legal and professional services                        |       | 851,391                                    |       | 2,203,899                                |       | 1,564,743 |   | 3,903,771 |   |
| Provision for doubtful accounts                        |       | 2,365,150                                  |       | 4,062,044                                |       | 4,711,950 |   | 6,092,049 |   |
| Rent expense                                           |       | 1,731,547                                  |       | 2,132,656                                |       | 3,367,372 |   | 4,389,099 |   |
| Taxes other than income                                |       | 841,109                                    |       | 1,307,449                                |       | 1,849,647 |   | 2,504,836 |   |
| Network Operation and Maintenance                      |       | 1,726,390                                  |       | 797,115                                  |       | 3,292,937 |   | 1,739,190 |   |
| Other expenses                                         |       | 2,426,762                                  |       | 1,633,898                                |       | 4,777,609 |   | 3,428,385 |   |
| Management fee to General Partner                      |       | 68,750                                     |       | 60,750                                   |       | 137,500 |   | 60,750 |   |
| Services rendered by related parties                   |       | 1,258,326                                  |       | 648,866                                  |       | 2,586,220 |   | 1,531,424 |   |
| Loss on Sale of California License                     |       | 25,832                                     |       | —                                   |       | 25,832 |   | — |   |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
|                                                   |       | 25,878,128                                 |       | 27,160,234                               |       | 52,149,107 |   | 51,151,370 |   |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
| **Income (Loss) from Operations**                      |       | 1,256,214                                  |       | 636,071                                  |       | 3,300,056 |   | 2,939,816 |   |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
| **Other Income (Expense)**                             |       |                                       |       |                                     |       |   |   |   |   |
| Interest income                                        |       | 38,549                                     |       | 66,380                                   |       | 116,971 |   | 130,904 |   |
| Depreciation                                           |       | (4,388,884                                 | )          | (4,407,373                               | )          | (8,693,346 | ) | (8,425,512 | ) |
| Loss of WriteOff in inventory                          |       |                                       |       | 1,194,622                                |       |   |   | (4,364,728 | ) |
| Other Income                                           |       | (57,396                                    | )          | (49                                      | )          | (57,179 | ) | 46 |   |
| Interest expense                                       |       | (2,321,032                                 | )          | (3,516,253                               | )          | (4,687,799 | ) | (6,961,807 | ) |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
|                                                   |       | (6,728,763                                 | )          | (6,662,673                               | )          | (13,321,353 | ) | (19,621,097 | ) |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
| **Net Income (Loss)**                                  |       | $                                          | (5,472,549 | )                                        | $          | (6,026,602 | ) | $ | (10,021,297 | ) | $ | (16,681,281 | ) |
|                                                   |       |                                       |       |                                     |       |   |   |   |   |
| **Net Income (Loss) Attributable to  General Partner** |       | $                                          | (5,472,549 | )                                        | $          | (6,026,602 | ) | $ | (10,021,297 | ) | $ | (16,681,281 | ) |

 

The accompanying notes are integral part of these consolidatedfinancial statements.

 

4

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ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF CHANGES IN PARTNERS’ DEFICIT (Unaudited)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30,2004

 
| ** **                                                          | ** ** | **Limited Partners** | ** ** | **General** | ** ** | **Accumulated  Other  Comprehensive** | ** **  | ** ** | ** ** |
|---------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|---------------------------------------|-------------|------------|------------|
| ** **                                                          | ** ** | **Units**            | ** ** | **Amount**  | ** ** | **Partner**                           | ** **  | **Loss**   | ** ** | **Total** | ** ** |
|                                                                |       |                 |       |        |       |                                  |        |       |       |   |   |
| **BALANCES,**  December 31, 2003                               |       | 2,906.1              |       | —      |       | $                                     | (87,654,900 | )          | $          | (37,827 | ) | $ | (87,692,727 | ) |
|                                                                |       |                 |       |        |       |                                  |        |       |       |   |   |
| **Net loss for the  six months period****ended June 30, 2004** |       | —               |       | —      |       | (10,021,297                           | )           | 37,827     |       | (9,983,470 | ) |
| ** **                                                          |       |                 |       |        |       |                                  |        |       |       |   |   |
| **Purchase of  Partnership Units Tender Offer**                     |       | (139.90              | )          |        |       | (1,189,150                            | )           | —     |       | (1,189,150 | ) |
|                                                                |       |                 |       |        |       | —                                |        | —     |       | — |   |
|                                                                |       |                 |       |        |       |                                  |        |       |       |   |   |
| **BALANCES,**  June 30, 2004                                   |       | 2,766.2              |       | —      |       | $                                     | (98,865,347 | )          | $          | — |   | $ | (98,865,347 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

 
| ** **                                                                       | ** ** | **Six-Month Periods Ended** | ** **  |
|----------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                                       | ** ** | **June 30,****2004**   | ** **  | **June 30,****2003** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                       |       |                        |        |   |   |
| Net loss                                                                         |       | $                           | (10,021,297 | ) | $ | (17,038,174 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities- |       |                        |        |   |   |
| Depreciation and amortization                                                    |       | 8,638,296                   |        | 8,320,412 |   |
| Equity in losses of unconsolidated subsidiary                                    |       | 12,178                      |        | 70,304 |   |
| Amortization of loan origination fees                                            |       | 98,436                      |        | 105,102 |   |
| Amortization of discount on note payable to FCC                                  |       | —                      |        | 1,247,862 |   |
| Write-off on discount of note payable to FCC                                     |       | —                      |        | 4,364,728 |   |
| Other non-cash items                                                             |       |                        |        | (6,502 | ) |
| Inventory Reserve                                                                |       | 1,310,427                   |        |   |   |
| Bad debt expense                                                                 |       | 4,711,950                   |        | 6,092,049 |   |
| Loss on sale of California Licenses                                              |       | 25,832                      |        |   |   |
| Gain from sale of vehicles                                                       |       | (28,327                     | )           | — |   |
| Capitalized interest                                                             |       | 395,588                     |        | — |   |
| Changes in operating assets and liabilities-                                     |       |                        |        |   |   |
| Increase in interest receivable                                                  |       | (83,336                     | )           | (1,500 | ) |
| Increase in accounts receivable, before write-offs                               |       | (3,662,572                  | )           | (7,608,864 | ) |
| Decrease in insurance claim receivable                                           |       |                        |        | 270,002 |   |
| Decrease (increase) in inventories                                               |       | (2,130,573                  | )           | 641,629 |   |
| Decrease (increase) overdraft                                                    |       | (82,469                     | )           |   |   |
| Increase in prepaid expenses                                                     |       | (260,560                    | )           | (407,541 | ) |
| Decrease in accounts payable and accrued  liabilities                            |       | 3,404,818                   |        | 2,858,022 |   |
| Decrease in accounts payable to related parties                                  |       | (876,410                    | )           | (2,012,166 | ) |
| (Decrease) Increase in accrued interest                                          |       | (71,287                     | )           | (1,372,963 | ) |
| (Decrease) increase in deferred income                                           |       | (466,003                    | )           | 385,662 |   |
| Total adjustments                                                                |       | 10,935,988                  |        | 12,946,236 |   |
| Net cash provided by operating activities                                        |       | 914,691                     |        | (4,091,938 | ) |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                       |       |                        |        |   |   |
| Redemption of investment securities                                              |       | 8,837,147                   |        | — |   |
| Proceeds from the sale of vehicle                                                |       | 184,000                     |        |   |   |
| Acquisition of property and equipment                                            |       | (2,264,466                  | )           | (2,633,132 | ) |
| Payment for the investment in subsidiary                                         |       | (130,667                    | )           | (261,334 | ) |
| Proceeds from the sale of California License                                     |       | 9,400,000                   |        | — |   |
| Net cash provided by (used in) investing  activities                             |       | 16,026,014                  |        | (2,894,466 | ) |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                       |       |                        |        |   |   |
| Proceeds from issuance of note payable to  Telefonica Moviles                    |       | 3,662,428                   |        | 1,831,179 |   |
| Payment for deferred financing costs                                             |       |                        |        | (60,000 | ) |
| Proceeds from extension of note payable to  ABN/AMRO                             |       |                        |        | 1,000,000 |   |
| Principal payments of note payable                                               |       | (8,525,338                  | )           | (15,937,565 | ) |
| Tender Offer payments                                                            |       | (1,189,150                  | )           |   |   |
| Net cash used in financing activities                                            |       | (6,052,060                  | )           | (13,166,386 | ) |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                   |       | 10,888,645                  |        | (20,152,790 | ) |
| **CASH AND CASH EQUIVALENTS,  beginning of period**                              |       | 1,007,353                   |        | 22,709,786 |   |
| **CASH AND CASH EQUIVALENTS, end of  period**                                    |       | $                           | 11,895,998  |   | $ | 2,556,996 |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH  FLOWS INFORMATION:**                         |       |                        |        |   |   |
| **INTEREST PAID**                                                                |       | $                           | 4,430,435   |   | $ | 6,314,000 |   |

 

**SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ANDFINANCING TRANSACTIONS:**

During the period ended June 30, 2004,interest expense from TEM-PR totaling $395,588 was capitalized into long-termdebt

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

6

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CLEARCOMM, L.P.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.                                       BASIS OFPRESENTATION AND INTRODUCTION

 

The unaudited interim consolidated financial statements presentedherein have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial statements and with theinstructions to Form 10-Q and Regulation S-X pertaining to interim financialstatements.  Accordingly, they do notinclude all information and footnotes required by accounting principlesgenerally accepted in 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 June 30,2004 and results of operations and cash flows for the three-month periods endedJune 30, 2004 and 2003.  Theunaudited interim consolidated financial statements should be read inconjunction 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, 2003.  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 organizedon January 24, 1995 under the laws of the State of Delaware.  The Partnership was formed to fileapplications with the Federal Communications Commission (“FCC”) under personalcommunications service (“PCS”) frequency Block C, originally restricted tominorities, small businesses and designated entities, to become a provider ofbroadband PCS.  The Partnership willterminate on December 31, 2005, or earlier upon the occurrence of certainspecified events as detailed in the Partnership Agreement.

 

SuperTel Communications Corp. (“SuperTel”), a Puerto Rico corporation,is the General Partner.  Its total shareof the income and losses of the Partnership is 25% in accordance with thePartnership Agreement.  Approximately1,500 limited partners also invested in the Partnership through a private placement.

 

On January 22, 1997, the Partnership was granted the PCS Block Clicenses for Puerto Rico and certain cities in California.

 

On February 4, 1999, the Partnership entered into a joint ventureagreement (the “Joint Venture Agreement”) with Telefónica Larga Distancia DePuerto Rico, Inc. (“TLD”) to jointly develop and operate certain PCS licensesin Puerto Rico.  Among the most importantprovisions of the Joint Venture Agreement are the following:

 

•                  The Partnershiptransferred all of its Puerto Rico PCS licenses including its related debt withthe FCC to NewComm Wireless Services, Inc. (“NewComm”), a newly organizedPuerto Rico corporation, in exchange for all of NewComm’s issued andoutstanding common stock.

 

•                  TLD loanedapproximately $20 million to NewComm by means of a secured convertiblepromissory note payable (the “Promissory Note”).  The Promissory Note is secured by a securityagreement pursuant to which a security interest is imposed upon NewComm’s assets,a Partnership guarantee and a pledge agreement, as defined.

 

•                  Once certainregulatory and other requirements are met, the Promissory Note will beconverted to NewComm’s common stock representing approximately 49.9% ofNewComm’s equity at the time of the exchange. Originally, TLD had the option to buy an additional .2%, which wouldhave brought its ownership to 50.1%, subject to a third party valuation ofNewComm’s stock and approval by the FCC. On June 26, 2001, the Joint Venture Agreement was amendedeliminating the TLD Option to buy the additional .2%.  However, by means of a Stock PurchaseAgreement dated as of March 12, 2002, and subject to certain conditions,the Partnership has agreed to sell an amount of shares equal to 0.2% of NewCommto TLD.

 

•                  The new SaleAgreement provides that at any time after 14 months from the signing of theStock Purchase Agreement with TLD, that is, any time after May 2003, ClearComm(or TLD), as the case may be, may trigger a shareholder obligation to sellNewComm.  Within 30 days of a notice ofsale, TLD (or ClearComm as the case may be) would have the right to purchaseClearComm’s (or TLD’s) interest.  Thepurchase price to be paid at that time would be based on a valuation performedby the investment banking firm that prepared the one under the Stock PurchaseAgreement.  If TLD does not exercise itsright to buy out ClearComm’s interest, the shareholders will be bound toproceed with the sales

 

7

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process to attempt a sale of NewComm. All shareholders are bound to cooperate and undertake all that isnecessary in that effort.  Further, theshareholders are bound to accept the highest price proposed by an interestedbuyer, which price must be payable in cash or freely tradable securities, or acombination thereof, and which must be for a price not less than the valuationprepared by the investment banker.

 

•                  At the closingof the sale of NewComm, the Management Agreement and the Technology TransferAgreement held by TLD will terminate. Also, no premium for controlling interest or discount for holding aminority interest in NewComm will apply. The Sale Agreement shall continue in full force and effect even if theStock Purchase Agreement with TLD, for whatever reason, does not close.

 

•                  NewComm and TLDentered into certain management and technology transfer agreements.

 

In September 1999, NewComm commenced providing PCS services inPuerto Rico.

 

In each of November 2000, December 2000, and March 2001,NewComm received $5,000,000, from Syndicated Communications Venture PartnersIV, L.P. (Syncom), a third party, in exchange for approximately 4.92% ownershipin NewComm. Syncom has committed to contribute up to $25 million to NewComm inexchange for an approximately 8.2% ownership interest in NewComm.

 

On March 2, 2002, the Partnership sold approximately 4.08% ofNewComm to a group of investors led by Fleet Development Ventures for $13million.  The Partnership and TLDcontributed approximately $9 million each to NewComm in the form of equity andconvertible debt, respectively.

 

In 2003, TLD transferred all its rights and interests in NewComm toTelefónica Móviles (“TEM”), the wireless communications affiliate of theTelefónica Group, the largest wireless operator in Latin American with over 35million subscribers world-wide.  ThePartnership believes it has obtained sufficient funds, together with TEM, toprovide NewComm with the capital necessary for the Project Finance Facility andto fully fund NewComm’s operations.  TEMand ClearComm have each advanced in the form of loans a total of $9.2M to makethe scheduled loan payments on the Puerto Rico licenses to the FCC.

 

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.  The Partnershiphas no other licenses in California.

 

Internet Surfing Stores of P.R., Inc. - (eMilios)

 

On April 16, 2002, ClearComm, L.P. entered into a Shareholders’Agreement to form a joint venture with eMilios International, L.L.C., a FloridaLimited Liability Corporation, to promote and establish in Puerto Rico theeMilios concept.  The joint venture wasformed under a Puerto Rico Corporation named Internet Surfing Stores of PuertoRico, Inc. (“ISS”).  The Partnership owns49% and eMilios International owns 51% of ISS.

 

The eMilios concept involves internet communication galleries that aregeared towards educating people in the use of computers and the internet, andacts as a communication and recreational center as well.  The broadband connectivity that is offered ateMilios allows the stores to efficiently offer internet communications and alsoaccess to a great variety of interactive content, such as cyber games, as wellas software and tools for free lancers and small business entities.  The service is provided and collected with aproprietary smart card and software application.

 

Tender Offer

 

During the months of May and June of 2004, the Partnershipconducted a voluntary tender offer program to all partners holding less than 2Units.  The program was available to over1,100 partners.  The price per Unitoffered was $8,500.00.  Only 130unit-holders tendered their Units amounting to approximately 140 Unitsre-purchased and representing approximately a 5% reduction of outstandingpartnership Units.

 

2.                                       FINANCINGREQUIREMENTS

 

The accompanying consolidated financial statements have been preparedon a going concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business.  The Partnership commenced operations inSeptember 1999 and has realized a net income from operations amounting to$3.3 million for the six-month period ended June 30, 

 

8

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2004 and a net income from operations of $3 million for the six monthperiod ended June 30, 2003.  It alsohas working capital deficit and partners’ capital deficits of $ 123.9 and $98.9million, respectively, as of June 30, 2004.  The Partnership is likely to continueincurring net losses until such time as its subscriber base generates revenuein excess of the Partnership’s expenses. Development of a significant subscriber base is likely to take time,during which the Partnership must finance its operations by means other thanits revenues.

 

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 DivisionMultiple Access (“CDMA”) protocol.  Thetotal cost of the 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 due under the contract under a formal financing agreement. An Agreementrestructuring Lucent’s outstanding debt was executed on June 4, 2003.  The now outstanding debt to Lucent isapproximately $46M and is payable over a six-year period at 8% annual interestrate.  On June 20, 2003, an agreementrestructuring Alcatel’s debt was executed. Alcatel’s credit is now $1.3M at 6.5% payable over a three yearperiod.  Also, by means of letter fromTEM (and its parent, Telefónica Internacional, S.A.), TEM has agreed to issue acorporate guarantee to serve as collateral for a $110M bank loan.

 

Management believes that the Partnership will comly with all therequirements for obtaining the financing and believes that cash and cashequivalents on hand, anticipated growth in revenues, vendor financing and thepermanent financing will be adequate to fund its operations, at a minimum,through the end of 2004.  However, in theabsence of improved operating results and cash flows, and without the closingof its contemplated permanent financing, the Partnership may face liquidityproblems to fund its operations and meet its obligations.  As a result of these matters, substantialdoubt exists about the Partnership’s ability to continue as a goingconcern.  The accompanying consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

3.                                       RECENTACCOUNTING PRONOUNCEMENTS

 

**(a)****         **In July 2001,the Financial Accounting Standard Board (FASB) issued SFAS No. 143, ***Accounting for Asset Retirement Obligations***.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  SFAS No. 143 becomes effective for fiscalyears beginning after June 15, 2002. The implementation of SFAS No. 143 did not have a material effect on thePartnership’s consolidated results of operations or its financial position.

 

**(b)****         **In April 2002,the FASB issued SFAS No. 145, ***Rescission of FASB No. 4,44 and 64, Amendment of SFAS No. 13, and Technical Corrections***.  SFAS No. 145 rescinds SFAS No. 4, ***Reporting Gains and Losses from Extinguishment ofDebt*** – ***an amendment of APBOpinion No. 30***, which required all gains and losses fromextinguishments of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain Opinion 30 will now be used to classify those gains and losses.  SFAS No. 145 becomes effective for financialstatements issued on or after May 15, 2002.  Requirements and guidance of SFAS No. 145were applied in connection with the write-off of the FCC debt discount.  Please refer to Note 14 (c).

 

**(c)****         **In June 2002,the FASB issued SFAS No. 146, ***Accounting for CostsAssociated with Exit or Disposal Activities***.  SFAS No. 146 requires that a liability for acost associated with an exit or disposal activity to be recognized and measuredinitially at fair value only when the liability is incurred.  SFAS No. 146 also establishes that fair valueis the objective for initial measurement of the liability.  SFAS No. 146 applies to costs associated withan exit activity but does not involve an entity newly acquired in a businesscombination or with a disposal activity covered by SFAS No. 144.  SFAS No. 146 does not apply to costsassociated with a retirement covered by SFAS No. 143.  SFAS No. 146 became effective for exit ordisposal activities that were initiated after December 31, 2002.  The implementation of SFAS No. 146 did nothave a material effect on the Partnership’s consolidated financial position orresults from operations.

 

**(d)****         **InDecember 2002, the FASB issued Interpretation No. 45 (FIN 45),“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others”. For a guarantee subject to FASB Interpretation No. 45, a guarantor isrequired to:

 

•                  Measure andrecognize the fair value of the guarantee at inception (for many guarantees,fair value will be determined using a present value method); and

•                  Provide newdisclosures regarding the nature of any recourse provisions or assets held aspayments, the current carrying amount of the guarantee liability, and thenature of any recourse provisions or assets held as collateral that could beliquidated and allow the guarantor to recover all or a portion of its paymentsin the event guarantee payments are required.

 

The disclosure requirement of this Interpretation is effective forfinancial statements for fiscal years ending after

 

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December 15, 2002; it did not have any effect on the Partnership’sfinancial statements.  The initialrecognition and measurement provisions are effective prospectively forguarantees issued or modified on or after January 1, 2003, which did nothave any effect on the Partnership’s financial statements.

 

**(e)****         **InJanuary 2003, the FASB issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”). Fin 46 clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements” and provides guidance on the identificationof entities (“variable interest entities” or “VIE’s”) for which control isachieved through means other than through voting rights and how to determinewhen and which business enterprise should consolidate the VIE.  This new model for consolidation applies toan entity which either (1) the equity investors (if any) do not have acontrolling financial interest of (2) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties.  In December 2003, the FASB issued arevision of the interpretation No. 46 to defer the implementation, classifysome of its provisions and to exempt certain entities from its requirements.  Management does not expect that theapplication of this standard will have any effect on the Partnership’sconsolidated results of operations or financial condition.

 

4.                                       LEGALPROCEEDINGS

 

##### From time to timethe Partnership 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’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-looking Statements

 

This Form 10-Q and future filings by the Partnership on Form 10-Q andForm 8-K and future oral and written statements by the Partnership may includecertain forward-looking statements, including (without limitation) statementswith respect 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,” andvariations of these words and similar expressions, are intended to identifythese forward-looking statements.  Forward-lookingstatements by the Partnership are based on estimates, projections, beliefs andassumptions of management and are not guarantees of future performance.  The Partnership disclaims any obligation toupdate or revise any forward-looking statement based on the occurrence offuture events, the receipt of new information, or otherwise.

 

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.

 

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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 Company’s AnnualReport on Form 10-K for the year ended December 31, 2003, in addition tothe interim consolidated financial statements and accompanying notes presentedin Part 1, Item 1 of this Form 10-Q.

 

The Partnership was formed in January 1995 and is managed by itsGeneral Partner, SuperTel Communications Corp. The Partnership was organized to acquire, own, consult and operatepersonal communication services PCS licenses in the Block C band and to take advantageof the benefits that the FCC has set aside for entrepreneurs.  The Partnership owns the Puerto RicoLicenses, which consist of two 15 MHz PCS licenses covering Puerto Rico.  The Partnership owned certain Californialicenses that sold in 2001 and 2004.

 

The Partnership commenced commercial operations of its PCS network inPuerto Rico on September 24, 1999 when it began offering wireless servicesin Puerto Rico to the public.  Prior tothat date, its income had consisted of interest earnings only.  Since the Partnership commenced commercialoperations in 1999 and during 2000 was still in the start-up process, thecomparisons presented below may not be indicative of future operations.

 

The Partnership established its Puerto Rico network by forming a whollyowned subsidiary, NewComm, on January 29, 1999.  On February 4, 1999, the Partnership andNewComm entered into an agreement with TEM, whereby the Partnership contributedits two Puerto Rico Licenses to NewComm and TEM provided NewComm a $19,960,000loan to develop the Puerto Rico Licenses. TEM’s loan is pursuant to a secured convertible promissory note (the“Note”) which is convertible into 49.9% of NewComm’s equity.  The Note however, cannot be converted untilthe FCC authorizes TEM to hold more than a 25% equity interest in NewComm.  By means of a Stock Purchase Agreementexecuted on March 12, 2002, the Partnership has agreed to sell sharesequal to 0.2% in NewComm to TEM conditioned to obtaining permanent financingand a clear exit path for the Partnership. This transaction is pending Department of Homeland Security and FCCapproval.  The Partnership believes thistransaction and permanent finance will be obtained before the end of 2004.

 

Results of Operations

 

Three-month period endedJune 30, 2004 compared with three-month period ended June 30, 2003.

 

Set forth below is a summary of the results of operations before otherincome and expenses for the periods indicated:

 

| ** **                             | ** ** | **June 30,** | ** **     | ** **     | ** ** |
|----------------------------------------|------------|-------------------|----------------|----------------|------------|
| ** **                             | ** ** | **2004**          | ** **     | **2003**       | ** ** | **Change** | ** ** |
| **Revenues:**                          | ** ** | ** **        | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Service revenues**                   | ** ** | **$**             | **25,906,148** | ** **     | **$**      | **25,760,778** | ** ** | **1** | **%** |
| **Handsets and accessories sales**     | ** ** | **1,228,194**     | ** **     | **2,035,527**  | ** ** | **-40** | **%** |
| ** **                             | ** ** | ** **        | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Total Revenues**                     | ** ** | **27,134,342**    | ** **     | **27,796,305** | ** ** | **-2** | **%** |
| **Expenses:**                          | ** ** | ** **        | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Operating expenses**                 | ** ** | **25,875,519**    | ** **     | **27,517,127** | ** ** | **-6** | **%** |
| ** **                             | ** ** | ** **        | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Income (loss) from operations**      | ** ** | **1,258,823**     | ** **     | **279,178**    | ** ** | **351** | **%** |
| ** **                             | ** ** | ** **        | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Interest expense**                   | ** ** | **(2,321,032**    | **)**          | **(3,516,253** | **)**      | **-34** | **%** |
| ** **                             | ** ** | ** **        | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Depreciation and amortization**      | ** ** | **(4,388,884**    | **)**          | **(4,407,373** | **)**      | **0** | **%** |
| ** **                             | ** ** | ** **        | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Loss before other income (expense)** | ** ** | **(5,451,093**    | **)**          | **(7,644,448** | **)**      | **-29** | **%** |
|                                        |            |                   |                |                |            |  |  |  |  |

 

Revenues

 

The Partnership’s revenues for the three-month period endedJune 30,-2004 decreased by 2% from $27.8 million to $27.1 as compared tothe same period in 2003. Total revenues include service as well as handset andaccessories revenues.  Service revenuesfor the three-month period ended June 30, 2004 increased by 1% whencompared to the same period in 2003 while handset

 

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and accessories sales decreased by 40%. The decrease in handsets and accessories revenues is mainly due tohandset units pricing adjustments.  Theincrease in service revenues is related to the utilization of airtime by ourcontract customer base.

 

Expenses

 

The following table shows the variances for the three month period endedJune 30, 2004 as compared to the same period in 2003:

 

| ** **                                                     | ** ** | **June 30,** | ** **     | ** **    | ** ** |
|----------------------------------------------------------------|------------|-------------------|----------------|---------------|------------|
| ** **                                                     | ** ** | **2004**          | ** **     | **2003**      | ** ** | **Change** | ** ** |
|                                                           |       |              |           |          |       |   |   |
| **Cost of handset and  accesories**                            | ** ** | **$**             | **5,170,954**  | ** **    | **$**      | **6,032,883** | ** ** | **-14** | **%** |
| **Interconnection  expense**                                   | ** ** | **1,065,425**     | ** **     | **1,215,333** | ** ** | **-12** | **%** |
| **Sales and dealers  commissions**                             | ** ** | **2,533,551**     | ** **     | **1,575,700** | ** ** | **61** | **%** |
| **Salaries and  benefits**                                     | ** ** | **3,955,461**     | ** **     | **4,047,338** | ** ** | **-2** | **%** |
| **Selling and  advertising expense**                           | ** ** | **1,857,480**     | ** **     | **1,443,163** | ** ** | **29** | **%** |
| **Legal and  professional services**                           | ** ** | **851,391**       | ** **     | **2,174,218** | ** ** | **-61** | **%** |
| **Provision for  doubtful accounts**                           | ** ** | **2,365,150**     | ** **     | **4,062,044** | ** ** | **-42** | **%** |
| **Rent expense**                                               | ** ** | **1,731,547**     | ** **     | **2,132,656** | ** ** | **-19** | **%** |
| **Taxes, other than  income**                                  | ** ** | **841,109**       | ** **     | **1,307,449** | ** ** | **-36** | **%** |
| **Network operation  and maintenance**                         | ** ** | **1,726,390**     | ** **     | **797,115**   | ** ** | **117** | **%** |
| **Other expenses**                                             | ** ** | **2,424,153**     | ** **     | **1,887,170** | ** ** | **28** | **%** |
| **Management fee to  General Partner**                         | ** ** | **68,750**        | ** **     | **60,750**    | ** ** | **13** | **%** |
| **Consulting and  legal services rendered by related parties** | ** ** | **1,258,326**     | ** **     | **781,308**   | ** ** | **61** | **%** |
| ** **                                                     | ** ** | **—**        | ** **     | ** **    | ** ** | ** ** | ** ** |
| **Total Expenses**                                             | ** ** | **$**             | **25,849,687** | ** **    | **$**      | **27,517,127** | ** ** | **-6** | **%** |

 

Expenses for the three-month period ended June 30, 2004 totaled$25,849,687 as compared to $27,517,127 for the same period in 2003.  There was a 6% overall reduction of operatingexpenses during the second quarter of 2004, the Partnership’s expensesdecreased by $1.7 million

 

The overall decrease in expenses is mainly due to decreases in the costof handsets and accessories sold, interconnection expenses, legal andprofessional fees, in the provision for doubtful accounts, rent and taxes otherthan income.  The decrease in the provisionfor doubtful accounts of $1.7 million is related to the implementation of thenew billing software and tighter credit and collection policies

 

Income from Operations

 

Income from operations reflects the ability of the Partnership togenerate positive cash flows from its operations, which does not take intoconsideration expenses such as amortization, depreciation and interest thatmust be reported for generally accepted accounting principles (GAAP) to arriveat the net income or loss.

 

Income from operations for the three month period ended June 30,2004 of $1,258,823 shows a significant increase of 351% or $979,645 as comparedto the income from operations for the same period in 2003.  This increase in income from operations isrelated to the increase in service revenues from contract customers.

 

Interest expense for the three month period ended June 30, 2004 of$2.3 million ($3.5million in 2003) and depreciation expense of $4.3million($4.4 million in 2003) reduce the income from operations and result in a netloss before other income of $5,451,093 for the first quarter of 2004($7,252,403 in 2003); an overall reduction in net loss of 25% when compared to2003.  The reduction in interest expenseis mainly attributable to the refinancing of various debts and to reduction ofdebt outstanding related to the Note Payable to Alcatel.

 

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Six-month period ended June 30, 2004 compared with three-monthperiod ended June 30, 2003.

 

The following table summarizes changes in certain financial informationfor the period indicated:

 

| ** **                             | ** ** | **Six-Month Periods Ended  June 30,** | ** **     | ** **      | ** ** |
|----------------------------------------|------------|--------------------------------------------|----------------|-----------------|------------|
| ** **                             | ** ** | **2004**                                   | ** **     | **2003**        | ** ** | **Change** | ** ** |
| **Revenues:**                          | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Service revenues**                   | ** ** | **$**                                      | **52,784,373** | ** **      | **$**      | **50,160,175** | ** ** | **5** | **%** |
| **Handsets and accessories sales**     | ** ** | **2,664,790**                              | ** **     | **3,931,011**   | ** ** | **-32** | **%** |
| ** **                             | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Total Revenues**                     | ** ** | **55,449,163**                             | ** **     | **54,091,186**  | ** ** | **3** | **%** |
| **Expenses:**                          | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Operating expenses**                 | ** ** | **52,149,107**                             | ** **     | **51,508,263**  | ** ** | **1** | **%** |
| ** **                             | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Income (loss) from operations**      | ** ** | **3,300,056**                              | ** **     | **2,582,923**   | ** ** | **28** | **%** |
| ** **                             | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Loss on Write Off Inventory**        | ** ** | **—**                                 | ** **     | **(4,364,728**  | **)**      | **-100** | **%** |
| ** **                             | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Interest expense**                   | ** ** | **(4,687,799**                             | **)**          | **(6,961,807**  | **)**      | **-33** | **%** |
| ** **                             | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Depreciation and amortization**      | ** ** | **(8,693,346**                             | **)**          | **(8,425,512**  | **)**      | **3** | **%** |
| ** **                             | ** ** | ** **                                 | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Loss before other income (expense)** | ** ** | **(10,081,089**                            | **)**          | **(17,169,124** | **)**      | **-41** | **%** |
|                                        |            |                                            |                |                 |            |  |  |  |  |

 

Revenues

 

ThePartnership’s revenues for the six-month period ended June 30, 2004totaled $55,449,163 as compared to $54,091,186 for the same period in2003.  Revenues for the six-month period ended June 30, 2004 included$52,784,373 in service revenues and $2,664,790 in handset and accessories salesgenerated from NewComm’s wireless operations, as compared to $50,160,175 and$3,931,011 respectively, for the same period in 2003.  The 5% increase in service revenues isconsistent with an increase in airtime on contract subscribers.  The decrease in handset and accessories salesis indicative of a stabilized customer base on contract subscribers and pricingadjustments on the handsets sold.

 

Expenses

 

The following table shows the variances for the six month period endedJune 30, 2004 as compared to the same period in 2003:

 

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| ** **                                                     | ** ** | **June 30,** | ** **     | ** **    | ** ** |
|----------------------------------------------------------------|------------|-------------------|----------------|---------------|------------|
| ** **                                                     | ** ** | **2004**          | ** **     | **2003**      | ** ** | **Change** | ** ** |
|                                                           |       |              |           |          |       |   |   |
| **Cost of handset and  accesories**                            | ** ** | **$**             | **11,109,918** | ** **    | **$**      | **10,917,429** | ** ** | **2** | **%** |
| **Interconnection  expense**                                   | ** ** | **2,040,979**     | ** **     | **2,341,685** | ** ** | **-13** | **%** |
| **Sales and dealers  commissions**                             | ** ** | **5,380,383**     | ** **     | **2,963,205** | ** ** | **82** | **%** |
| **Salaries and  benefits**                                     | ** ** | **7,989,871**     | ** **     | **8,282,046** | ** ** | **-4** | **%** |
| **Selling and  advertising expense**                           | ** ** | **3,314,146**     | ** **     | **2,998,361** | ** ** | **11** | **%** |
| **Legal and  professional services**                           | ** ** | **1,564,743**     | ** **     | **3,874,090** | ** ** | **-60** | **%** |
| **Provision for  doubtful accounts**                           | ** ** | **4,711,950**     | ** **     | **6,092,049** | ** ** | **-23** | **%** |
| **Rent expense**                                               | ** ** | **3,367,372**     | ** **     | **4,389,099** | ** ** | **-23** | **%** |
| **Taxes, other than  income**                                  | ** ** | **1,849,647**     | ** **     | **2,504,836** | ** ** | **-26** | **%** |
| **Network operation  and maintenance**                         | ** ** | **3,292,937**     | ** **     | **1,739,190** | ** ** | **100** | **%** |
| **Other expenses**                                             | ** ** | **4,777,609**     | ** **     | **3,623,880** | ** ** | **32** | **%** |
| **Management fee to  General Partner**                         | ** ** | **137,500**       | ** **     | **121,500**   | ** ** | **13** | **%** |
| **Loss on sale of  license**                                   | ** ** | **25,832**        | ** **     | **—**    | ** ** | **100** | **%** |
| **Consulting and  legal services rendered by related parties** | ** ** | **2,586,220**     | ** **     | **1,660,893** | ** ** | **56** | **%** |
| ** **                                                     | ** ** | **—**        | ** **     | ** **    | ** ** | ** ** | ** ** |
| **Total Expenses**                                             | ** ** | **$**             | **52,149,107** | ** **    | **$**      | **51,508,263** | ** ** | **1** | **%** |

 

Expenses for the six-month period ended June 30, 2004 totaled$51,149,107 as compared to $51,508,263 for the same period in 2003. During the six-month period ended June 30, 2004, the Partnership’sexpenses increase by 1% due to pricing adjustments made by suppliers for thecost of handsets which resulted in a 2% increase in such expense and due to the23% reduction in the provision for doubtful accounts which resulted from themigration to a new billing software that avoids billings on delinquentaccounts.  The other variances as shownabove are mostly related to reclassifications among accounts made at thePartnerships subsidiary level to properly record transactions in a moreefficient manner.

 

Income from Operations

 

Income from operations reflects the ability of the Partnership togenerate positive cash flows from its operations, which does not take intoconsideration expenses such as amortization, depreciation and interest thatmust be reported for generally accepted accounting principles (GAAP) to arriveto the net income or loss.

 

Income from operations for the six month period ended June 30,2004 of $3,300,056 shows an increase of 28% as compared to the income fromoperations for the same period in 2003. This increase in income from operations is related to the increase inservice revenues from contract subscribers and to the reduction in the cost ofacquiring new customers.

 

Interest expense for the six- month period ended June 30, 2004 of$4.7 million ($6.7 million in 2003) and depreciation expense of $8.7 million($8.4million in 2003) reduce income from operations and result in a net lossbefore other income (expense) of $10 million for the second quarter of 2004($16.8 million in 2003); an overall reduction in net loss before other income(expense) of 40% when compared to 2003. The reduction in interest expense is attributable to the reduction ofdebt outstanding related to the Note Payable to Alcatel.

 

The increase in depreciation expense is related to the increase in thedepreciable assets placed in service during the period.

 

Liquidity and Capital Resources

 

As of June 30, 2004,the Partnership had cash and cash equivalents amounting to $11,895,998, whichare mostly related to proceeds from the sale of the California licenses toMetro PCS in the second quarter, 2004 for a cash payment of $10.9 million.

 

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As part of the agreement with TLD, NewComm entered into a contract withLucent Technologies, Inc. (“Lucent”) that required Lucent to build a network thatuses the Code Division Multiple Access (“CDMA”) protocol.  The total cost of the original network wasapproximately $125 million.  During 2000,NewComm’s management and Lucent agreed on formally extending the payment of upto $61.0 million of the total amount of network construction payable, at thetime, under a formal financing agreement. An agreement restructuring Lucent’s debt was executed on June 4,2003.  This now outstanding debt is of$46 million at a fixed annual interest over a six year term.

 

In addition, thePartnership owes the United States federal government approximately $36.5M plusaccrued interest at 6.5% in connection with the acquisition of its PCSlicenses.

 

The Partnership estimates that the total cost to implement NewComm’sbusiness plan will be approximately $200 million.  This consists of approximately $125 millionin costs associated with building-out the Puerto Rico Network, andapproximately $75 million to fund NewComm’s operations until these becomeprofitable.  NewComm obtained a shortterm financing (“Bridge Loan”) of $60 million which has been extended untilNovember 29, 2002, with an interest rate of .75% over 90-day LIBOR.  The Bridge Loan is now guaranteed byTelefónica Internacional, S.A. (TISA), an affiliate of TEM.  ClearComm and TEM continue to work towardssecuring a permanent financing facility.

 

On March 2, 2002, the Partnership sold 4.08% of NewComm to a groupof investors led by Fleet Development Ventures for $13 million.  During the second quarter of 2002, the Partnershipand TLD contributed approximately $9 million each to NewComm in the form ofequity and convertible debt, respectively. The Partnership believes it has obtained sufficient funds, together withTLD, to provide NewComm with the capital necessary for the Project FinanceFacility and to fully fund NewComm’s operations.

 

The Partnership anticipates that earnings and cash distributionsderived from its Puerto Rico Network, interim and permanent financing and, ifnecessary, additional capital calls from its Investors or accessing the publiccapital markets, should provide it with the liquidity to meet its obligations.

 

ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Partnership’s exposure to market risk through derivative financial instrumentsand other financial instruments is not material because the Partnership doesnot use derivative financial instruments and does not have foreign currencyexchange risks.  The Partnership investscash balances in excess of operating requirements in short-term money marketfunds.  As of June 30, 2004, thePartnership had cash equivalents and short-term investments of approximately$5,411,210 consisting of cash and highly liquid, short-term investments inmoney market funds.

 

The Partnership’s cash andcash equivalents will increase or decrease by an immaterial amount if marketinterest rates increase or decrease, and therefore, its exposure to interestrate changes has been immaterial.  ThePartnership’s loans payable to the FCC have a fixed interest rate of 6.5% andtherefore are not exposed to interest rate risks.  The TEM Note relating to indebtedness ofNewComm bears interest at the floating rate of the 90-day LIBOR plus 1.5% andhas been extended to December 2004.

 

An agreementrestructuring Lucent’s outstanding debt was executed on June 4, 2003.  The now outstanding debt to Lucent is $46Mand is payable over a six-year period at 8% annual interest rate.  On June 20, 2003, an agreementrestructuring Alcatel’s debt was executed. Alcatel’s credit is now $1M at 6.5% payable over a three yearperiod.  Also, by means of letter fromTLD (and its parent, Telefónica Internacional, S.A., and its affiliate, TEM),TEM has agreed to issue a corporate guarantee to serve as collateral for a$110M bank loan in order to refinance the Bridge Loan and the FCC debt.

 

Controls and Procedures

 

The Partnership’s Chief Executive Officer, Javier O. Lamoso, and thePartnership’s Chief Financial Officer, Edileen Salicrup, have evaluated thePartnership’s disclosure controls and procedures within 90 days of the filingof this report.

 

Mr. Lamoso and Ms. Salicrup have concluded that the Partnership’sdisclosure controls and procedures provide reasonable assurance that thePartnership can meet its disclosure obligations.  The Partnership’s disclosure controls andprocedures are based upon a roll-up of financial and non-financial reportingthat is consolidated by TEM pursuant to the Partnership’s Management Agreementwith TEM.  The reporting process isdesigned to ensure that information required to be disclosed by the Partnershipin the reports that it files or submits with the Commission is recorded,processed, summarized and reported within the time periods specified in theCommission’s rules and forms.

 

There have been no significant changes in the Partnership’s internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation.

 

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PART II:OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

Information regardinglegal proceedings is disclosed in Part I, Item 1, Notes to Interim ConsolidatedFinancial Statements (unaudited), Section 4, and is hereby incorporatedinto Part II, Item 1 by this reference.

 

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                                  List of Exhibits

 

Exhibit 31.1:  Certification ofChief Executive Officer

 

Exhibit 31.2:  Certification ofChief Financial Officer

 

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

 

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

 

(b)                                 ThePartnership filed a Form 8-K on August 9, 2004.

 

ITEMS 2, 3, 4 and 5 are not applicable and have been omitted.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                             |   | ClearComm, L.P.               |
|----------------------------------|--------|-------------------------------|
|                             |   |                          |
|                             |   |                          |
|                             | By:    | SuperTel Communications Corp. |
|                             |   |                          |
|                             |   |                          |
| Date:  August 16, 2004 |   | By:                           | /s/ Javier O. Lamoso |
|                             |   | Name: Javier O. Lamoso        |
|                             |   | Title: President              |

 

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