** **

**Securitiesand Exchange Commission**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****          ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2004**

 

**o****          ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from        to        **

 

**Commissionfile number 0-28362**

 

**ClearComm, L.P.**

(Exact name of registrant asspecified in its charter)

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

 

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

Yes o  No ý

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

 

 

----

 

ClearComm, L.P.

INDEX

 
| PART I. FINANCIAL INFORMATION. |                                                                                                                                                  |
|--------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                                                  |
| Item 1.                        | Financial Statements                                                                                                                                  |   |
|                           |                                                                                                                                                  |   |
|                           | Consolidated Statements of Assets,  Liabilities and Partners’ Deficit as of September 30, 2004 (unaudited) and  December 31, 2003 (audited) |   |
|                           |                                                                                                                                                  |   |
|                           | Consolidated Statements of Revenues and  Expenses for the three-month and nine-month periods ended September 30, 2004  and 2003 (unaudited)           |   |
|                           |                                                                                                                                                  |   |
|                           | Consolidated Statements of Changes in  Partners’ Deficit for the nine-month period ended September 30, 2004  (unaudited)                         |   |
|                           |                                                                                                                                                  |   |
|                           | Consolidated Statements of Cash Flows for  the nine-month periods ended September 30, 2004 and 2003 (unaudited)                                       |   |
|                           |                                                                                                                                                  |   |
|                           | Notes to Interim Consolidated Financial  Statements (unaudited)                                                                                       |   |
|                           |                                                                                                                                                  |   |
| Item 2.                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                           |   |
|                           |                                                                                                                                                  |   |
| Item 3.                        | Quantitative Disclosure About Market Risk                                                                                                             |   |
|                           |                                                                                                                                                  |   |
| Item 4.                        | Controls and Procedures                                                                                                                               |   |
|                           |                                                                                                                                                  |   |
| PART II                        | OTHER INFORMATION.                                                                                                                                    |   |
|                           |                                                                                                                                                  |   |
| Item 5.                        | Legal Proceedings                                                                                                                                     |   |
|                           |                                                                                                                                                  |   |
| Item 6.                        | Exhibits and Reports on Form 8-K                                                                                                                      |   |
|                           |                                                                                                                                                  |
| Signatures.                    |                                                                                                                                                  |
|                           |                                                                                                                                                  |
|                           |                                                                                                                                                  |

 

2

----

 

PART I.   FINANCIALINFORMATION.

ITEM 1.   FINANCIALSTATEMENTS

 

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF ASSETS, LIABILITIES

AND PARTNERS’ DEFICIT

 
| ** **                                                                                                                                             | ** ** | **September 30  2004** | ** **      | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-----------------|------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(Unaudited)**        | ** **      | **(Audited)**          | ** ** |
| **ASSETS:**                                                                                                                                            | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Cash and cash equivalents**                                                                                                                          | ** ** | **$**                  | **10,244,369**  | ** **             | **$**      | **1,007,353** | ** ** |
| **Cash in escrow account**                                                                                                                             | ** ** | **—**             | ** **      | **1,500,000**          | ** ** |
| **Accounts receivable, net**                                                                                                                           | ** ** | **11,540,094**         | ** **      | **12,297,162**         | ** ** |
| **Accounts receivable, other**                                                                                                                         | ** ** | **7,062,436**          | ** **      | **7,457,028**          | ** ** |
| **Accounts receivable, insurance claim**                                                                                                               | ** ** | **403,657**            | ** **      | **—**             | ** ** |
| **Interest receivable**                                                                                                                                | ** ** | **18,500**             | ** **      | **14,000**             | ** ** |
| **Inventories, net**                                                                                                                                   | ** ** | **2,003,196**          | ** **      | **3,908,736**          | ** ** |
| **Prepaid expenses**                                                                                                                                   | ** ** | **1,613,415**          | ** **      | **672,406**            | ** ** |
| **Investment in securities**                                                                                                                           | ** ** | **—**             | ** **      | **7,338,288**          | ** ** |
| **Investment in subsidiary**                                                                                                                           | ** ** | **490,441**            | ** **      | **397,980**            | ** ** |
| **PCS licenses, net**                                                                                                                                  | ** ** | **46,750,449**         | ** **      | **57,517,974**         | ** ** |
| **Deferred financing costs**                                                                                                                           | ** ** | **638,375**            | ** **      | **774,363**            | ** ** |
| **Note receivable from officer**                                                                                                                       | ** ** | **100,000**            | ** **      | **100,000**            | ** ** |
| **Property and equipment, net**                                                                                                                        | ** ** | **80,052,781**         | ** **      | **90,753,422**         | ** ** |
| ** **                                                                                                                                             | ** ** | ** **             | ** **      | ** **             | ** ** |
| ** **                                                                                                                                             | ** ** | **$**                  | **160,917,713** | ** **             | **$**      | **183,738,712** | ** ** |
| ** **                                                                                                                                             | ** ** | ** **             | ** **      | ** **             | ** ** |
| **LIABILITIES AND PARTNERS’ DEFICIT:**                                                                                                            | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Accounts payable and accrued liabilities**                                                                                                           | ** ** | **$**                  | **44,768,897**  | ** **             | **$**      | **40,224,333** | ** ** |
| **Notes payable — short-term**                                                                                                                    | ** ** | **119,406,225**        | ** **      | **113,816,297**        | ** ** |
| **Notes payable — long-term**                                                                                                                     | ** ** | **102,268,357**        | ** **      | **117,390,809**        | ** ** |
| ** **                                                                                                                                             | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Unitholders’ capital (deficit) 2,765.20 as  of September 30, 2004 (2,906.1 as of December 31, 2003) units and 1 general  partnership interest** | ** ** | ** **             | ** **      | ** **             | ** ** |
| ** **                                                                                                                                             | ** ** | ** **             | ** **      | ** **             | ** ** |
| ** **                                                                                                                                             | ** ** | **(105,525,766**       | **)**           | **(87,692,727**        | **)**      |
| ** **                                                                                                                                             | ** ** | ** **             | ** **      | ** **             | ** ** |
| **Total liabilities and partner’s deficit**                                                                                                       | ** ** | **$**                  | **160,917,713** | ** **             | **$**      | **183,738,712** | ** ** |
| ** **                                                                                                                                             | ** ** | ** **             | ** **      | ** **             | ** ** |
| **BOOK VALUE(DEFICIT) PER UNIT**                                                                                                                       | ** ** | **$**                  | **(38,162**     | **)**                  | **$**      | **(30,165** | **)** |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

3

----

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF REVENUES AND EXPENSES 

(UNAUDITED)

 
| ** **                                              | ** ** | **Three-Month Periods Ended  September 30** | ** ** | **Nine-Month Periods Ended  September 30** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenues:**                                           |       |                                        |       |                                       |       |   |   |   |   |
| Service revenues                                        |       | $                                           | 24,156,171 |                                       | $          | 24,908,493 |   | $ | 76,940,544 |   | $ | 75,068,668 |   |
| Handset and accessories sales                           |       | 975,313                                     |       | 1,811,184                                  |       | 3,640,103 |   | 5,742,195 |   |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
|                                                    |       | 25,131,484                                  |       | 26,719,677                                 |       | 80,580,647 |   | 80,810,863 |   |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
| **Operating Cost and Expenses:**                        |       |                                        |       |                                       |       |   |   |   |   |
| Cost of handset and accessories                         |       | 5,643,781                                   |       | 4,970,662                                  |       | 16,753,699 |   | 15,888,091 |   |
| Interconnection expense                                 |       | 694,166                                     |       | 1,263,297                                  |       | 2,735,145 |   | 3,604,982 |   |
| Sales and dealers commissions                           |       | 2,731,291                                   |       | 1,338,561                                  |       | 8,111,674 |   | 4,301,766 |   |
| Salaries and benefits                                   |       | 4,018,377                                   |       | 3,743,473                                  |       | 12,008,249 |   | 12,024,659 |   |
| Advertising expense                                     |       | 1,539,925                                   |       | 1,919,543                                  |       | 4,854,071 |   | 4,917,904 |   |
| Legal and professional services                         |       | 435,118                                     |       | 2,060,866                                  |       | 1,999,861 |   | 5,964,637 |   |
| Provision for doubtful accounts                         |       | 2,168,272                                   |       | 1,063,241                                  |       | 6,880,222 |   | 7,155,290 |   |
| Rent expense                                            |       | 1,735,119                                   |       | 2,176,087                                  |       | 5,102,491 |   | 6,565,186 |   |
| Taxes other than income                                 |       | 1,048,121                                   |       | 1,595,141                                  |       | 2,897,768 |   | 4,099,977 |   |
| Network Operation and Maintenance                       |       | 1,628,648                                   |       | 779,797                                    |       | 4,921,585 |   | 2,518,987 |   |
| Other expenses                                          |       | 1,946,573                                   |       | 2,098,215                                  |       | 6,723,642 |   | 5,465,850 |   |
| Management fee to General Partner                       |       | 68,750                                      |       | 60,750                                     |       | 206,250 |   | 182,250 |   |
| Services rendered by related parties                    |       | 1,245,169                                   |       | 728,667                                    |       | 3,831,389 |   | 2,260,091 |   |
| Gain on Sale of California License                      |       | (30,000                                     | )          | —                                     |       | (4,168 | ) | — |   |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
|                                                    |       | 24,873,310                                  |       | 23,798,300                                 |       | 77,021,878 |   | 74,949,670 |   |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
| **Income (Loss) from Operations**                       |       | 258,174                                     |       | 2,921,377                                  |       | 3,558,769 |   | 5,861,193 |   |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
| **Other Income (Expense)**                              |       |                                        |       |                                       |       |   |   |   |   |
| Interest income                                         |       | 119,309                                     |       | 32,637                                     |       | 236,281 |   | 163,541 |   |
| Depreciation                                            |       | (4,565,310                                  | )          | (4,313,717                                 | )          | (13,258,655 | ) | (12,739,229 | ) |
| Loss of Write-Off in inventory                          |       |                                        |       | (2,413,119                                 | )          |   |   | (6,777,847 | ) |
| Other Income                                            |       | —                                      |       | —                                     |       | (57,720 | ) | 46 |   |
| Interest expense                                        |       | (2,464,093                                  | )          | (3,132,618                                 | )          | (7,151,892 | ) | (10,094,425 | ) |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
|                                                    |       | (6,910,094                                  | )          | (9,826,817                                 | )          | (20,231,986 | ) | (29,447,914 | ) |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
| **Net Income (Loss)**                                   |       | $                                           | (6,651,920 | )                                          | $          | (6,905,440 | ) | $ | (16,673,217 | ) | $ | (23,586,721 | ) |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
| **Net Income (Loss) Attributable to General  Partner**  |       | $                                           | (6,651,920 | )                                          | $          | (6,905,440 | ) | $ | (16,673,217 | ) | $ | (23,586,721 | ) |
|                                                    |       |                                        |       |                                       |       |   |   |   |   |
| **Net Income (Loss) Attributable to Limited  Partners** |       | $                                           | —     |                                       | $          | — |   | $ | — |   | $ | — |   |

 

The accompanying notes are integral part of these consolidatedfinancial statements.

 

4

----

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF CHANGES IN PARTNERS’ DEFICIT

(Unaudited)

FOR THE NINE-MONTH PERIOD ENDEDSEPTEMBER 30, 2004

 
| ** **                                                         | ** ** | **Limited Partners** | ** ** | **General** | ** ** | **Accumulated  Other  Comprehensive** | ** **   | ** ** | ** ** |
|--------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|---------------------------------------|--------------|------------|------------|
| ** **                                                         | ** ** | **Units**            | ** ** | **Amount**  | ** ** | **Partner**                           | ** **   | **Loss**   | ** ** | **Total** | ** ** |
| ** **                                                         | ** ** | ** **           | ** ** | ** **  | ** ** | ** **                            | ** **   | ** ** | ** ** | ** ** | ** ** |
| **BALANCES,**December  31, 2003                                    |       | 2,906.1              |       | —      |       | $                                     | (87,654,900  | )          | $          | (37,827 | ) | $ | (87,692,727 | ) |
|                                                               |       |                 |       |        |       |                                  |         |       |       |   |   |
| **Net loss for the three-month period ended  March 31, 2004**      |       | —               |       | —      |       | (4,548,748                            | )            | —     |       | (4,548,748 | ) |
|                                                               |       |                 |       |        |       |                                  |         |       |       |   |   |
| **Net loss for the three-month period ended  June 30, 2004**       |       | 2,766.2              |       |        |       | (5,472,549                            | )            | (1,151,323 | )          | (6,623,872 | ) |
|                                                               |       |                 |       |        |       |                                  |         |       |       |   |   |
| **Net loss for the three-month period ended  Sep;tember 30, 2004** |       | 2,765.2              |       |        |       | (6,651,919                            | )            | (8,500     | )          | (6,660,419 | ) |
|                                                               |       |                 |       |        |       |                                  |         |       |       |   |   |
| **BALANCES,**September  30, 2004                                   |       | 2,766.2              |       | —      |       | $                                     | (104,328,116 | )          | $          | (1,197,650 | ) | $ | (105,525,766 | ) |

 

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

 

5

----

 

ClearComm, L.P.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS 

(UNAUDITED)

 
| ** **                                                                       | ** ** | **September 30,  2004** | ** **  | **September 30,  2003** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                        |       |                    |        |                    |       |
| Net loss                                                                         |       | $                       | (16,673,216 | )                       | $          | (23,586,721 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities- |       |                    |        |                    |       |
| Depreciation and amortization                                                    |       | 13,122,667              |        | 12,652,984              |       |
| Equity in losses of unconsolidated  subsidiary                                   |       | 38,206                  |        | 105,456                 |       |
| Amortization of loan origination fees                                            |       | 135,988                 |        | 157,653                 |       |
| Amortization of discount on note payable to  FCC                                 |       | —                  |        | 1,840,133               |       |
| Write-off on discount of note payable to  FCC                                    |       | —                  |        | —                  |       |
| Inventory reserve                                                                |       | 910,427                 |        | 6,777,847               |       |
| Bad debt expense                                                                 |       | 6,880,222               |        | 7,155,290               |       |
| Gain from sale of vehicles                                                       |       | (28,327                 | )           | —                  |       |
| Loss on sale of Licenses                                                         |       |                    |        | 25,822                  |       |
| Capitalized interest                                                             |       | 632,649                 |        | —                  |       |
| Other non-cash transactions                                                      |       |                    |        | —                  |       |
| Changes in operating assets and  liabilities-                                    |       |                    |        |                    |       |
| Increase in interest receivable                                                  |       | (1,500                  | )           | (4,500                  | )          |
| Increase in accounts receivable, before  write-offs                              |       | (5,761,469              | )           | (7,024,803              | )          |
| Increase in accounts receivable, insurance  claim                                |       | (403,657                | )           |                    |       |
| Decrease in insurance claim receivable                                           |       | 270,002                 |        |                    |       |
| (Decrease) in checks drawn in excess of  bank balance                            |       | (82,469                 | )           | —                  |       |
| Decrease (increase) in inventories                                               |       | 995,114                 |        | (2,232,890              | )          |
| Increase in prepaid expenses                                                     |       | (941,009                | )           | (658,084                | )          |
| Increase accounts payable and accrued  liabilities                               |       | 4,259,771               |        | 3,806,608               |       |
| Decrease in accounts payable to related  parties                                 |       | 453,976                 |        | (1,074,936              | )          |
| (Decrease) Increase in accrued interest                                          |       | 19,207                  |        | (1,233,659              | )          |
| (Decrease) increase in deferred income                                           |       | (643,900                | )           | 345,597                 |       |
| Total adjustments                                                                |       | 19,611,718              |        | 20,882,698              |       |
| Net cash provided by operating activities                                        |       | 2,938,502               |        | (2,704,023              | )          |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                        |       |                    |        |                    |       |
| Redemption of investment securities                                              |       | 7,681,018               |        | 1,831,736               |       |
| Proceeds from the sale of vehicle                                                |       | 184,000                 |        |                    |       |
| Proceeds from the sale of California  License                                    |       | 9,400,000               |        |                    |       |
| Acquisition of property and equipment                                            |       | (2,705,647              | )           | (3,689,590              | )          |
| Payment for the investment in subsidiary                                         |       | (130,667                | )           | (261,334                | )          |
| Payments for deferred financing costs                                            |       | —                  |        | (60,000                 | )          |
| Net cash provided by (used in) investing  activities                             |       | 14,428,704              |        | (2,179,188              | )          |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                        |       |                    |        |                    |       |
| Proceeds from issuance of note payable to  Telefonica Moviles                    |       | 5,493,642               |        | 3,662,428               |       |
| Payment of note payable                                                          |       | (13,623,832             | )           | (18,269,142             | )          |
| Net cash used in financing activities                                            |       | (8,130,190              | )           | (14,606,714             | )          |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                    |       | 9,237,016               |        | (19,489,925             | )          |
| **CASH AND CASH EQUIVALENTS,**beginning  of period                               |       | 1,007,353               |        | 22,709,786              |       |
| **CASH AND CASH EQUIVALENTS,**end  of period                                     |       | $                       | 10,244,369  |                    | $          | 3,219,861 |   |
|                                                                             |       |                    |        |                    |       |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOWS  INFORMATION:**                         |       |                    |        |                    |       |
| **INTEREST PAID**                                                                |       | $                       | 2,265,518   |                    | $          | 6,314,000 |   |

 

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

 

6

----

 

ClearComm, L.P.

NOTES TOINTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.             BASISOF PRESENTATION AND INTRODUCTION

 

The unaudited interim consolidated financialstatements presented herein have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialstatements and with the instructions to Form 10-Q and Regulation S-X pertainingto interim financial statements. Accordingly, they do not include all information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements.  The unauditedinterim consolidated financial statements reflect all adjustments, consistingof normal recurring adjustments and accruals which, in the opinion ofmanagement, are considered necessary for a fair presentation of the Partnership’sfinancial position at September 30, 2004 and results of operations and cashflows for the three-month and nine-months periods ended September 30, 2004 and2003.  The unaudited interim consolidatedfinancial statements should be read in conjunction with the summary ofsignificant accounting policies and notes to consolidated financial statementsincluded in the Partnership’s Annual Report on Form 10-K for the year endedDecember 31, 2003.  Results ofoperations for interim periods are not necessarily indicative of the resultsthat may be expected for the full year.

 

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

 

SuperTel Communications Corp. (“SuperTel”), aPuerto 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 1,500 limited partners also investedin the Partnership through a private placement.

 

On January 22, 1997, the Partnership wasgranted the PCS Block C licenses for Puerto Rico and certain cities inCalifornia.

 

On February 4, 1999, the Partnershipentered into a joint venture agreement (the “Joint Venture Agreement”) withTelefónica Larga Distancia De Puerto Rico, Inc. (“TLD”) to jointly develop andoperate certain PCS licenses in Puerto Rico. Among the most important provisions of the Joint Venture Agreement arethe following:

 

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

 

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

 

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

 

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

 

7

----

 

process to attempt a sale of NewComm.  All shareholders are bound to cooperate andundertake all that is necessary in that effort. Further, the shareholders are bound to accept the highest price proposedby an interested buyer, which price must be payable in cash or freely tradablesecurities, or a combination thereof, and which must be for a price not lessthan the valuation prepared by the investment banker.

 

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

 

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

 

In September 1999, NewComm commencedproviding PCS services in Puerto Rico.

 

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, inexchange for approximately 4.92% ownership in NewComm. Syncom has committed tocontribute up to $25 million to NewComm in exchange for an approximately 8.2%ownership interest in NewComm.

 

On March 2, 2002, the Partnership soldapproximately 4.08% of NewComm to a group of investors led by Fleet DevelopmentVentures for $13 million.  ThePartnership and TLD contributed approximately $9 million each to NewComm in theform of equity and convertible debt, respectively.

 

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

 

In August 2004, the Partnership retained the services of a consultingfirm (other than its external auditors) to audit the operations and performanceof NewComm under the management of TEM. The results of the audit were reported to the Board of Directors ofNewComm on September 30. Under the Partnership’s direction, the Board ofDirectors of NewComm terminated TEM as Manager under the Management Agreementon October 28, 2004.  Currently, thePartnership is reviewing other actions to be taken in connection with thetermination of TEM as Manager.

 

California Licenses

 

On August 28, 2000, the Partnership entered into a Purchase andSale Agreement with Leap Wireless International (“Leap Wireless”), pursuant towhich the Partnership sold the Visalia-Porterville license to Leap Wireless inexchange for a $9,500,000 cash payment. The sale was approved by the FCC and closed on June 8, 2001.

 

On November 26, 2003, the Partnership entered into a Purchase andSale Agreement with Metro PCS pursuant to which the Partnership sold all of itsremaining California Licenses.  The salewas approved by the FCC 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 Stores of P.R., Inc. - (eMilios)

 

On April 16, 2002, ClearComm, L.P.entered into a Shareholders’ Agreement to form a joint venture with eMiliosInternational, L.L.C., a Florida Limited Liability Corporation, to promote andestablish in Puerto Rico the eMilios concept. The joint venture was formed under a Puerto Rico Corporation namedInternet Surfing Stores of Puerto Rico, Inc. (“ISS”).  The Partnership owns 49% and eMilios Internationalowns 51% of ISS.

 

The eMilios concept involves internetcommunication galleries that are geared towards educating people in the use ofcomputers and the internet, and acts as a communication and recreational centeras well.  The broadband connectivity thatis offered at eMilios allows the stores to efficiently offer internetcommunications and also access to a great variety of interactive content, suchas cyber games, as well as software and tools for free lancers and smallbusiness entities.  The service isprovided and collected with a proprietary smart card and software application.

 

Tender Offer

 

During the months of May and June of2004, the Partnership conducted a voluntary tender offer program to allpartners holding less than 2 Units.  Theprogram was available to over 1,100 partners. The price per Unit offered was $8,500.00.  Only 130 unit-holders tendered their Unitsamounting to approximately 140 Units re-purchased and representingapproximately a 5% reduction of outstanding partnership Units.

 

2.             FINANCINGREQUIREMENTS

 

The accompanying consolidated financialstatements have been prepared on a going concern basis, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business.  The Partnership commencedoperations in September 1999 and has realized a net loss amounting to$16.7 million for the nine-month period ended September 30,

 

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2004 and a net loss of $23.6 million for the nine month period endedSeptember 30, 2003.  It also has workingcapital deficit and partners’ capital deficits of $ 131.3 and $105.5 million,respectively, as of September 30, 2004. The Partnership is likely to continue incurring net losses until suchtime as its subscriber base generates revenue in excess of the Partnership’sexpenses.  Development of a significantsubscriber base is likely to take time, during which the Partnership mustfinance its operations by means other than its revenues.

 

As part of the agreement with TEM, NewComm entered into a contract withLucent Technologies, Inc. (“Lucent”) that required Lucent to build a networkthat uses the Code Division Multiple Access (“CDMA”) protocol.  The total cost of the network wasapproximately $125 million.  During 2000,NewComm’s management and Lucent agreed on formally extending the payment of upto $61.0 million of the total amount due under the contract under a formalfinancing agreement. An Agreement restructuring Lucent’s outstanding debt wasexecuted on June 4, 2003.  The nowoutstanding debt to Lucent is approximately $46 million and is payable over asix-year period at 8% annual interest rate. On June 20, 2003, an agreement restructuring Alcatel’s debt wasexecuted.  Alcatel’s credit is now $1.3million at 6.5% payable over a three year period.  Also, by means of letter from TEM (and itsparent, Telefónica Internacional, S.A.), TEM agreed to issue a corporateguarantee to serve as collateral for a $110 million bank loan.

 

Management believes that the Partnership willcomply with all the requirements for obtaining the financing and believes thatcash and cash equivalents on hand, anticipated growth in revenues, vendorfinancing and the permanent financing will be adequate to fund its operations,at a minimum, through the end of 2004. However, in the absence of improved operating results and cash flows,and without the closing of its contemplated permanent financing, thePartnership may face liquidity problems to fund its operations and meet itsobligations.  As a result of thesematters, 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 ACCOUNTINGPRONOUNCEMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

The disclosure requirement of thisInterpretation is effective for financial statements for fiscal years endingafter

 

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December 15, 2002; it did not have anyeffect on the Partnership’s financial statements.  The initial recognition and measurementprovisions are effective prospectively for guarantees issued or modified on orafter January 1, 2003, which did not have any effect on the Partnership’sfinancial statements.

 

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

 

4.             LEGAL PROCEEDINGS

 

##### From time to time the Partnership is involvedin litigation 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.

#####  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

 

Forward-looking Statements

 

This Form 10-Q and future filings by thePartnership on Form 10-Q and Form 8-K and future oral and written statements bythe Partnership may include certain forward-looking statements, including(without limitation) statements with respect to anticipated future operatingand financial performance, growth opportunities and growth rates, acquisitionand divestitive opportunities, and other similar forecasts and statements ofexpectation.  Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates,” and “should,” andvariations of these words and similar expressions, are intended to identifythese forward-looking statements. Forward-looking statements by the Partnership are based on estimates,projections, beliefs and assumptions of management and are not guarantees offuture performance.  The Partnershipdisclaims any obligation to update or revise any forward-looking statementbased on the occurrence of future events, the receipt of new information, orotherwise.

 

Actual future performance, outcomes and results may differ materiallyfrom those expressed in forward-looking statements made by the Partnership as aresult of a number of important factors. Examples of these factors include, without limitation, rapidtechnological developments and changes in the telecommunications industry;ongoing deregulation (and the resulting likelihood of significantly increasedprice and product/service competition) in the telecommunications industry as aresult of the Telecommunications Act of 1996 and other similar federal andstate legislation and the federal and state rules and regulations enactedpursuant to that legislation; regulatory limitations on the Partnership’sability to compete in the telecommunications services industry; and continuingconsolidation in the telecommunications services industry.  In addition to these factors, actual futureperformance, outcomes and results may differ materially because of other, moregeneral factors including, without limitation, general industry and marketconditions and growth rates, domestic and international economic conditions,governmental and public policy changes and the continued availability offinancing in the amounts, at the terms and on the conditions necessary tosupport the Partnership’s future business.

 

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Introduction

 

The information contained in this Part I, Item 2 updates, and should beread in conjunction with, information set forth in Part II, Items 7 and 8,in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003, in addition to the interim consolidated financialstatements and accompanying notes presented in Part 1, Item 1 of thisForm 10-Q.

 

The Partnership was formed inJanuary 1995 and is managed by its General Partner, SuperTelCommunications Corp.  The Partnership wasorganized to acquire, own, consult and operate personal communication servicesPCS licenses in the Block C band and to take advantage of the benefits that theFCC has set aside for entrepreneurs.  ThePartnership owns the Puerto Rico Licenses, which consist of two 15 MHz PCSlicenses covering Puerto Rico.  ThePartnership owned certain California licenses that sold in 2001 and 2004.

 

The Partnership commenced commercialoperations of its PCS network in Puerto Rico on September 24, 1999 when itbegan offering wireless services in Puerto Rico to the public.  Prior to that date, its income had consistedof interest earnings only.  Since thePartnership commenced commercial operations in 1999 and during 2000 was stillin the start-up process, the comparisons presented below may not be indicativeof future operations.

 

The Partnership established its Puerto Riconetwork by forming a wholly owned subsidiary, NewComm, on January 29,1999.  On February 4, 1999, thePartnership and NewComm entered into an agreement with TEM, whereby thePartnership contributed its two Puerto Rico Licenses to NewComm and TEMprovided NewComm a $19,960,000 loan to develop the Puerto Rico Licenses.  TEM’s loan is pursuant to a securedconvertible promissory note (the “Note”) which is convertible into 49.9% ofNewComm’s equity.  The Note however,cannot be converted until the FCC authorizes TEM to hold more than a 25% equityinterest in NewComm.  By means of a StockPurchase Agreement executed on March 12, 2002, the Partnership has agreedto sell shares equal to 0.2% in NewComm to TEM conditioned to obtainingpermanent financing and a clear exit path for the Partnership.  This transaction is pending Department ofHomeland Security and FCC approval.  ThePartnership believes this transaction and permanent finance will be obtainedbefore the end of 2004.

 

Results of Operations

 

Set forth below is a summary of the results of operations before otherincome and expenses for the three-month period ended September 30, 2004compared with the three-month period ended September 30, 2003:

 
| ** **                             | ** ** | **Three-Month Periods Ended  September 30,** | ** **     |
|----------------------------------------|------------|----------------------------------------------|----------------|
| ** **                             | ** ** | **2004**                                     | ** **     | **2003** | ** ** | **Change** | ** ** |
| **Revenues:**                          |       |                                         |           |   |   |   |   |
| **Service revenues**                   | ** ** | **$**                                        | **24,156,171** | ** ** | **$** | **24,908,493** | ** ** | **-3** | **%** |
| **Handsets and accessories sales**     | ** ** | **975,313**                                  | ** **     | **1,811,184** | ** ** | **-46** | **%** |
|                                   |       |                                         |           |   |   |   |   |
| **Total Revenues**                     | ** ** | **25,131,484**                               | ** **     | **26,719,677** | ** ** | **-6** | **%** |
| **Expenses:**                          |       |                                         |           |   |   |   |   |
| **Operating expenses**                 | ** ** | **24,844,133**                               | ** **     | **23,692,844** | ** ** | **5** | **%** |
|                                   |       |                                         |           |   |   |   |   |
| **Income (loss) from operations**      | ** ** | **287,351**                                  | ** **     | **3,026,833** | ** ** | **-91** | **%** |
|                                   |       |                                         |           |   |   |   |   |
| **Interest expense**                   | ** ** | **(2,464,093**                               | **)**          | **(3,107,377** | **)** | **-21** | **%** |
|                                   |       |                                         |           |   |   |   |   |
| **Depreciation and amortization**      | ** ** | **(4,565,310**                               | **)**          | **(4,313,717** | **)** | **6** | **%** |
|                                   |       |                                         |           |   |   |   |   |
| **Loss before other income (expense)** | ** ** | **$**                                        | **(6,742,052** | **)** | **$** | **(4,394,261** | **)** | **53** | **%** |
|                                        |            |                                              |                |  |  |  |  |  |  |  |

 

Revenues

 

The Partnership’s revenues for thethree-month period ended September 30, 2004 decreased by 6% from $26.7 millionto $25.1 as compared to the same period in 2003. Total revenues include serviceas well as handset and accessories revenues. Service revenues for the three-month period ended September 30, 2004decreased by 3% when compared to the same period in 2003 while handset

 

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and accessories sales decreased by 46%. The decrease in handsets and accessories revenues is mainly due tohandset unit pricing adjustments.  Thedecrease in service revenues is related to the full implementation of thesoftware for billings and collections which efficiently identifies delinquentaccounts and to the reduction on the customer base and to a shifting of thecustomer base from prepaid customers to contract customers.

 

Expenses

 

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

 
| ** **                                                     | ** ** | **Three-Month Periods Ended  September 30,** | ** **     |
|----------------------------------------------------------------|------------|----------------------------------------------|----------------|
| ** **                                                     | ** ** | **2004**                                     | ** **     | **2003** | ** ** | **Change** | ** ** |
|                                                           |       |                                         |           |   |   |   |   |
| **Cost of handset and accesories**                             | ** ** | **5,643,781**                                | ** **     | **$** | **4,970,662** | ** ** | **14** | **%** |
| **Interconnection expense**                                    | ** ** | **694,166**                                  | ** **     | **1,263,297** | ** ** | **-45** | **%** |
| **Sales and dealers commissions**                              | ** ** | **2,731,291**                                | ** **     | **1,338,561** | ** ** | **104** | **%** |
| **Salaries and benefits**                                      | ** ** | **4,018,377**                                | ** **     | **3,743,473** | ** ** | **7** | **%** |
| **Selling and advertising expense**                            | ** ** | **1,539,925**                                | ** **     | **1,919,543** | ** ** | **-20** | **%** |
| **Legal and professional services**                            | ** ** | **435,118**                                  | ** **     | **2,060,866** | ** ** | **-79** | **%** |
| **Provision for doubtful accounts**                            | ** ** | **2,168,272**                                | ** **     | **1,063,241** | ** ** | **104** | **%** |
| **Rent expense**                                               | ** ** | **1,735,119**                                | ** **     | **2,176,087** | ** ** | **-20** | **%** |
| **Taxes, other than income**                                   | ** ** | **1,048,121**                                | ** **     | **1,595,141** | ** ** | **-34** | **%** |
| **Network operation and maintenance**                          | ** ** | **1,628,648**                                | ** **     | **779,797** | ** ** | **109** | **%** |
| **Other expenses**                                             | ** ** | **1,887,396**                                | ** **     | **1,992,759** | ** ** | **-5** | **%** |
| **Management fee to General Partner**                          | ** ** | **68,750**                                   | ** **     | **60,750** | ** ** | **13** | **%** |
| **Consulting and legal services rendered by  related parties** | ** ** | **1,245,169**                                | ** **     | **728,667** | ** ** | **71** | **%** |
| ** **                                                     |       |                                         |           |   |   |   |   |
| **Total Expenses**                                             | ** ** | **$**                                        | **24,844,133** | ** ** | **$** | **23,692,844** | ** ** | **5** | **%** |
|                                                                |            |                                              |                |  |  |  |  |  |  |  |

 

Expenses for the three-month period endedSeptember 30, 2004 totaled $24,844,133 as compared to $23,692,844 for the sameperiod in 2003.  There was a 5% overallincrease of operating expenses during the third quarter of 2004.

 

The overall increase in expenses is mainlydue to the increase in the cost of handsets and accessories sold and inthe   provision for doubtful accountsoffset by a significant reduction in the interconnection expense.  The increase in the provision for doubtful accountsis related to the implementation of the new billing software and tighter creditand collection policies.  Variances inother accounts are mostly related to reclassifications made to accounts ascompared to 2003.

 

Income from Operations

 

Income from operations reflects the abilityof the Partnership to generate positive cash flows from its operations, whichdoes not take into consideration expenses such as amortization, depreciationand interest that must be reported for generally accepted accounting principles(GAAP) to arrive at the net income or loss.

 

Income from operations for the three monthperiod ended September 30, 2004 of $287,351 shows a significant decrease of 91%or $2.7 million as compared to the income from operations for the same periodin 2003.  This decrease in income fromoperations is related to a 6% decrease in revenues combined with a 5% increasein overall expenses as compared with the same period in 2003.

 

Interest expense for the three month periodended September 30, 2004 of $2.5 million ($3.1 million in 2003) anddepreciation expense of $4.6 million ($4.3 million in 2003) reduce the incomefrom operations and result in a net loss before other income of $6,742,052 forsuch period of 2004 ($4,394,261 in 2003); an overall increase in net loss of21% when compared to 2003.  The reductionin interest expense is mainly attributable to the refinancing of various debtsand to reduction of debt outstanding related to the Note Payable to Alcatel.

 

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The following table summarizes changes incertain financial information for the nine-month period ended September 30,2004 compared with nine-month period ended September 30, 2003:

 

 
| ** **                             | ** ** | **Nine-Month Periods Ended  September 30,** | ** **      |
|----------------------------------------|------------|---------------------------------------------|-----------------|
| ** **                             | ** ** | **2004**                                    | ** **      | **2003** | ** ** | **Change** | ** ** |
| **Revenues:**                          |       |                                        |            |   |   |   |   |
| **Service revenues**                   | ** ** | **$**                                       | **76,940,544**  | ** ** | **$** | **75,068,668** | ** ** | **2** | **%** |
| **Handsets and accessories sales**     | ** ** | **3,640,103**                               | ** **      | **5,742,195** | ** ** | **-37** | **%** |
|                                   |       |                                        |            |   |   |   |   |
| **Total Revenues**                     | ** ** | **80,580,647**                              | ** **      | **80,810,863** | ** ** | **0** | **%** |
| **Expenses:**                          |       |                                        |            |   |   |   |   |
| **Operating expenses**                 | ** ** | **76,983,671**                              | ** **      | **74,844,214** | ** ** | **3** | **%** |
|                                   |       |                                        |            |   |   |   |   |
| **Income (loss) from operations**      | ** ** | **3,596,976**                               | ** **      | **5,966,649** | ** ** | **-40** | **%** |
|                                   |       |                                        |            |   |   |   |   |
| **Interest expense**                   | ** ** | **(7,151,892**                              | **)**           | **(10,069,184** | **)** | **-29** | **%** |
|                                   |       |                                        |            |   |   |   |   |
| **Depreciation and amortization**      | ** ** | **(13,258,655**                             | **)**           | **(12,739,229** | **)** | **4** | **%** |
|                                   |       |                                        |            |   |   |   |   |
| **Loss before other income (expense)** | ** ** | **$**                                       | **(16,813,571** | **)** | **$** | **(16,841,764** | **)** | **-0.17** | **%** |
|                                        |            |                                             |                 |  |  |  |  |  |  |  |  |

 

Revenues

 

The Partnership’s revenues for the nine-month period ended September30, 2004 totaled $80,580,647 as compared to $80,810,863 for the same period in2003.  Revenues for the nine-month period ended September 30, 2004included $76,940,544 in service revenues and $3,640,103 in handset andaccessories sales generated from NewComm’s wireless operations, as compared to$75,068,668 and $5,742,195, respectively, for the same period in 2003.  The 2% increase in service revenues isrelated to an increase in airtime on contract subscribers for the first twoquarters of 2004 and to the increase in customer base during the thirdquarter.  The decrease in handset andaccessories sales is indicative of a growing contract customer base and pricingadjustments on the handsets sold.

 

Expenses

 

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

 

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| ** **                                                     | ** ** | **Three-Month Periods Ended****September 30,** | ** **     |
|----------------------------------------------------------------|------------|------------------------------------------------|----------------|
| ** **                                                     | ** ** | **2004**                                       | ** **     | **2003** | ** ** | **Change** | ** ** |
|                                                           |       |                                           |           |   |   |   |   |
| **Cost of handset and accesories**                             | ** ** | **$**                                          | **16,753,699** | ** ** | **$** | **15,888,091** | ** ** | **5** | **%** |
| **Interconnection expense**                                    | ** ** | **2,735,145**                                  | ** **     | **3,604,982** | ** ** | **-24** | **%** |
| **Sales and dealers commissions**                              | ** ** | **8,111,674**                                  | ** **     | **4,301,766** | ** ** | **89** | **%** |
| **Salaries and benefits**                                      | ** ** | **12,008,249**                                 | ** **     | **12,024,659** | ** ** | **0** | **%** |
| **Selling and advertising expense**                            | ** ** | **4,854,071**                                  | ** **     | **4,917,904** | ** ** | **-1** | **%** |
| **Legal and professional services**                            | ** ** | **1,999,861**                                  | ** **     | **5,964,637** | ** ** | **-66** | **%** |
| **Provision for doubtful accounts**                            | ** ** | **6,880,222**                                  | ** **     | **7,155,290** | ** ** | **-4** | **%** |
| **Rent expense**                                               | ** ** | **5,102,491**                                  | ** **     | **6,565,186** | ** ** | **-22** | **%** |
| **Taxes, other than income**                                   | ** ** | **2,897,768**                                  | ** **     | **4,099,977** | ** ** | **-29** | **%** |
| **Network operation and maintenance**                          | ** ** | **4,921,585**                                  | ** **     | **2,518,987** | ** ** | **100** | **%** |
| **Other expenses**                                             | ** ** | **6,685,436**                                  | ** **     | **5,178,144** | ** ** | **29** | **%** |
| **Management fee to General Partner**                          | ** ** | **206,250**                                    | ** **     | **364,500** | ** ** | **-43** | **%** |
| **Loss on sale of license**                                    | ** ** | **(4,168**                                     | **)**          | **—** | ** ** | **100** | **%** |
| **Consulting and legal services rendered by  related parties** | ** ** | **3,831,389**                                  | ** **     | **2,260,091** | ** ** | **70** | **%** |
| ** **                                                     |       |                                           |           |   |   |   |   |
| **Total Expenses**                                             | ** ** | **$**                                          | **76,983,672** | ** ** | **$** | **74,844,214** | ** ** | **3** | **%** |

 

Expenses for the nine-month period endedSeptember 30, 2004 totaled $76,983,672 as compared to $74,844,214 for the sameperiod in 2003.  During the nine-month period ended September 30, 2004,the Partnership’s expenses increased by 3% due to pricing adjustments made bysuppliers for the cost of handsets which resulted in a 5% increase in suchexpense and due to the shifting of the customer base from prepaid customers tocontract customers.  Sales and dealerscommissions were doubled compared to the same period in 2003 due to the factthat the commissions paid to sales persons and dealers are greater for contractcustomers than for prepaid customers. Shifting among the two categories of customer causes an increase in thesales and dealers commission.

 

Income from Operations

 

Income from operations reflects the abilityof the Partnership to generate positive cash flows from its operations, whichdoes not take into consideration expenses such as amortization, depreciationand interest that must be reported for generally accepted accounting principles(GAAP) to arrive to the net income or loss.

 

Income from operations for the nine monthperiod ended September 30, 2004 of $3.4 million shows a decrease of 40% ascompared to the income from operations for the same period in 2003.  This reduction in income from operations isrelated to the decrease in service revenues from the shifting to contractsubscribers and to the increase in the cost of acquiring new customers.

 

Interest expense for the nine- month periodended September 30, 2004 of $7.1 million ($10 million in 2003) and depreciationexpense of $13.3 million ($12.7 million in 2003) reduce income from operationsand result in a net loss before other income (expense) of $16.8 million asof  the third quarter of 2004 (also $16.8million in 2003); an overall reduction in net loss before other income(expense) of less than 1% when compared to 2003.  The reduction in interest expense isattributable to the reduction of debt outstanding related to the Note Payableto Alcatel.

 

The increase in depreciation expense isrelated to the increase in the depreciable assets placed in service during theperiod.

 

Liquidity and Capital Resources

 

As of September 30, 2004, the Partnership had cash and cash equivalentsamounting to $10,244,369, which are mostly related to proceeds from the sale ofthe California licenses to Metro PCS in the second quarter of 2004 for a cashpayment of $10.9 million.

 

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As part of the agreement with TLD, NewComm entered into a contract withLucent Technologies, Inc. (“Lucent”) that required Lucent to build a networkthat uses the Code Division Multiple Access (“CDMA”) protocol.  The total cost of the original network wasapproximately $125 million.  During 2000,NewComm’s management and Lucent agreed on formally extending the payment of upto $61.0 million of the total amount of network construction payable, at thetime, under a formal financing agreement. An agreement restructuring Lucent’s debt was executed on June 4,2003.  The now outstanding debt to Lucentis $46 million payable at a fixed annual interest of 8% over a six year term.

 

In addition, the Partnership owes the United States federal governmentapproximately $36.5 million plus accrued interest at 6.5% in connection withthe acquisition of its PCS licenses.

 

The Partnership estimates that the total costto implement NewComm’s business plan will be approximately $200 million.  This consists of approximately $125 millionin costs associated with building out the Puerto Rico Network, andapproximately $75 million to fund NewComm’s operations until these becomeprofitable.  NewComm obtained a shortterm financing (“Bridge Loan”) of $61 million which has been extended untilDecember 31, 2004, with an interest rate of .75% over 90-day LIBOR.  The Bridge Loan is now guaranteed byTelefónica Internacional, S.A. (TISA), an affiliate of TEM.  ClearComm and TEM continue to work towardssecuring a permanent financing facility.

 

On March 2, 2002, the Partnership sold4.08% of NewComm to a group of investors led by Fleet Development Ventures for$13 million.  During the second quarterof 2002, 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 andcash distributions 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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

The Partnership’s exposure to market riskthrough derivative 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 September 30, 2004, the Partnership hadcash equivalents and short-term investments of approximately $10,244,369consisting of cash and highly liquid, short-term investments in money marketfunds.

 

The Partnership’s cash and cash equivalents will increase or decreaseby an immaterial amount if market interest rates increase or decrease, andtherefore, its exposure to interest rate changes has been immaterial.  The Partnership’s loans payable to the FCChave a fixed interest rate of 6.5% and therefore are not exposed to interestrate risks.  The TEM Note relating toindebtedness of NewComm bears interest at the floating rate of the 90-day LIBORplus 1.5% and has been extended to December 2004.

 

An agreement restructuring Lucent’s outstanding debt was executed onJune 4, 2003.  The now outstandingdebt to Lucent is $46 million and is payable over a six-year period at 8%annual interest rate.  On June 20,2003, an agreement restructuring Alcatel’s debt was executed.  Alcatel’s credit is now $1 million at 6.5%payable over a three year period.  Also,by means of letter from TLD (and its parent, Telefónica Internacional, S.A.,and its affiliate, TEM), TEM has agreed to issue a corporate guarantee to serveas collateral for a $110 million bank loan in order to refinance the BridgeLoan and the FCC debt.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

The Partnership’s Chief Executive Officer,Javier O. Lamoso, and the Partnership’s Chief Financial Officer, EdileenSalicrup, have evaluated the Partnership’s disclosure controls and procedureswithin 90 days of the filing of this report.

 

Mr. Lamoso and Ms. Salicrup have concludedthat the Partnership’s disclosure controls and procedures provide reasonableassurance that 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 the Commission’srules and forms.

 

There have been no significant changes in thePartnership’s internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

 

Information regarding legal proceedings is disclosed in Part I, Item 1,Notes to Interim Consolidated Financial Statements (unaudited), Section 4,and is hereby incorporated into Part II, Item 1 by this reference.

 

ITEM 6.  EXHIBITS AND REPORTS ONFORM 8-K

 

(a)           Listof Exhibits

 

Exhibit 31.1: Certification of Chief Executive Officer

 

Exhibit 31.2: Certification of Chief Financial Officer

 

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

 

Exhibit32.2:  Certification Pursuant toSection 1350 of Chapter 63 of Title 18 of the United States Code

 

(b)           Noreports on Form 8-K were filed during the period covered by this report.

 

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

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|                    |   | ClearComm, L.P.               |
|-------------------------|--------|-------------------------------|
|                    |   |                          |
|                    |   |                          |
|                    | By:    | SuperTel Communications Corp. |
|                    |   |                          |
|                    |   |                          |
| Date: November 15, 2004 |   | By:                           | /s/ Javier O. Lamoso |   |
|                    |   | Name: Javier O. Lamoso        |
|                    |   | Title: President              |

 

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