**Securities and ExchangeCommission**

**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, 2003**                                                                                                                                              |
|                                                                                                                                                                                          |       |                                                                                           |
| **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.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                                 | ** ** | **66-0514434**                         |
|------------------------------------------------------------------------------|------------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization)             |       | (I.R.S.  Employer  Identification No.) |
|                                                                         |       |                                   |
| **268 Muñoz Rivera Ave. Suite 2206  San Juan, 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 reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months and (2) has beensubject to such filing requirements for the past 90 days.

 

 

Yes   o  No  ý

 

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

 

Yes   o  No  ý

 

 

 

 

 

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ClearComm,L.P.

INDEX

 
| PART I         | FINANCIAL INFORMATION                                                                                                                       |   |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                                        |   |
| Item 1.        | Financial Statements                                                                                                                        |   |
|           |                                                                                                                                        |   |
|           | Consolidated  Statements of Assets, Liabilities and Partners’ Deficit as of June 30, 2003  (unaudited) and December 31, 2002 (audited) |   |
|           |                                                                                                                                        |   |
|           | Consolidated  Statements of Revenues and Expenses for the six-month period ended June 30,  2003 and 2002 (unaudited)                        |   |
|           |                                                                                                                                        |   |
|           | Consolidated  Statements of Changes in Partners’ Deficit for the six-month period ended  June 30, 2003 (unaudited)                     |   |
|           |                                                                                                                                        |   |
|           | Consolidated  Statements of Cash Flows for the six-month period ended June 30, 2003 and  2002 (unaudited)                                   |   |
|           |                                                                                                                                        |   |
|           | Notes  to Interim Consolidated Financial Statements as of June 30, 2003 (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         | Controls and Procedures                                                                                                                     |   |
|           |                                                                                                                                        |   |
| 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.

 

CONSOLIDATEDSTATEMENTS OF ASSETS, LIABILITIES

ANDPARTNERS’ DEFICIT

 
| ** **                                                                           | ** ** | **June 30, 2003** | ** **  | **December 31, 2002** | ** **  |
|--------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|-------------|
| ** **                                                                           | ** ** | **(Unaudited)**   | ** **  | **(Audited)**         | ** **  |
| ASSETS:                                                                              |       |              |        |                  | ** **  |
| Cash and cash equivalents                                                            |       | $                 | 2,556,996   |                  | $           | 22,709,786 | ** ** |
| Accounts receivable, net                                                             |       | 12,611,333        |        | 11,594,949            | ** **  |
| Accounts receivable, other                                                           |       | 6,964,936         |        | 6,483,255             | ** **  |
| Insurance claims receivable                                                          |       | —            |        | 270,002               | ** **  |
| Interest receivable                                                                  |       | 11,000            |        | 8,000                 | ** **  |
| Inventories, net                                                                     |       | 5,454,755         |        | 10,461,112            | ** **  |
| Prepaid expenses                                                                     |       | 1,033,151         |        | 625,610               | ** **  |
| Investment in securities                                                             |       | 10,000,000        |        | 10,000,000            | ** **  |
| Investment in subsidiary                                                             |       | 538,588           |        | 277,254               | ** **  |
| PCS licenses, net                                                                    |       | 57,517,974        |        | 57,517,974            | ** **  |
| Deferred financing costs                                                             |       | 856,132           |        | 901,235               | ** **  |
| Note receivable from officer                                                         |       | 100,000           |        | 100,000               | ** **  |
| Property and equipment, net                                                          |       | 96,251,132        |        | 101,931,922           | ** **  |
|                                                                                 |       |              |        |                  | ** **  |
|                                                                                 |       | $                 | 193,895,997 |                  | $           | 222,881,099 | ** ** |
|                                                                                 |       |              |        |                  | ** **  |
| LIABILITIES AND PARTNERS’ DEFICIT:                                              |       |              |        |                  | ** **  |
| Accounts payable and accrued liabilities                                             |       | $                 | 40,672,891  |                  | $           | 40,130,876 | ** ** |
| Notes payable — short-term                                                      |       | 106,434,222       |        | 89,538,758            | ** **  |
| Notes payable — long-term                                                       |       | 120,764,691       |        | 150,505,987           | ** **  |
|                                                                                 |       |              |        |                  | ** **  |
| Unitholders’ capital (deficit) 2906.1 units and 1 general partnership  interest |       |              |        |                  | ** **  |
|                                                                                 |       |              |        |                  | ** **  |
|                                                                                 |       | (73,975,807       | )           | (57,294,522           | **) ** |
|                                                                                 |       |              |        |                  | ** **  |
| Total liabilities and partners deficit                                               |       | $                 | 193,895,997 |                  | $           | 222,881,099 | ** ** |
|                                                                                 |       |              |        |                  | ** **  |
| BOOK VALUE (DEFICIT) PER UNIT                                                        |       | $                 | (25,455     | )                     | $           | (19,708 | **)** |
|                                                                                      |            |                   |             |                       |             |  |  |  |  |  |

 

 

The accompanying notes are an integral partof these consolidated statements.

 

 

3

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ClearComm,L.P.

CONSOLIDATEDSTATEMENTS OF REVENUES AND EXPENSES

(2003UNAUDITED and 2002 UNAUDITED )

 

 
| ** **                                             | ** ** | **Three-Month Periods Ended** | ** ** | **Six-Month Periods Ended** | ** ** |
|--------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **June 30**                   | ** ** | **June 30**                 | ** ** |
| ** **                                             | ** ** | **2003**                      | ** ** | **2002**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Revenues:**                                          |       |                          |       |                        |       |   |   |   |   |
| Service revenues                                       |       | $                             | 25,760,778 |                        | $          | 25,443,665 |   | $ | 50,160,175 |   | $ | 52,070,415 |   |
| Handset and accessories sales                          |       | 2,035,527                     |       | 2,359,450                   |       | 3,931,011 |   | 3,713,061 |   |
|                                                   |       |                          |       |                        |       |   |   |   |   |
|                                                   |       | 27,796,305                    |       | 27,803,115                  |       | 54,091,186 |   | 55,783,476 |   |
|                                                   |       |                          |       |                        |       |   |   |   |   |
| **Operating Cost and Expenses:**                       |       |                          |       |                        |       |   |   |   |   |
| Cost of handset and accessories                        |       | 6,032,883                     |       | 5,381,502                   |       | 10,917,429 |   | 12,432,244 |   |
| Interconnection expense                                |       | 1,215,333                     |       | 2,001,828                   |       | 2,341,685 |   | 2,980,748 |   |
| Sales and dealers commissions                          |       | 1,575,700                     |       | 791,209                     |       | 2,963,205 |   | 2,259,509 |   |
| Salaries and benefits                                  |       | 4,046,478                     |       | 3,177,705                   |       | 8,281,186 |   | 7,335,893 |   |
| Advertising expense                                    |       | 1,443,163                     |       | 3,240,163                   |       | 2,998,361 |   | 4,891,333 |   |
| Legal and professional services                        |       | 2,203,899                     |       | 2,203,500                   |       | 3,903,771 |   | 4,697,892 |   |
| Provision for doubtful accounts                        |       | 4,062,044                     |       | 1,974,286                   |       | 6,092,049 |   | 5,455,014 |   |
| Rent expense                                           |       | 2,132,656                     |       | 2,697,291                   |       | 4,389,099 |   | 4,171,796 |   |
| Taxes other than income                                |       | 1,307,449                     |       | 1,544,366                   |       | 2,504,836 |   | 1,925,225 |   |
| Network Operation and Maintenance                      |       | 797,115                       |       | 0                           |       | 1,739,190 |   | 0 |   |
| Other expenses                                         |       | 1,633,898                     |       | 1,829,360                   |       | 3,367,635 |   | 2,483,652 |   |
| Management fee to General Partner                      |       | 60,750                        |       | 30,000                      |       | 121,500 |   | 62,000 |   |
| Services rendered by related parties                   |       | 648,866                       |       | 1,477,493                   |       | 1,531,424 |   | 3,021,342 |   |
|                                                   |       | 27,160,234                    |       | 26,348,703                  |       | 51,151,370 |   | 51,716,648 |   |
|                                                   |       |                          |       |                        |       |   |   |   |   |
| **Income (Loss) from Operations**                      |       | 636,071                       |       | 1,454,412                   |       | 2,939,816 |   | 4,066,828 |   |
| ** **                                             |       |                          |       |                        |       |   |   |   |   |
| **Other Income (Expense)**                             |       |                          |       |                        |       |   |   |   |   |
| Interest income                                        |       | 66,380                        |       | 189,931                     |       | 130,904 |   | 305,462 |   |
| Depreciation                                           |       | (4,407,373                    | )          | (4,071,901                  | )          | (8,425,512 | ) | (8,019,269 | ) |
| Gain on sale of investment in stock of subsidiary      |       |                          |       | —                      |       |   |   | 13,000,000 |   |
| Loss on WriteOff of inventory                          |       | 1,194,622                     |       |                        |       | (4,364,728 | ) |   |   |
| Other Income                                           |       | (49                           | )          | —                      |       | 46 |   | — |   |
| Interest expense                                       |       | (3,516,253                    | )          | (3,615,072                  | )          | (6,961,807 | ) | (8,734,358 | ) |
|                                                   |       |                          |       |                        |       |   |   |   |   |
|                                                   |       | (6,662,673                    | )          | (7,497,042                  | )          | (19,621,097 | ) | (3,448,165 | ) |
|                                                   |       |                          |       |                        |       |   |   |   |   |
| **Net Income (Loss)**                                  |       | $                             | (6,026,602 | )                           | $          | (6,042,630 | ) | $ | (16,681,281 | ) | $ | 618,663 |   |
| **Net Income (Loss) Attributable to General  Partner** |       | $                             | (6,026,602 | )                           | $          | (6,042,630 | ) | $ | (16,681,281 | ) | 618,663 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

 

4

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ClearComm,L.P.

CONSOLIDATEDSTATEMENTS OF CHANGES IN PARTNERS’ DEFICIT

(Unaudited)

FORTHE SIX-MONTH PERIOD ENDED JUNE 30, 2003

 
| ** **                                               | ** ** | **Limited Partners** | ** ** | **General  Partner** | ** **  | ** ** | ** **  |
|----------------------------------------------------------|------------|----------------------|------------|----------------------|-------------|------------|-------------|
| ** **                                               | ** ** | **Units**            | ** ** | **Amount**           | ** **  | ** ** | **Total**   | ** ** |
| BALANCES, December 31, 2002                              |       | 2,906.1              |       | —               |        | $          | (57,294,526 | ) | $ | (57,294,526 | ) |
|                                                     |       |                 |       |                 |        |       |        |   |   |
| Net loss for the three month period ended March 31, 2003 |       |                 |       |                 |        |       |        |   |   |
|                                                     | —     |                 | —     |                 | (10,654,679 | )          | (10,654,679 | ) |
|                                                     |       |                 |       |                 |        |       |        |   |   |
| Net  loss for the three month period ended June 30, 2003 |       |                 |       |                 |        | (6,026,602 | )      | (6,026,602 | )  |
|                                                     |       |                 |       |                 |        |       |        |   |   |
| BALANCES, June 30, 2003                                  |       | 2,906.1              |       | —               |        | $          | (73,975,807 | ) | $ | (73,975,807 | ) |
|                                                          |            |                      |            |                      |             |            |             |  |  |  |  |  |

 

 

The accompanying notes are an integral partof these consolidated financial statements.

 

 

5

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ClearComm,L.P.

CONSOLIDATED STATEMENTS OFCASH FLOWS

(2003 UNAUDITED AND 2002 UNAUDITED)

 
| ** **                                                                       | ** ** | **Six-Month Periods Ended** | ** **  |
|----------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                                       | ** ** | **June 30,****2003**        | ** **  | **June 30,****2002** | ** ** |
|                                                                             |       |                        |        |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                        |       |                        |        |   |   |
| Net loss                                                                         |       | $                           | (16,681,281 | ) | $ | 618,663 |   |
| Adjustments to reconcile net loss to net cash provided by operating  activities- |       |                        |        |   |   |
| Depreciation and amortization                                                    |       | 8,320,412                   |        | 8,019,629 |   |
| Equity in losses of unconsolidated subsidiary                                    |       | 70,304                      |        | — |   |
| Amortization of loan origination fees                                            |       | 105,102                     |        | — |   |
| Amortization of discount on note payable to FCC                                  |       | 1,247,862                   |        | — |   |
| Obsolete inventories reserve                                                     |       | 4,364,728                   |        | — |   |
| Other non-cash items                                                             |       | (6,502                      | )           | — |   |
| Bad debt expense                                                                 |       | 6,092,049                   |        | 5,455,014 |   |
| Increase in interest receivable                                                  |       | (1,500                      | )           | — |   |
| Increase in accounts receivable, before write-offs                               |       | (7,608,864                  | )           | (3,964,190 | ) |
| Decrease in insurance claim receivable                                           |       | 270,002                     |        | (717 | ) |
| Decrease (increase) in inventories                                               |       | 641,629                     |        | (791,820 | ) |
| Increase in prepaid expenses                                                     |       | (407,541                    | )           | (210,459 | ) |
| Decrease in accounts payable and accrued liabilities                             |       | 2,858,022                   |        | (3,666,397 | ) |
| Decrease in accounts payable to related parties                                  |       | (2,369,059                  | )           | 1,069,095 |   |
| (Decrease) Increase in accrued interest                                          |       | (1,372,963                  | )           | (3,890,126 | ) |
| (Decrease) increase in deferred income                                           |       | 385,662                     |        | (269,265 | ) |
| Total adjustments                                                                |       | 12,589,343                  |        | 1,750,764 |   |
| Net cash provided by operating activities                                        |       | (4,091,938                  | )           | 2,369,427 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                        |       |                        |        |   |   |
| Redemption of investment securities                                              |       | —                      |        | — |   |
| Proceeds from the sale of vehicle                                                |       | —                      |        |   |   |
| Acquisition of property and equipment                                            |       | (2,633,132                  | )           | (3,555,427 | ) |
| Payment for the investment in subsidiary                                         |       | (261,334                    | )           | (238,266 | ) |
| Gain on sale of investment stock in subsidiary                                   |       | —                      |        | (13,000,000 | ) |
| Net cash provided by (used in) investing activities                              |       | (2,894,466                  | )           | (16,793,693 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                        |       |                        |        |   |   |
| Proceeds from issuance of note payable to Telefonica Moviles                     |       | 1,831,179                   |        | 13,783,225 |   |
| Payment for deferred financing costs                                             |       | (60,000                     | )           | — |   |
| Proceeds from extension of note payable to ABN/AMRO                              |       | 1,000,000                   |        |   |   |
| Proceeds from the sale of stock in subsidiary                                    |       |                        |        | 13,000,000 |   |
| Principal payments of note payable                                               |       | (15,937,565                 | )           | (5,354,111 | ) |
| Net cash used in financing activities                                            |       | (13,166,386                 | )           | 21,429,114 |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                    |       | (20,152,790                 | )           | 7,004,848 |   |
| **CASH AND CASH EQUIVALENTS, beginning of period**                               |       | 22,709,786                  |        | 10,241,902 |   |
| **CASH AND CASH EQUIVALENTS, end of period**                                     |       | $                           | 2,556,996   |   | $ | 17,246,750 |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOWS  INFORMATION****:**                     |       |                        |        |   |   |
| **INTEREST PAID**                                                                |       | $                           | 6,314,000   |   | $ | 7,032,035 |   |
|                                                                             |       |                        |        |   |   |

The accompanying notes are an integral partof these consolidated financial statements.

 

 

6

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CLEARCOMM,L.P.

NOTESTO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (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-Q andRegulation 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 June 30, 2003and results of operations and cash flows for the six-month periods ended June30, 2003 and 2002.  The unaudited interimconsolidated financial statements should be read in conjunction with thesummary of significant accounting policies and notes to consolidated financialstatements included in the Partnership’s Annual Report on Form 10-K for theyear ended December 31, 2002.  Results ofoperations for interim periods are not necessarily indicative of the resultsthat may be expected for the full year.

 

ClearComm, L.P. (the “Partnership”)is a limited partnership organized on January 24, 1995 under the laws of theState of Delaware.  The Partnership wasformed 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 the occurrenceof certain specified events as detailed in the Partnership Agreement.

 

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, thePartnership was granted the PCS Block C licenses for Puerto Rico and certaincities in California.

 

On February 4, 1999, thePartnership entered into a joint venture agreement (the “Joint VentureAgreement”) with Telefónica Larga Distancia De Puerto Rico, Inc. (“TLD”) tojointly develop and operate certain PCS licenses in Puerto Rico.  Among the most important provisions of theJoint 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’sassets, 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% of NewComm’sequity 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 amended eliminatingthe TLD Option to buy the additional .2%. However, by means of a Stock Purchase Agreement dated as of March 12,2002, and subject to certain conditions, the Partnership has agreed to sell anamount of shares equal to 0.2% of NewComm to 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 process to attempt a sale of NewComm.  All shareholders are bound to cooperate andundertake all that is necessary in that effort.  Further, the shareholders are bound to

 

 

7

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accept the highest priceproposed by an interested buyer, which price must be payable in cash or freelytradable securities, or a combination thereof, and which must be for a pricenot less than the valuation prepared by the investment banker.  Some additional points are that at theclosing of the sale of NewComm the Management Agreement and the TechnologyTransfer Agreement 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, NewCommcommenced providing PCS services in Puerto Rico.  In each of November 2000, December 2000, andMarch 2001, NewComm received $5,000,000, from Syndicated Communications VenturePartners IV, L.P. (Syncom), a third party, in exchange for approximately 4.92%ownership in NewComm. Syncom has contributed $25 million to NewComm in exchangefor approximately 8.2% ownership interest in NewComm.  The last $10 million installment wascontributed in November 2002.

 

On March 2, 2002, thePartnership sold approximately 4.08% of NewComm to a group of investors led byFleet Development Ventures for $13 million. The Partnership and TEM contributed approximately $9 million each toNewComm in the form of equity and convertible debt, respectively. ThePartnership and TEM have committed an additional $10 million each to close theProject Finance Facility.  ThePartnership believes it has obtained sufficient funds, together with TEM, toprovide NewComm with the capital necessary for the Project Finance Facility andto fund NewComm’s operations.

 

In 2003, TLD transferred allits rights and interests in NewComm to Telefónica Móviles (“TEM”), the wirelesscommunications affiliate of the Telefónica Group, the largest wireless operatorin Latin American with over 35 million subscribers world-wide.  The Partnership believes it has obtainedsufficient funds, together with TEM, to provide NewComm with the capitalnecessary for the Project Finance Facility and to fully fund NewComm’soperations.  TEM and ClearComm have eachadvanced in the form of loans a total of $9.2 million to make the scheduledloan payments on the Puerto Rico licenses to the FCC.

 

California Licenses

 

On August 28, 2000, thePartnership 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.

 

Internet Surfing Stores of 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%and eMilios International owns 51% of ISS.

 

The eMilios concept involvesinternet communication galleries that are geared towards educating people inthe use of computers and the internet, and acts as a communication andrecreational center as well.  The broadbandconnectivity that is offered at eMilios allows the stores to efficiently offerinternet communications and also access to a great variety of interactivecontent, such as cyber games, as well as software and tools for free lancersand small business entities.  The serviceis provided and collected with a proprietary smart card and softwareapplication.  The commitment of thePartnership 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. The investment has an exit mechanism whereby at any time after 2003,ClearComm can force the acquisition of its shares in ISS or the sale of thewhole company.

 

 

8

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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 inSeptember 1999 and has incurred losses amounting to $6.7 million for thethree-month period ended June 30, 2003 and incurred operating losses of $6million for the three month period ended June 30, 2002.  It also has working capital deficits andpartners’ capital deficit of $118.5 million and $73.4 million, respectively, asof June 30, 2003.  The Partnership islikely to continue incurring losses until such time as its subscriber basegenerates revenue 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 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 network was approximately $125 million. During 2000, NewComm’s management and Lucent agreed on formallyextending the payment of up to $61.0 million of the total amount due under thecontract under a formal financing agreement. As of June 30, 2003, the Partnership is negotiating the restructuring ofLucent’s and Alcatel outstanding debts.  Theoutstanding debt to Lucent is approximately $48 million and Alcatel is $2.5million.  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 $110 million bank loan.

 

Management believes that thePartnership will comply with all the requirements for obtaining the financingand believes that cash and cash equivalents on hand, anticipated growth inrevenues, vendor financing and the permanent financing will be adequate to fundits operations, at a minimum, through the end of 2004.  However, in the absence of improved operatingresults and cash flows, and without the closing of its contemplated permanentfinancing, 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 adjustments thatmight result from the outcome of this uncertainty.

 

3.             INVENTORY— CHANGE IN ACCOUNTING METHOD

 

Effective January 1, 2003,the Partnership changed its method to account for the loss on sale of handsetsto customers, from the recognition of such loss at the time of sale, to theestablishment of an inventory reserve to account for that loss at the end ofeach accounting period.  Managementbelieves that this new method better matches costs and revenues.

 

In accordance withAccounting Principle Board Opinion No. 20, “Accounting Changes”, the change inaccounting method explained above requires the determination of the cumulativeeffect, as if the newly adopted method had been applied during all periodsaffected.  In this specific situation,the retroactive application and determination of pro-forma information isimpracticable, because the effects are not determinable, since it requiresassumptions about Management’s intent in prior periods, and significantestimates by Management.  The effect ofthe change on net income for the period ended June 30, 2003 was $4,364,728.

 

4.             RECENTACCOUNTING PRONOUNCEMENTS:

 

**(a)**                                  InJuly 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)****                                 **InApril 2002, the FASB issued SFAS No. 145, ***Rescissionof 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***,  whichrequired all gains and losses from extinguishments of debt to be aggregatedand, if material, classified as an extraordinary item, net of related incometax effect. As a result, the criteria in Opinion 30 will now be used toclassify those gains and losses.  SFASNo. 145 becomes effective for financial statements issued on or afterMay 15, 2002.  Requirements andguidance of SFAS No. 145 were applied in connection with the write-off of theFCC debt discount.

 

 

9

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**(c)****                                 **InJune 2002, the FASB issued SFAS No. 146, ***Accountingfor Costs Associated 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’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees 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 requirementof this Interpretation is effective for financial statements for fiscal yearsending after December 15, 2002; it did not have any effect on thePartnership’s financial statements.  Theinitial recognition 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 in which either (1) the equity investors (if any) do not have acontrolling financial interest of or (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 a revisionof the interpretation No. 46 to defer the implementation, classify some of itsprovisions 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.

 

5.             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’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-looking statements in this Form 10-Qand future filings by the Partnership on Form 10-Q and Form 8-K and future oraland written statements by the Partnership may include certain forward-lookingstatements, including (without limitation) statements with respect toanticipated future operating and financial performance, growth opportunitiesand growth rates, acquisition and divestitive opportunities, and other similarforecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”“estimates,” and “should,” and variations of these words and similarexpressions, are intended to identify these forward-looking statements.  Forward-looking statements by the Partnershipare based on estimates, projections, beliefs and assumptions of management andare not guarantees of future performance. The Partnership disclaims any obligation to update or revise anyforward-looking statement based on the occurrence of future events, the receiptof new information, or otherwise.

 

 

10

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Actual future performance,outcomes and results may differ materially from those expressed in forward-lookingstatements made by the Partnership as a result of a number of importantfactors.  Examples of these factorsinclude, without limitation; rapid technological developments and changes inthe telecommunications industry; ongoing deregulation (and the resultinglikelihood of significantly increased price and product/service competition) inthe telecommunications industry as a result of the Telecommunications Act of1996 and other similar federal and state legislation and the federal and staterules and regulations enacted pursuant to that legislation; regulatorylimitations on the Partnership’s ability to compete in the telecommunicationsservices industry; and continuing consolidation in the telecommunicationsservices industry.  In addition to thesefactors, actual future performance, outcomes and results may differ materiallybecause of other, more general factors including, without limitation, generalindustry and market conditions and growth rates, domestic and internationaleconomic conditions, governmental and public policy changes and the continuedavailability of financing in the amounts, at the terms and on the conditionsnecessary to support the Partnership’s future business.

 

Introduction

 

The information contained inthis Part I, Item 2 updates, and should be read in conjunction with,information set forth in Part II, Items 7 and 8, in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2002, in addition to the interimconsolidated financial statements and accompanying notes presented in Part 1,Item 1 of this Form 10-Q.  ThePartnership was formed in January 1995 and is managed by its General Partner,SuperTel Communications Corp.  The Partnershipwas organized to acquire, own, consult and operate personal communicationservices PCS licenses in the Block C band and to take advantage of the benefitsthat the FCC has set aside for entrepreneurs.

 

The Partnership owns thePuerto Rico Licenses, which consist of two 15 MHz PCS licenses covering PuertoRico. The license covering Visalia-Porterville, California, had been previouslysold and transferred to Leap Wireless on June 8, 2001 in exchange for$9,500,000 cash payment.

 

The Partnership commencedcommercial operations of its PCS network in Puerto Rico on September 24, 1999 whenit began offering wireless services in Puerto Rico to the public.  Prior to that date, its income had consistedof interest earnings only.

 

The Partnership establishedits Puerto Rico network by forming a wholly owned subsidiary, NewComm, onJanuary 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 is pursuant to a securedconvertible promissory note (the “Note”) which is convertible into 49.9% ofNewComm’s equity.  The Note however,cannot be converted until the FCC authorizes TEM to hold more than a 25% equityinterest in NewComm.  By means of a StockPurchase Agreement executed on March 12, 2002, the Partnership has agreed tosell shares equal to 0.2% in NewComm to TEM conditioned to obtaining permanentfinancing and a clear exit path for the Partnership.  This transaction is pending Department ofHomeland Security and FCC approval.  ThePartnership believes this transaction and permanent finance will be obtainedbefore the end of 2004.

 

Results of Operations

 

Set forth below is a summaryof the results of operations before other income and expenses for thethree-month period ended June 30, 2003 as compared with the three-month periodended June 30, 2002:

 

 

11

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| ** **                             | ** ** | **June 30,**   | ** **     | ** **     | ** ** |
|----------------------------------------|------------|----------------|----------------|----------------|------------|
| ** **                             | ** ** | **2003**       | ** **     | **2002**       | ** ** | **Change** | ** ** |
| **Revenues:**                          | ** ** | ** **     | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Service revenues**                   | ** ** | **$**          | **25,760,778** | ** **     | **$**      | **25,443,665** | ** ** | **1** | **%** |
| **Handsets and accessories sales**     | ** ** | **2,035,527**  | ** **     | **2,359,450**  | ** ** | **-14** | **%** |
| ** **                             | ** ** | ** **     | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Total Revenues**                     | ** ** | **27,796,305** | ** **     | **27,803,115** | ** ** | **0** | **%** |
| **Expenses:**                          | ** ** | ** **     | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Operating expenses**                 | ** ** | **27,160,234** | ** **     | **26,348,703** | ** ** | **3** | **%** |
| ** **                             | ** ** | ** **     | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Income (loss) from operations**      | ** ** | **636,071**    | ** **     | **1,454,412**  | ** ** | **-56** | **%** |
| ** **                             | ** ** | ** **     | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Interest expense**                   | ** ** | **(3,516,253** | **)**          | **(3,615,072** | **)**      | **-3** | **%** |
| ** **                             | ** ** | ** **     | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Depreciation and amortization**      | ** ** | **(4,407,373** | **)**          | **(4,071,901** | **)**      | **8** | **%** |
| ** **                             | ** ** | ** **     | ** **     | ** **     | ** ** | ** ** | ** ** |
| **Loss before other income (expense)** | ** ** | **$**          | **(7,287,555** | **)**          | **$**      | **(6,232,561** | **)** | **17** | **%** |
|                                        |            |                |                |                |            |  |  |  |  |  |

 

 

Revenues

 

The Partnership’s revenuesfor the three-month period ended June 30, 2003 showed a flat market with aslight decreased of less than 1% at $27.8 million as compared for the sameperiod in 2002. Total revenues include service as well as handset andaccessories revenues.  Service revenuesfor the three-month period ended June 30, 2003 increased by 1% when compared tothe same period in 2002 while handset and accessories sales decreased by14%.  The decrease in handsets andaccessories revenues is indicative of a flat growth for the period as comparedto the same period in 2002.  The increasein service revenues is related to airtime consumption by existing customers.

 

Expenses

 

The following table showsthe variances for the three month period ended June 30, 2003 as compared to thesame period in 2002:

 

 
| ** **                                                     | ** ** | **June 30,**  | ** **     | ** **    | ** ** |
|----------------------------------------------------------------|------------|---------------|----------------|---------------|------------|
| ** **                                                     | ** ** | **2003**      | ** **     | **2002**      | ** ** | **Change** | ** ** |
| **Cost of handset and accesories**                             | ** ** | **$**         | **6,032,883**  | ** **    | **$**      | **5,381,502** | ** ** | **12** | **%** |
| **Interconnection expense**                                    | ** ** | **1,215,333** | ** **     | **2,001,828** | ** ** | **-39** | **%** |
| **Sales and dealers commissions**                              | ** ** | **1,575,700** | ** **     | **791,209**   | ** ** | **99** | **%** |
| **Salaries and benefits**                                      | ** ** | **4,046,478** | ** **     | **3,177,705** | ** ** | **27** | **%** |
| **Selling and advertising expense**                            | ** ** | **1,443,163** | ** **     | **3,240,163** | ** ** | **-55** | **%** |
| **Legal and professional services**                            | ** ** | **2,203,899** | ** **     | **2,203,500** | ** ** | **0** | **%** |
| **Provision for doubtful accounts**                            | ** ** | **4,062,044** | ** **     | **1,974,286** | ** ** | **106** | **%** |
| **Rent expense**                                               | ** ** | **2,132,656** | ** **     | **2,697,291** | ** ** | **-21** | **%** |
| **Taxes, other than income**                                   | ** ** | **1,307,449** | ** **     | **1,544,366** | ** ** | **-15** | **%** |
| **Network operation and maintenance**                          | ** ** | **797,115**   | ** **     | **—**    | ** ** | **100** | **%** |
| **Other expenses**                                             | ** ** | **1,633,898** | ** **     | **1,829,360** | ** ** | **-11** | **%** |
| **Management fee to General Partner**                          | ** ** | **60,750**    | ** **     | **30,000**    | ** ** | **103** | **%** |
| **Consulting and legal services rendered by  related parties** | ** ** | **648,866**   | ** **     | **1,477,493** | ** ** | **-56** | **%** |
|                                                           | ** ** | **—**    |           |          |       |   |   |
| **Total Expenses**                                             | ** ** | **$**         | **27,160,234** | ** **    | **$**      | **26,348,703** | ** ** | **3** | **%** |
|                                                                |            |               |                |               |            |  |  |  |  |  |

 

 

12

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Expenses for the three-monthperiod ended June 30, 2003 totaled $27,160,234 as compared to $26,348,703 forthe same period in 2002.  During suchsecond quarter of 2003, the Partnership’s expenses increased by 3% or $1.2million.

 

The overall increase in expensesof $1.2 million is mainly due to the increase in the provision for doubtfulaccounts which resulted from the Partnership’s tighter credit policies due tothe implementation of new billings and collections software which moreefficiently identifies delinquent customers. The variances in taxes other than income, other expenses and legalservices are actually related to reclassification of certain accounts.

 

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 generallyaccepted accounting principles (GAAP) to arrive to the net income or loss.

 

Income from operations forthe three month period ended June 30, 2003 of $636,071 shows a decrease of 56%as compared to the income from operations for the same period in 2002.  This reduction in income from operations isrelated to the cost of acquiring new customers with total expenses increasing3% while revenues remain flat at $27.8 million for the quarter.

 

Interest expense for thethree month period ended June 30, 2003 of $3.5 million ($3.6 million in 2002)and depreciation expense of $4.3 million ($4 million in 2002) reduce the incomefrom operations and result in a net loss before other income of $7,287,555 forthe second quarter of 2003 ($6,232,561 in 2002); an overall reduction in netloss of 17% when compared to 2002.  Thereduction in interest expense is mainly attributable to the refinancing of thevarious debts and to reduction of debt outstanding related to the Note Payableto Alcatel.

 

The increase in depreciationexpense is related to the increase in the depreciable assets placed in serviceduring the period.

 

 

13

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The following tablessummarize changes in certain financial information for the six-month periodended June 30, 2003 as compared with the six-month period ended June 30, 2002.

 

Revenues

 
| ** **                             | ** ** | **Six-Month Periods Ended** | ** **     | ** **      | ** ** |
|----------------------------------------|------------|-----------------------------|----------------|-----------------|------------|
| ** **                             | ** ** | **June 30,**                | ** **     | ** **      | ** ** |
| ** **                             | ** ** | **2003**                    | ** **     | **2002**        | ** ** | **Change** | ** ** |
| **Revenues:**                          | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Service revenues**                   | ** ** | **$**                       | **50,160,175** | ** **      | **$**      | **52,070,415** | ** ** | **-4** | **%** |
| **Handsets and accessories sales**     | ** ** | **3,931,011**               | ** **     | **3,713,061**   | ** ** | **6** | **%** |
| ** **                             | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Total Revenues**                     | ** ** | **54,091,186**              | ** **     | **55,783,476**  | ** ** | **-3** | **%** |
| **Expenses:**                          | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Operating expenses**                 | ** ** | **51,151,370**              | ** **     | **51,716,648**  | ** ** | **-1** | **%** |
| ** **                             | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Income (loss) from operations**      | ** ** | **2,939,816**               | ** **     | **4,066,828**   | ** ** | **-28** | **%** |
| ** **                             | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Loss on Write Off Inventory**        | ** ** | **(4,364,728**              | **)**          | **—**      | ** ** | **100** | **%** |
| ** **                             | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Interest expense**                   | ** ** | **(6,961,807**              | **)**          | **(8,734,358**  | **)**      | **-20** | **%** |
| ** **                             | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Depreciation and amortization**      | ** ** | **(8,425,512**              | **)**          | **(8,019,629**  | **)**      | **5** | **%** |
| ** **                             | ** ** | ** **                  | ** **     | ** **      | ** ** | ** ** | ** ** |
| **Loss before other income (expense)** | ** ** | **(16,812,231**             | **)**          | **(12,687,159** | **)**      | **33** | **%** |
|                                        |            |                             |                |                 |            |  |  |  |  |

 

The Partnership’s revenuesfor the six-month period ended June 30, 2003 totaled $54,091,186 as compared to$55,783,476 for the same period in 2002.  Revenues for the six-monthperiod ended June 30, 2003 included $50,160,175 in service revenues and$3,931,011 in handset and accessories sales generated from NewComm’s wirelessoperations, as compared to $52,070,415 and $3,713,061 respectively, for thesame period in 2002.  The decrease of 3%in revenues for the first half of the year is related to the migration to thenew billings and collection software while the increase in handset andaccessories sales are mainly due to pricing adjustments on the units sold.

 

 

14

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Expenses

 

 
| ** **                                                     | ** ** | **June 30,**  | ** **     | ** **    | ** ** |
|----------------------------------------------------------------|------------|---------------|----------------|---------------|------------|
| ** **                                                     | ** ** | **2003**      | ** **     | **2002**      | ** ** | **Change** | ** ** |
| **Cost of handset and accesories**                             | ** ** | **$**         | **10,917,429** | ** **    | **$**      | **12,432,244** | ** ** | **-12** | **%** |
| **Interconnection expense**                                    | ** ** | **2,341,685** | ** **     | **2,980,748** | ** ** | **-21** | **%** |
| **Sales and dealers commissions**                              | ** ** | **2,963,205** | ** **     | **2,259,509** | ** ** | **31** | **%** |
| **Salaries and benefits**                                      | ** ** | **8,281,186** | ** **     | **7,335,893** | ** ** | **13** | **%** |
| **Selling and advertising expense**                            | ** ** | **2,998,361** | ** **     | **4,891,333** | ** ** | **-39** | **%** |
| **Legal and professional services**                            | ** ** | **3,903,771** | ** **     | **4,697,892** | ** ** | **-17** | **%** |
| **Provision for doubtful accounts**                            | ** ** | **6,092,049** | ** **     | **5,455,014** | ** ** | **12** | **%** |
| **Rent expense**                                               | ** ** | **4,389,099** | ** **     | **4,171,796** | ** ** | **5** | **%** |
| **Taxes, other than income**                                   | ** ** | **2,504,836** | ** **     | **1,925,225** | ** ** | **30** | **%** |
| **Network operation and maintenance**                          | ** ** | **1,739,190** | ** **     | **—**    | ** ** | **100** | **%** |
| **Other expenses**                                             | ** ** | **3,367,635** | ** **     | **2,483,652** | ** ** | **36** | **%** |
| **Management fee to General Partner**                          | ** ** | **121,500**   | ** **     | **62,000**    | ** ** | **96** | **%** |
| **Loss on sale of license**                                    | ** ** | **—**    | ** **     | **—**    | ** ** | **100** | **%** |
| **Consulting and legal services rendered by  related parties** | ** ** | **1,531,424** | ** **     | **3,021,342** | ** ** | **-49** | **%** |
| ** **                                                     |       | **—**    |           |          |       |   |   |
| **Total Expenses**                                             | ** ** | **$**         | **51,151,370** | ** **    | **$**      | **51,716,648** |   | **-1** | **%** |

 

Expenses for the six-monthperiod ended June 30, 2003 totaled $51,151,370 as compared to $51,716,648 forthe same period in 2002.  During the six-month period ended June 30, 2003,the Partnership’s expenses decreased by 1% due to pricing adjustments made bysuppliers for the cost of handsets which resulted in a 12% reduction in suchexpense and due to the 39% reduction in selling and advertising expenses forthe period.  The other variances as shownabove are mostly related to reclassifications among accounts made at thePartnership’s subsidiary level to properly record transactions in a moreefficient manner.

 

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 generallyaccepted accounting principles (GAAP) to arrive to the net income or loss.

 

Income from operations forthe six-month period ended June 30, 2003 of $2,939,816 shows a 19% decrease ascompared to the loss from operations for the same period in 2002.  This decrease in income from operations isrelated to the fact that while revenues for the first half of the year had a 3%reduction and there was an overall reduction of 1% in expenses at thesubsidiary level, the actual dollar amount reduction in revenues was greaterthan the dollar amount reduction of expenses which caused the overall 28%reduction in income from operations.

 

Interest expense for thesix-month period ended June 30, 2003 of $7 million ($8.7 million in 2002) anddepreciation expense of $8.4 million ($8 million in 2002) reduce income fromoperations and result in a net loss before other income (expense) of$16,812,231 for the first half of 2003 ($13,117,371 in 2002); an overallreduction in net loss before other income (expense) of 28% when compared to2002.  The decrease in interest expenseis attributable to the debt restructuring that began in 2003.

 

The increase in depreciationexpense is related to additional assets placed in service during the period.

 

Liquidity and Capital Resources

 

As of June 30, 2003, thePartnership had cash and cash equivalents amounting to $2,556,996, which aremostly related to proceeds from the sale of the Visalia-Porterville, Californialicense in the second quarter of 2001, and the Fleet Transaction.

 

 

15

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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.  An agreement restructuringLucent’s debt was executed on June 4, 2003.  This outstanding debt is approximately $51million at a fixed annual interest over a six year term.

 

In addition, the Partnershipowes the United States federal government approximately $43,434,041 plusaccrued interest at 6.5% in connection with the acquisition of its PCSlicenses.

 

The Partnership has asecured promissory note payable to TEM, which bears interest at the floatingrate of 90-day LIBOR plus 1.5% and is due in March 2004.

 

The Partnership estimatesthat the total cost to implement NewComm’s business plan will be approximately$200 million.  This consists ofapproximately $125 million in costs associated with building-out the PuertoRico Network, and approximately $75 million to fund NewComm’s operations untilthese become profitable.  NewCommobtained a short term financing (“Bridge Loan”) of $60 million which has beenextended until December 31, 2004, with an interest rate of .75% over 90-dayLIBOR.  The Bridge Loan is now guaranteedby Telefónica Internacional, S.A. (TISA), an affiliate of TEM.  ClearComm and TEM continue to work towardssecuring a permanent financing facility.

 

During 2001, the Partnershipsold 8.02% of NewComm to Syncom Venture Funds in exchange for $25 million,  and on March 2, 2002, the Partnership sold4.08% of NewComm to a group of investors led by Fleet Development Ventures for$13 million.

 

The Partnership anticipatesthat earnings and cash distributions derived from its Puerto Rico Network,interim and permanent financing and, if necessary, additional capital callsfrom its Investors or accessing the public capital markets, should provide itwith the liquidity to meet its obligations.

 

ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Partnership’s exposureto market risk through derivative financial instruments and other financialinstruments is not material because the Partnership does not use derivativefinancial instruments and does not have foreign currency exchange risks.  The Partnership invests cash balances inexcess of operating requirements in short-term money market funds.  As of June 30, 2003, the Partnership had cashequivalents and short-term investments of approximately $2,556,996 consistingof cash and highly liquid, short-term investments in money 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%.

 

ITEM 4. CONTROLS ANDPROCEDURES

 

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 TEM pursuant to the Partnership’sManagement Agreement with TEM.  Thereporting process is designed to ensure that information required to bedisclosed by the Partnership in the reports that it files or submits with theCommission is recorded, processed, summarized and reported within the timeperiods specified in the Commission’s rules and forms.

 

There have been nosignificant changes in the Partnership’s internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theirevaluation.

 

 

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PART II: OTHER

 

INFORMATION

 

ITEM  1. LEGAL PROCEEDINGS

 

Information regarding legalproceedings is disclosed in Part I, Item 1, Notes to Interim ConsolidatedFinancial Statements as of June 30, 2003 (unaudited), Section 5, and is herebyincorporated into Part II, Item 1 by this reference.

 

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

 
| (a)    | List of Exhibits                                                             |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |   |
|   | Exhibit 31.1:                                                                | Certification of Principal  Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|   |                                                                         |   |
|   | Exhibit 31.2:                                                                | Certification of Principal  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|   |                                                                         |   |
|   | Exhibit 32.1:                                                                | Certification pursuant to  Section 1350 of Chapter 63 of Title 18 of the United States Code |
|   |                                                                         |   |
|   | Exhibit 32.2:                                                                | Certification pursuant to  Section 1350 of Chapter 63 of Title 18 of the United States Code |
|   |                                                                         |   |
| (b)    | No reports on Form 8-K  were filed during the period covered by this report. |

 

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

 

 

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SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                    |   | ClearComm, L.P.                                 |
|-------------------------|--------|-------------------------------------------------|
|                    |   |                                            |
|                    |   |                                            |
|                    | By:    | SuperTel Communications  Corp., General Partner |
|                    |   |                                            |
|                    |   |                                            |
| Date: December 10, 2004 |   | By: /s/ Javier O. Lamoso                        |
|                    |   | Name: Javier O. Lamoso                          |
|                    |   | Title: President                                |

 

 

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**EXHIBIT INDEX**

 

Exhibit 31.1:       Certification of Principal ExecutiveOfficer pursuant to Rule 13a-14(a)/15d-14(a)

 

Exhibit 31.2:       Certification of Principal FinancialOfficer pursuant to Rule 13a-14(a)/15d-14(a)

 

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

 

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

 

 

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