**UNITED STATES**

**Securities and ExchangeCommission**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**
| ** **                                              | **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------|------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** ** | ** **                                                                                                |
| **For the  quarterly period ended March 31, 2005** |
| ** **                                              | ** ** | ** ** | ** **                                                                                                |
| ** **                                              | **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom            to            **

 

**Commission file 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  San Juan, Puerto Rico** | ** ** | **00918-1929**                         |
| (Address of  principal executive offices)                             |       | (Zip Code)                             |

 

Registrant’s telephone number, including area code: **(787) 620-0140**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes  ý     No o

 

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

 

----

 

PART I   FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF ASSETS, LIABILITIESAND PARTNERS’ DEFICIT

 
| ** **                                                                                                                  | ** ** | **March 31,  2005** | ** **      | **December 31,  2004** | ** **      |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-----------------|-----------------------------|-----------------|
| ** **                                                                                                                  | ** ** | **(Unaudited)**          | ** **      | **(Audited)**               | ** **      |
| **ASSETS:**                                                                                                                 | ** ** | ** **               | ** **      | ** **                  | ** **      |
| **Cash and  cash equivalents**                                                                                              | ** ** | **$**                    | **9,548,999**   | ** **                  | **$**           | **10,612,430** | ** ** |
| **Accounts  receivable, net**                                                                                               | ** ** | **8,989,906**            | ** **      | **7,909,573**               | ** **      |
| **Accounts  receivable, other**                                                                                             | ** ** | **4,522,916**            | ** **      | **4,204,524**               | ** **      |
| **Insurance  claim receivable**                                                                                             | ** ** | **103,657**              | ** **      | **403,657**                 | ** **      |
| **Interest  receivable**                                                                                                    | ** ** | **—**               | ** **      | **20,000**                  | ** **      |
| **Inventories,  net**                                                                                                       | ** ** | **11,786**               | ** **      | **1,304,392**               | ** **      |
| **Prepaid  expenses**                                                                                                       | ** ** | **1,198,977**            | ** **      | **841,750**                 | ** **      |
| **Leasehold  rights, net**                                                                                                  | ** ** | **3,757,905**            | ** **      | **3,314,144**               | ** **      |
| **Investment  in subsidiary**                                                                                               | ** ** | **217,959**              | ** **      | **247,959**                 | ** **      |
| **PCS  licenses, net**                                                                                                      | ** ** | **46,750,449**           | ** **      | **46,750,449**              | ** **      |
| **Deferred  financing costs**                                                                                               | ** ** | **580,772**              | ** **      | **635,824**                 | ** **      |
| **Note  receivable from officer**                                                                                           | ** ** | **—**               | ** **      | **100,000**                 | ** **      |
| **Property  and equipment, net**                                                                                            | ** ** | **76,478,945**           | ** **      | **80,546,773**              | ** **      |
| ** **                                                                                                                  | ** ** | ** **               | ** **      | ** **                  | ** **      |
| ** **                                                                                                                  | ** ** | **152,162,271**          | ** **      | **$**                       | **156,891,475** | ** ** |
| ** **                                                                                                                  | ** ** | ** **               | ** **      | ** **                  | ** **      |
| **LIABILITIES  AND PARTNERS’ DEFICIT:**                                                                                | ** ** | ** **               | ** **      | ** **                  | ** **      |
| **Accounts  payable and accrued liabilities**                                                                               | ** ** | **$**                    | **46,673,916**  | ** **                  | **$**           | **48,810,130** | ** ** |
| **Notes  payable — short-term**                                                                                        | ** ** | **133,764,820**          | ** **      | **136,836,780**             | ** **      |
| **Notes  payable — long-term**                                                                                         | ** ** | **95,740,297**           | ** **      | **90,226,258**              | ** **      |
| ** **                                                                                                                  | ** ** | ** **               | ** **      | ** **                  | ** **      |
| **Unitholders’  capital (deficit) 2,765.20 Units in 2005, 2906.1 Units in 2004, and 1 general  partnership interest.** | ** ** | ** **               | ** **      | ** **                  | ** **      |
| ** **                                                                                                                  | ** ** | ** **               | ** **      | ** **                  | ** **      |
| ** **                                                                                                                  | ** ** | **(124,016,762**         | **)**           | **(118,981,693**            | **)**           |
| ** **                                                                                                                  | ** ** | ** **               | ** **      | ** **                  | ** **      |
| **Total  liabilities and partner’s deficit**                                                                           | ** ** | **$**                    | **152,162,271** | ** **                  | **$**           | **156,891,475** | ** ** |
| ** **                                                                                                                  | ** ** | ** **               | ** **      | ** **                  | ** **      |
| **BOOK  VALUE(DEFICIT) PER UNIT**                                                                                           | ** ** | **$**                    | **(44,849**     | **)**                       | **$**           | **(43,013** | **)** |

 

The accompanying notes are integral part of these consolidatedstatements.

 

1

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ClearComm, L.P.

CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES (UNAUDITED)

 
| ** **                                              | ** ** | **Three-Month Periods Ended  March 31,** | ** **     |
|---------------------------------------------------------|------------|-----------------------------------------------|----------------|
| ** **                                              | ** ** | **2005**                                      | ** **     | **2004** | ** ** |
| **Revenues:**                                           | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Service  revenues**                                   | ** ** | **$**                                         | **22,878,520** | ** ** | **$** | **26,878,225** | ** ** |
| **Handsets  and accessories sales**                     | ** ** | **737,460**                                   | ** **     | **1,436,596** | ** ** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Total  Revenues**                                     | ** ** | **23,615,980**                                | ** **     | **28,314,821** | ** ** |
| **Expenses:**                                           | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Operating  expenses**                                 | ** ** | **25,599,110**                                | ** **     | **30,565,872** | ** ** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Income  from operations**                             | ** ** | **(1,983,130**                                | **)**          | **(2,251,051** | **)** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Interest  expense**                                   | ** ** | **(3,054,582**                                | **)**          | **(2,366,768** | **)** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Loss before  other income (expense)**                 | ** ** | **(5,037,712**                                | **)**          | **(4,617,819** | **)** |
| **Other  Income (expense)**                             | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Equity  in net loss of subsidiary**                   | ** ** | **(30,000**                                   | **)**          | **(9,569** | **)** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Interest  income**                                    | ** ** | **32,644**                                    | ** **     | **78,423** | ** ** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Other**                                               | ** ** | **—**                                    | ** **     | **217** | ** ** |
|                                                    |       |                                          |           |   |   |
| **Net loss**                                            | ** ** | **$**                                         | **(5,035,068** | **)** | **$** | **(4,548,748** | **)** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Net loss  attributable to General Partner**           | ** ** | **$**                                         | **(5,035,068** | **)** | **$** | **(4,548,748** | **)** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Net loss  attributable to Limited Partners**          | ** ** | **$**                                         | **—**     | ** ** | **$** | **—** | ** ** |
| ** **                                              | ** ** | ** **                                    | ** **     | ** ** | ** ** |
| **Net loss  per unit attributable to Limited Partners** | ** ** | **$**                                         | **—**     | ** ** | **$** | **—** | ** ** |

 

The accompanying notes are integral part of these consolidatedfinancial statements.

 

2

----

 

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT (Unaudited)

FOR THE THREE-MONTH PERIODENDED MARCH 31, 2005

 
| ** **                                                          | ** ** | **Limited Partners** | ** ** | **General** | ** ** | ** **  | ** **   |
|---------------------------------------------------------------------|------------|----------------------|------------|-------------|------------|-------------|--------------|
| ** **                                                          | ** ** | **Units**            | ** ** | **Amount**  | ** ** | **Partner** | ** **   | **Total** | ** ** |
| ** **                                                          | ** ** | ** **           | ** ** | ** **  | ** ** | ** **  | ** **   | ** ** | ** ** |
| **BALANCES,**December 31, 2004                                 |       | 2,765.2              |       | —      |       | $           | (118,981,694 | ) | $ | (118,981,694 | ) |
|                                                                |       |                 |       |        |       |        |         |   |   |
| **Net loss  for the three months period ended March 31, 2005** |       | 2,765.2              |       | —      |       | (5,035,068  | )            | (5,035,068 | ) |
|                                                                |       |                 |       |        |       |        |         |   |   |
| **BALANCES,**March 31, 2005                                    |       | 2,765.2              |       | —      |       | $           | (124,016,762 | ) | $ | (124,016,762 | ) |

 

The accompanying notes are integral part of these consolidatedfinancial statements.

 

3

----

 

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
| ** **                                                                       | ** ** | **Three-Month Period Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                       | ** ** | **March 31,  2005**     | ** ** | **March 31,  2004** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                       |       |                         |       |   |   |
| Net loss                                                                         |       | $                            | (5,035,068 | ) | $ | (4,548,748 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities- |       |                         |       |   |   |
| Depreciation  and amortization                                                   |       | 4,571,468                    |       | 4,249,438 |   |
| Equity in  losses of unconsolidated subsidiary                                   |       | 30,000                       |       | 9,569 |   |
| Amortization  of loan origination fees                                           |       | —                       |       | 55,051 |   |
| Inventory  reserve                                                               |       | 44,270                       |       | 174,000 |   |
| Bad debt  expense                                                                |       | 2,188,569                    |       | 2,346,800 |   |
| Gain from  sale of vehicles                                                      |       | —                       |       | 16,454 |   |
| Capitalized  interest                                                            |       | —                       |       | 184,830 |   |
| Changes in  operating assets and liabilities-                                    |       |                         |       |   |   |
| Increase in  interest receivable                                                 |       | —                       |       | (51,218 | ) |
| Increase in  accounts receivable, before write-offs                              |       | (3,867,113                   | )          | (3,202,354 | ) |
| Decrease in  insurance claim receivable                                          |       | 300,000                      |       | — |   |
| (Decrease)  in checks drawn in excess of bank balance                            |       | —                       |       | (82,469 | ) |
| Decrease  (increase) in inventories                                              |       | 1,225,979                    |       | (149,140 | ) |
| Increase in  prepaid expenses                                                    |       | (357,227                     | )          | (638,378 | ) |
| Increase  (decrease) accounts payable and accrued liabilities                    |       | (2,296,563                   | )          | 3,431,423 |   |
| Decrease in  accounts payable to related parties                                 |       | 294,681                      |       | (930,406 | ) |
| (Decrease)  Increase in accrued interest                                         |       | 1,969,232                    |       | (35,000 | ) |
| (Decrease)  increase in deferred income                                          |       | 196,216                      |       | (174,070 | ) |
| Total  adjustments                                                               |       | 4,299,512                    |       | 5,204,530 |   |
| Net cash  provided by operating activities                                       |       | (735,556                     | )          | 655,782 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                       |       |                         |       |   |   |
| Redemption  of investment securities                                             |       | —                       |       | 2,853,949 |   |
| Proceeds  from the sale of property                                              |       | 475,161                      |       | 38,000 |   |
| Acquisition  of property and equipment                                           |       | (178,642                     | )          | (352,771 | ) |
| Payment for  the investment in subsidiary                                        |       | —                       |       | (130,667 | ) |
| Net cash  provided by (used in) investing activities                             |       | 296,519                      |       | 2,408,511 |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                       |       |                         |       |   |   |
| Proceeds  from issuance of note payable to Telefonica Moviles                    |       | —                       |       | 1,831,214 |   |
| Principal  payments of capital lease obligations                                 |       | (49,664                      | )          |   |   |
| Payment of  note payable to Alcatel                                              |       | (575,000                     | )          | (4,975,989 | ) |
| Net cash  used in financing activities                                           |       | (624,664                     | )          | (3,144,775 | ) |
| **NET  INCREASE IN CASH AND CASH EQUIVALENTS**                                   |       | (1,063,701                   | )          | (80,482 | ) |
| **CASH AND  CASH EQUIVALENTS,** beginning of period                              |       | 10,612,430                   |       | 1,007,353 |   |
| **CASH AND  CASH EQUIVALENTS,** end of period                                    |       | $                            | 9,548,729  |   | $ | 926,871 |   |
|                                                                             |       |                         |       |   |   |
| **SUPPLEMENTAL  DISCLOSURES OF CASH FLOWS INFORMATION:**                         |       |                         |       |   |   |
| **INTEREST  PAID**                                                               |       | $                            | 1,085,350  |   | $ | 2,265,518 |   |

 

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

 

Duringthe period ended March 31, 2004, interest expense from TEM Puerto Ricototaling $184,830 was capitalized into long-term debt.

 

The accompanying notes are integral part of these consolidatedfinancial statements.

 

4

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CLEARCOMM, L.P.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31,2004 (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-Xpertaining to 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 March 31, 2005 and results of operations and cashflows for the three-month periods ended March 31, 2005 and 2004.  The unaudited interim consolidated financialstatements should be read in conjunction with the summary of significantaccounting policies and notes to consolidated financial statements included inthe Partnership’s Annual Report on Form 10-K for the year ended December 31,2004.  Results of operations for interimperiods are not necessarily indicative of the results that may be expected forthe 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 1,600 limited partners alsoinvested in 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.

 

NewComm Wireless Services, Inc. (“NewComm”)

 

ThePartnership established its Puerto Rico network by forming a wholly ownedsubsidiary, NewComm, on January 29, 1999. NewComm commenced providing PCS services in Puerto Rico in September 1999.

 

On February 4, 1999, the Partnership and NewComm entered into anagreement with Telefónica Móviles, S.A. (“TEM”), whereby the Partnershipcontributed its two Puerto Rico Licenses to NewComm and TEM provided 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 was convertible into 49.9% ofNewComm’s equity.  The Note was convertedto equity by a successor and affiliate of TEM, Telefónica Móviles PuertoRico, Inc. (“TEM Puerto Rico”), on April 20, 2005 pursuant tothe Settlement Agreement described below in Part I, Item 2.

 

The Partnership has agreed to sell to TEM Puerto Rico such number ofshares of NewComm as shall be necessary to enable TEM Puerto Rico to have atotal of 50.1% interest in NewComm.  Thetransaction, which is described in the Settlement Agreement, involves inaddition amendments to the Stock Purchase Agreement, a Shareholders Agreement,and a Sale Agreement.  A summary of theterms of these agreements is included in the Partnership’s Annual Report on Form 10-Kfor the year ended December 31, 2004. The foregoing transaction is described in greater detail below in Part I,Item 2, and the Settlement Agreement and the amendments to the other agreementsdescribed above are attached at exhibits to this Quarterly Report on Form 10-Q.

 

In each of November 2000, December 2000,and March 2001, NewComm received $5,000,000, from Syndicated CommunicationsVenture Partners IV, L.P. (“Syncom”), a third party, in exchange forapproximately 4.92% ownership in NewComm. Syncom has contributed $25 million toNewComm in exchange for approximately 8.2% ownership interest in NewComm.  The last $10 million installment wascontributed in November 2002.

 

On March 2,2002, the Partnership sold approximately 4.08% of NewComm to a group ofinvestors led by Fleet Development Ventures (“The Fleet Group”)  for $13 million.  The Partnership and TEM contributed approximately$9 million each to NewComm in the form of equity and convertible debt,respectively. The Partnership and TEM have committed an additional $10M each toclose the Project Finance Facility.  ThePartnership believes it has obtained financing alternatives, together with TEM,to provide NewComm with the capital necessary for the Project Finance Facilityand to fund NewComm’s operations.

 

5

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As a result of the Settlement Agreement, thePartnership has obtained the appropriate financing sources to provide NewCommwith the capital necessary for the Project Finance Facility and to fund NewComm’soperations.  In addition, NewComm’sShareholders possess the following ownership interests in NewComm, as of thedate of effectiveness of the Settlement Agreement:

 

| **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 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 eMilios International, L.L.C., a Floridalimited liability company, to promote and establish in Puerto Rico the eMiliosconcept (described below).  The jointventure was formed under a Puerto Rico corporation named Internet Surfing Storesof Puerto Rico, Inc. (“ISS”).  ThePartnership owns 49% and eMilios International owns 51% of ISS.

 

The eMilios concept involves internet communication galleries that aregeared towards educating people in the use of computers and the internet, and actsas a communication and recreational center as well.  The broadband connectivity that is offered ateMilios allows the stores to efficiently offer internet communications and alsoaccess to a great variety of interactive content, such as cyber games, as wellas software and tools for free lancers and small business entities.  The service is provided and collected with aproprietary smart card and software application.  The commitment of the Partnership to ISS is$1 million and eMilios International has committed $500,000 in cash plustrade-name, systems, software, and technology know-how equivalent to$500,000.  The Partnership is responsiblefor 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 2004due to unfavorable market conditions in the area.  As a result, the Partnership has written downits Investment in the subsidiary by $165,306 to reflect the change.  The investment has an exit mechanismwhereby at any time after 2003, ClearComm can force the acquisition of itsshares in ISS or the sale of the whole company.

 

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 incurred losses amounting to $5 million for the three-month period endedMarch 31, 2005 and incurred operating losses of $4.5 million for the threemonth period ended March 31, 2004. It also has working capital deficits and partners’ capital deficit of $156.0million and $124.0 million, respectively, as of March 31, 2005.  The Partnership is likely to continueincurring losses until such time as its subscriber base generates revenue inexcess of the Partnership’s expenses. Development of a significant subscriber base is likely to take time,during which the Partnership must finance its operations by means other thanits revenues.

 

As part of an agreement with TEM, NewComm entered into a contract withLucent Technologies, Inc. (“Lucent”) that required Lucent to build anetwork that uses the Code Division Multiple Access (“CDMA”) protocol.  The total cost of the network

 

6

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was approximately $125 million. During 2000, NewComm’s management and Lucent agreed on formallyextending the payment of up to $61.0 million of the total amount due under thecontract under a formal financing agreement. An Agreement restructuring Lucent’soutstanding debt was executed on June 4, 2003.  The now outstanding debt to Lucent is $48.5million and is payable over a six-year period at 8% annual interest rate.  On June 20, 2003, an agreementrestructuring Alcatel’s debt was executed. Alcatel’s credit is now $2.5 million at 6.5% payable over a three yearperiod.

 

Pursuant to the Settlement Agreement, TEM agrees to undertake all commercially reasonable actions necessary torefinance the Bridge Loan on or before April 20, 2008, with a two-yearterm loan maturing on or before April 20, 2010 (“The Long-Term Financing”)and to cause Telefónica S.A., its parent company (“TEF”), subject to thesatisfaction 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 FCC debt which originated when the Partnershipacquired its PCS licenses, and for which the Partnership owes the United Statesfederal government approximately $33.6 million plus accrued interest at 6.5% asof March 31, 2005, TEM has secured the repayment of this debt by means ofa subordinated line of credit guaranteed as described on the SettlementAgreement.

 

TEM has agreed to undertake all commercially reasonable actionsnecessary to arrange a subordinated line of credit from a commercial bank forNewComm, the proceeds of which shall be available solely to pay the balance ofthe FCC debt as currently scheduled or as extended.

 

A total of $73.8 million in accounts payable to TEM and T-Moviles wasconverted into equity as a result of the Settlement Agreement on April 20,2005.  This conversion has significantlydecreased the Partnership’s accounts payable by said amount and increasedNewComm’s capital account from $44.5 million to $118 million.

 

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 operationsduring such period.  However, in theabsence of

 

7

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improved operating results and cash flows, and without the closing ofits contemplated permanent financing, the Partnership may face liquidityproblems to fund its operations and meet its obligations.  As a result of these matters, substantialdoubt exists about the Partnership’s ability to continue as a goingconcern.  The accompanying consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

3.                                       **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 identificationof entities for which control is achieved through means other than throughvoting rights (“variable interest entities” or “VIE’s”) 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 a revision of the interpretation No. 46 to defer theimplementation, clarify some of its provisions and to exempt certain entitiesfrom its requirements.  Management doesnot expect that the application of this standard will have any effect on theCompany’s consolidated results of operations or its financial condition.

 

b)             In May 2003,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 150 (FAS-150), Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.  FAS-150 addresses certain financialinstruments that, under previous guidance, could be accounted for as equity,but now must be classified as liabilities in statements of financialposition.  These financial instruments include:(1) mandatory redeemable financial instruments, (2) obligations torepurchase the issuer’s equity shares by transferring assets, and (3) obligationsto issue a variable number of shares. With limited exceptions, FAS-150 is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective atthe beginning of the first interim period beginning after June 15,2003.  The Company does not expect thatthe adoption of FAS-150 will have a material impact on its consolidated resultsof operations and financial position.

 

c)              In April 2003,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 149 (FAS-149), Amendment of Statement 133 onDerivative Instruments and Hedging Activities. FAS-149 amends and clarifies accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under FAS 133, Accounting for Derivative Instruments andHedging Activities.  FAS-149 is effectivefor contracts entered into or modified after June 30, 2003.  The Company does not expect that the adoptionof FAS-149 will have an impact on its consolidated results of operations andfinancial position.

 

d)             In December 2003,the Financial Accounting Standards Board issued a revised Statement ofFinancial Accounting Standards No. 132 (FAS-132R), Employers’ Disclosuresabout Pensions and Other Postretirement Benefits, which replaces the previouslyissued Statement.  FAS-132R increases theexisting disclosures for defined benefit pension plans and other definedbenefit postretirement plans.  However,it does not change the measurement or recognition of those plans as requiredunder FAS-87, Employers’ Accounting for Pensions, FAS-88, Employers’ Accountingfor Settlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits, and FAS-106, Employers’ Accounting for PostretirementBenefits Other Than Pensions. Specifically, FAS-132R requires companies to provide additionaldisclosures about pensions plan assets, benefit obligations, cash flows, andbenefit costs of defined benefit pension plans and other defined benefitpostretirement plans.  Also, companiesare 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 andtarget allocation percentages for these asset categories.  The Company is currently evaluating theeffect 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 ofDebt*** – ***an amendment of APBOpinion No. 30***, which required all gains and losses from extinguishments of debt to beaggregated and, if material, classified as an extraordinary item, net ofrelated income tax effect. As a result, the criteria in Opinion 30 will now beused to classify those gains and losses. SFAS No. 145 becomes effective for financial statements issued onor after May 15, 2002.  Requirementsand guidance of SFAS No. 145 were applied in connection with the write-offof the FCC debt discount.  Please referto Note 14 (c).

 

f)                In June 2002,the FASB issued SFAS No. 146, ***Accounting for CostsAssociated with Exit or Disposal Activities***.  SFAS No. 146 requires that a liabilityfor a cost associated with an exit or disposal activity to be recognized andmeasured initially at fair value only when the liability is incurred.  SFAS No. 146 also establishes that fairvalue is

 

8

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the objective for initial measurement of theliability.  SFAS No. 146 applies tocosts associated with an exit activity but does not involve an entity newlyacquired in a business combination 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 exitor disposal activities that were initiated after December 31, 2002.  The implementation of SFAS No. 146 didnot have a material effect on the Partnership’s consolidated financial positionor results from operations.

 

g)             In December 2002,the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  For a guaranteesubject to FASB Interpretation No. 45, a guarantor is required to:

 

Measure and recognize the fair value of theguarantee at inception (for many guarantees, fair value will be determinedusing a present value method); and

 

Provide new disclosures regarding the natureof any recourse provisions or assets held as payments, the current carryingamount of the guarantee liability, and the nature of any recourse provisions orassets held as collateral that could be liquidated and allow the guarantor torecover all or a portion of its payments in the event guarantee payments arerequired.

 

h)             The disclosurerequirement of this Interpretation is effective for financial statements forfiscal years ending after December 15, 2002; it did not have any effect onthe Partnership’s financial statements. The initial recognition and measurement provisions are effective prospectivelyfor guarantees issued or modified on or after January 1, 2003, which didnot have any effect on the Partnership’s financial statements.

 

4.                                       LEGALPROCEEDINGS

 

##### From time to time the Partnership is involved in litigation arisingfrom the ordinary course of business, some of which is ongoing.  The General Partner does not believe that anylitigation involving the Partnership will have a material adverse effect on thePartnership’s business or financial condition.

#####  

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

 

Forward-looking Statements

 

This Quarterly Report on Form 10-Q andfuture filings by the Partnership on Form 10-Q and Form 8-K andfuture oral and written statements by the Partnership may include certainforward-looking statements, including (without limitation) statements withrespect to anticipated future operating and financial performance, growthopportunities and growth rates, acquisition and divestitive opportunities, andother similar forecasts and statements of expectation.  Words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “seeks,” “estimates,” and “should,” and variations ofthese words and similar expressions, are intended to identify theseforward-looking statements.  Forward-looking statements by the 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 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.

 

9

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Introduction

 

The information contained in this Part I, Item 2 updates, and shouldbe read in conjunction with, information set forth in Part II, Items 7 and8, in the Company’s Annual Report on Form 10-K for the year ended December 31,2004, in addition to the interim consolidated financial statements andaccompanying notes presented in Part 1, Item 1 of this Quarterly Report onForm 10-Q.

 

The Partnership was formed in January 1995and is managed 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 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.

 

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 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, and TEM Puerto Rico was consummated on April 20, 2005 pursuant tothe terms of the Settlement Agreement. Some of the most important provisions of the Settlement Agreement aresummarized below:

 

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

 

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

 

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

 

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

 

•                  Uponthe earlier to occur of a liquidation or sale of NewComm, TEM Puerto Rico’sacquisition of 50.1% of NewComm stock pursuant to the Stock Purchase Agreement,or the fifth anniversary of the Settlement Agreement’s effective date, TEMPuerto Rico will be required to pay a premium to the Partnership and NewComm’sother shareholders.  The amount of thepremium payment will be calculated pursuant to the terms set forth in theSettlement Agreement, but will not exceed 16.6% of the resulting proceeds, netof certain costs, fees, and expenses and minus NewComm’s indebtedness existingat such time.

 

10

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 On April 20,2005, the Stock Purchase Agreement was amended in order to, among other things,extend by 3 1⁄2 years, to approximately October 2008, TEM Puerto Rico’soption to buy a majority interest in NewComm. In addition, the Sale Agreementwas amended in order to clarify the procedures that would apply upon the saleof NewComm to a third-party purchaser in the event that neither TEM PuertoRico, nor the Partnership exercised its rights under the Sale Agreement topurchase NewComm.

 

Also, the Shareholders Agreement was amendedand restated on April 20, 2005, and provides among other things that onceTEM Puerto Rico becomes the holder of more than 50% of NewComm’s capital stock,TEM Puerto Rico will have the right to designate four directors to NewComm’sboard (two more directors than it currently has the right to designate), andthe Partnership will have the right to designate three directors to NewComm’sboard (one less director than it currently has the right to designate).  It also provides that if NewComm proposes toissue additional shares at a price that is deemed fair by TEM Puerto Rico onthe basis of an equity valuation, and TEM Puerto Rico does not exercise itspreemptive rights under the agreement, then TEM Puerto Rico will be obligatedto transfer to NewComm’s other shareholders the number of its shares needed toprevent the other shareholders from being diluted as a result of NewComm’sproposed issuance.

 

Results of Operations

 

Three-month period ended March 31-, 2005 compared with three-monthperiod ended March 31, 2004.

 

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

 

| ** **                              | ** ** | **Three-Month Periods Ended  March 31,** | ** **     | ** **     | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|----------------|----------------|------------|
| ** **                              | ** ** | **2005**                                      | ** **     | **2004**       | ** ** | **Change** | ** ** |
| **Revenues:**                           |       |                                          |           |           |       |   |   |
| **Service  revenues**                   | ** ** | **$**                                         | **22,878,520** | ** **     | **$**      | **26,878,225** | ** ** | **-15** | **%** |
| **Handsets  and accessories sales**     | ** ** | **737,460**                                   | ** **     | **1,436,596**  | ** ** | **-49** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Total  Revenues**                     | ** ** | **23,615,980**                                | ** **     | **28,314,821** | ** ** | **-17** | **%** |
| **Expenses:**                           |       |                                          |           |           |       |   |   |
| **Operating  expenses**                 | ** ** | **25,599,110**                                | ** **     | **30,565,872** | ** ** | **-16** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Income  (loss) from operations**      | ** ** | **(1,983,130**                                | **)**          | **(2,251,051** | **)**      | **-12** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Interest  expense**                   | ** ** | **(3,054,582**                                | **)**          | **(2,366,767** | **)**      | **29** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Loss  before other income (expense)** | ** ** | **(5,037,712**                                | **)**          | **(4,617,818** | **)**      | **9** | **%** |
|                                         |            |                                               |                |                |            |  |  |  |  |

 

Revenues

 

The Partnership’s revenues for thethree-month period ended March 31, 2005 decreased by 17% or $4.7 millionfrom $28.3 millions to $23.6 as compared for the same period in 2004. Totalrevenues include service as well as handset and accessories revenues.  Service revenues for the three-month periodended March 31, 2005 decreased by 15% or $4 million when compared to thesame period in 2004 while handset and accessories sales decreased by 49% or .7million.  The decrease in handsets andaccessories revenues is mainly due to handset units pricing adjustments.  The decrease in service revenues is relatedto a net decrease in the customer base during the quarter as compared to thesame period in 2004.  Strong competitionamong the seven PCS companies in Puerto Rico is the main reason for thedecrease.  The Partnership isaggressively pursuing a marketing campaign which is intended to benefit itscustomer base by providing additional services while attracting customers fromother companies.

 

11

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Expenses

 

The following table shows the variances for the three month periodended March 31, 2005 as compared to the same period in 2004:

 
| ** **                                                     | ** ** | **Three-Month Periods Ended  March 31,** | ** **     | ** **    | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|----------------|---------------|------------|
| ** **                                                     | ** ** | **2005**                                      | ** **     | **2004**      | ** ** | **Change** | ** ** |
|                                                           |       |                                          |           |          |       |   |   |
| **Cost of  handset and accesories**                            | ** ** | **$**                                         | **4,185,011**  | ** **    | **$**      | **5,938,964** | ** ** | **-30** | **%** |
| **Interconnection  expense**                                   | ** ** | **795,577**                                   | ** **     | **975,554**   | ** ** | **-18** | **%** |
| **Sales  and dealers commissions**                             | ** ** | **2,034,700**                                 | ** **     | **2,846,832** | ** ** | **-29** | **%** |
| **Salaries  and benefits**                                     | ** ** | **3,913,919**                                 | ** **     | **4,034,411** | ** ** | **-3** | **%** |
| **Selling  and advertising expense**                           | ** ** | **710,503**                                   | ** **     | **1,456,666** | ** ** | **-51** | **%** |
| **Legal  and professional services**                           | ** ** | **391,782**                                   | ** **     | **713,352**   | ** ** | **-45** | **%** |
| **Depreciation**                                               | ** ** | **4,571,468**                                 | ** **     | **4,304,462** | ** ** | **6** | **%** |
| **Provision  for doubtful accounts**                           | ** ** | **2,188,569**                                 | ** **     | **2,346,800** | ** ** | **-7** | **%** |
| **Rent  expense**                                              | ** ** | **1,793,093**                                 | ** **     | **1,635,825** | ** ** | **10** | **%** |
| **Taxes,  other than income**                                  | ** ** | **1,042,232**                                 | ** **     | **1,008,538** | ** ** | **3** | **%** |
| **Network  operation and maintenance**                         | ** ** | **1,940,708**                                 | ** **     | **1,566,547** | ** ** | **24** | **%** |
| **Other  expenses**                                            | ** ** | **1,170,182**                                 | ** **     | **2,341,278** | ** ** | **-36** | **%** |
| **Management  fee to General Partner**                         | ** ** | **68,750**                                    | ** **     | **68,750**    | ** ** | **0** | **%** |
| **Consulting  and legal services rendered by related parties** | ** ** | **792,616**                                   | ** **     | **1,327,894** | ** ** | **-40** | **%** |
| ** **                                                     | ** ** | ** **                                    | ** **     | ** **    |       |   |   |
| **Total  Expenses**                                            | ** ** | **$**                                         | **25,599,110** | ** **    | **$**      | **30,565,872** | ** ** | **-15** | **%** |

 

Expenses for the three-month period ended March 31,2005 totaled $25,599,110 as compared to $30,565,872 for the same period in2004.  During such first quarter of 2005,the Partnership’s expenses decreased by 15% or $4.9 million.

 

The overall decrease in expenses of $4.9million is mainly due to a decrease of 30% in the cost of handsets andaccessories sold, combined with an increase in network maintenance costs, andrent.  The decrease in cost of handsetssold is directly related to the pricing adjustments offered to customers.  In addition, the handset subsidy, whereby thecost of acquiring handset is greater that the price charged to customers, wassignificantly reduced during the quarter.

 

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.

 

Loss from operations for the three month period ended March 31, 2005 of$1,983,130 shows a favorable variance of 12% or $200,000 as compared to the lossfrom operations for the same period in 2004. This reduction in loss from operations is related to the overallreduction of expenses during the quarter which compensated the decrease inrevenues.

 

Interest expense for the three month periodended March 31, 2005 of $3 million ($2.4 million in 2004) and depreciationexpense of $4.6 million ($4.6 million in 2004) reduce the income fromoperations and result in a net loss before other income of $5,037,712 for thefirst quarter of 2004 ($4,617,818 in 2004); an overall increase in net loss of9% when compared to 2004.  The increasein interest expense is mainly attributable to additional debt incurred duringthe period.  However, a significantportion of such debt will be converted into equity pursuant to the SettlementAgreement.

 

Depreciation expense remains constant as nomajor fixed assets have been acquired during the quarter.

 

12

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Three-month period ended March 31, 2004 compared with three-monthperiod ended March 31, 2003.

 

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

 
| ** **                              | ** ** | **Three-Month Periods Ended  March 31,** | ** **     | ** **     | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|----------------|----------------|------------|
| ** **                              | ** ** | **2004**                                      | ** **     | **2003**       | ** ** | **Change** | ** ** |
| **Revenues:**                           |       |                                          |           |           |       |   |   |
| **Service  revenues**                   | ** ** | **$**                                         | **26,878,225** | ** **     | **$**      | **24,399,397** | ** ** | **10** | **%** |
| **Handsets  and accessories sales**     | ** ** | **1,436,596**                                 | ** **     | **1,895,484**  | ** ** | **-24** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Total  Revenues**                     | ** ** | **28,314,821**                                | ** **     | **26,294,881** | ** ** | **8** | **%** |
| **Expenses:**                           |       |                                          |           |           |       |   |   |
| **Operating  expenses**                 | ** ** | **26,261,410**                                | ** **     | **23,955,984** | ** ** | **10** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Income  (loss) from operations**      | ** ** | **2,053,411**                                 | ** **     | **2,338,897**  | ** ** | **-12** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Interest  expense**                   | ** ** | **(2,366,767**                                | **)**          | **(3,445,554** | **)**      | **-31** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Depreciation  and amortization**      | ** ** | **(4,304,462**                                | **)**          | **(4,018,139** | **)**      | **7** | **%** |
|                                    |       |                                          |           |           |       |   |   |
| **Loss  before other income (expense)** | ** ** | **(4,617,818**                                | **)**          | **(5,124,796** | **)**      | **-10** | **%** |
|                                         |            |                                               |                |                |            |  |  |  |  |

 

Revenues

 

The Partnership’s revenues for thethree-month period ended March 31, 2004 increased by 8% or $2 million from$26.3 million to $28.3 million as compared for the same period in 2003. Totalrevenues include service as well as handset and accessories revenues.  Service revenues for the three-month periodended March 31, 2004 increased by 10% or $2.5 million when compared to thesame period in 2003 while handset and accessories sales decreased by 24% or $0..5 million.  The decrease in handsets andaccessories revenues is mainly due to handset units pricing adjustments.  The increase in service revenues is relatedto the utilization of airtime and an increase in our contract customer base.

 

Expenses

 

The following table shows the variances for the three month periodended March 31, 2004 as compared to the same period in 2003:

 
| ** **                                                     | ** ** | **Three-Month Periods Ended  March 31,** | ** **     | ** **    | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|----------------|---------------|------------|
| ** **                                                     | ** ** | **2004**                                      | ** **     | **2003**      | ** ** | **Change** | ** ** |
|                                                           |       |                                          |           |          |       |   |   |
| **Cost of  handset and accesories**                            | ** ** | **$**                                         | **5,938,964**  | ** **    | **$**      | **4,884,546** | ** ** | **22** | **%** |
| **Interconnection  expense**                                   | ** ** | **975,554**                                   | ** **     | **1,126,352** | ** ** | **-13** | **%** |
| **Sales  and dealers commissions**                             | ** ** | **2,846,832**                                 | ** **     | **1,387,505** | ** ** | **105** | **%** |
| **Salaries  and benefits**                                     | ** ** | **4,034,411**                                 | ** **     | **4,234,708** | ** ** | **-5** | **%** |
| **Selling  and advertising expense**                           | ** ** | **1,456,666**                                 | ** **     | **1,555,198** | ** ** | **-6** | **%** |
| **Legal  and professional services**                           | ** ** | **713,352**                                   | ** **     | **1,699,872** | ** ** | **-58** | **%** |
| **Provision  for doubtful accounts**                           | ** ** | **2,346,800**                                 | ** **     | **2,030,005** | ** ** | **16** | **%** |
| **Rent  expense**                                              | ** ** | **1,635,825**                                 | ** **     | **2,256,443** | ** ** | **-28** | **%** |
| **Taxes,  other than income**                                  | ** ** | **1,008,538**                                 | ** **     | **1,197,387** | ** ** | **-16** | **%** |
| **Network  operation and maintenance**                         | ** ** | **1,566,547**                                 | ** **     | **942,075**   | ** ** | **66** | **%** |
| **Other  expenses**                                            | ** ** | **2,341,278**                                 | ** **     | **1,701,558** | ** ** | **38** | **%** |
| **Management  fee to General Partner**                         | ** ** | **68,750**                                    | ** **     | **60,750**    | ** ** | **13** | **%** |
| **Consulting  and legal services rendered by related parties** | ** ** | **1,327,894**                                 | ** **     | **879,585**   | ** ** | **51** | **%** |
| ** **                                                     |       | **—**                                    |           |          |       |   |   |
| **Total  Expenses**                                            | ** ** | **$**                                         | **26,261,410** | ** **    | **$**      | **23,955,984** | ** ** | **10** | **%** |

 

Expenses for the three-month period ended March 31,2004 totaled $26,261,410 as compared to $23,955,984 for the same period in2003.  During the first quarter of 2004,the Partnership’s expenses increased by 10% or $2.3 million

 

The overall increase in expenses of $2.3million is mainly due to an increase of 22% in the cost of handsets andaccessories sold, combined with an increase in network maintenance costs,dealers commissions and professional services. The increase in cost of

 

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handsets sold is directly related to the handset subsidy whereby thecost of acquiring handsets is higher than the pricing offered tocustomers.  In fact, the handset subsidyfor the three month period ended March 31, 2004 was $4.5 million comparedto $3 million for the same period in 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 March 31, 2004 of $2,053,411 shows a slight decrease of 12%or $280,000 as compared to the income from operations for the same period in2003.  This reduction in income fromoperations is related to the cost of acquiring new customers and the increasein network maintenance.

 

Interest expense for the three month periodended March 31, 2004 of $2.4 million ($3.4 million in 2003) anddepreciation expense of $4.3 million ($4 million in 2003) reduce the incomefrom operations and result in a net loss before other income of $4,617,818 forthe first quarter of 2004 ($5,124,796 in 2003); an overall reduction in netloss of 10% when compared to 2003.  Thereduction in interest expense is mainly attributable to the refinancing of thevarious debts and to reduction of debt outstanding related to the Note Payableto Alcatel.

 

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

 

Liquidity and Capital Resources

 

As of March 31, 2005, the Partnership had cash and cashequivalents amounting to $9,549,999, which are mostly related to proceeds fromthe sale of the Visalia-Porterville and California licenses in prior periodsand the Fleet Transaction.

 

As part of the agreement with TEM, NewCommentered into a contract with Lucent Technologies, Inc. (“Lucent”) thatrequired Lucent to build a network that uses the Code Division Multiple Access(“CDMA”) protocol.  The total cost of theoriginal network was approximately $125 million.  During 2000, NewComm’s management and Lucentagreed on formally extending the payment of up to $61.0 million of the totalamount of network construction payable, at the time, under a formal financingagreement.  An agreement restructuringLucent’s outstanding debt was executed on June 4, 2003.  This now outstanding debt is of $48 millionat a fixed annual interest over a six year term.

 

In addition, the Partnership owes the United States federal governmentapproximately $33.6 million plus accrued interest at 6.5% in connection withthe acquisition of its PCS licenses.  Therepayment of this debt has been secured by means of a subordinated line ofcredit guaranteed by TEF as a result of the Settlement Agreement.

 

The Partnership secured promissory note payable to TEM was converted toequity as a result of the Settlement Agreement.

 

ThePartnership estimates that the total cost to implement NewComm’s business planwill be approximately $200 million.  Thisconsists of approximately $125 million in costs associated with building-outthe Puerto Rico Network, and approximately $75 million to fund NewComm’s operationsuntil these become profitable.  NewCommobtained a short term financing (“Bridge Loan”) of $60 million. As a result ofthe Settlement Agreement effective April 20, 2005, TEM agrees to undertakeall commercially reasonable actions necessary to refinance the Bridge Loan onor before April 20, 2008, with a two-year term loan maturing on or before April 20,2010 and to cause TEF, subject to the satisfaction of certain conditions, toguarantee the prompt and complete payment and performance by NewComm when dueof the Long-Term Financing.  TheLong-Term Financing guarantee shall be jointly and severally guaranteed by thePartnership.

 

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 During2001, the Partnership sold 8.02% of NewComm to Syncom Venture Funds in exchangefor $25 million,  and on March 2,2002, the Partnership sold 4.08% of NewComm to a group of investors led byFleet Development Ventures for $13 million. Those percentages have diluted due to the conversion to equity of TEM’s49.9% promissory notes.  As a result, thestockholders ownership interest in NewComm are as follows:

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

 

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 March 31, 2005, the Partnershiphad cash equivalents and short-term investments of approximately $9,549,999consisting 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 has beenconverted into equity as described on the Settlement Agreement.

 

An agreement restructuring Lucent’s outstanding debt was executed on June 4,2003 (“Senior Credit Agreement”).  OnApril 1, 2005, the Partnership executed a Forebearance Agreement by whichLucent agreed to forebear payment under the Senior Credit Agreement until June29, 2005.  The now outstanding debt toLucent is $48 million and is payable over a six-year period at 8% annualinterest rate.  On June 20, 2003, anagreement restructuring Alcatel’s debt was executed.  Alcatel’s credit is now $2.5 million at 6.5%payable over a three year period.  As aresult of the Settlement Agreement the Bridge Loan will be refinanced on orbefore April 20, 2008 with jointly and severally guarantees from TEF andthe Partnership.

 

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

 

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 ON FORM 8-K

 

(a)                                  Listof Exhibits

 

Exhibit 10.1:  Settlement Agreement and Mutual Release,dated April 20, 2005, among NewComm Wireless Services, Inc. (“NewComm”),Telefónica Móviles S.A., Telefónica Móviles Puerto Rico, Inc., ClearComm,L.P., and the shareholders of NewComm.

 

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Exhibit 10.2:  Amendment No. 6 to Stock PurchaseAgreement, dated April 20, 2005, among Telefónica Móviles Puerto Rico, Inc.,ClearComm, L.P., and NewComm Wireless Services, Inc.

 

Exhibit 10.3:  Amendment No. 1 to Sale Agreement, datedApril 20, 2005, among Telefónica Móviles Puerto Rico, Inc.,ClearComm, L.P., Syndicated Communications Venture Partners IV, L.P., FleetDevelopment Ventures, LLC, Opportunity Capital Partners IV, L.P., PowerEquities, Inc., and NewComm Wireless Services, Inc.

 

Exhibit 10.4:  Amended and Restated NewComm WirelessServices, Inc. Shareholders Agreement, dated April 20, 2005, amongTelefónica Móviles Puerto Rico, Inc., ClearComm, L.P., SyndicatedCommunications Venture Partners IV, L.P., Fleet Development Ventures, LLC,Opportunity Capital Partners IV, L.P., Power Equities, Inc., and NewCommWireless Services, Inc.

 

Exhibit 31.1:  Certification of Chief Executive Officerpursuant to Rule 13a-14(a)/15d-14(a).

 

Exhibit 31.2:  Certification of Chief Financial Officer pursuantto Rule 13a-14(a)/15d-14(a).

 

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

 

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

 

(b)                                  Noreports on Form 8-K have been filed during the quarter for which thisreport is filed.

 

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

 

 

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. |
|                    | Its:   | General Partner               |
|                    |   |                          |
| Date: May 23, 2005 |   | By:                           | /s/ Javier O. Lamoso |   |
|                    |   | Name: Javier O. Lamoso        |
|                    |   | Title: President              |

 

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