UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

For Annual and Transition Reports to Section 13 or 15(d) of the
Securities Exchange Act of 1934

 

(Mark one)

 

ý	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the calendar year ended December 31, 2004
or
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required)
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.)
City View Plaza-Suite 700 No. 48 of Road 165
Guaynabo, Puerto Rico		00968
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (787) 620-0140

 

Securities registered pursuant to Section 12(b) of the Act:

 

Name of Each Exchange
Title of Each Class on Which Registered
Securities registered pursuant to Section 12(g) of the Act:

 

Units of Limited Partnership Interest

(Title of class)

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  o  No  ý

 

The Registrant’s outstanding securities consist of units of limited partnership interests which have no readily ascertainable market value since there is no public trading market for these securities on which to base a calculation of aggregate market value.

 

Documents incorporated by reference.          None.

 

 

ClearComm, L.P.

 

TABLE OF CONTENTS

 

Part I		3
Item 1.	Business	3
Item 2.	Properties	8
Item 3.	Legal Proceedings	8
Part II		9
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	9
Item 6.	Selected Financial Data	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 8.	Financial Statements and Supplementary Data	21
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	55
Item 9A.	Controls and Procedures	55
Part III
Item 10.	Directors and Executive Officers of the Registrant	55
Item 11.	Executive Compensation	57
Item 12.	Security Ownership of Certain Beneficial Owners and Management	58
Item 13.	Certain Relationships and Related Transactions	59
Part IV
Item 14.	Principal Accounting Fees and Services	59
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	60
SIGNATURES		62

 

2

 

Part I

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K 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 divestiture 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.

 

ITEM 1.  BUSINESS

 

General

 

ClearComm, L.P., a Delaware limited partnership (the “Partnership” or “ClearComm”), was formed on January 24, 1995 under the name PCS 2000, L.P., to own and operate broadband personal communications services (“PCS”) licenses to be acquired in auctions conducted by the Federal Communications Commission (the “FCC”).  The Partnership competed for PCS licenses in frequency Block C, set aside for “designated entities” (“Entrepreneurs”) that met certain financial and equity structure requirements and that qualify for certain benefits under rules, regulations and policies of the FCC and related statutory provisions (“FCC Rules”).

 

The Partnership, through its majority-owned subsidiary, NewComm Wireless Services, Inc. (“NewComm”), owns and operates a state-of-the-art PCS network in Puerto Rico (the “Puerto Rico Network”).  The Partnership directly or indirectly through NewComm owns two 15 MHz C-Block PCS licenses covering the entire island of Puerto Rico (the “Puerto Rico Licenses”) and four 15 MHz licenses in California (the “California Licenses,” and together with the Puerto Rico Licenses, the “Licenses”).   The California Licenses have been sold and the transaction was approved by the FCC.

 

The Agreement of Limited Partnership of the Partnership (the “Partnership Agreement”) provides that the Partnership will terminate on December 31, 2005. The Partnership will dissolve on such date (unless terminated earlier or unless the Partnership Agreement is amended to change such date).  The Partnership Agreement also provides for a reasonable time to wind-up the affairs of the Partnership in case of termination.  The Partnership’s General Partner, SuperTel Communications Corporation, is considering alternatives to dissolution, including an extension of the Partnership’s termination date that would require the consent of the Partnership’s partners.

 

NewComm

 

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 Telefónica Moviles, S.A. (“TEM”).  The results

 

3

 

of the audit were reported to the Board of Directors of NewComm on September 30, 2004 with the conclusion that TEM had not performed adequately.  Under the Partnership’s direction, the Board of Directors of NewComm terminated TEM as Manager under the Management Agreement on October 28, 2004.  Arbitration proceedings have begun in accordance to the Joint Venture Agreement.  See discussion below at The Puerto Rico Network and Legal Proceeding sections.

 

The Puerto Rico Network

 

The Partnership and NewComm started building its Puerto Rico Network during the first quarter of 1999 and the system commenced commercial operations on September 24, 1999.  The Partnership was the fifth entrant into the Puerto Rico wireless telecommunications market.  It currently provides wireless coverage in the areas where 95% of the Puerto Rico wireless traffic occurs and expanding.  The Partnership has established points of sale in all major shopping districts and has over 200 points of sale throughout Puerto Rico.  The Partnership believes that it currently has approximately 8% of the Puerto Rico wireless market.

 

To build and operate its Puerto Rico network, the Partnership entered into an agreement, dated February 4, 1999 (the “TLD Agreement”) with Telefónica Larga Distancia de Puerto Rico, Inc. (“TLD”).  TLD is a wholly owned subsidiary of Telefónica Internacional, S.A. which is a member of the Telefónica, S.A. group (Ticker: TEF) (the “Telefónica Group”), Spain’s largest traded company and one of the world’s largest telecommunication companies.  Telefónica Móviles (Ticker: TEM), the wireless communications affiliate of Telefónica, currently has approximately 32 million subscribers worldwide.  Pursuant to the terms of the TLD Agreement, the Partnership transferred the Puerto Rico Licenses (including its related debt) and associated business plans and studies to NewComm.  TLD provided NewComm a loan of approximately $19.96 million and received a secured convertible promissory note (the “Note”) which entitles TLD to select a director for one of the five NewComm board of director seats (the “Board”).  The Note was assigned to TEM on September 23, 2003.  The Note is convertible into 49.9% of NewComm’s equity.  The Note cannot be converted without FCC authorization.  NewComm and TEM entered into a management agreement whereby TEM provided day-to-day management services for NewComm, subject to the supervision of NewComm’s Board.  Pursuant to a certain Stock Purchase Agreement dated as of March 12, 2002, by and between the Partnership and TLD, the Partnership had agreed to sell 0.2% control interest at market value to TEM.  The transfer of this control interest was approved by the FCC during 2004. As part of the requirements of the Stock Purchase Agreement, TEM (and Telefónica Internacional, S.A., its parent company) had agreed to issue their corporate guarantee as collateral for long-term financing of NewComm of approximately $110 million.  Together with the Stock Purchase Agreement and as part of the transaction a Shareholders’ Agreement and a Sale Agreement were executed between the parties.  The Shareholders’ Agreement provides for a great number of general and specific protections and rights for the Partnership as a minority shareholder in NewComm.  The Sale Agreement provides for a convenient exit for the Partnership from NewComm.  Under the Joint Venture Agreement the Partnership’s principal means of exiting from NewComm was by exercising Registration Rights against TEM.  Due to Telefónica’s re-organization and new market conditions, the possibility of publicly registering an exclusive wireless service company limited to the Puerto Rico market is very unlikely.  However, under the Sale Agreement, the Partnership can force the sale of NewComm to TEM and/or third parties.

 

The Sale Agreement provides that from and after May 12, 2003, either party (the Partnership or TLD) may trigger a shareholder obligation to sell NewComm.  Within 30 days of a notice of sale, TEM (or the Partnership as the case may be) would have the right to purchase the Partnership’s (or TEM’s) interest.  The purchase price to be paid at that time would be based on a valuation performed by an internationally recognized investment-banking firm selected by both parties.  If TEM does not exercise its right to buy out the Partnership’s interest, TEM is bound, together with the Partnership, to proceed with the sales process to attempt a sale of NewComm.  TEM and the Partnership 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 the Management Agreement and the Technology Transfer Agreement originally held by TLD (and assigned to TEM) will terminate without compensation, and no premium for controlling interest or discount for holding a minority interest in NewComm will apply.

 

The Sale Agreement will continue in full force and effect even if the Stock Purchase Agreement with TEM, for whatever reason, does not close.  The Stock Purchase Agreement and the Sale Agreement are currently subject to arbitration proceedings that were filed by TEM upon TEM’s termination as manager of NewComm. See Legal Proceedings section below.

 

4

 

The Partnership’s Puerto Rico Network operates under the image and brand name “MoviStar.”  MoviStar is the PCS brand name of the Telefónica Group in Spain and certain other countries in Latin America.  The Puerto Rico Network is a state-of-the-art CDMA (“Code Division Multiple Access”) network.  Pursuant to a roaming agreement with Sprint PCS, MoviStar customers have mainland U.S. coverage.

 

Lucent Technologies, Inc. (“Lucent”) built the Puerto Rico Network on behalf of NewComm.  The Partnership continues optimizing the network to maintain and offer better quality service to its customers.

 

The Puerto Rico Market

 

The Partnership believes that the Puerto Rico market provides many unique advantages for telecommunications companies.  Puerto Rico is politically stable, as it has been a territory of the United States for over 100 years and its economy is fully integrated with that of the United States mainland.  It has the Caribbean’s best-educated, most skilled labor force and the most sophisticated manufacturing and transportation infrastructure.  Puerto Rico has a solid base of major manufacturers, which includes Hewlett-Packard Company, Microsoft Corporation, BASF Corporation, Colgate-Palmolive, Johnson & Johnson, Amgen, Pharmacia, and Pfizer Pharmaceutical.  Along with its U.S.-linked stability, Puerto Rico offers the advantage of emerging market type growth and significant cash based economy.  The Partnership believes that current per capita income and consumption in Puerto Rico, combined with continued economic growth will support continued demand for high quality telephone services, which NewComm is offering.

 

Competition in Puerto Rico

 

The continued success of the Partnership’s PCS business in Puerto Rico will depend upon its ability to compete with five other wireless operators (including Verizon, Sprint PCS, SunCom, Centennial and Cingular) and potential future wireless communications providers in the Puerto Rico market.  All wireless operators compete in the optimization of their networks to provide a better service for their customers.  As wireless use increases, wireless operators compete more directly with traditional landline telephone service providers and other technologies including mobile satellite systems and cable operators offering voice communications.  In addition, the availability of new spectrum and resale of existing spectrum and the entry of new participants may result in increased competition in the Puerto Rico market.  At the end of 2004, Puerto Rico had a wireless market penetration of approximately 47% while the United States mainland ended the same year with an approximate market penetration of 57%.

 

5

 

Markets

 

The following table sets forth as of December 31, 2004, with respect to each Market in which the Partnership owns a PCS license, the estimated persons of population (“POPs”).

 

Market Name		2004 POPs*
San Juan, PR		2,364,414
Mayaguez-Aguadilla, PR		1,444,196

 

*                                         Based on US Census Bureau 2000 figures.

 

Internet Surfing Stores of Puerto Rico, Inc

 

On April 16, 2002, the Partnership 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 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 Partnership has decided to concentrate its operations on the San Juan area and decided to close the store located in Mayaguez effective December 31, 2004.  As a result, the Partnership has written down its investment in the subsidiary by $165,306 to reflect the change.  The investment has an exit mechanism whereby at any time after 2003, the Partnership can force the acquisitions of its shares in ISS or the sale of the whole company.

 

Regulation

 

Overview

 

In 1993, Congress adopted the Omnibus Budget Reconciliation Act of 1993 (the “Reconciliation Act”) which, among other things, mandated auctions for the award of certain FCC licenses, including PCS licenses.  Pursuant to authority granted to the FCC by the Reconciliation Act, the FCC awarded PCS licenses through a process of competitive bidding auctions in which there were multiple applications for the same license (the “Auctions”).

 

PCS is a radio-based transmission technology, which, like cellular technology, uses the same frequencies repeatedly in a multiple-transmitter cell design.  PCS is a digital technology, capable of numerous advanced service features, including caller-ID, voice-prompting, voice-recognition, scrambled (secure) calling, message and image delivery, intelligent call transfer and follow-me calling, single number service (the same number can be assigned to multiple PCS telephones in different locations) and auto-trace of crank callers. The Partnership has been offering E-mail and internet access from its handsets since June of 2000.  The Partnership began offering wireless banking services in October of 2000.  The Partnership also pioneered in the Puerto Rico market short text messaging services from its handsets in October of 2001.  An average of 600,000 text messages per month is being sent by subscribers from their handsets.

 

6

 

Frequency Blocks

 

The FCC divided PCS into six frequency blocks, designated Blocks A through F, such that there are six overlapping licenses in each market in each geographic area of the country.  Blocks A, B and C are 30 MHz blocks, and Blocks D, E and F are 10 MHz blocks.  The FCC has created new C2 blocks of 15 MHz in certain markets including Puerto Rico.

 

Entrepreneur Classes and Economic Preferences

 

Block C and F licenses were reserved for Entrepreneurs meeting certain limiting criteria set forth in FCC Rules.  Entrepreneurs were granted a set of economic preferences in the Auctions.  Under FCC Rules, an Entrepreneur is defined as an entity that, together with its affiliates and persons or entities that holds attributable interests in such entity and their affiliates, has less than (i) $500 million of assets and (ii) $125 million of annual gross revenue over the prior two years.  In addition, FCC Rules define three classes of Entrepreneurs, with each class eligible for different economic preferences in the Blocks C and F Auctions.  The Partnership’s Entrepreneur qualification is as a “Small Business,” which is an entity that at the date of grant of the license had less than $40 million of aggregate annual gross revenue averaged over the last three years.

 

Small Businesses were entitled to make interest-only payments for the first six years and can amortize interest and principal over the remaining four years of the license term.  The interest rate applicable to Small Businesses is the 10-year treasury note rate at the date of grant of the license.  In addition, Small Businesses were entitled to a bidding credit of 25%.  In March 1997, the FCC issued an order suspending indefinitely interest payments on all Block C licenses; however, interest continued to accrue.  Ultimately, in accordance with the FCC procedures specified in the FCC’s March 24, 1998 Order on Reconsideration of the Second Report and Order (the “Reconsideration Order”), the Partnership commenced interest payments during July, 1998. The Partnership originally owed $51.3 million exclusively in connection with the Puerto Rico License. As of December 31, 2004 the Partnership owes the FCC the principal amount of $33.6 million.

 

During the year ended December 31, 2004, the Partnership paid the amount of $11,009,302 including interest and principal.  The payment due in October 2004 was not made and was accumulated with its related interest and penalty charge of approximately $122,000.  The subsequent payment due in January 2005 was not made.

 

Build-Out Requirements

 

The Partnership has complied with its build out requirements for the Puerto Rico Licenses.

 

Employees

 

The Partnership, including its majority owned subsidiary NewComm, had approximately 378 employees at the end of 2004. On November of 2004, approximately 35 employees were terminated as part of an organizational restructuring plan.

 

Available Information

 

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to these reports, and other information with the Securities and Exchange Commission (“SEC”).  The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1800-SEC-0330.  The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  We also make available, free of charge, through our Internet website (www.clearcommlp.com), our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if available, amendments to those reports filed or furnished pursuant to the Securities

 

7

 

Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

 

ITEM 2.  PROPERTIES

 

The Partnership leases office space in Hato Rey and Guaynabo, Puerto Rico.  In connection with the Partnership’s Puerto Rico Network, NewComm leases sites where its telephone switching equipment, relay stations and other equipment are located, as well as sites and kiosks in malls and shopping centers where it sells its services to the public.

 

ITEM 3.  LEGAL PROCEEDINGS

 

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, 2004, with the conclusion that TEM had not performed adequately.  Under the Partnership’s direction, the Board of Directors of NewComm terminated TEM as the Manager of NewComm under the Management Agreement on October 28, 2004.

 

TEM filed for arbitration proceedings in accordance with the Joint Venture Agreement.  TEM alleges unlawful and wrongful termination of the Technology and Management Agreements.  The Partnership, on behalf of NewComm, intends to proactively demand and seek compensation for damages caused by what the Partnership believes was TEM’s nonperformance and breach of the Technology and Management Agreements. Javier O. Lamoso has assumed responsibility for the day-to-day management of NewComm since the termination of the Technology and Management Agreements.

 

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.

 

8

 

Part II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

There is no trading market for the Units, and it is unlikely that a trading market will exist at any time in the future.  Any transfer of the Units is severely restricted by certain conditions outlined in the Partnership Agreement, and requires the consent of the Partnership’s General Partner, SuperTel Communications Corp., which can be withheld in the General Partner’s sole reasonable discretion.

 

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. A total of 130 Unit-holders tendered their Units, amounting to approximately 140 Units re-purchased and representing approximately a 5% reduction of outstanding partnership Units.

 

As of December 31, 2004, the General Partner holds one general partnership interest, and approximately 1,445 investors hold an aggregate of 2,765.20 Units of limited partnership interest.  There are 3.3 Units held as treasury.

 

There have been no cash distributions to the Investors to date.  The following summary of certain allocation provisions of the Partnership Agreement is entirely qualified by reference to the Partnership Agreement, which was previously attached as an Exhibit to the Partnership’s Form 10-K, filed March 31, 1997.  As a general rule, the General Partner shall cause the Partnership to make distributions, if any, of cash flow received from operations of the Partnership which the General Partner, in its sole discretion, determines to distribute to Investors (“Cash Flow”).  All distributions will be made 75% to the Investors and 25% to the General Partner.  Distributions to the Investors shall be made in proportion to the number of Units held by each Investor on the last day of the calendar quarter to which such distribution relates.

 

The availability of Cash Flow for distribution to the Investors is dependent upon the Partnership earning more than its expenses.  No assurance can be given that income in any given year will be sufficient to generate Cash Flow for distribution to the Investors or that there will not be cash deficits. Further, because operating expenses are subject to increases, and increases in revenue from Partnership operations may be subject to market limitations, income from the Partnership in any year may not be sufficient to generate Cash Flow.

 

Net losses from operations of the Partnership will be allocated as follows: first, to the Investors to offset any profits previously allocated to the Investors and second, 75% to the Investors in accordance with the number of Units held by each Investor and 25% to the General Partner.  The gain from a financing, refinancing, sale or other disposition of the Partnership’s assets (or from similar capital transactions) (collectively, “Capital Transactions”) will be allocated 75% to the Investors and 25% to the General Partner.  The loss from a Capital Transaction will be allocated in the same way that net losses from the Partnership’s operations are allocated.  Further adjustments to capital accounts may be required and are authorized by the Partnership Agreement to comply with the provisions of any future Internal Revenue Service regulations.

 

The Partnership may realize net proceeds (that is, proceeds available after the payment of certain fees and expenses including payments to the General Partner or its affiliates) from a Capital Transaction.  No assurance can be given, however, as to the availability of a Capital Transaction or the amount of net cash proceeds therefrom.  Any amounts received by the Partnership which constitute amounts derived from a Capital Transaction, will be treated as being received from operations of the Partnership and will be distributed to Investors only if the General Partner determines to do so.

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The following table summarizes selected consolidated financial data of the Partnership from the period from January 1, 2002 to December 31, 2002, from January 1, 2003 to December 31, 2003 and from January 1, 2004 to December 31, 2004.  This information should be read in conjunction with the Partnership’s audited consolidated financial statements and related notes thereto and management discussion contained herein.

 

9

 

Statements of Operations Data

 

		December 31,			December 31,			December 31,			Percent Increase/Decrease (-)
		2004			2003			2002			2004 vs 2003		2003 vs 2002
Revenues:
Service revenues		$	100,336,047		$	101,557,423		$	99,779,656		-1	%	2	%
Handsets and accessories sales		4,665,889			7,336,689			8,177,441			-36	%	-10	%
Total Revenues		105,001,936			108,894,112			107,957,097			-4	%	1	%
Expenses:
Operating expenses		107,644,333			100,086,717			103,734,297			8	%	-4	%
Income (loss) from operations		(2,642,397		)	8,807,395			4,222,800			-130	%	109	%
Interest expense		(9,470,793		)	(13,312,468		)	(16,212,644		)	-29	%	-18	%
Depreciation and amortization		(17,811,034		)	(17,272,191		)	(14,171,258		)	3	%	22	%
Loss before other income (expense)		(29,924,224		)	(21,777,264		)	(26,161,102		)	37	%	-17	%
Other Income (expense)
Gain on sale of California Licenses		4,168			—			—			—		—
Gain on sale of investment in stock of subsidiary		—			—			13,000,000			—		-100	%
Equity in net loss of subsidiary		(115,382		)	(140,608		)	(114,746		)	-18	%	23	%
Interest income		126,827			213,369			249,661			-41	%	-15	%
Other		1,292			337			1,113			283	%	-70	%
Write-down of investment in subsidiary		(165,306		)	—			—			-100	%	—
Realized loss on sale of investment in securities		(56,518		)	—			—			-100	%	—
Loss on write-off of inventories		—			(4,742,559		)	—			-100	%	-100	%
Write-off of discount on note payable to FCC		—			(3,913,661		)	—			-100	%	100	%
Net loss		$	(30,129,143	)	$	(30,360,386	)	$	(13,025,074	)	-1	%	133	%
Net loss attributable to General Partner		$	(30,129,143	)	$	(30,360,386	)	$	(13,025,074	)	-1	%	133	%
Net loss attributable to Limited Partners		$	—		$	—		$	—		—		—

 

10

 

Balance Sheets Data

 

		December 31,			December 31,			December 31,			Percent Increase/Decrease (-)
		2004			2003			2002			2004 vs 2003		2003 vs 2002
ASSETS:
Cash and cash equivalents		$	10,612,430		$	1,007,353		$	22,709,786		953	%	-96	%
Cash in escrow account		—			1,500,000			—			-100	%	100	%
Accounts receivable, net		7,909,573			12,297,162			11,594,949			-36	%	6	%
Accounts receivable, other		4,204,524			7,457,028			6,483,255			-44	%	15	%
Insurance claim receivable		403,657			—			270,002			100	%	-100	%
Interest receivable		20,000			14,000			8,000			43	%	75	%
Inventories		1,304,392			3,908,736			10,461,112			-67	%	-63	%
Prepaid expenses		841,750			672,406			625,610			25	%	7	%
Investment in Securities		—			7,338,288			10,000,000			-100	%	-27	%
Leasehold rights, net		3,314,144			—			—			100	%	0	%
Investment in Subsidiary		247,959			397,980			277,254			-38	%	44	%
PCS licenses, net		46,750,449			57,517,974			57,517,974			-19	%	0	%
Deferred financing costs		635,824			774,363			901,235			-18	%	-14	%
Note receivable from officer		100,000			100,000			100,000			0	%	0	%
Property and equipment, net		80,546,773			90,753,422			101,931,922			-11	%	-11	%
		$	156,891,475		$	183,738,712		$	222,881,099		-15	%	-18	%
LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT):
Accounts payable and accrued Liabilities		$	53,900,719		$	40,224,333		$	47,022,094		21	%	-14	%
Notes payable — short-term		122,548,553			113,816,297			82,647,544			20	%	38	%
Notes payable — long-term		99,423,894			117,390,809			150,505,987			-23	%	-22	%
Unitholders’ capital (deficit) 2,765.20 Units in 2004, 2,906.1 Units in 2003, 2002, and 1 general Partnership interest		(118,981,691		)	(87,692,727		)	(57,294,526		)	36	%	53	%
		$	156,891,475		$	183,738,712		$	222,881,099		-15	%	-18	%
BOOK VALUE PER UNIT		$	(43,013	)	$	(30,165	)	$	(19,708	)	36	%	53	%

 

11

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

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 is the controlling entity of NewComm, which in turn owns and operates two 15 MHz PCS licenses covering Puerto Rico (“the Puerto Rico Licenses”).

 

The Partnership owned certain PCS licenses in California.  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.

 

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 revenues had consisted of interest income only.  Since the Partnership commenced commercial operations in 1999, 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 TLD, whereby the Partnership contributed its two Puerto Rico Licenses to NewComm and TLD provided NewComm a $19,960,000 loan to develop the Puerto Rico Licenses.  TLD’s loan is pursuant to a secured convertible promissory note (the “Note”) which is convertible into 49.9% of NewComm’s equity.  The Note could not be converted without FCC authorization, which was granted in 2004.

 

The Partnership has agreed to sell shares in NewComm to TEM in sufficient amount to provide TEM with an additional 0.2% share interest in NewComm, enabling TEM to have a total of 50.1% control interest in NewComm.  The transaction involves a Stock Purchase Agreement, a Shareholders Agreement, and a Sale Agreement.  A summary of the terms of the sale and these agreements is provided below.

 

The Stock Purchase Agreement

 

The purchase price for the 0.2% share interest in NewComm will be determined after all conditions to closing are obtained.  The principal conditions for this closing are the closing of the long term financing for NewComm and the final approval by the FCC, which was granted in 2004.  At such time, the Partnership and TEM will select an internationally recognized investment-banking firm who will perform a valuation of the shares to be sold.  The investment banker will have an agreed upon period of time to prepare the valuation of the shares.  After delivery of the valuation, a closing will occur.

 

The investment banking firm will use a combination of various methodologies for its valuation, including:  discounted cash flows, comparable transactions and trading prices of comparable transactions, and trading prices of comparable publicly held companies; and in the application of such methodologies will use acceptable industry standards.  Payment will be in cash.

 

12

 

The Shareholders Agreement

 

In consideration of the sale of a controlling interest in NewComm a new Shareholders Agreement will become effective upon the closing of the Stock Purchase Agreement.  The Shareholders Agreement will incorporate all of the rights and benefits under the current Joint Venture Agreement, which include rights of first refusal, pre-emptive rights, drag-along rights, registration rights, piggy back rights, financial reporting and other rights.

 

In addition to the above, the Partnership will have approval rights with respect to a number of NewComm’s actions including the following: any transaction between NewComm and a shareholder or an affiliate of such shareholder, other than the Management Agreement and the Technology Transfer Agreement; the annual strategic business plan and operating budgets for each calendar year and any variations or modifications which individually or in the aggregate exceed 10 percent of the operating budget for such annual period; the appointment of the general manager, the director of finance and all directors of each division of NewComm, as well as the compensation of each such person, consent to which shall not be unreasonably withheld; the engagement of a new marketing consultant and the employment of marketing strategies, promotions, advertising and product development different from those in effect on the date hereof, consent to which shall not unreasonably be withheld; any modification to the Certificate of Incorporation or Bylaws of NewComm that would have an adverse effect on any rights granted to a shareholder thereunder or under applicable law; and any amendments or modifications to the Management Agreement or the Technology Transfer Agreement in effect as of the Effective Date.  The Partnership will have the right to appoint four directors and TEM will have the right to appoint five directors.

 

13

 

The Sale Agreement

 

The new Sale Agreement provides that the Partnership (or TEM) may trigger a shareholder obligation to sell NewComm.  Within 30 days of a notice of sale, TEM (or the Partnership as the case may be) would have the right to purchase the Partnership’s (or TEM’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 valuation under the Stock Purchase Agreement.

 

If TEM does not exercise its right to buy out the Partnership’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 now by TEM 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 TEM, for whatever reason, does not close.

 

Project Finance Facility

 

With the signing of the Stock Purchase Agreement, ABN/AMRO (the “Bank”) has proceeded to work towards providing a $110 million Project Finance Facility for NewComm.

 

An agreement restructuring Lucent’s outstanding debt has been attained and it was executed on June 4, 2003.  The now outstanding debt to Lucent is $48.5  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 $2.5 million at 6.5% payable over a three year period.

 

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.

 

Critical Accounting Policies

 

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Partnership to make estimates and assumptions.  The Partnership has no off-balance sheet arrangements and believes that of its significant accounting policies (see Note 3 to the consolidated financial statements), the following may involve a higher degree of judgment and complexity.

 

We rely on the use of estimates and make assumptions that impact our financial condition and results.  These estimates and assumptions are based on historical results and trends as well as our forecasts as to how these might change in the future.  Some of the most critical accounting policies that might materially impact our results include:

 

14

 

Valuation of Accounts Receivable, Inventories, Long-lived Assets and Intangibles

 

Allowance for Doubtful Accounts - Estimates used in determining our provision for doubtful accounts are based on our historical collection experience, current trends, credit policy and a percentage of our accounts receivable by aging category.  In determining these percentages, we look at historical write-offs of our receivables and our history is limited.  We also look at current trends in the credit quality of our customer base as well as changes in the credit policies.  Under NewComm’s credit policy, customers who do not meet certain credit criteria are required to make a deposit ranging from $70 to $250 that could be credited against future billings, to control credit exposure.  If the estimates are insufficient for any reason, our operating income, earnings before interest, taxes, depreciation and amortization (“EBITDA”) and available cash would be reduced.

 

Write-down of Refurbished and Excess or Obsolete Inventories - We currently have written-down refurbished handset inventories to the lower of cost or market value (which approximates cost to refurbish or replace the handsets).  We currently have written-down excess or

 

15

 

obsolete handset accessories to net realizable value.  As an inducement to obtain new customers, the Partnership may sell handsets to customers for a price that is less than cost.  Until December 31, 2002, the loss on such sales was recognized at the time of sale.  We continue to monitor the depletion of our current inventory levels.

 

Effective January 1, 2003 we changed our 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.

 

Long-lived Assets - We continually evaluate long-lived assets to determine whether current events and circumstances warrant adjustment to the carrying values or amortization periods.  The Partnership measures impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  In performing the review for recoverability, an estimate of the future cash flows expected to result from the use of the asset and its eventual disposition must be made.  If the sum of the future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized.  The impairment loss, if any, is determined based on projected discounted future operating cash flows using a discount rate reflecting the Partnership’s average cost of funds.  No impairment loss was recognized during 2004, 2003 and 2002.  If the estimates used to measure impairment are insufficient for any reason, our net income or loss would be reduced or increased, respectively.

 

Valuation of Intangibles (PCS Licenses) – Because of the adoption by the Partnership of SFAS 142 (Goodwill and other Intangible assets) imposed by the FASB for calendar years commencing after December 31, 2001, PCS Licenses are no longer amortized and instead they are subject to periodic impairment testing.  Based on analysis of future cash flows and other related variables, we determined that no impairment adjustment was necessary for the years ended December 31, 2004, 2003 and 2002.  We will perform the impairment test at least every quarter or as soon as anything comes to our attention that could cause us to believe that the recorded balance of the PCS Licenses may be affected.  If the estimates used to measure impairment are insufficient for any reason, our net income or loss would be reduced or increased, respectively.

 

Revenue Recognition

 

We recognize post-paid PCS service revenue from our customers as they use the service.  Prepaid PCS service revenue is recognized based on estimates of usage.  Additionally, we provide a reduction of recorded revenue for billing adjustments and billing corrections.  We record equipment revenue for the sale of handsets and accessories to customers in our retail stores and through our third party dealers.  If the estimate used to recognize prepaid PCS service revenue usage varies from actual results or if the estimate of certain revenue adjustments is inaccurate, our revenues would be adjusted accordingly.

 

Results of Operations - 2004 Compared to 2003

 

The Partnership’s Consolidated revenues for the year ended December 31, 2004, which amounted to $105,001,936 ($108,894,112 in 2003), included $100,336,047 ($101,557,423 in 2003) in service revenues and $4,665,889  ($7,336,689 in 2003) in handset and accessories sales generated from NewComm’s wireless operations. The 36% decrease in handsets and accessories revenues is mainly due to handset unit pricing adjustments.  The 1% decrease in service revenues is related to a reduction of the subscriber base which was mostly offset by airtime consumption of existing customers and to a shifting of the customer base from prepaid customers to contract customers.  The Partnership’s operations are not materially affected by inflationary increases.  Any inflationary impact on the cost of products and services offered by the Partnership’s subsidiary, NewComm, is offset by pricing adjustments to the retail prices of handsets, accessories, and various offers available to the customers.

 

Expenses

 

Consolidated Operating expenses for the year ended December 31, 2004 totaled $107,644,333, as compared to $100,086,717 for the same period in 2003, as shown on the following table:

 

16

 

		2004			2003			Variances
Cost of handsets and accessories sold		$	24,352,074		$	22,523,576		8	%
Salaries and benefits		15,642,745			15,169,673			3	%
Provision for doubtful accounts		14,762,108			8,907,241			66	%
Salesmen and dealers commissions		11,652,417			8,375,695			39	%
Advertising expense		6,936,679			7,353,590			-6	%
Rent expense		6,922,312			6,755,926			2	%
Network operation and maintenance expense		4,479,139			5,559,349			-19	%
Taxes, other than income		3,952,175			4,945,218			-20	%
Interconnection expense		2,798,991			4,245,415			-34	%
Services rendered by related parties		4,930,413			3,621,826			36	%
Legal and consulting fees rendered by related parties		536,213			469,000			14	%
Legal and professional services		2,700,917			2,682,232			1	%
Other expenses		7,978,150			9,477,976			-16	%
Total operating expenses		$	107,644,333		$	100,086,717		8	%

 

The increase in expenses of 8% during 2004, as compared to 2003, is mainly due to the increase in the provision for doubtful accounts which resulted in additional $6 million reserves and is directly related to the full implementation of the new billings and collections software migration.  The increase in salesmen and dealers commissions is related to the shifting during the year from prepaid customer accounts to contract customers that triggers higher commissions.  The 19% decrease in network operation and maintenance expense is related to operational efficiencies obtain at the subsidiary level and to the sale of 12 network towers to a third party during the fourth quarter of 2004 as explained in Note 11 of the combined financial statements.

 

Net losses of $30,129,143 for 2004 and $30,360,386 for 2003 reflect the costs of competing in the Puerto Rico market against existing and new cellular and PCS operators in order to continue to develop and maintain a strong subscriber base.  Such losses include certain non recurring other income and expense items.  For instance, the loss before other income and expenses for 2004 totaled $29.9 million compared to $21.8 million in 2003.  The 37% increase in said losses is primarily attributed to the $6 million increase in the provision for doubtful accounts and the $3.8 million decrease in total revenues netted by a 29% reduction in the interest expense account.

 

Interest expense for the year ended December 31, 2004, totaled $9,470,793 as compared to $13,312,468 for the same period in 2003.  The decrease in interest expense during 2004 is primarily attributable to the restructuring of the Partnership’s Notes Payable (refer to Notes 12, 14 and 15 to the accompanying consolidated financial statements) and to downward trends of interest rates in the markets.  In 2004, the Partnership had interest income of $126,827, as compared to $213,369 in 2003.

 

Liquidity and Capital Resources

 

As of December 31, 2004, the Partnership had cash and cash equivalents amounting to $10,612,430, which resulted from the sale of the California Licenses to an independent group of investors as described in Item 7.

 

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 Code Division Multiple Access (“CDMA”) protocol. The total cost was approximately $125 million.  On June 4, 2003, Lucent’s outstanding debt was restructured for a six-year term with an interest rate of eight percent (8%) annually and due in September 2009.  As of December 31, 2004, $48,470,205 was outstanding under this financing agreement (refer to Note 15(a) to the accompanying consolidated financial statements).  During 2004 a total of $3 million were paid as principal payments.

 

Alcatel USA International Marketing, Inc. (“Alcatel”) was contracted to build part of the CDMA network. On June 20, 2003, NewComm and Alcatel entered into Amendment No. 2 to Promissory Agreement and Note dated as of December 28, 2001.  The final maturity date on the 6.5% annual interest rate note is December 20, 2005.  During 2004

 

17

 

$2,075,000 where paid for principal payments and $2,461,029 is outstanding as of December 31, 2004.

 

In addition, at December 31, 2004, the Partnership owes the United States Federal government approximately $33.6 million plus accrued interest at 6.5% in connection with the acquisition of its Puerto Rico PCS licenses.  In accordance to industry practices the note payable was recorded net of a discount that has been amortized in prior years.  Due to the refinancing of the debt that is expected to be completed before December 2005, the discount balance of $3,913,661 as of December 31, 2003 was written off and reflected as interest expense in the other expenses section of the accompanying statement of operations. (Refer to Note 15(c) to the accompanying consolidated financial statements). During the current year, the Partnership paid $9,073,831 in principal and interest related to this note.  Quarterly interest and principal payments due at the subsidiary level total $3.7 million and are funded through contributions made by the Partnership and amounts loaned by TEM.

 

The Partnership has a secured promissory note payable to TLD (now TEM), which bears interest at the floating rate of 90-day LIBOR plus 1.5% and was originally due in March 2004.  On January 1, 2004, this secured promissory note was amended to be due in December 2004, and to bear interest at 1%.  In addition, in January 2000 the joint venture agreement with TLD was amended to provide NewComm a revolving line of credit of approximately $30 million for working capital from TLD.  This loan was paid-off in December 2000 by means of a $60 million bridge loan (the “Bridge Loan Facility”) to NewComm from ABN-AMRO and BBVA (the “Banks”).  The original Bridge Loan Facility bore interest at 1.5% over 90-day LIBOR, which was originally supposed to expire on March 15, 2001, and was then extended until March 17, 2002, with an interest rate of .75% over 90-day LIBOR.  The Bridge Loan is now guaranteed by Telefónica Internacional, S.A. (“TISA”) and was extended again until April 30, 2005.  It is expected that the bridge loan will be replaced with a permanent Project Finance Facility of approximately $110 million.

 

The Partnership, by means of Syncom, and TLD, each contributed $15 million of additional capital.  Syncom now has ownership of 8.02% of NewComm after having contributed a total of $25 million of capital.  On March 2, 2002, the Partnership sold a portion its equity interest equal to 4.08% (on a fully diluted basis) in NewComm to a group of investors led by Fleet Development Ventures for $13 million.  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.

 

Once TEM is able to convert its debt to 49.9% of NewComm, and the Partnership concedes to the sale of  0.2% control stock, the Partnership will own 38.3% of NewComm equity.

 

The Partnership anticipates that earnings and cash distributions derived from its Puerto Rico Network once it matures, 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

 

Results of Operations - 2003 Compared to 2002

 

The Partnership’s Consolidated revenues for the year ended December 31, 2003, which amounted to $108,894,112 ($107,957,097 in 2002), included $101,557,423 ($99,799,656 in 2002) in service revenues and $7,336,689 ($8,177,441 in 2002) in handset and accessories sales generated from NewComm’s wireless operations.  The increase in service revenues is primarily due to an increase during 2003 of the subscriber base.  The decrease in handset and accessories revenues is related to a reduction in the retail pricing of handsets.

 

Expenses

 

Consolidated Operating expenses for the year ended December 31, 2003 totaled $100,086,717, as compared to $103,734,297 for the same period in 2002.  During 2003, the Partnership’s expenses included  $ 22,523,576 ($20,297,712 for 2002) in costs of handset and accessories, $ 15,169,673 ($15,662,484 for 2002) in salaries and benefits, $ 2,682,232 ($9,915,770 for 2002) for legal and professional services, $17,272,191 ($14,171,258 for 2002) in depreciation and amortization, $8,907,241 ($9,854,591 for 2002) in provision for doubtful accounts, $46,713,169 ($41,933,902 for 2002) in interconnection, network maintenance, sales commissions, advertising, rent, taxes and other expenses, $4,165,826 ($5,808,374 for 2002) for services rendered by related parties and $ 282,280 ($262,164 for 2002) for management fees paid to the general partner. Variances in expenses such as legal and professional and services rendered by related parties

 

18

 

are due to reclassification of accounts at the subsidiary level and are not related to actual variations in such accounts.  The decrease in expenses during 2003, as compared to 2002, is primarily associated with an overall decrease in operating expenses of $3.6 million resulting from cost control management implemented at the Partnership and subsidiary level.  The increase in salaries and benefits was offset by a decrease in legal and professional services and a reduction in the provision for doubtful accounts, due to better collection efforts and tighter credit policy.

 

Net losses of $30,360,386 for 2003 and $13,025,074 for 2002, reflect the costs of competing in the Puerto Rico market against existing and new cellular and PCS operators in order to continue to develop and maintain a strong subscriber base.  The increase of the net loss as compared to the prior year is primarily due to the fact that the 2002 loss was reduced by a $13 million gain on the sale of stock.  Accordingly, the operational loss for 2002 was $26 million.  The net loss of $30,360,386 for 2003 includes nonrecurring losses amounting to $8.6 million, such as the loss of $4,742,559 on the write off of inventory and the $3,913,661 write-off of the discount on note payable to the FCC which resulted from the debt restructuring which should be finalized during 2004. Therefore, the adjusted net loss for 2003 would be $21.8 million compared to the adjusted $26 million in 2002.  Therefore, the net loss for 2003 shows a reduction of approximately $4 million which is directly proportional to the reduction in operating expenses as described above.

 

Interest expense for the year ended December 31, 2003, totaled $13,312,468 as compared to $16,212,644 for the same period in 2002.  The decrease in interest expense during 2003 is primarily attributable to the restructuring of the Partnership’s Notes Payable (refer to Notes 12, 14 and 15 to the accompanying consolidated financial statements) and to downward trends of interest rates in the markets.  In 2003, the Partnership had interest income of $213,369, as compared to $249,661 in 2002.

 

Contractual Obligations

 

As of December 31, 2004 the Partnership’s contractual obligations including payments due by period, are as follows:

 

		Payments due by Periods
					Less than			1-3			3-5			More than
		Total			1 yr			years			years			5 years
Rental Commitments (1)		$	26,075		$	26,075		$	—		$	—		$	—
Operating Lease Agreement (2)		19,123,987			6,362,828			4,051,337			7,044,469			1,665,353
Sales-Leaseback (3)		5,705,800			578,400			1,156,800			1,735,200			2,235,400
Notes Payable (4)		—			—			—			—			—
Lucent		48,470,205			6,000,000			14,500,000			25,929,632			2,040,573
Alcatel		2,461,029			2,461,029			—			—			—
FCC		33,620,245			16,133,067			17,487,178			—			—
TEM		62,097,930			36,769,293			25,328,637			—			—
Total Contractual Obligations		$	171,505,271		$	68,330,692		$	62,523,952		$	34,709,301		$	5,941,326

 

(1). Rental commitments represent the balance due on the Partnership’s General Partner office lease which finalizes in July 2005.

(2). Operating Lease Agreement is related to the minimal annual rental commitments of the Partnership’s subsidiary at Guaynabo.

(3). Sales-Leaseback includes the principal and imputed interest payments on the lease agreement with Mountain Union for the lease of certain space on 12 towers.  Under the lease agreement, NewComm was granted a license to install, maintain and operate its wireless communications equipment and accessories on the towers for a 10 year period.

(4). Notes payable include the principal installments due by period on Lucent, Alcatel, FCC and TEM Notes.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Partnership’s exposure to market risk through derivative financial instruments and other financial instruments

 

19

 

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 December 31, 2004, the Partnership had cash equivalents and short-term investments of $10,612,430 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 TLD Note relating to indebtedness of NewComm bears interest at the floating rate of the 90-day LIBOR plus 1% and is due six months from date of issuance but can be extended for periods of six months, thereafter.  Lucent’s debt was restructured on June 4, 2003 to a six-year term credit facility with an interest rate of eight percent (8%) annually.  As of December 2004, the outstanding principal balance owed to Lucent was $48.5  million.  The Bridge Loan bears an interest rate of 0.75% over 90-day LIBOR and is now guaranteed by TISA.  As part of this arrangement the Partnership agreed to pay an annual fee of 2% over half of this guarantee (or $30 million), or provide an equivalent cash collateral to the Banks.  This loan guarantee fee is not due until the sale of the Partnership’s interest in NewComm.  The Bridge Loan Facility has been extended again to April 30, 2005, with the option to extend by one or more additional periods of 30 days with the lender’s prior consent.

 

20

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

ClearComm, L.P.
Report of Independent Public Accountants — December 31, 2004, 2003, and 2002
Consolidated Balance Sheets - December 31, 2004, 2003, and 2002
Consolidated Statements of Operations for the years ended - December 31, 2004, 2003, and 2002
Consolidated Statements of Changes in Partners’ Deficit for the years ended - December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the years ended - December 31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements
SuperTel Communications Corp.
Report of Independent Public Accountants – December 31, 2004, 2003, and 2002
Balance Sheets - December 31, 2004, 2003, and 2002
Statements of Income and Accumulated Deficit for the years ended December 31, 2004, 2003, and 2002
Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002
Notes to Financial Statements

 

All financial schedules have been omitted because they are not applicable or because the information required is included in the financial statements or notes thereto.

 

21

 

Report of Independent Public Accountants

 

To the Partners of
   CLEARCOMM L.P. AND SUBSIDIARY:

 

 

We have audited the accompanying consolidated balance sheets of CLEARCOMM L.P. (a Delaware Limited Partnership) AND SUBSIDIARY (together, “the Company”) as of December 31, 2004, 2003 and 2002, and the related consolidated statements of operations, changes in partners’ deficit, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America as establish by the Auditing Standards Board of the American Institute of Certified Public Accountants.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ClearComm, L.P. and Subsidiary as of December 31, 2004, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring operating losses, has a working capital deficit and a partners’ capital deficit, and has not yet obtained permanent financing for the cost of its network and its working capital needs which matters raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 3(h), effective January 1, 2003, the Company changed its method of accounting for the amount of loss incurred on the sale of handsets to customers.  In addition, and as discussed in Note 3(k), effective January 1, 2002, the Company changed its method for assessing the recoverability of its intangible assets.

 

 

San Juan, Puerto Rico,
   February 9, 2005.

 

22

 

ClearComm, L.P.

Consolidated Balance Sheets

December 31, 2004, 2003, and 2002

 

		2004			2003			2002
CURRENT ASSETS:
Cash and cash equivalents		$	10,612,430		$	1,007,353		$	22,709,786
Cash in escrow account		—			1,500,000			—
Accounts receivable, net of allowance for doubtful accounts of $9,429,779, $15,032,114 and $18,627,970, respectively		7,909,573			12,297,162			11,594,949
Accounts receivable, other		4,204,524			7,457,028			6,483,255
Insurance claims receivable		403,657			—			270,002
Interest receivable		20,000			14,000			8,000
Inventories, net		1,304,392			3,908,736			10,461,112
Prepaid expenses		841,750			672,406			625,610
Total current assets		25,296,326			26,856,685			52,152,714
INVESTMENT IN SECURITIES		—			7,338,288			10,000,000
INVESTMENT IN 49% OWNED SUBSIDIARY, AT EQUITY, net		247,959			397,980			277,254
PCS LICENSES		46,750,449			57,517,974			57,517,974
LEASEHOLD RIGHTS, net		3,314,144			—			—
DEFERRED FINANCING COSTS		635,824			774,363			901,235
NOTE RECEIVABLE FROM OFFICER		100,000			100,000			100,000
PROPERTY AND EQUIPMENT, net		80,546,773			90,753,422			101,931,922
Total assets		$	156,891,475		$	183,738,712		$	222,881,099
LIABILITIES AND PARTNERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of notes payable		$	61,363,389		$	42,510,010		$	22,647,544
Bridge Loan Facility		61,000,000			61,000,000			60,000,000
Capital lease obligation - current portion		185,164			—			—
Accounts payable and accrued liabilities		27,838,987			23,631,877			23,430,433
Accounts payable to related parties		20,785,979			16,592,457			16,700,443
Option deposit - PCS Licenses		—			1,500,000			—
Accrued interest		1,579,002			921,902			4,977,700
Deferred income		1,907,103			2,390,750			1,913,514
Total current liabilities		174,659,624			148,546,996			129,669,634
NOTES PAYABLE TO TELEFONICA MOVILES, S.A.		10,987,284			5,493,642			—
LONG-TERM NOTES PAYABLE, net of current portion		85,286,020			117,390,809			150,505,987
CAPITAL LEASE OBLIGATION, net of current portion		3,150,590			—			—
DEFERRED INCOME, net of current portion		1,789,648			—			—
Total liabilities		275,873,166			271,431,447			280,175,621
PARTNERS’ DEFICIT:
Limited partners’ capital (2,765.2, 2,906.1, 2,906.1 units issued and outstanding, respectively)		71,841,976			73,039,616			73,039,616
General partner’s capital (1 unit issued and outstanding)		100,000			100,000			100,000
Other comprehensive loss		—			(37,827		)	—
Accumulated losses		(190,923,667		)	(160,794,524		)	(130,434,138		)
Total partners’ deficit		(118,981,691		)	(87,692,735		)	(57,294,522		)
Total liabilities and partners’ deficit		$	156,891,475		$	183,738,712		$	222,881,099

 

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

 

23

 

ClearComm, L.P.

 

Consolidated Statements of Operations for the years ended

December 31, 2004, 2003, 2002

 

		2004			2003			2002
REVENUES:
Service revenues		$	100,336,047		$	101,557,423		$	99,779,656
Handset and accessories sales		4,665,889			7,336,689			8,177,441
Total revenue		105,001,936			108,894,112			107,957,097
OPERATING EXPENSES:
Cost of handsets and accessories sold		24,352,074			22,523,576			20,297,712
Salaries and benefits		15,642,745			15,169,673			15,662,484
Provision for doubtful accounts		14,762,108			8,907,241			9,854,591
Salesmen and dealers commissions		11,652,417			8,375,695			4,241,827
Advertising expense		6,936,679			7,353,590			8,461,265
Rent expense		6,922,312			6,755,926			7,766,611
Network operation and maintenance expense		4,479,139			5,559,349			8,057,442
Taxes, other than income		3,952,175			4,945,218			1,262,577
Interconnection expense		2,798,991			4,245,415			4,916,771
Services rendered by related parties		5,466,626			4,090,826			6,070,538
Legal and professional services		2,700,917			2,682,232			9,915,770
Other expenses		7,978,150			9,477,976			7,226,709
Total operating expenses		107,644,333			100,086,717			103,734,297
INCOME FROM OPERATIONS		(2,642,397		)	8,807,395			4,222,800
INTEREST EXPENSE		(9,470,793		)	(13,312,468		)	(16,212,644		)
DEPRECIATION AND AMORTIZATION		(17,811,034		)	(17,272,191		)	(14,171,258		)
LOSS BEFORE OTHER INCOME (EXPENSE)		(29,924,224		)	(21,777,264		)	(26,161,102		)
OTHER INCOME (EXPENSE):
Gain on sale of California License		4,168			—			—
Gain on sale of investment in stock of subsidiary		—			—			13,000,000
Realized loss on sale of investment in securities		(56,518		)	—			—
Equity in net loss of 49% owned subsidiary		(115,382		)	(140,608		)	(114,746		)
Interest income		126,827			213,369			249,661
Write-down of investment in subsidiary		(165,306		)	—			—
Loss on write-off of inventories		—			(4,742,559		)	—
Write-off of discount on note payable to FCC		—			(3,913,661		)	—
Other		1,292			337			1,113
NET LOSS		$	(30,129,143	)	$	(30,360,386	)	$	(13,025,074	)
NET LOSS ATTRIBUTABLE TO GENERAL PARTNER		$	(30,129,143	)	$	(30,360,386	)	$	(13,025,074	)
NET LOSS ATTRIBUTABLE TO LIMITED PARTNERS		$	—		$	—		$	—
NET LOSS PER UNIT ATTRIBUTABLE TO LIMITED PARTNERS		$	—		$	—		$	—

 

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

 

24