CLEARCOMM L P - 10-Q Quarterly Report

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

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

For the transition period from to

Commission file number 0-28362

ClearComm, L.P.

(Exact name of registrant as specified in its charter)

Delaware		66-0514434
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

268 Muñoz Rivera Ave. Suite 2206 San Juan, Puerto Rico		00918-1929
(Address of principal executive offices)		(Zip Code)

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

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

Yes o No ý

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

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF ASSETS, LIABILITIES

AND PARTNERS’ DEFICIT

	June 30, 2003				December 31, 2002
	(Unaudited)				(Audited)
ASSETS:
Cash and cash equivalents	$	2,556,996			$			22,709,786
Accounts receivable, net	12,611,333				11,594,949
Accounts receivable, other	6,964,936				6,483,255
Insurance claims receivable	—				270,002
Interest receivable	11,000				8,000
Inventories, net	5,454,755				10,461,112
Prepaid expenses	1,033,151				625,610
Investment in securities	10,000,000				10,000,000
Investment in subsidiary	538,588				277,254
PCS licenses, net	57,517,974				57,517,974
Deferred financing costs	856,132				901,235
Note receivable from officer	100,000				100,000
Property and equipment, net	96,251,132				101,931,922

	$	193,895,997			$		222,881,099

LIABILITIES AND PARTNERS’ DEFICIT:
Accounts payable and accrued liabilities	$		40,672,891		$		40,130,876
Notes payable — short-term	106,434,222				89,538,758
Notes payable — long-term	120,764,691				150,505,987

Unitholders’ capital (deficit) 2906.1 units and 1 general partnership interest

	(73,975,807			)	(57,294,522				)

Total liabilities and partners deficit	$	193,895,997			$	222,881,099

BOOK VALUE (DEFICIT) PER UNIT	$		(25,455	)	$	(19,708			)

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

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES

(2003 UNAUDITED and 2002 UNAUDITED )

	Three-Month Periods Ended						Six-Month Periods Ended
	June 30						June 30
	2003			2002			2003			2002
Revenues:
Service revenues	$	25,760,778		$	25,443,665		$	50,160,175		$	52,070,415
Handset and accessories sales	2,035,527			2,359,450			3,931,011			3,713,061

	27,796,305			27,803,115			54,091,186			55,783,476

Operating Cost and Expenses:
Cost of handset and accessories	6,032,883			5,381,502			10,917,429			12,432,244
Interconnection expense	1,215,333			2,001,828			2,341,685			2,980,748
Sales and dealers commissions	1,575,700			791,209			2,963,205			2,259,509
Salaries and benefits	4,046,478			3,177,705			8,281,186			7,335,893
Advertising expense	1,443,163			3,240,163			2,998,361			4,891,333
Legal and professional services	2,203,899			2,203,500			3,903,771			4,697,892
Provision for doubtful accounts	4,062,044			1,974,286			6,092,049			5,455,014
Rent expense	2,132,656			2,697,291			4,389,099			4,171,796
Taxes other than income	1,307,449			1,544,366			2,504,836			1,925,225
Network Operation and Maintenance	797,115			0			1,739,190			0
Other expenses	1,633,898			1,829,360			3,367,635			2,483,652
Management fee to General Partner	60,750			30,000			121,500			62,000
Services rendered by related parties	648,866			1,477,493			1,531,424			3,021,342
	27,160,234			26,348,703			51,151,370			51,716,648

Income (Loss) from Operations	636,071			1,454,412			2,939,816			4,066,828

Other Income (Expense)
Interest income	66,380			189,931			130,904			305,462
Depreciation	(4,407,373		)	(4,071,901		)	(8,425,512		)	(8,019,269		)
Gain on sale of investment in stock of subsidiary				—						13,000,000
Loss on WriteOff of inventory	1,194,622						(4,364,728		)
Other Income	(49		)	—			46			—
Interest expense	(3,516,253		)	(3,615,072		)	(6,961,807		)	(8,734,358		)

	(6,662,673		)	(7,497,042		)	(19,621,097		)	(3,448,165		)

Net Income (Loss)	$	(6,026,602	)	$	(6,042,630	)	$	(16,681,281	)	$	618,663
Net Income (Loss) Attributable to General Partner	$	(6,026,602	)	$	(6,042,630	)	$	(16,681,281	)	618,663

The accompanying notes are an integral part of these consolidated financial statements.

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT

(Unaudited)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003

	Limited Partners		General Partner
	Units	Amount	General Partner			Total
BALANCES, December 31, 2002	2,906.1	—	$	(57,294,526	)	$		(57,294,526	)

Net loss for the three month period ended March 31, 2003
Net loss for the three month period ended March 31, 2003	—	—	(10,654,679		)	(10,654,679			)

Net loss for the three month period ended June 30, 2003			(6,026,602		)	(6,026,602			)

BALANCES, June 30, 2003	2,906.1	—	$	(73,975,807	)	$	(73,975,807		)

The accompanying notes are an integral part of these consolidated financial statements.

ClearComm, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(2003 UNAUDITED AND 2002 UNAUDITED)

	Six-Month Periods Ended
	June 30, 2003			June 30, 2002

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

The accompanying notes are an integral part of these consolidated financial statements.

CLEARCOMM, L.P.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 (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 June 30, 2003 and results of operations and cash flows for the six-month periods ended June 30, 2003 and 2002. 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, 2002. 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 1,600 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. Some additional points are that 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 contributed $25 million to NewComm in exchange for approximately 8.2% ownership interest in NewComm. The last $10 million installment was contributed in November 2002.

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 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 $10 million each to close the Project Finance Facility. 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 fund NewComm’s operations.

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.

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.

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 company, to promote and establish in Puerto Rico the eMilios concept (described below). 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. The commitment of the Partnership to ISS is $1 million and eMilios International has committed $500,000 in cash plus trade-name, systems, software, and technology know-how equivalent to $500,000. The Partnership is responsible for the management and day to day operations of ISS. ISS opened its first store with 48 computer stations on October 23, 2002. A second store with 40 computer stations was inaugurated on January 11, 2003 to serve the western part of Puerto Rico. The investment has an exit mechanism whereby at any time after 2003, ClearComm can force the acquisition of its shares in ISS or the sale of the whole company.

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 incurred losses amounting to $6.7 million for the three-month period ended June 30, 2003 and incurred operating losses of $6 million for the three month period ended June 30, 2002. It also has working capital deficits and partners’ capital deficit of $118.5 million and $73.4 million, respectively, as of June 30, 2003. The Partnership is likely to continue incurring 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. As of June 30, 2003, the Partnership is negotiating the restructuring of Lucent’s and Alcatel outstanding debts. The outstanding debt to Lucent is approximately $48 million and Alcatel is $2.5 million. Also, by means of letter from TEM (and its parent, Telefónica Internacional, S.A.), TEM has 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. INVENTORY — CHANGE IN ACCOUNTING METHOD

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

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

4. 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.

(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 in which either (1) the equity investors (if any) do not have a controlling financial interest of 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.

5. 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 in 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, 2002, 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 license covering Visalia-Porterville, California, had been previously sold and transferred to Leap Wireless on June 8, 2001 in exchange for $9,500,000 cash payment.

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.

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 June 30, 2003 as compared with the three-month period ended June 30, 2002:

	June 30,
	2003			2002				Change
Revenues:
Service revenues	$	25,760,778		$		25,443,665		1	%
Handsets and accessories sales	2,035,527			2,359,450				-14	%

Total Revenues	27,796,305			27,803,115				0	%
Expenses:
Operating expenses	27,160,234			26,348,703				3	%

Income (loss) from operations	636,071			1,454,412				-56	%

Interest expense	(3,516,253		)	(3,615,072			)	-3	%

Depreciation and amortization	(4,407,373		)	(4,071,901			)	8	%

Loss before other income (expense)	$	(7,287,555	)	$	(6,232,561		)	17	%

Revenues

The Partnership’s revenues for the three-month period ended June 30, 2003 showed a flat market with a slight decreased of less than 1% at $27.8 million as compared for the same period in 2002. Total revenues include service as well as handset and accessories revenues. Service revenues for the three-month period ended June 30, 2003 increased by 1% when compared to the same period in 2002 while handset and accessories sales decreased by 14%. The decrease in handsets and accessories revenues is indicative of a flat growth for the period as compared to the same period in 2002. The increase in service revenues is related to airtime consumption by existing customers.

Expenses

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

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

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

Revenues

	Six-Month Periods Ended
	June 30,
	2003			2002			Change
Revenues:
Service revenues	$	50,160,175		$	52,070,415		-4	%
Handsets and accessories sales	3,931,011			3,713,061			6	%

Total Revenues	54,091,186			55,783,476			-3	%
Expenses:
Operating expenses	51,151,370			51,716,648			-1	%

Income (loss) from operations	2,939,816			4,066,828			-28	%

Loss on Write Off Inventory	(4,364,728		)	—			100	%

Interest expense	(6,961,807		)	(8,734,358		)	-20	%

Depreciation and amortization	(8,425,512		)	(8,019,629		)	5	%

Loss before other income (expense)	(16,812,231		)	(12,687,159		)	33	%

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

Expenses

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

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

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 to the net income or loss.

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

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

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

Liquidity and Capital Resources

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

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 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. This outstanding debt is approximately $51 million at a fixed annual interest over a six year term.

In addition, the Partnership owes the United States federal government approximately $43,434,041 plus accrued interest at 6.5% in connection with the acquisition of its PCS licenses.

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

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 $60 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.

During 2001, the Partnership sold 8.02% of NewComm to Syncom Venture Funds in exchange for $25 million, and on March 2, 2002, the Partnership sold 4.08% of NewComm to a group of investors led by Fleet Development Ventures for $13 million.

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 June 30, 2003, the Partnership had cash equivalents and short-term investments of approximately $2,556,996 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%.

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.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Assets, Liabilities and Partners’ Deficit as of June 30, 2003 (unaudited) and December 31, 2002 (audited)

	Consolidated Statements of Revenues and Expenses for the six-month period ended June 30, 2003 and 2002 (unaudited)

	Consolidated Statements of Changes in Partners’ Deficit for the six-month period ended June 30, 2003 (unaudited)

	Consolidated Statements of Cash Flows for the six-month period ended June 30, 2003 and 2002 (unaudited)

	Notes to Interim Consolidated Financial Statements as of June 30, 2003 (unaudited)

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3	Quantitative and Qualitative Disclosure About Market Risk

Item 4	Controls and Procedures

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 6.	Exhibits and Reports on Form 8-K

Signatures.

Exhibit Index

(a)	List of Exhibits

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

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

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

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

(b)	No reports on Form 8-K were filed during the period covered by this report.

		ClearComm, L.P.


	By:	SuperTel Communications Corp., General Partner


Date: December 10, 2004		By: /s/ Javier O. Lamoso
		Name: Javier O. Lamoso
		Title: President