CLEARCOMM L P - 10-Q Quarterly Report

PART I. FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS

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 consolidated statements.

ClearComm, L.P.

CONSOLIDATED STATEMENTS 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 consolidated financial statements.

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT

(Unaudited)

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 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 consolidated financial statements.

ClearComm, L.P.

CONSOLIDATED STATEMENTS 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 consolidated financial statements.

ClearComm, L.P.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND INTRODUCTION

The unaudited interim consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and accruals which, in the opinion of management, are considered necessary for a fair presentation of the Partnership’s financial position at September 30, 2004 and results of operations and cash flows for the three-month and nine-months periods ended September 30, 2004 and 2003. The unaudited interim consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2003. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.

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

SuperTel Communications Corp. (“SuperTel”), a Puerto Rico corporation, is the General Partner. Its total share of the income and losses of the Partnership is 25% in accordance with the Partnership Agreement. Approximately 1,500 limited partners also invested in the Partnership through a private placement.

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

On February 4, 1999, the Partnership entered into a joint venture agreement (the “Joint Venture Agreement”) with Telefónica Larga Distancia De Puerto Rico, Inc. (“TLD”) to jointly develop and operate certain PCS licenses in Puerto Rico. Among the most important provisions of the Joint Venture Agreement are the following:

• The Partnership transferred all of its Puerto Rico PCS licenses including its related debt with the FCC to NewComm Wireless Services, Inc. (“NewComm”), a newly organized Puerto Rico corporation, in exchange for all of NewComm’s issued and outstanding common stock.

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

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

• The new Sale Agreement provides that at any time after 14 months from the signing of the Stock 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 sell NewComm. Within 30 days of a notice of sale, TLD (or ClearComm as the case may be) would have the right to purchase ClearComm’s (or TLD’s) interest. The purchase price to be paid at that time would be based on a valuation performed by the investment banking firm that prepared the one under the Stock Purchase Agreement. If TLD does not exercise its right to buy out ClearComm’s interest, the shareholders will be bound to proceed with the sales

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

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

• NewComm and TLD entered into certain management and technology transfer agreements.

In September 1999, NewComm commenced providing PCS services in Puerto Rico.

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

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

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

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

California Licenses

On August 28, 2000, the Partnership entered into a Purchase and Sale Agreement with Leap Wireless International (“Leap Wireless”), pursuant to which the Partnership sold the Visalia-Porterville license to Leap Wireless in exchange 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 and Sale Agreement with Metro PCS pursuant to which the Partnership sold all of its remaining California Licenses. The sale was approved by the FCC and the licenses were transferred to Metro PCS on April 15, 2004 for a $10,900,000 cash payment. The Partnership 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 Florida Limited Liability Corporation, to promote and establish in Puerto Rico the eMilios concept. The joint venture was formed under a Puerto Rico Corporation named Internet Surfing Stores of Puerto Rico, Inc. (“ISS”). The Partnership owns 49% and eMilios International owns 51% of ISS.

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

Tender Offer

During the months of May and June of 2004, the Partnership conducted a voluntary tender offer program to all partners holding less than 2 Units. The program was available to over 1,100 partners. The price per Unit offered was $8,500.00. Only 130 unit-holders tendered their Units amounting to approximately 140 Units re-purchased and representing approximately a 5% reduction of outstanding partnership Units.

2. FINANCING REQUIREMENTS

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

2004 and a net loss of $23.6 million for the nine month period ended September 30, 2003. It also has working capital 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 such time as its subscriber base generates revenue in excess of the Partnership’s expenses. Development of a significant subscriber base is likely to take time, during which the Partnership must finance its operations by means other than its revenues.

As part of the agreement with TEM, NewComm entered into a contract with Lucent Technologies, Inc. (“Lucent”) that required Lucent to build a network that uses the Code Division Multiple Access (“CDMA”) protocol. The total cost of the network was approximately $125 million. During 2000, NewComm’s management and Lucent agreed on formally extending the payment of up to $61.0 million of the total amount due under the contract under a formal financing agreement. An Agreement restructuring Lucent’s outstanding debt was executed on June 4, 2003. The now outstanding debt to Lucent is approximately $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 $1.3 million at 6.5% payable over a three year period. Also, by means of letter from TEM (and its parent, Telefónica Internacional, S.A.), TEM agreed to issue a corporate guarantee to serve as collateral for a $110 million bank loan.

Management believes that the Partnership will comply with all the requirements for obtaining the financing and believes that cash and cash equivalents on hand, anticipated growth in revenues, vendor financing 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, the Partnership may face liquidity problems to fund its operations and meet its obligations. As a result of these matters, substantial doubt exists about the Partnership’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

(d) In December 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. For a guarantee subject to FASB Interpretation No. 45, a guarantor is required to:

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

• Provide new disclosures regarding the nature of any recourse provisions or assets held as payments, the current carrying amount of the guarantee liability, and the nature of any recourse provisions or assets held as collateral that could be liquidated and allow the guarantor to recover all or a portion of its payments in the event guarantee payments are required.

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

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

(e) In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). Fin 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provides guidance on the identification of entities (“variable interest entities” or “VIE’s”) for which control is achieved through means other than through voting rights and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest, or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In December 2003, the FASB issued a revision of the interpretation No. 46 to defer the implementation, classify some of its provisions and to exempt certain entities from its requirements. Management does not expect that the application of this standard will have any effect on the Partnership’s consolidated results of operations or financial condition.

4. LEGAL PROCEEDINGS

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

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

Forward-looking Statements

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

Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Partnership as a result of a number of important factors. Examples of these factors include, without limitation, rapid technological developments and changes in the telecommunications industry; ongoing deregulation (and the resulting likelihood of significantly increased price and product/service competition) in the telecommunications industry as a result of the Telecommunications Act of 1996 and other similar federal and state legislation and the federal and state rules and regulations enacted pursuant to that legislation; regulatory limitations on the Partnership’s ability to compete in the telecommunications services industry; and continuing consolidation in the telecommunications services industry. In addition to these factors, actual future performance, outcomes and results may differ materially because of other, more general factors including, without limitation, general industry and market conditions and growth rates, domestic and international economic conditions, governmental and public policy changes and the continued availability of financing in the amounts, at the terms and on the conditions necessary to support the Partnership’s future business.

Introduction

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

The Partnership was formed in January 1995 and 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 the Block C band and to take advantage of the benefits that the FCC has set aside for entrepreneurs. The Partnership owns the Puerto Rico Licenses, which consist of two 15 MHz PCS licenses covering Puerto Rico. The Partnership owned certain California licenses that sold in 2001 and 2004.

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

The Partnership established its Puerto Rico network by forming a wholly owned subsidiary, NewComm, on January 29, 1999. On February 4, 1999, the Partnership and NewComm entered into an agreement with TEM, whereby the Partnership contributed 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 is pursuant to a secured convertible promissory note (the “Note”) which is convertible into 49.9% of NewComm’s equity. The Note however, cannot be converted until the FCC authorizes TEM to hold more than a 25% equity interest in NewComm. By means of a Stock Purchase Agreement executed on March 12, 2002, the Partnership has agreed to sell shares equal to 0.2% in NewComm to TEM conditioned to obtaining permanent financing and a clear exit path for the Partnership. This transaction is pending Department of Homeland Security and FCC approval. The Partnership believes this transaction and permanent finance will be obtained before the end of 2004.

Results of Operations

Set forth below is a summary of the results of operations before other income and expenses for the three-month period ended September 30, 2004 compared 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 the three-month period ended September 30, 2004 decreased by 6% from $26.7 million to $25.1 as compared to the same period in 2003. Total revenues include service as well as handset and accessories revenues. Service revenues for the three-month period ended September 30, 2004 decreased by 3% when compared to the same period in 2003 while handset

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

Expenses

The following table shows the variances for the three month period ended 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 ended September 30, 2004 totaled $24,844,133 as compared to $23,692,844 for the same period in 2003. There was a 5% overall increase of operating expenses during the third quarter of 2004.

The overall increase in expenses is mainly due to the increase in the cost of handsets and accessories sold and in the provision for doubtful accounts offset by a significant reduction in the interconnection expense. The increase in the provision for doubtful accounts is related to the implementation of the new billing software and tighter credit and collection policies. Variances in other accounts are mostly related to reclassifications made to accounts as compared to 2003.

Income from Operations

Income from operations reflects the ability of the Partnership to generate positive cash flows from its operations, which does not take into consideration expenses such as amortization, depreciation and 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 month period 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 period in 2003. This decrease in income from operations is related to a 6% decrease in revenues combined with a 5% increase in overall expenses as compared with the same period in 2003.

Interest expense for the three month period ended September 30, 2004 of $2.5 million ($3.1 million in 2003) and depreciation expense of $4.6 million ($4.3 million in 2003) reduce the income from operations and result in a net loss before other income of $6,742,052 for such period of 2004 ($4,394,261 in 2003); an overall increase in net loss of 21% when compared to 2003. The reduction in interest expense is mainly attributable to the refinancing of various debts and to reduction of debt outstanding related to the Note Payable to Alcatel.

The following table summarizes changes in certain 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 September 30, 2004 totaled $80,580,647 as compared to $80,810,863 for the same period in 2003. Revenues for the nine-month period ended September 30, 2004 included $76,940,544 in service revenues and $3,640,103 in handset and accessories 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 is related to an increase in airtime on contract subscribers for the first two quarters of 2004 and to the increase in customer base during the third quarter. The decrease in handset and accessories sales is indicative of a growing contract customer base and pricing adjustments on the handsets sold.

Expenses

The following table shows the variances for the nine month period ended 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	$	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 ended September 30, 2004 totaled $76,983,672 as compared to $74,844,214 for the same period in 2003. During the nine-month period ended September 30, 2004, the Partnership’s expenses increased by 3% due to pricing adjustments made by suppliers for the cost of handsets which resulted in a 5% increase in such expense and due to the shifting of the customer base from prepaid customers to contract customers. Sales and dealers commissions were doubled compared to the same period in 2003 due to the fact that the commissions paid to sales persons and dealers are greater for contract customers than for prepaid customers. Shifting among the two categories of customer causes an increase in the sales and dealers commission.

Income from Operations

Income from operations for the nine month period ended September 30, 2004 of $3.4 million shows a decrease of 40% as compared to the income from operations for the same period in 2003. This reduction in income from operations is related to the decrease in service revenues from the shifting to contract subscribers and to the increase in the cost of acquiring new customers.

Interest expense for the nine- month period ended September 30, 2004 of $7.1 million ($10 million in 2003) and depreciation expense of $13.3 million ($12.7 million in 2003) reduce income from operations and result in a net loss before other income (expense) of $16.8 million as of the third quarter of 2004 (also $16.8 million 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 is attributable to the reduction of debt outstanding related to the Note Payable to Alcatel.

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

Liquidity and Capital Resources

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Partnership’s exposure to market risk through derivative financial instruments and other financial instruments is not material because the Partnership does not use derivative financial instruments and does not have foreign currency exchange risks. The Partnership invests cash balances in excess of operating requirements in short-term money market funds. As of September 30, 2004, the Partnership had cash equivalents and short-term investments of approximately $10,244,369 consisting of cash and highly liquid, short-term investments in money market funds.

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

An agreement restructuring Lucent’s outstanding debt was executed on June 4, 2003. The now outstanding debt 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 serve as collateral for a $110 million bank loan in order to refinance the Bridge Loan 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, Edileen Salicrup, have evaluated the Partnership’s disclosure controls and procedures within 90 days of the filing of this report.

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

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

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

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.

		ClearComm, L.P.


	By:	SuperTel Communications Corp.


Date: November 15, 2004		By:	/s/ Javier O. Lamoso
		Name: Javier O. Lamoso
		Title: President