** **

**UNITED STATES**

**Securities and Exchange Commission**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

**(AmendmentNo.1)**

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

 

**ClearComm, L.P.**

(Exact name ofregistrant as specified in its charter)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months and (2) has been subject to such filing requirements forthe past 90 days.

Yesý   Noo 

 

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

Yes o  No ý

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange 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, 2005  (unaudited) and December 31, 2004 (audited) |   |   |
|                         |   |                                                                                                                                                  |   |   |
|                         |   | Consolidated Statements of  Revenues and Expenses for the three-month and six-month period ended  June 30, 2005 and 2004 (unaudited).            |   |   |
|                         |   |                                                                                                                                                  |   |   |
|                         |   | Consolidated Statements of  Changes in Partners’ Deficit for the six-month period ended June 30,  2005 (unaudited)                          |   |   |
|                         |   |                                                                                                                                                  |   |   |
|                         |   | Consolidated Statements of  Cash Flows for the six-month period ended June 30, 2005 and 2004  (unaudited)                                        |   |   |
|                         |   |                                                                                                                                                  |   |   |
|                         |   | Notes to Interim  Consolidated Financial Statements (unaudited)                                                                                       |   |   |
|                         |   |                                                                                                                                                  |   |   |
| Item 2                       |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                           |   |   |
|                         |   |                                                                                                                                                  |   |   |
| Item 3                       |   | Quantitative  Disclosure About Market Risk.                                                                                                           |   |   |
|                         |   |                                                                                                                                                  |   |   |
| Item  4                      |   | Control  and Procedures                                                                                                                               |   |   |
|                         |   |                                                                                                                                                  |   |   |
| PART II                      |   | OTHER INFORMATION                                                                                                                                     |   |   |
|                         |   |                                                                                                                                                  |   |   |
| Item 1.                      |   | Legal Proceedings                                                                                                                                     |   |   |
|                         |   |                                                                                                                                                  |   |   |
| Item 6.                      |   | Exhibits and Reports on Form 8-K                                                                                                                      |   |   |
|                         |   |                                                                                                                                                  |   |   |
| Signatures.                  |   |                                                                                                                                                  |
|                         |   |                                                                                                                                                  |   |   |
| Exhibit Index.               |   |                                                                                                                                                  |

 

 

2

----

 

PART I    FINANCIAL INFORMATION

ITEM1.   FINANCIALSTATEMENTS

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF ASSETS, LIABILITIESAND PARTNERS’ DEFICIT

 
| ** **                                                                                                                 | ** ** | **June 30,**    | ** **      | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------|-----------------|------------------|------------|
| ** **                                                                                                                 | ** ** | **2005**        | ** **      | **2004**         | ** ** |
| ** **                                                                                                                 | ** ** | **(Unaudited)** | ** **      | **(Restated)**   | ** ** |
| **ASSETS:**                                                                                                                | ** ** | ** **      | ** **      | ** **       | ** ** |
| **Cash and cash equivalents**                                                                                              | ** ** | **$**           | **10,000,428**  | ** **       | **$**      | **10,612,430** | ** ** |
| **Accounts receivable, net**                                                                                               | ** ** | **8,474,072**   | ** **      | **7,909,573**    | ** ** |
| **Accounts receivable, other**                                                                                             | ** ** | **4,846,298**   | ** **      | **4,204,524**    | ** ** |
| **Insurance claim receivable**                                                                                             | ** ** | **—**      | ** **      | **403,657**      | ** ** |
| **Interest receivable**                                                                                                    | ** ** | **—**      | ** **      | **20,000**       | ** ** |
| **Inventories, net**                                                                                                       | ** ** | **3,106,564**   | ** **      | **4,341,975**    | ** ** |
| **Prepaid expenses**                                                                                                       | ** ** | **948,830**     | ** **      | **841,750**      | ** ** |
| **Leasehold rights, net**                                                                                                  | ** ** | **3,660,498**   | ** **      | **3,314,144**    | ** ** |
| **Investment in subsidiary**                                                                                               | ** ** | **217,959**     | ** **      | **247,959**      | ** ** |
| **PCS licenses, net**                                                                                                      | ** ** | **46,750,449**  | ** **      | **46,750,449**   | ** ** |
| **Deferred financing costs**                                                                                               | ** ** | **518,776**     | ** **      | **635,824**      | ** ** |
| **Note receivable from officer**                                                                                           | ** ** | **-**           | ** **      | **100,000**      | ** ** |
| **Property and equipment, net**                                                                                            | ** ** | **73,543,967**  | ** **      | **80,546,773**   | ** ** |
| ** **                                                                                                                 | ** ** | ** **      | ** **      | ** **       | ** ** |
| ** **                                                                                                                 | ** ** | **$**           | **152,067,841** | ** **       | **$**      | **159,929,058** | ** ** |
| ** **                                                                                                                 | ** ** | ** **      | ** **      | ** **       | ** ** |
| **LIABILITIES AND PARTNERS’ DEFICIT:**                                                                                | ** ** | ** **      | ** **      | ** **       | ** ** |
| **Accounts payable and accrued liabilities**                                                                               | ** ** | **$**           | **29,296,342**  | ** **       | **$**      | **48,810,130** | ** ** |
| **Notes payable — short-term**                                                                                        | ** ** | **38,715,009**  | ** **      | **136,836,780**  | ** ** |
| **Notes payable — long-term**                                                                                         | ** ** | **128,835,066** | ** **      | **90,226,258**   | ** ** |
| ** **                                                                                                                 | ** ** | ** **      | ** **      | ** **       | ** ** |
| **Unitholders’ capital (deficit) 2,765.20 Units in  2005, 2906.1 Units in 2004, and 1 general partnership interest.** | ** ** | ** **      | ** **      | ** **       | ** ** |
| ** **                                                                                                                 | ** ** | ** **      | ** **      | ** **       | ** ** |
| ** **                                                                                                                 | ** ** | **(44,778,577** | **)**           | **(115,944,108** | **)**      |
| ** **                                                                                                                 | ** ** | ** **      | ** **      | ** **       | ** ** |
| **Total liabilities and partner's deficit**                                                                                | ** ** | **$**           | **152,067,840** | ** **       | **$**      | **159,929,060** | ** ** |
| ** **                                                                                                                 | ** ** | ** **      | ** **      | ** **       | ** ** |
| **BOOK VALUE(DEFICIT) PER UNIT**                                                                                           | ** ** | **$**           | **(16,194**     | **)**            | **$**      | **(41,930** | **)** |
|                                                                                                                            |            |                 |                 |                  |            |  |  |  |

 

 

The accompanying notesare an integral part of these consolidated statements.

 

 

3

----

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF REVENUES AND EXPENSES (UNAUDITED)

 
| ** **                                              | ** ** | **Three-Month Periods Ended June 30** | ** ** | **Six-Month Periods Ended June 30** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | ** **                            | ** ** | **(Restated)**                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Revenues:**                                           |       |                                  |       |                                |       |   |   |   |   |
| Service revenues                                        |       | $                                     | 22,686,968 |                                | $          | 25,906,148 |   | $ | 45,565,488 |   | $ | 52,784,373 |   |
| Handset and accessories sales                           |       | 1,169,624                             |       | 1,228,194                           |       | 1,907,084 |   | 2,664,790 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
|                                                    |       | 23,856,592                            |       | 27,134,342                          |       | 47,472,572 |   | 55,449,163 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Operating Cost and Expenses:**                        |       |                                  |       |                                |       |   |   |   |   |
| Cost of handset and accessories                         |       | 4,362,624                             |       | 5,652,167                           |       | 9,047,636 |   | 11,591,131 |   |
| Interconnection expense                                 |       | 807,907                               |       | 1,065,425                           |       | 1,603,484 |   | 2,040,979 |   |
| Sales and dealers commissions                           |       | 1,891,224                             |       | 2,533,551                           |       | 3,925,924 |   | 5,380,383 |   |
| Salaries and benefits                                   |       | 3,859,776                             |       | 3,955,461                           |       | 7,773,695 |   | 7,989,871 |   |
| Depreciation                                            |       | 4,524,200                             |       | 4,388,884                           |       | 9,095,668 |   | 8,693,346 |   |
| Advertising expense                                     |       | 1,382,099                             |       | 1,857,480                           |       | 2,092,602 |   | 3,314,146 |   |
| Legal and professional services                         |       | 287,520                               |       | 851,391                             |       | 679,302 |   | 1,564,743 |   |
| Provision for doubtful accounts                         |       | 3,293,557                             |       | 2,365,150                           |       | 5,482,126 |   | 4,711,950 |   |
| Rent expense                                            |       | 1,824,870                             |       | 1,731,547                           |       | 3,617,963 |   | 3,367,372 |   |
| Taxes other than income                                 |       | 529,874                               |       | 841,109                             |       | 1,572,106 |   | 1,849,647 |   |
| Network Operation and Maintenance                       |       | 2,011,529                             |       | 1,726,390                           |       | 3,952,237 |   | 3,292,937 |   |
| Other expenses                                          |       | -136,634                              |       | 2,426,762                           |       | 1,396,574 |   | 4,777,609 |   |
| Management fee to General Partner                       |       | 68,750                                |       | 68,750                              |       | 137,500 |   | 137,500 |   |
| Services rendered by related parties                    |       | 626,235                               |       | 1,258,326                           |       | 1,418,851 |   | 2,586,220 |   |
| Loss on Sale of California License                      |       | —                                |       | 25,832                              |       | — |   | 25,832 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
|                                                    |       | 25,333,531                            |       | 30,748,225                          |       | 51,795,668 |   | 61,323,666 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Income (Loss) from Operations**                       |       | (1,476,939                            | )          | (3,613,883                          | )          | (4,323,096 | ) | -5,874,503 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Other Income (Expense)**                              |       |                                  |       |                                |       |   |   |   |   |
| Interest income                                         |       | 75,134                                |       | 38,549                              |       | 408,160 |   | 116,971 |   |
| Other Income                                            |       | —                                |       | (57,396                             | )          | 32,644 |   | (57,179 | ) |
| Interest expense                                        |       | (2,913,539                            | )          | (2,321,032                          | )          | (5,968,121 | ) | (4,687,799 | ) |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
|                                                    |       | (2,838,405                            | )          | (2,339,879                          | )          | (5,527,317 | ) | (4,628,007 | ) |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Net Income (Loss)**                                   |       | $                                     | (4,315,344 | )                                   | $          | (5,953,762 | ) | $ | (9,850,413 | ) | $ | (10,502,510 | ) |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Net  Income (Loss) Attributable to General Partner**  |       | $                                     | (4,315,344 | )                                   | $          | (5,953,762 | ) | $ | (9,850,413 | ) | $ | (10,502,510 | ) |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Net  Income (Loss) Attributable to Limited Partners** |       | $                                     | —     |                                | $          | — |   | $ | — |   | $ | — |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |

 

 

The accompanying notesare integral part of these consolidated financial statements.

 

 

4

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ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF CHANGES IN PARTNERS’ DEFICIT (Unaudited)

FOR THE SIX-MONTHPERIOD ENDED JUNE 30, 2005

 

 

 
| ** **                                                                                                      | ** ** | **Limited Partners** | ** ** | **General** | ** ** | ** **  | ** **   |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|-------------|--------------|
| ** **                                                                                                      | ** ** | **Units**            | ** ** | **Amount**  | ** ** | **Partner** | ** **   | **Total** | ** ** |
| ** **                                                                                                      | ** ** | ** **           | ** ** | ** **  | ** ** | ** **  | ** **   | ** ** | ** ** |
| **BALANCES,**December  31, 2004                                                                                 |       | 2,765.2              |       | —      |       | $           | (115,944,108 | ) | $ | (115,944,108 | ) |
|                                                                                                            |       |                 |       |        |       |        |         |   |   |
| **Net  loss for the three-months period ended March 31, 2005**                                                  |       |                 |       |        |       | (5,535,069  | )            | (5,535,069 | ) |
|                                                                                                            |       |                 |       |        |       |        |         |   |   |
| **Net  loss for the three-months period ended June 30, 2005**                                                   |       | —               |       | —      |       | (4,315,344  | )            | (4,315,344 | ) |
|                                                                                                            |       |                 |       |        |       |        |         |   |   |
| **Additional  Capital Contribution from conversion pursuant to the settlement agreement  dated April 20, 2005** |       |                 |       |        |       | 81,015,944  |         | 81,015,944 |   |
|                                                                                                            |       |                 |       |        |       |        |         |   |   |
| **BALANCES,**June  30, 2005                                                                                     |       | 2,765.2              |       | —      |       | $           | (44,778,577  | ) | $ | (44,778,577 | ) |

 

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

 

 

5

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ClearComm, L.P.

CONSOLIDATED STATEMENTSOF CASH FLOWS (UNAUDITED)

 

 
| ** **                                                                       | ** ** | **Six-Month Periods Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                       | ** ** | **June 30,**                | ** ** | **June 30,** | ** ** |
| ** **                                                                       | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | ** **                  | ** ** | **(Restated)** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                        |       |                        |       |   |   |
| Net loss                                                                         |       | $                           | (9,850,413 | ) | $ | (10,502,510 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities- |       |                        |       |   |   |
| Depreciation and  amortization                                                   |       | 9,095,668                   |       | 8,638,296 |   |
| Equity in losses  of unconsolidated subsidiary                                   |       | 30,000                      |       | 12,178 |   |
| Amortization of  loan origination fees                                           |       |                        |       | 98,436 |   |
| Inventory  Reserve                                                               |       | 172,033                     |       | 348,000 |   |
| Bad debt expense                                                                 |       | 5,482,126                   |       | 4,711,950 |   |
| Loss on sale of  California Licenses                                             |       |                        |       | 25,832 |   |
| Gain from sale  of vehicles                                                      |       | (432,527                    | )          | (28,327 | ) |
| Capitalized  interest                                                            |       | 102,761                     |       | 395,588 |   |
| Changes in  operating assets and liabilities-                                    |       |                        |       |   |   |
| Increase in  interest receivable                                                 |       | —                      |       | (83,336 | ) |
| Increase in  accounts receivable, before write-offs                              |       | (6,968,218                  | )          | (3,662,572 | ) |
| Decrease in  insurance claim receivable                                          |       | 403,657                     |       |   |   |
| Decrease  (increase) in inventories                                              |       | 1,541,022                   |       | (686,933 | ) |
| Increase  overdraft                                                              |       | —                      |       | (82,469 | ) |
| Increase in  prepaid expenses                                                    |       | (107,080                    | )          | (260,560 | ) |
| Decrease in  accounts payable and accrued liabilities                            |       | 2,000,205                   |       | 3,575,702 |   |
| Decrease in  accounts payable to related parties                                 |       | (3,196,515                  | )          | (876,410 | ) |
| (Decrease)  Increase in accrued interest                                         |       | 565,151                     |       | (71,287 | ) |
| (Decrease)  increase in deferred income                                          |       | 66,460                      |       | (466,003 | ) |
| Total  adjustments                                                               |       | 8,754,743                   |       | 11,588,085 |   |
| Net cash  provided by operating activities                                       |       | (1,095,670                  | )          | 1,085,575 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                        |       |                        |       | — |   |
| Redemption of  investment securities                                             |       |                        |       | 8,837,147 |   |
| Proceeds from  the sale of vehicle                                               |       | 483,161                     |       | 184,000 |   |
| Proceeds from  sale of accounts receivable                                       |       | 455,890                     |       | — |   |
| Payment for  deferred financing costs                                            |       | (117,091                    | )          | — |   |
| Acquisition of  property and equipment                                           |       | (1,279,113                  | )          | (2,264,466 | ) |
| Payment for the  investment in subsidiary                                        |       |                        |       | (130,667 | ) |
| Proceeds from  the sale of California License                                    |       |                        |       | 9,400,000 |   |
| Net cash  provided by (used in) investing activities                             |       | (457,153                    | )          | 16,026,014 |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                        |       |                        |       |   |   |
| Principal  payments of capital leases                                            |       | (104,297                    | )          | — |   |
| Proceeds from  issuance of note payable to Tmobiles                              |       |                        |       | 3,662,428 |   |
| Proceeds of  issuance of subordinated loan                                       |       | 11,743,256                  |       | — |   |
| Principal  payments of long term debt                                            |       | (10,698,408                 | )          | (8,525,338 | ) |
| Tender Offer  payments                                                           |       |                        |       | (1,189,150 | ) |
| Net cash used in  financing activities                                           |       | 940,551                     |       | (6,052,060 | ) |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                    |       | (612,272                    | )          | 11,059,529 |   |
| **CASH AND CASH EQUIVALENTS,**beginning  of period                               |       | 10,612,430                  |       | 1,007,353 |   |
| **CASH AND CASH EQUIVALENTS,**end  of period                                     |       | $                           | 10,000,158 |   | $ | 12,066,882 |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOWS  INFORMATION:**                         |       |                        |       | $ | — |   |
| **INTEREST PAID**                                                                |       | $                           | 4,349,229  |   | $ | 4,430,435 |   |

 

**(Continued)**

** **

 

6

----

 

**(Continued)**

** **

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

 

 

Non-Cash investingand financing activities during the period ended June 30, 2005 are as follows:

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

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

 
| (b) | The Partnership’s  subsidiary acquired equipment with a cost of  $511,785 under a capital lease  financing agreement.                                           |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (c) | The Partnership  amortized $60,632 pertaining to the sales and leaseback transaction deferred  gain.                                                                      |
| (d) | The Partnership sold  property and equipment with a coast of $216,383 and accumulated depreciation  of $131,831 for the amount of $8,000; resulting in a loss of $76,552. |
| (e) | The Partnership through  its subsidiary wrote-off an account payable of $207,300.                                                                                         |

 

 

During the periodended June 30, 2004, interest expense from TEM-PR totaling $395,588 wascapitalized into long-term debt.

 

 

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

 

 

7

----

 

 

CLEARCOMM, L.P.

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

 

1.                                       BASISOF PRESENTATION AND INTRODUCTION

 

The unaudited interimconsolidated financial statements presented herein have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial statements and with the instructions to Form 10-Qand Regulation S-X pertaining to interim financial statements.  Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The unaudited interim consolidated financialstatements reflect all adjustments, consisting of normal recurring adjustmentsand accruals which, in the opinion of management, are considered necessary fora fair presentation of the Partnership’s financial position at June 30, 2005and results of operations and cash flows for the three-month periods ended June30, 2005 and 2004.  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/A forthe year ended December 31, 2004. Results of operations for interim periods are not necessarily indicativeof the results that may be expected for the full year.

 

ClearComm, L.P. (the“Partnership”) is a limited partnership organized on January 24, 1995under the laws of the State of Delaware. The Partnership was formed to file applications with the FederalCommunications Commission (“FCC”) under personal communications service (“PCS”)frequency Block C, originally restricted to minorities, small businesses anddesignated entities, to become a provider of broadband PCS.  The Partnership will terminate on December 31,2005, or earlier upon the occurrence of certain specified events as detailed inthe 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,the Partnership was granted the PCS Block C licenses for Puerto Rico andcertain cities in California.

 

NewComm Wireless Services, Inc.(“NewComm”)

 

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

 

On February 4, 1999,the Partnership and NewComm entered into an agreement with Telefónica Móviles,S.A. (“TEM”), whereby the Partnership contributed its two Puerto Rico Licensesto NewComm and TEM provided NewComm a $19,960,000 loan to develop the PuertoRico Licenses.  TEM’s loan was madepursuant to a secured convertible promissory note (the “Note”) which was convertibleinto 49.9% of NewComm’s equity.  The Notewas converted to equity by a successor and affiliate of TEM, Telefónica MóvilesPuerto Rico, Inc. (“TEM Puerto Rico”), on April 20, 2005 pursuant tothe Settlement Agreement described below in Part I,Item 2.

 

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

 

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

 

On March 2, 2002, the Partnership soldapproximately 4.08% of NewComm to a group of investors led by Fleet DevelopmentVentures (“The Fleet Group”) 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 $10M each to close the ProjectFinance Facility.  The Partnershipbelieves it has obtained financing alternatives, together with TEM, to provideNewComm with the capital necessary for the Project Finance Facility and to fundNewComm’s operations.

 

 

8

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As a result of theSettlement Agreement, the Partnership has obtained the appropriate financingsources to provide NewComm with the capital necessary for the Project FinanceFacility and to fund NewComm’s operations. In addition, NewComm’s Shareholders possess the following ownershipinterests in NewComm, as of the date of effectiveness of the SettlementAgreement:

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

 

California Licenses

 

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

 

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

 

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

 

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

 

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

 

2.             FINANCING REQUIREMENTS

 

The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction of liabilitiesin the normal course of business.  ThePartnership commenced operations in September 1999 and has incurred lossesamounting to $4.3 million for the three-month period ended June 30, 2005 andincurred operating losses of $5 million for the three month period ended June30, 2004.  It also has working capital of$40.6 million (a deficit of $156.0 in 2004) and partners’ capital deficit of $44.8million in 2005 compared to $124.0 million in 2005. The significant reductionof the Partner’s capital deficit is due to additional capital contributed forthe conversion of certain payables and accrued expenses as described on theSettlement agreement described in Part 1, Item 2.   ThePartnership is likely to continue incurring losses until such time as itssubscriber base generates 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 an 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

 

 

9

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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 due under the contract under a formalfinancing agreement. OnJune 4, 2003, NewComm entered into a Senior Credit Agreement with Lucent,which extended the maturity date of the $51.5 million remaining on the creditfacility to September 30, 2009, with interest at 8% annually.  InJuly 2005, Lucent sold the Note, which at the time had a principal balance of$48.5 million, to D.B. Zwirn & Co. (“D.B. Zwirn”).  The Company signeda Forbearance Agreement with D.B Zwirn on July 14, 2005. NewComm is currentlynegotiating a new credit facility with D.B. Zwirn and expects to close ona new credit before August 31, 2005.The Company expects that the principal balance under the new credit agreementwith D.B. Zwirn will be $53.3 million, with a term until January 31, 2006 and afloating interest rate of LIBOR plus 700 basis points. The facility includes$48.5 million of principal, $2.0 million of accrued interest and $4.0 millionadditional funding for working capital and general purpose needs.

 

On June 20,2003, an agreement restructuring Alcatel’s debt was executed.  Alcatel’s credit is now $1.3 million at 6.5%payable over a three year period.

 

Pursuant to theSettlement Agreement, TEM has agreed to undertake all commercially reasonable actionsnecessary to refinance the Bridge Loan on or before April 20, 2008, with atwo-year term loan maturing on or before April 20, 2010 (“The Long-TermFinancing”) and to cause Telefónica S.A., its parent company (“TEF”), subjectto the satisfaction of certain conditions, to guarantee the prompt and completepayment and performance by NewComm when due of the Long-Term Financing.  The Long-Term Financing guarantee will bejointly and severally guaranteed by the Partnership.

 

With respect to the FCCdebt which originated when the Partnership acquired its PCS licenses, and forwhich the Partnership owes the United States federal government approximately $24.0million plus accrued interest at 6.5% as of June 30, 2005, TEM has secured therepayment of this debt by means of a subordinated line of credit guaranteed asdescribed on the Settlement Agreement.

 

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

 

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

 

Management believes thatthe Partnership will comply with all the requirements for obtaining thefinancing and believes that cash and cash equivalents on hand, anticipatedgrowth in revenues, vendor financing and the permanent financing will beadequate to fund its operations during such period.  However, in the absence of improved operatingresults and cash flows, and without the closing of its contemplated 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 adjustmentsthat might result from the outcome of this uncertainty.

 

3.                                       **Recent accounting pronouncements:**

 
| a)     |   | In January 2003, the FASB issued FASB  Interpretation No. 46, “Consolidation of Variable Interest Entities”  (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin  No. 51, “Consolidated Financial Statements” and provides guidance on the  identification of entities for which control is achieved through means other  than through voting rights (“variable interest entities” or “VIE’s”) and how  to determine when and which business enterprise should consolidate the VIE.  This new model for consolidation applies to an entity which either  (1) the equity investors (if any) do not have a controlling financial  interest or (2) the equity investment at risk is insufficient to finance  that entity’s activities without receiving additional subordinated financial  support from other parties. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   | In  December 2003, the FASB issued a revision of the interpretation No. 46  to defer the implementation, clarify some of its provisions and to exempt  certain entities from its requirements. Management does not expect that the  application of this standard will have any effect on the Company’s  consolidated results of operations or its financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| b)     |   | In  May 2003, the Financial Accounting Standards Board issued Statement of  Financial Accounting Standards No. 150 (FAS-150), Accounting for Certain  Financial Instruments with Characteristics of Both Liabilities and Equity.  FAS-150 addresses certain financial instruments that, under previous  guidance, could be accounted for as equity, but now must be classified as  liabilities in statements of financial position. These financial instruments  include: (1) mandatory redeemable financial instruments,  (2) obligations to repurchase the issuer’s equity shares by transferring  assets, and (3) obligations to issue a variable number of shares. With  limited exceptions, FAS-150 is

                                                                                                                                                                                  |

 

 

10

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|   |   | effective  for financial instruments entered into or modified after May 31, 2003,  and otherwise is effective at the beginning of the first interim period  beginning after June 15, 2003. The Company does not expect that the  adoption of FAS-150 will have a material impact on its consolidated results  of operations and financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| c)     |   | In  April 2003, the Financial Accounting Standards Board issued Statement of  Financial Accounting Standards No. 149 (FAS-149), Amendment of Statement  133 on Derivative Instruments and Hedging Activities. FAS-149 amends and  clarifies accounting for derivative instruments, including certain derivative  instruments embedded in other contracts, and for hedging activities under FAS  133, Accounting for Derivative Instruments and Hedging Activities. FAS-149 is  effective for contracts entered into or modified after June 30, 2003.  The Company does not expect that the adoption of FAS-149 will have an impact  on its consolidated results of operations and financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| d)     |   | In  December 2003, the Financial Accounting Standards Board issued a revised  Statement of Financial Accounting Standards No. 132 (FAS-132R),  Employers’ Disclosures about Pensions and Other Postretirement Benefits,  which replaces the previously issued Statement. FAS-132R increases the  existing disclosures for defined benefit pension plans and other defined  benefit postretirement plans. However, it does not change the measurement or  recognition of those plans as required under FAS-87, Employers’ Accounting for  Pensions, FAS-88, Employers’ Accounting for Settlements and Curtailments of  Defined Benefit Pension Plans and for Termination Benefits, and FAS-106,  Employers’ Accounting for Postretirement Benefits Other Than Pensions.  Specifically, FAS-132R requires companies to provide additional disclosures  about pensions plan assets, benefit obligations, cash flows, and benefit  costs of defined benefit pension plans and other defined benefit  postretirement plans. Also, companies are required to provide a breakdown of  plan assets by category, such as debt, equity and real estate, and to provide  certain expected rates of return and target allocation percentages for these  asset categories. The Company is currently evaluating the effect of this  pronouncement on its financial statement disclosures. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| e)     |   | 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 of  Debt*** – ***an amendment of APB  Opinion No. 30***, which required all gains and losses from  extinguishments of debt to be aggregated and, if material, classified as an  extraordinary item, net of related income tax effect. As a result, the  criteria in Opinion 30 will now be used to classify those gains and losses.  SFAS No. 145 becomes effective for financial statements issued on or  after May 15, 2002. Requirements and guidance of SFAS No. 145 were  applied in connection with the write-off of the FCC debt discount. Please  refer to Note 14 (c).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| f)     |   | In June 2002, the  FASB issued SFAS No. 146, ***Accounting for Costs  Associated with Exit or Disposal Activities***. SFAS No. 146  requires that a liability for a cost associated with an exit or disposal  activity to be recognized and measured initially at fair value only when the  liability is incurred. SFAS No. 146 also establishes that fair value is the  objective for initial measurement of the liability. SFAS No. 146 applies  to costs associated with an exit activity but does not involve an entity  newly acquired in a business combination or with a disposal activity covered  by SFAS No. 144. SFAS No. 146 does not apply to costs associated  with a retirement covered by SFAS No. 143. SFAS No. 146 became  effective for exit or disposal activities that were initiated after  December 31, 2002. The implementation of SFAS No. 146 did not have  a material effect on the Partnership’s consolidated financial position or  results from operations.                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| g)     |   | In December 2002,  the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting  and Disclosure Requirements for Guarantees, Including Indirect Guarantees of  Indebtedness of Others.” For a guarantee subject to FASB Interpretation  No. 45, a guarantor is required to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | Measure and recognize  the fair value of the guarantee at inception (for many guarantees, fair value  will be determined using a present value method); and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | Provide new disclosures  regarding the nature of any recourse provisions or assets held as payments,  the current carrying amount of the guarantee liability, and the nature of any  recourse provisions or assets held as collateral that could be liquidated and  allow the guarantor to recover all or a portion of its payments in the event  guarantee payments are required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | The disclosure  requirement of this Interpretation is effective for financial statements for  fiscal years ending after December 15, 2002; it did not have any effect  on the Partnership’s financial statements. The initial recognition and  measurement provisions are effective prospectively for guarantees issued or  modified on or after January 1, 2003, which did not have any effect on  the Partnership’s financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

 

11

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4.             LEGAL PROCEEDINGS

 

##### From time to time the Partnership is involved inlitigation arising from the ordinary course of business, some of which isongoing.  The General Partner does notbelieve that any litigation involving the Partnership will have a materialadverse effect on the Partnership’s business or financial condition.

#####  

ITEM2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-looking Statements

 

This Quarterly Report on Form 10-Q/A and futurefilings 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.

 

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

 

Introduction

 

The information containedin this Part I, Item 2 updates, and should be read in conjunction with,information set forth in Part II, Items 7 and 8, in the Company’s AnnualReport on Form 10-K/A for the year ended December 31, 2004, inaddition to the interim consolidated financial statements and accompanyingnotes presented in Part 1, Item 1 of this Quarterly Report onForm 10-Q/A.

 

The Partnership’spreviously issued financial statements as of and for the years ended December31, 2004 and 2003 have been restated to correct the accounting for the methodused to record the amount of loss incurred on the sale of handsets tocustomers.  Effective January 1, 2003,the Partnership changed its method of accounting for the loss on the sales ofhandsets to customers, from the recognition of such anticipated future loss atthe time of sale, to the establishment of an inventory reserve account for thatloss at the end of each accounting period. After discussions with staff members from the Securities and ExchangeCommission (SEC) of their interpretation of correct accounting treatment of theinherent losses in the value of the Partnership’s handset inventory at the endof an accounting period, the Partnership’s management has decided tore-establish the previous method for inventory pricing.  Under the reestablished method, the loss onhandset sales is recognized at the time of sale.

 

The Partnership was formed in January 1995 and ismanaged by its General Partner, SuperTel Communications Corp.  The Partnership was organized to acquire,own, consult and operate personal communication services PCS licenses in theBlock C band and to take advantage of the benefits that the FCC has set asidefor entrepreneurs.  The Partnership ownsthe Puerto Rico Licenses, which consist of two 15 MHz PCS licenses coveringPuerto Rico. The California Licenses, which consist of four 15 MHz PCS licensescovering the California cities of Eureka, Redding, Modesto, and Merced weresold and transferred to Metro PCS on April 15, 2004 for $10,900,000 cashpayment. The license covering Visalia-Porterville, California, had beenpreviously sold and transferred to Leap Wireless on June 8, 2001 inexchange for $9,500,000 cash payment.

 

The Partnership commenced commercial operations of itsPCS network in Puerto Rico on September 24, 1999 when it began offeringwireless services in Puerto Rico to the public. Prior to that date, its income had consisted of interest earnings only.

 

The Partnership established its Puerto Rico network byforming a wholly owned subsidiary, NewComm, on January 29, 1999.  On February 4, 1999, the Partnership andNewComm entered into an agreement with TEM, whereby the Partnership

 

12

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

 

Entry into Material Definitive Agreements

 

The transaction among the Partnership, NewComm, andTEM Puerto Rico was consummated on April 20, 2005 pursuant to the terms ofthe Settlement Agreement.  Some of themost important provisions of the Settlement Agreement are summarized below:

 

•                  The Partnership, NewComm, and NewComm’sshareholders, on the one hand, and TEM, on the other hand, agreed to releasecertain claims each may have against the other in connection with theperformance of certain contracts previously entered into by the parties.

 

•                  NewComm will capitalize the $73.8 millionloan (including interest) previously made to it by TEM and TelefónicaMóviles S.A. and will issue a convertible promissory note to thePartnership in the amount of the loan.

 

•                  The effectiveness of the SettlementAgreement was conditioned upon the satisfaction of certain events, includingthe following: TEM Puerto Rico becoming the holder of 49.9% of NewComm’scapital stock; the termination of the Joint Venture Agreement, the ManagementAgreement, and the Technology Transfer Agreement, each of which involvedNewComm and included TEM as a party; the amendment of the Stock PurchaseAgreement, the Sale Agreement, dated March 12, 2002 (the “Sale Agreement”),among NewComm, TEM Puerto Rico, the Partnership, and the other shareholders ofNewComm, and the Shareholders Agreement, dated March 12, 2002 (the “ShareholdersAgreement”), among the Partnership, NewComm, TEM Puerto Rico, and the othershareholders of NewComm; TEM’s entry into a line of credit to be used to paythe balance of NewComm’s indebtedness to the FCC; and an extension orrefinancing of NewComm’s bridge loan from ABN Amro Bank, N.V.

 

•                  In the event that as ofSeptember 30, 2006, NewComm’s net income, as determined in accordance withU.S. generally accepted accounting principles and measured on the basis ofEBITDA for the twelve-month period then ended, is less than $10,970,000, TEMmay require that the Partnership, and NewComm’s shareholders, together with TEMPuerto Rico, sell their respective interests in NewComm to a third party.

 

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

 

 On April 20, 2005, the Stock PurchaseAgreement was amended in order to, among other things, extend by 3 1⁄2years, to approximately October 2008, TEM Puerto Rico’s option to buy amajority interest in NewComm. In addition, the Sale Agreement was amended inorder to clarify the procedures that would apply upon the sale of NewComm to athird-party purchaser in the event that neither TEM Puerto Rico, nor thePartnership exercised its rights under the Sale Agreement to purchase NewComm.

 

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

 

13

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Results of Operations

 

Three-monthperiod ended June 30, 2005 compared with three-month period endedJune 30, 2004.

 

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

 

 

| ** **                                              | ** ** | **Three-Month Periods Ended** | ** **     | ** **     | ** ** |
|---------------------------------------------------------|------------|-------------------------------|----------------|----------------|------------|
| ** **                                              | ** ** | **June 30,**                  | ** **     | ** **     | ** ** |
| ** **                                              | ** ** | **2005**                      | ** **     | **2004**       | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | ** **                    | ** **     | **(Restated)** | ** ** | ** ** | ** ** |
| **Revenues:**                                           |       |                          |           |           |       |   |   |
| **Service  revenues**                                   | ** ** | **$**                         | **22,686,968** | ** **     | **$**      | **25,906,148** | ** ** | **-12** | **%** |
| **Handsets  and accessories sales**                     | ** ** | **1,169,624**                 | ** **     | **1,228,194**  | ** ** | **-5** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Total Revenues**                                      | ** ** | **23,856,592**                | ** **     | **27,134,342** | ** ** | **-12** | **%** |
| **Expenses:**                                           |       |                          |           |           |       |   |   |
| **Operating  expenses, excluding depreciation expense** | ** ** | **20,809,331**                | ** **     | **26,356,732** | ** ** | **-21** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Income (loss) from operations**                       | ** ** | **3,047,261**                 | ** **     | **777,610**    | ** ** | **292** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Interest expense**                                    | ** ** | **(2,913,539**                | **)**          | **(2,321,032** | **)**      | **26** | **%** |
|                                                    |       |                          |           |           |       |   |   |
| **Income (loss) before other income (expense)**         | ** ** | **$**                         | **133,722**    | ** **     | **$**      | **(1,543,422** | **)** | **-109** | **%** |

 

 

Revenues

 

The Partnership’s revenues for the three-month periodended June 30,-2005 decreased by 12% from $27.1 million to $23.9 ascompared to the same period in 2004. Total revenues include service as well ashandset and accessories revenues. Service revenues for the three-month period ended June 30, 2005decreased by 12% when compared to the same period in 2004 while handset andaccessories sales decreased by 5%.  Thedecrease in handsets and accessories revenues is mainly due to handset unitspricing adjustments.  The decrease inservice revenues is related to tighter credit policies and a reduction in thePartnership’s customer base during the second quarter of 2005.

 

14

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Expenses

 

The following table shows the variances for the three month periodended June 30, 2005 as compared to the same period in 2004

 

 

| ** **                           | ** ** | **Three-months ended June 30,** | ** ** | **%**          | ** ** |
|--------------------------------------|------------|---------------------------------|------------|----------------|------------|
| **Expenses**                         | ** ** | **2005**                        | ** ** | **2004**       | ** ** | **Change** | ** ** |
| ** **                           | ** ** | ** **                      | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                      | ** ** | ** **     | ** ** | ** ** | ** ** |
| Cost of handset and accessories      |       | $                               | 4,362,624  |           | $          | 5,652,167 |   | -23 | % |
| Interconnection expense              |       | 807,907                         |       | 1,065,425      |       | -24 | % |
| Sales and dealers commissions        |       | 1,891,224                       |       | 2,533,551      |       | -25 | % |
| Salaries and benefits                |       | 3,859,776                       |       | 3,955,461      |       | -2 | % |
| Depreciation                         |       | 4,524,200                       |       | 4,388,884      |       | 3 | % |
| Advertising expense                  |       | 1,382,099                       |       | 1,857,480      |       | -26 | % |
| Legal and professional services      |       | 287,520                         |       | 851,391        |       | -66 | % |
| Provision for doubtful accounts      |       | 3,293,557                       |       | 2,365,150      |       | 39 | % |
| Rent expense                         |       | 1,824,870                       |       | 1,731,547      |       | 5 | % |
| Taxes other than income              |       | 529,874                         |       | 841,109        |       | -37 | % |
| Network Operation and Maintenance    |       | 2,011,529                       |       | 1,726,390      |       | 17 | % |
| Other expenses                       |       | -136,634                        |       | 2,426,762      |       | -106 | % |
| Management fee to General Partner    |       | 68,750                          |       | 68,750         |       | 0 | % |
| Services rendered by related parties |       | 626,235                         |       | 1,258,326      |       | -50 | % |
| Loss on Sale of California License   |       | —                          |       | 25,832         |       | -100 | % |
|                                 |       |                            |       |           |       |   |   |
| Total expenses                       |       | $                               | 25,333,531 |           | $          | 30,748,225 |   | -18 | % |

 

 

Expenses for the three-month period endedJune 30, 2005 totaled $25,333,531 as compared to $30,748,225 for the sameperiod in 2004.  There was an overallreduction of 18% in operating expenses or $5.4 million during the secondquarter of 2005.

 

The overall decrease in expenses is mainly due todecreases in the cost of handsets and accessories sold, interconnectionexpenses, sales and dealers commissions, legal and professional fees, and taxesother than income.

 

Income from Operations

 

Income from operations reflects the ability of thePartnership to generate positive cash flows from its operations, which does nottake into consideration expenses such as amortization, depreciation andinterest that must be reported for generally accepted accounting principles(GAAP) to arrive at the net income or loss.

 

Income from operations for the three month periodended June 30, 2005 of $3,047,261 shows a significant increase of 292% or$2.3 million as compared to the income from operations for the same period in2004.  This increase in income fromoperations is related to overall 18% decrease in expenses.

 

Interest expense for the three month period ended June 30, 2005 of$2.9 million ($2.3 million in 2004) reduce the income from operations andresult in net income before other income and expenses of $133,722 for the secondquarter of 2005 and a loss of $1,543,422 for the same period in 2004; anoverall reduction in net loss of 109% when compared to 2004.  Depreciation expense

 

15

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of $4.4 million ($4.3 million in 2004), a non-cash itemfurther reduces the book income to $4.3 million in 2005 ($6 million in 2004).

 

16

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Six-month period ended June 30, 2005 comparedwith six-month period ended June 30, 2004.

 

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

 

 

| ** **                                                                       | ** ** | **Six-Month Periods Ended** | ** **     | ** **     | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|----------------|----------------|------------|
| ** **                                                                       | ** ** | **June 30,**                | ** **     | ** **     | ** ** |
| ** **                                                                       | ** ** | **2005**                    | ** **     | **2004**       | ** ** | **Change** | ** ** |
| ** **                                                                       | ** ** | ** **                  | ** **     | **(Restated)** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                    |       |                        |           |           |       |   |   |
| **Service revenues**                                                             | ** ** | **$**                       | **45,565,488** | ** **     | **$**      | **52,784,373** | ** ** | **-14** | **%** |
| **Handsets and accessories sales**                                               | ** ** | **1,907,084**               | ** **     | **2,664,790**  | ** ** | **-28** | **%** |
|                                                                             |       |                        |           |           |       |   |   |
| **Total Revenues**                                                               | ** ** | **47,472,572**              | ** **     | **55,449,163** | ** ** | **-14** | **%** |
| **Expenses:**                                                                    |       |                        |           |           |       |   |   |
| **Operating  expenses, excluding depreciation expense**                          | ** ** | **42,670,000**              | ** **     | **52,618,142** | ** ** | **-19** | **%** |
|                                                                             |       |                        |           |           |       |   |   |
| **Income (loss) from operations**                                                | ** ** | **4,802,572**               | ** **     | **2,831,021**  | ** ** | **70** | **%** |
|                                                                             |       |                        |           |           |       |   |   |
| **Interest expense**                                                             | ** ** | **(5,968,121**              | **)**          | **(4,687,799** | **)**      | **27** | **%** |
|                                                                             |       |                        |           |           |       |   |   |
| **Income  (loss) before other income (expense), excluding depreciation expense** | ** ** | **$**                       | **(1,165,549** | **)**          | **$**      | **(1,856,778** | **)** | **-37** | **%** |

 

 

 

Revenues

 

ThePartnership’s revenues for the six-month period ended June 30, 2005totaled $47,472,572 as compared to $55,449,163 for the same period in 2004. Revenues for the six-month period ended June 30, 2005 included $45,565,488in service revenues and $1,907,084 in handset and accessories sales generatedfrom NewComm’s wireless operations, as compared to $52,784,373 and $2,664,790 respectively,for the same period in 2004.  The 14% decreasein service revenues is consistent with a decrease in the Partnership’s customerbase which was offset by an increase in airtime on contract subscribers.  The decrease in handset and accessories salesis related to pricing adjustments and a slight reduction on the handset subsidyon the handsets sold.

 

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Expenses

 

The following table shows the variances for the six month period endedJune 30, 2005 as compared to the same period in 2004:

 

| ** **                           | ** ** | **Six-months ended June 30,** | ** ** | **%**          | ** ** |
|--------------------------------------|------------|-------------------------------|------------|----------------|------------|
| **Expenses**                         | ** ** | **2005**                      | ** ** | **2004**       | ** ** | **Variances** | ** ** |
| ** **                           | ** ** | ** **                    | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Cost of handset and accessories      |       | 9,047,636                     |       | 11,591,131     |       | -22 | % |
| Interconnection expense              |       | 1,603,484                     |       | 2,040,979      |       | -21 | % |
| Sales and dealers commissions        |       | 3,925,924                     |       | 5,380,383      |       | -27 | % |
| Salaries and benefits                |       | 7,773,695                     |       | 7,989,871      |       | -3 | % |
| Depreciation                         |       | 9,095,668                     |       | 8,693,346      |       | 5 | % |
| Advertising expense                  |       | 2,092,602                     |       | 3,314,146      |       | -37 | % |
| Legal and professional services      |       | 679,302                       |       | 1,564,743      |       | -57 | % |
| Provision for doubtful accounts      |       | 5,482,126                     |       | 4,711,950      |       | 16 | % |
| Rent expense                         |       | 3,617,963                     |       | 3,367,372      |       | 7 | % |
| Taxes other than income              |       | 1,572,106                     |       | 1,849,647      |       | -15 | % |
| Network Operation and Maintenance    |       | 3,952,237                     |       | 3,292,937      |       | 20 | % |
| Other expenses                       |       | 1,396,574                     |       | 4,777,609      |       | -71 | % |
| Management fee to General Partner    |       | 137,500                       |       | 137,500        |       | 0 | % |
| Services rendered by related parties |       | 1,418,851                     |       | 2,586,220      |       | -45 | % |
| Loss on Sale of California License   |       | —                        |       | 25,832         |       | -100 | % |
|                                 |       |                          |       |           |       |   |   |
| Total expenses                       |       | 51,795,668                    |       | 61,323,666     |       | -16 | % |

 

 

Expenses for the six-month period ended June 30,2005 totaled $51,795,668 as compared to $61,323,666 for the same period in 2004. During the six-month period ended June 30, 2005, the Partnership’sexpenses decrease by 16% due to pricing adjustments which reduced the handsetsubsidy on the purchase of handsets and contributed to the 22% reduction in costof handsets and accessories.  ThePartnership managed to reduce overall expenses by implementing new operationsprocedures and eliminating various outsourcing contracts related to inventorymanagement and customer service.

 

Income from Operations

 

Income from operations reflects the ability of thePartnership to generate positive cash flows from its operations, which does nottake into consideration expenses such as amortization, depreciation andinterest that must be reported for generally accepted accounting principles(GAAP) to arrive to the net income or loss.

 

Income from operations for the six month period endedJune 30, 2005 of $4.8 shows an increase of 70% as compared to the incomefrom operations for the same period in 2004. This increase in income from operations is mainly due to the overalldecrease in expenses and to the reduction in the cost of acquiring newcustomers.

 

Interest expense for the six- month period endedJune 30, 2005 of $6.0 million ($4.7 million in 2004) reduce income fromoperations and result in a net loss before other income (expense) of $1.2million for the second quarter of 2005 ($1.9 million in 2004); an overallreduction in net loss before other income (expense) of 37% when compared to 2004.  Depreciation expense of $9.0 million($8.7million in 2004) reduces the Partnership’s book income but as a non-cash item it does not represent additionaldisbursements for operations.

 

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

 

Liquidity and Capital Resources

 

Asof June 30, 2005, the Partnership had cash and cash equivalents amountingto $10 million which are mostly related to proceeds from the sale of theCalifornia licenses to Metro PCS in the second quarter, 2004 for a cash paymentof $10.9 million.

 

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                As part of theagreement with TLD, NewComm entered into a contract with Lucent Technologies,Inc. (“Lucent”) that required Lucent to build a network that uses the CodeDivision Multiple Access (“CDMA”) protocol. The total cost of the original network was approximately $125million.  During 2000, NewComm’smanagement and Lucent agreed on formally extending the payment of up to $61.0million of the total amount of network construction payable, at the time, undera formal financing agreement.  OnJune 4, 2003, NewComm entered into a Senior Credit Agreement with Lucent,which extended the maturity date of the $51.5 million remaining on the creditfacility to September 30, 2009, with interest at 8% annually.  InJuly 2005, Lucent sold the Note, which at the time had a principal balance of$48.5 million, to D.B. Zwirn & Co. (“D.B. Zwirn”).  The Company signeda Forbearance Agreement with D.B Zwirn on July 14, 2005 and was later extendeduntil August 22, 2005. NewComm is currently negotiating a newcredit facility with D.B. Zwirn and expects to close on a newcredit before August 31, 2005. The Company expects that the principal balanceunder the new credit agreement with D.B. Zwirn will be $53.3 million, with aterm until January 31, 2006 and a floating interest rate of LIBOR plus 700basis points. The facility includes $48.5 million of principal, $2.0 million ofaccrued interest and $4.0 million additional funding for working capital andgeneral purpose needs.

 

In addition, the Partnership owes the United Statesfederal government approximately $24 million plus accrued interest at 6.5% inconnection with the acquisition of its PCS licenses. TEM has secured the repaymentof this debt by means of a subordinated line of credit guaranteed as describedon the Settlement Agreement.

 

On March 2, 2002, the Partnership sold 4.08% ofNewComm to a group of investors led by Fleet Development Ventures for $13million.  During the second quarter of2002, the Partnership and TLD contributed approximately $9 million each toNewComm in the form of equity and convertible debt, respectively.  The Partnership believes it has obtainedsufficient funds, together with TLD, to provide NewComm with the capitalnecessary for the Project Finance Facility and to fully fund NewComm’soperations.

 

The Partnership anticipates that earnings and cashdistributions derived from its Puerto Rico Network, interim and permanentfinancing and, if necessary, additional capital calls from its Investors oraccessing the public capital markets, should provide it with the liquidity tomeet its obligations.

 

ITEM3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Partnership’s exposure to market risk throughderivative financial instruments and other financial instruments is notmaterial because the Partnership does not use derivative financial instrumentsand 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, 2005, the Partnership hadcash equivalents and short-term investments of approximately $10,000,000consisting of cash and highly liquid, short-term investments in money marketfunds.

 

ThePartnership’s cash and cash equivalents will increase or decrease by animmaterial amount if market interest rates increase or decrease, and therefore,its exposure to interest rate changes has beenimmaterial.  The Partnership’s loans payableto the FCC have a fixed interest rate of 6.5% and therefore are not exposed tointerest rate risks.  The TEM Noterelating to indebtedness of NewComm bears interest at the floating rate of the90-day LIBOR plus 1.5% and has been extended to December 2004.

 

Anagreement restructuring Lucent’s outstanding debt was executed on June 4,2003.  In July 2005, Lucent sold the Note, which at the timehad a principal balance of $48.5 million, to D.B. Zwirn & Co. (“D.B. Zwirn”). The Company signed a Forbearance Agreement with D.B Zwirn on July 14, 2005 andwas later extended until August 22, 2005. NewComm is currently negotiating anew credit facility with D.B. Zwirn and expects to close on anew credit agreement before August 31, 2005.

 

Controls and Procedures

 

The Partnership’s Chief Executive Officer, Javier O.Lamoso, and the Partnership’s Chief Financial Officer, Edileen Salicrup, haveevaluated the Partnership’s disclosure controls and procedures within 90 daysof the filing of this report.

 

Mr. Lamoso and Ms. Salicrup have concluded that thePartnership’s disclosure controls and procedures provide reasonable assurancethat the Partnership 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 significant changes in the Partnership’sinternal controls that have affected these controls subsequent to the date oftheir evaluation.  The Partnership iscurrently improving internal controls on its billings and collections proceduresand continues to assess other areas in which internal controls may be extendedor modified.

 

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PART II: OTHER INFORMATION

 

ITEM1.  LEGAL PROCEEDINGS

 

Informationregarding legal proceedings is disclosed in Part I, Item 1, Notes to InterimConsolidated Financial Statements (unaudited), Section 4, and is herebyincorporated into Part II, Item 1 by this reference.

 

ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)           List of Exhibits

 
| Exhibit 31.1: | Certification of Chief Executive Officer                                                         |
|---------------|--------------------------------------------------------------------------------------------------|
|          |                                                                                             |
| Exhibit 31.2: | Certification of Chief Financial Officer                                                         |
|          |                                                                                             |
| 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 |

 

 

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

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|                       |   | ClearComm, L.P.               |
|----------------------------|--------|-------------------------------|
|                       |   |                          |
|                       |   |                          |
|                       | By:    | SuperTel Communications Corp. |
|                       |   |                          |
|                       |   |                          |
| Date: August 24, 2005 |   | By:                           | /s/ Javier O. Lamoso |
|                       |   | Name: Javier O. Lamoso        |
|                       |   | Title: President              |

 

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