**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 

**ForAnnual and Transition Reports to Section 13 or 15(d) of theSecurities 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, 2002**                                                              |
|                                                                                                                |   |                                                                                                                  |
| **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.) |
|                                                            |   |                                  |
| **268 Muñoz Rivera Ave.  Suite 2206**                      |   |                                  |
| **San Juan, Puerto Rico**                                       |   | **00918-1929**                        |
| (Address of Principal Executive Offices)                        |   | (Zip Code)                            |

 

Registrant’sTelephone Number, Including Area Code: **(787) 620-0140**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

Name of EachExchangeTitle of Each Class on Which RegisteredSecurities 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 allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  o    No  ý

 

Registrant’s financial statements for calendar years 2001 and 2000 arerestated and unaudited.  See Note 2.

 

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

 

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

 

The Registrant’s outstanding securities consist of units of limitedpartnership interests which have no readily ascertainable market value sincethere is no public trading market for these securities on which to base acalculation of aggregate market value.

 

Documentsincorporated by reference.         None.

 

 

----

 

**ClearComm, L.P.**

 

**CLEARCOMM, L.P. ( THE “PARTNERSHIP”) RESTATEDITS CONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEARS ENDED DECEMBER 31,2001 AND 2000, AS DESCRIBED IN NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTSINCLUDED AS PART OF THIS ANNUAL REPORT ON FORM 10-K.  OUR PRIOR INDEPENDENT ACCOUNTANTS, ARTHUR ANDERSEN LLP, ARE NOTABLE TO REISSUE THEIR REPORT RELATING TO THE PARTNERSHIP’S FINANCIAL STATEMENTSFOR 2001 AND 2000 OR TO AUDIT THE RESTATEMENT ADJUSTMENTS DESCRIBED INNOTE 2 BECAUSE THEY CEASED OPERATIONS IN 2002.   THE PARTNERSHIP BELIEVES THAT THE EFFECT OF THE ADJUSTMENTS MADEIN THE RESTATED FINANCIAL STATEMENTS, AND THE NATURE OF THE ACCOUNTING ISSUESADDRESSED BY THOSE ADJUSTMENTS, DO NOT HAVE A MATERIAL EFFECT ON THEPARTNERSHIP’S FINANCIAL POSITION AS A WHOLE OR ON THE PARTNERSHIP’S INVESTORS,CREDITORS, SUPPLIERS, EMPLOYEES OR CUSTOMERS. THEREFORE, THE PARTNERSHIP BELIEVES THAT A RE-AUDIT OF THE PARTNERSHIP’S2001 AND 2000 CONSOLIDATED FINANCIAL STATEMENTS IS UNNECESSARY.  ACCORDINGLY, OUR CONSOLIDATED FINANCIALSTATEMENTS FOR THE CALENDAR YEARS ENDED DECEMBER 31, 2001 AND 2000 ARERESTATED AND UNAUDITED.  OUR AUDITEDCONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEAR ENDED DECEMBER 31,2002 ARE INCLUDED AS PART OF THIS ANNUAL REPORT ON FORM 10-K.**

 

**THE RESTATEMENTS OF THE PARTNERSHIP’SCONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEARS ENDEDDECEMBER 31, 2001 AND 2000 ARE DESCRIBED IN DETAIL WITHIN ITEM 7,“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS” AND WITHIN THE PARTNERSHIP’S AUDITED CONSOLIDATED FINANCIALSTATEMENTS AND RELATED NOTES, INCLUDING NOTE 2, INCLUDED AS PART OF THISANNUAL REPORT ON FORM 10-K.**

 

TABLE OF CONTENTS

 
| Part I     | 3                                                                                           |
|------------|---------------------------------------------------------------------------------------------|
|       |                                                                                        |
| Item 1.    | Business                                                                                    | 3 |
| Item 2.    | Properties                                                                                  | 6 |
| Item 3.    | Legal Proceedings                                                                           | 6 |
| Item 4.    | Submission of Matters to a Vote of Security  Holders                                        | 6 |
|       |                                                                                        |   |
| Part II    | 7                                                                                           |
|       |                                                                                        |   |
| Item 5.    | Market for Registrant’s Common Equity and  Related Stockholder Matters                 | 7 |
| Item 6.    | Selected Financial Data                                                                     | 7 |
| Item 7.    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 10 |
| Item 7A.   | Quantitative and Qualitative Disclosures About  Market Risk                                 | 15 |
| Item 8.    | Financial Statements and Supplementary Data                                                 | 16 |
| Item 9.    | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure       | 45 |
| Item 9A.   | Controls and Procedures                                                                     | 45 |
|       |                                                                                        |
| Part III   |                                                                                        |
|       |                                                                                        |   |
| Item 10.   | Directors and Executive Officers of the  Registrant                                         | 45 |
| Item 11.   | Executive Compensation                                                                      | 47 |
| Item 12.   | Security Ownership of Certain Beneficial Owners  and Management                             | 47 |
| Item 13.   | Certain Relationships and Related  Transactions                                             | 48 |
|       |                                                                                        |   |
| Part IV    |                                                                                        |
|       |                                                                                        |   |
| Item 14.   | Exhibits, Financial Statement Schedules, and  Reports on Form 8-K                           | 48 |
|       |                                                                                        |   |
| SIGNATURES | 50                                                                                          |

 

2

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##### **PartI**

 

##### **FORWARD-LOOKING STATEMENTS**

#####  

This Form 10-K and future filings by the Partnership on Form 10-Q andForm 8-K and future oral and written statements by the Partnership may includecertain forward-looking statements, including (without limitation) statementswith respect to anticipated future operating and financial performance, growthopportunities and growth rates, acquisition and divestitive opportunities, andother similar forecasts and statements of expectation. Words such as “expects,”“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and“should,” and variations of these words and similar expressions, are intendedto 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 offuture performance. The Partnership disclaims any obligation to update orrevise 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 materiallyfrom those expressed in forward-looking statements made by the Partnership as aresult of a number of important factors. Examples of these factors include, without limitation, failure todevelop the Partnership’s PCS licenses in California due to an inability toobtain satisfactory financing or partners; rapid technological developments andchanges in the telecommunications industry; ongoing deregulation (and theresulting likelihood of significantly increased price and product/servicecompetition) in the telecommunications industry as a result of theTelecommunications Act of 1996 and other similar federal and state legislationand the federal and state rules and regulations enacted pursuant to thatlegislation; regulatory limitations on the Partnership’s ability to compete inthe telecommunications services industry; and continuing consolidation in thetelecommunications services industry. In addition to these factors, actual future performance, outcomes andresults may differ materially because of other, more general, factorsincluding, without limitation, general industry and market conditions andgrowth rates, domestic and international economic conditions, governmental andpublic policy changes and the continued availability of financing in theamounts, at the terms and on the conditions necessary to support thePartnership’s future business.

 

##### **ITEM1.  BUSINESS**

#####  

###### **General**

######  

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

 

The Partnership, through its majority-owned subsidiary, NewCommWireless Services, Inc. (“NewComm”), owns and operates a state-of-the-art PCSnetwork in Puerto Rico (the “Puerto Rico Network”).  The Partnership directly or indirectly through NewComm owns two15 MHz C-Block PCS licenses covering the entire island of Puerto Rico (the“Puerto Rico Licenses”) and four 15 MHz licenses in California (the “CaliforniaLicenses,” and together with the Puerto Rico Licenses, the “Licenses”).   Since January 2002, the Partnershiphas had a wireless DSL network in place throughout certain areas withinCalifornia and is currently in compliance with the FCC’s build-outrequirements.

 

The Agreement of Limited Partnership of the Partnership (the“Partnership Agreement”) provides that the Partnership will terminate onDecember 31, 2005. The Partnership will dissolve on such date (unless terminatedearlier or unless the Partnership Agreement is amended to change such date).

 

###### **ThePuerto Rico Network**

######  

The Partnership started building its Puerto Rico Network during thefirst quarter of 1999 and the system commenced commercial operations on September 24,1999.  The Partnership was the fifthentrant into the Puerto Rico wireless telecommunications market.  It currently provides wireless coverage inthe areas where 95% of the Puerto Rico wireless traffic occurs.  The Partnership has established points ofsale in all major shopping districts and has over 250 points of sale throughoutPuerto Rico.  The Partnership believesthat it currently has approximately 15% of the Puerto Rico wireless market.

 

To build and operate its Puerto Rico network, the Partnership enteredinto an agreement, dated February 4, 1999 (the “TLD Agreement”) withTelefónica Larga Distancia de Puerto Rico, Inc. (“TLD”).  TLD is a wholly owned subsidiary ofTelefónica Internacional, S.A. which is a member of the Telefónica, S.A. group(Ticker: TEF) (the “Telefónica Group”), Spain’s largest traded company and oneof the world’s largest telecommunication companies.  Telefónica Móviles (Ticker: TEM), the wireless communicationsaffiliate of Telefónica, currently has approximately 25 million subscribersworldwide.  Pursuant to the terms of theTLD Agreement, the Partnership transferred the

 

3

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Puerto Rico Licenses andassociated business plans and studies to NewComm.  TLD provided NewComm a loan of approximately $19.96 million andreceived a secured convertible promissory note (the “Note”) which entitles TLDto select a director for one of the five NewComm board of director seats (the“Board”).  The Note is convertible into49.9% of NewComm’s equity.  The Notecannot be converted, however, until the FCC authorizes TLD to hold more than a25% equity interest in NewComm.  NewCommand TLD entered into a management agreement whereby TLD provides day-to-daymanagement services for NewComm, subject to the supervision of NewComm’sBoard.  Pursuant to a certain StockPurchase Agreement dated as of March 12, 2002, by and between thePartnership and TLD, the Partnership has agreed to sell 0.2% control interestat market value to TLD.  The transfer ofthis control interest and validity of the agreement is subject to FCC approval.As part of the requirements of the Stock Purchase Agreement, TLD (andTelefónica Internacional, S.A., its parent company) have agreed to issue theircorporate guarantee as collateral for long-term financing of NewComm ofapproximately $110M.  Together with theStock 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 agreat number of general and specific protections and rights for the Partnershipas a minority shareholder in NewComm. The Sale Agreement provides for a convenient exit for the Partnershipfrom NewComm.  Under the Joint VentureAgreement the Partnership’s principal means of exiting from NewComm was byexercising Registration Rights against TLD. Due to Telefónica’s re-organization and new market conditions, thepossibility of publicly registering an exclusive wireless service companylimited to the Puerto Rico market is very unlikely.  However, under the Sale Agreement, the Partnership can force thesale of NewComm to TLD and/or third parties.

 

The new Sale Agreement provides that since May 12, 2003 eitherparty (ClearComm or TLD) may trigger a shareholder obligation to sellNewComm.  Within 30 days of a notice ofsale, TLD (or ClearComm as the case may be) would have the right to purchaseClearComm’s (or TLD’s) interest.  Thepurchase price to be paid at that time would be based on a valuation performedby an internationally recognized investment-banking firm selected by bothparties.  If TLD does not exercise itsright to buy out ClearComm’s interest, TLD is bound together with ClearComm toproceed with the sales process to attempt a sale of NewComm.  TLD and ClearComm are bound to accept thehighest price proposed by an interested buyer, which price must be payable incash or freely tradable securities, or a combination thereof, and which must befor a price not less than the valuation prepared by the investment banker.  At the closing of the sale the ManagementAgreement and the Technology Transfer Agreement held by TLD will terminatewithout compensation, and no premium for controlling interest or discount forholding a minority interest in NewComm will apply.

 

The Sale Agreement shall continue in full force and effect even if theStock Purchase Agreement with TLD, for whatever reason, does not close.

 

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

 

Lucent Technologies, Inc. (“Lucent”) built the Puerto Rico Network onbehalf of NewComm.  The Partnershipcontinues optimizing the network to maintain and offer better quality serviceto its customers.

 

###### **ThePuerto Rico Market**

######  

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

 

###### **Competitionin Puerto Rico**

######  

The continued success of the Partnership’s PCS business in Puerto Ricowill depend upon its ability to compete with the two cellular operators andthree operating PCS providers, potential competition from two other PCSlicensees and potential future wireless communications providers in the PuertoRico market.  All wireless operatorscompete in the optimization of their networks to provide a better service fortheir customers.  The Partnership alsofaces competition from other existing communications technologies such asconventional mobile telephone service, specialized mobile radio (“SMR”) andenhanced specialized mobile radio (“ESMR”). As wireless use increases, PCS competes more directly with traditionallandline telephone service providers and other technologies including mobilesatellite systems.  In addition, theavailability of new spectrum and resale of existing spectrum and the entry ofnew participants may result in increased competition in the Puerto Rico market.  At the end of 2002, Puerto Rico had awireless market penetration of approximately 33% while the United Statesmainland ended the same year with an approximate market penetration of 49%.  The latest market research reflects thatPuerto Rico should attain a market penetration of 48% by the end of 2005.

 

4

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###### **Markets**

######  

The following table sets forth as of December 31, 2002, withrespect to each Market in which the Partnership owns a PCS license, theestimated persons of population (“POPs”).

 
| **Market Name**        |   | **1997 POPs*** |   | **1990  POPs**** |   |
|------------------------|--------|----------------|--------|------------------|--------|
| San Juan, PR           |   | 2,704,110      | ***    | 2,170,250        |   |
| Mayaguez-Aguadilla, PR |   | 1,104,500      | ***    | 1,325,600        |   |
| Modesto, CA            |   | 487,000        |   | 418,980          |   |
| Redding, CA            |   | 284,000        |   | 253,260          |   |
| Merced, CA             |   | 227,000        |   | 192,710          |   |
| Eureka, CA             |   | 157,000        |   | 142,580          |   |
| Total:                 |   | 4,927,000      |   | 4,503,380        |   |

 

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*                                         Basedon the Paul Kagan 1998 PCS Atlas and Databook.

**                                  Basedon the 1990 census figures used by the FCC.

***                           Basedon US Census Bureau 2000 figures.

 

On August 28, 2001, the Partnership entered into a Purchase andSale Agreement with Leap Wireless International (“Leap Wireless”), pursuant towhich the Partnership sold the Visalia license to Leap Wireless in exchange for$9,500,000 cash payment. This sale was approved by the FCC and it closed onJune 8, 2001.

 

**InternetSurfing Stores of Puerto Rico, Inc**

 

On April 16, 2002, ClearComm, L.P. entered into a Shareholders’Agreement to form a joint venture with eMilios International, L.L.C., a Floridalimited liability company, to promote and establish in Puerto Rico the eMiliosconcept (described below).  The jointventure was formed under a Puerto Rico corporation named Internet SurfingStores of Puerto Rico, Inc. (“ISS”). The Partnership owns 49% and eMilios International owns 51% of ISS.

 

The eMilios concept involves internet communication galleries that aregeared towards educating people in the use of computers and the internet, andacts as a communication and recreational center as well.  The broadband connectivity that is offeredat eMilios allows the stores to efficiently offer internet communications andalso access to a great variety of interactive content, such as cyber games, aswell as software and tools for free lancers and small business entities.  The service is provided and collected with aproprietary smart card and software application.  The commitment of the Partnership to ISS is $1 million andeMilios 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 themanagement 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 computerstations was inaugurated on January 11, 2003 to serve the western part ofPuerto Rico.  The investment has an exitmechanism whereby at any time after 2003, ClearComm can force the acquisitionsof 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 theaward of certain FCC licenses, including PCS licenses.  Pursuant to authority granted to the FCC bythe Reconciliation Act, the FCC awarded PCS licenses through a process ofcompetitive bidding auctions in which there were multiple applications for thesame license (the “Auctions”).

 

PCS is a radio-based transmission technology, which, like cellulartechnology, uses the same frequencies repeatedly in a multiple-transmitter celldesign.  PCS is a digital technology,capable of numerous advanced service features, including caller-ID,voice-prompting, voice-recognition, scrambled (secure) calling, message andimage delivery, intelligent call transfer and follow-me calling, single numberservice (the same number can be assigned to multiple PCS telephones indifferent locations) and auto-trace of crank callers. The Partnership has beenoffering E-mail and internet access from its handsets since June of2000.  The Partnership began offeringwireless banking services in October of 2000.  The Partnership also pioneered in the Puerto Rico market shorttext messaging services from its handsets in October of 2001.  An average of 300,000 text messages per monthare being sent by subscribers from their handsets.

 

Frequency Blocks

 

The FCC has divided PCS into six frequency blocks, designated Blocks Athrough F, such that there are six overlapping licenses in

 

5

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each market in eachgeographic area of the country.  BlocksA, 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 incertain markets including Puerto Rico and California.

 

Entrepreneur Classes and Economic Preferences

 

Block C and F licenses were reserved for Entrepreneurs meeting certainlimiting criteria set forth in FCC Rules. Entrepreneurs were granted a set of economic preferences in theAuctions.  Under FCC Rules, anEntrepreneur is defined as an entity that, together with its affiliates andpersons or entities that holds attributable interests in such entity and theiraffiliates, has less than (i) $500 million of assets and (ii) $125 million ofannual gross revenue over the prior two years. In addition, FCC Rules define three classes of Entrepreneurs, with eachclass eligible for different economic preferences in the Blocks C and FAuctions.  The Partnership’sEntrepreneur qualification is as a “Small Business,” which is an entity that hadless than $40 million of aggregate annual gross revenue averaged over the lastthree years, at the date of grant of the license.

 

Small Businesses were entitled to make interest-only payments for thefirst six years and can amortize interest and principal over the remaining fouryears of the license term.  The interestrate applicable to Small Businesses is the 10-year treasury note rate at thedate of grant of the license.  Inaddition, Small Businesses were entitled to a bidding credit of 25%.  In March 1997, the FCC issued an ordersuspending indefinitely interest payments on all Block C licenses; however,interest continued to accrue. Ultimately, in accordance with the FCC procedures specified in the FCC’sMarch 24, 1998 Order on Reconsideration of the Second Report and Order(the “Reconsideration Order”), the Partnership commenced interest paymentsduring July, 1998. The Partnership owes $51.3M exclusively in connection withthe Puerto Rico License.

 

Build-Out Requirements

 

All PCS license holders are required to meet certain requirementsimposed by the FCC relating to the provision of service in each license area.Block C license holders must provide coverage to one-third of the POPs in eachlicense service area within five years of license grant and two-thirds of thePOPs in each license service area within ten years of license grant.  These periods were rescheduled by the FCC tobegin on June 8, 1998. The Partnership has complied with its build outrequirements for the Puerto Rico Licenses and the California Licenses.

 

###### Employees

######  

The Partnership, including its majority owned subsidiary NewComm, hadapproximately 300 employees at the end of 2002.

 

Available Information

 

We file annual reports on form 10-K, quarterly reportson Form 10Q, current reports on Form 8-K, amendments to these reports, andother information with the Securities and Exchange Commission (“SEC”).  The public may read and copy any materialswe file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street,N.W., Washington, D.C. 20549.  Thepublic may obtain information on the operation of the Public Reference Room bycalling the SEC at 1800-SEC-0330.  TheSEC maintains and Internet site (www.sec.gov) that contains reports, proxy andinformation statements, and other information regarding issuers that fileelectronically with the SEC.

 

##### **ITEM 2.  PROPERTIES**

#####  

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

 

In connection withthe California Licenses, the Partnership leases sites where its networkequipment and antennas are located.

 

##### **ITEM****3.  LEGAL PROCEEDINGS**

#####  

##### From time to timethe Partnership is involved in litigation arising from the ordinary course ofbusiness, some of which is ongoing.  TheGeneral Partner does not believe that any litigation involving the Partnershipwill have a material adverse effect on the Partnership’s business or financialcondition.

#####  

**ITEM****4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

6

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**Part II**

 

**ITEM 5****.  MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

There is no trading market for the Units, and it is unlikely that atrading market will exist at any time in the future.  Any transfer of the Units is severely restricted by certainconditions outlined in the Partnership Agreement, and requires the consent ofthe General Partner which can be withheld in the General Partner’s solereasonable discretion.

 

As of December 31, 2002, the General Partner holds one generalpartnership interest, and 1,606 investors hold an aggregate of 2,906.1 units oflimited partnership interest.  There are3.3 units held as treasury units.

 

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

 

The availability of Cash Flow for distribution to the Investors isdependent upon the Partnership earning more than its expenses.  No assurance can be given that income in anyyear will be sufficient to generate Cash Flow for distribution to the Investorsor that there will not be cash deficits. Further, because operating expensesare subject to increases, and increases in revenue from Partnership operationsmay be subject to market limitations, income from the Partnership in any yearmay not be sufficient to generate Cash Flow.

 

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

 

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

 

##### **ITEM6****. SELECTED FINANCIAL DATA**

#####  

The following table summarizes selected consolidated financial data ofthe Partnership from the period from January 1, 1998 to December 31,1998, from January 1, 1999 to December 31, 1999, from January 1,2000 to December 31, 2000 from January 1, 2001 to December 31,2001, and from January 1, 2002 to December 31, 2002.  This information should be read inconjunction with the Partnership’s audited consolidated financial statementsand related notes thereto and management discussion contained herein.  The financial statements for the calendaryears 2001 and 2000, which were audited by Arthur Andersen, LLP, thepredecessor independent accountants, are restated.  The financial statements for the calendar years endedDecember 31, 2000 and December 31, 2001 are considered unaudited forreasons discussed in Item 7 and in Note 2 to the Partnership’s auditedconsolidated financial statements attached to this Annual Report on Form 10-K.

 

7

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**Statementsof Operations Data**

 
|                                                                                                  |   | **December 31,  2002** |            | **December 31,  2001(1)** |       | **December 31,  2000(1)** |       | **December 31,  1999(2)** |            | **December 31,  1998(2)** |       |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|-----------------|--------------------------------|------------|
| **Revenues:**                                                                                         |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Service revenues**                                                                                  |   | **$**                       | **99,779,656**  | ** **                     | **$**      | **112,025,407**                | ** ** | **$**                          | **79,906,400**  | ** **                     | **$**      | **4,950,769** | ** ** | **$** | **—** | ** ** |
| **Handsets and  accessories sales**                                                                   |   | **8,177,441**               | ** **      | **11,710,520**                 | ** ** | **12,104,805**                 | ** ** | **2,357,790**                  | ** **      | **—**                     | ** ** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Total Revenues**                                                                                    |   | **107,957,097**             | ** **      | **123,735,927**                | ** ** | **92,011,205**                 | ** ** | **7,308,559**                  | ** **      | **—**                     | ** ** |
| **Expenses:**                                                                                         |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Operating  expenses**                                                                               |   | **103,734,297**             | ** **      | **119,309,062**                | ** ** | **112,939,103**                | ** ** | **25,114,638**                 | ** **      | **5,624,814**                  | ** ** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Income (loss)  from operations**                                                                    |   | **4,222,800**               | ** **      | **4,426,865**                  | ** ** | **(20,927,898**                | **)**      | **(17,806,079**                | **)**           | **(5,624,814**                 | **)**      |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Interest expense**                                                                                  |   | **(16,212,644**             | **)**           | **(20,172,216**                | **)**      | **(11,141,769**                | **)**      | **(2,263,002**                 | **)**           | **(5,749**                     | **)**      |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Depreciation and  amortization**                                                                    |   | **(14,171,258**             | **)**           | **(17,631,238**                | **)**      | **(20,458,500**                | **)**      | **(2,957,683**                 | **)**           | **(71,625**                    | **)**      |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Loss before  other income (expense)**                                                               |   | **(26,161,102**             | **)**           | **(33,376,589**                | **)**      | **(52,528,167**                | **)**      | **(23,026,764**                | **)**           | **(5,702,188**                 | **)**      |
| **Other Income  (expense)**                                                                           |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Gain on sale of  investment in stock of subsidiary**                                                |   | **13,000,000**              | ** **      | **—**                     | ** ** | **—**                     | ** ** | **—**                     | ** **      | **—**                     | ** ** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Equity in net  loss of subsidiary**                                                                 |   | **(114,746**                | **)**           | **—**                     | ** ** | **—**                     | ** ** | **—**                     | ** **      | **—**                     | ** ** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Interest income**                                                                                   |   | **249,661**                 | ** **      | **548,002**                    | ** ** | **490,309**                    | ** ** | **832,006**                    | ** **      | **324,232**                    | ** ** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Gain on sale of  Visalia-Porterville license**                                                      |   | **—**                  | ** **      | **—**                     | ** ** | **—**                     | ** ** | **—**                     | ** **      | **—**                     | ** ** |
| **License**                                                                                           |   |                        | ** **      | **4,814,337**                  | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Other**                                                                                             |   | **1,113**                   | ** **      | **—**                     | ** ** | **—**                     | ** ** | **—**                     | ** **      | **—**                     | ** ** |
| **Settlement  credit on legal disputes**                                                              |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      | **2,090,876**                  | ** ** |
| **Norfolk bid  withdrawal penalty credit**                                                            |   | **—**                  | ** **      | **—**                     | ** ** | **—**                     | ** ** | **—**                     | ** **      | **2,848,374**                  | ** ** |
| **License cost  forfeiture after disaggregation, prepayment and amnesty options offered by  the FCC** |   | **—**                  | ** **      | **—**                     | ** ** | **—**                     | ** ** | **—**                     | ** **      | **(10,989,972**                | **)**      |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
|                                                                                                  |   |                        |            |                           |       |                           |       |                           |            |                           |       |
| **Net loss**                                                                                          |   | **$**                       | **(13,025,074** | **)**                          | **$**      | **(28,014,250**                | **)**      | **$**                          | **(52,037,858** | **)**                          | **$**      | **(22,194,758** | **)** | **$** | **(11,428,678** | **)** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Net loss  attributable to General Partner**                                                         |   | **$**                       | **(13,025,074** | **)**                          | **$**      | **(28,014,250**                | **)**      | **$**                          | **(25,765,959** | **)**                          | **$**      | **(5,548,690** | **)** | **$** | **(2,857,170** | **)** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Net loss  attributable to Limited Partners**                                                        |   | **$**                       | **—**      | ** **                     | **$**      | **—**                     | ** ** | **$**                          | **(26,271,898** | **)**                          | **$**      | **(16,646,068** | **)** | **$** | **(8,571,508** | **)** |
|                                                                                                  |   |                        | ** **      |                           | ** ** |                           | ** ** |                           | ** **      |                           | ** ** |
| **Net loss per  unit attributable to Limited Partners**                                               |   | **$**                       | **—**      | ** **                     | **$**      | **—**                     | ** ** | **$**                          | **(9,035**      | **)**                          | **$**      | **(5,725** | **)** | **$** | **(3,028** | **)** |

 

----

**(1)**         Each of the 2001 and 2000calendar years are restated and unaudited.

**(2)   Calendar years audited by other independentpublic accountants.**

 

8

----

 

**Balance Sheets Data**

** **
|                                                                                                                                                                   |   | **December 31,  2002** |            | **December 31,  2001(1)** |       | **December 31,  2000 (1)** |       | **December 31,  1999 (2)** |            | **December 31,  1998(2)** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------------|--------------------------------|------------|---------------------------------|------------|---------------------------------|-----------------|--------------------------------|------------|
| **ASSETS:**                                                                                                                                                            |   |                        | ** **      |                           | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
| **Cash and cash equivalents**                                                                                                                                          |   | **$**                       | **22,709,786**  | ** **                     | **$**      | **10,241,902**                  | ** ** | **$**                           | **9,338,798**   | ** **                     | **$**      | **6,546,305** | ** ** | **$** | **4,246,412** | ** ** |
| **Accounts receivable, net**                                                                                                                                           |   | **18,078,204**              | ** **      | **19,099,986**                 | ** ** | **20,049,769**                  | ** ** | **3,244,067**                   | ** **      | **1,633,024**                  | ** ** |
| **Insurance claim receivable**                                                                                                                                         |   | **270,002**                 | ** **      | **1,496,324**                  | ** ** | **1,256,285**                   | ** ** | **—**                      | ** **      | **—**                     | ** ** |
| **Interest receivable**                                                                                                                                                |   | **8,000**                   | ** **      | **2,000**                      | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
| **Inventories**                                                                                                                                                        |   | **10,461,112**              | ** **      | **10,305,254**                 | ** ** | **12,977,164**                  | ** ** | **9,201,823**                   | ** **      | **—**                     | ** ** |
| **Prepaid expenses**                                                                                                                                                   |   | **625,610**                 | ** **      | **652,279**                    | ** ** | **751,603**                     | ** ** | **1,406,684**                   | ** **      | **125,388**                    | ** ** |
| **Investment in Securities**                                                                                                                                           |   | **10,000,000**              | ** **      | **—**                     | ** ** | **—**                      | ** ** | **—**                      | ** **      | **—**                     | ** ** |
| **Investment in Subsidiary**                                                                                                                                           |   | **277,254**                 | ** **      | **—**                     | ** ** | **—**                      | ** ** | **—**                      | ** **      | **—**                     | ** ** |
| **PCS licenses, net**                                                                                                                                                  |   | **57,517,974**              | ** **      | **57,517,974**                 | ** ** | **64,838,452**                  | ** ** | **67,543,320**                  | ** **      | **64,757,512**                 | ** ** |
| **Deferred financing costs**                                                                                                                                           |   | **901,235**                 | ** **      | **906,731**                    | ** ** | **1,730,047**                   | ** ** |                            | ** **      |                           | ** ** |
| **Note receivable from officer**                                                                                                                                       |   | **100,000**                 | ** **      | **100,000**                    | ** ** | **—**                      | ** ** | **—**                      | ** **      | **—**                     | ** ** |
| **Property and equipment, net**                                                                                                                                        |   | **101,931,922**             | ** **      | **102,095,953**                | ** ** | **97,002,140**                  | ** ** | **89,200,611**                  | ** **      | **18,495**                     | ** ** |
|                                                                                                                                                                   |   |                        | ** **      |                           | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
|                                                                                                                                                                   |   | **$**                       | **222,881,099** |                           | **$**      | **202,418,403**                 | ** ** | **$**                           | **207,944,258** | ** **                     | **$**      | **177,142,810** | ** ** | **$** | **70,780,831** | ** ** |
|                                                                                                                                                                   |   |                        | ** **      |                           | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
| **LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT):**                                                                                                                  |   |                        | ** **      |                           | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
| **Accounts payable and accrued Liabilities**                                                                                                                           |   | **$**                       | **47,022,094**  | ** **                     | **$**      | **41,642,052**                  | ** ** | **$**                           | **45,743,223**  | ** **                     | **$**      | **107,245,472** | ** ** | **$** | **2,317,681** | ** ** |
| **Notes payable — short-term**                                                                                                                                    |   | **82,647,544**              | ** **      | **133,321,837**                | ** ** | **121,000,000**                 | ** ** | **—**                      | ** **      | **—**                     | ** ** |
| **Notes payable — long-term**                                                                                                                                     |   | **150,505,987**             | ** **      | **81,723,962**                 | ** ** | **72,456,233**                  | ** ** | **59,114,678**                  | ** **      | **37,550,348**                 | ** ** |
|                                                                                                                                                                   |   |                        | ** **      |                           | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
| **Unitholders’ capital (deficit) 2,825.9 Units in 1997,  2,830.7 Units in 1998 and 2,906.1 Units in 1999, 2000, 2001, 2002, and 1  general Partnership interest** |   | **(57,294,526**             | **)**           | **(54,269,448**                | **)**      | **(31,255,198**                 | **)**      | **10,782,660**                  | ** **      | **30,912,802**                 | ** ** |
|                                                                                                                                                                   |   |                        | ** **      |                           | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
|                                                                                                                                                                   |   | **$**                       | **222,881,099** |                           | **$**      | **202,418,403**                 | ** ** | **$**                           | **207,944,258** | ** **                     | **$**      | **177,142,810** | ** ** | **$** | **70,780,831** | ** ** |
|                                                                                                                                                                   |   |                        | ** **      |                           | ** ** |                            | ** ** |                            | ** **      |                           | ** ** |
| **BOOK VALUE PER UNIT**                                                                                                                                                |   | **$**                       | **(19,708**     | **)**                          | **$**      | **(18,668**                     | **)**      | **$**                           | **(10,751**     | **)**                          | **$**      | **3,708** | ** ** | **$** | **10,921** | ** ** |

 

----

(1)          Each of the2001 and 2000 calendar years are restated and unaudited.

(2)          Calendaryears audited by other independent public accountants.

 

9

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**ITEM 7****.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Introduction**

 

The Partnership was formed in January 1995 and is managed by itsGeneral Partner, SuperTel Communications Corp. The Partnership was organized to acquire, own, consult and operatepersonal communication services (PCS) licenses in the Block C band and to takeadvantage of the benefits that the FCC has set aside for Entrepreneurs.  The Partnership owns the Puerto RicoLicenses, which consist of two 15 MHz PCS licenses covering Puerto Rico, andthe California Licenses, which consist of four 15 MHz PCS licenses covering theCalifornia cities of Eureka, Redding, Modesto, and Merced.

 

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

 

The Partnership commenced commercial operations of its PCS network inPuerto Rico on September 24, 1999 when it began offering wireless servicesin Puerto Rico to the public.  Prior tothat date, its revenues had consisted of interest income only.  Since the Partnership commenced commercialoperations in 1999, the comparisons presented below may not be indicative offuture operations.

 

The Partnership established its Puerto Rico network by forming a whollyowned subsidiary, NewComm, on January 29, 1999.  On February 4, 1999, the Partnership and NewComm enteredinto an agreement with TLD, whereby the Partnership contributed its two PuertoRico Licenses to NewComm and TLD provided NewComm a $19,960,000 loan to developthe Puerto Rico Licenses.  TLD’s loan ispursuant to a secured convertible promissory note (the “Note”) which isconvertible into 49.9% of NewComm’s equity. The Note however, cannot be converted until the FCC authorizes TLD tohold more than a 25% equity interest in NewComm.

 

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

 

**TheStock Purchase Agreement**

 

The purchase price for the 0.2% share interest in NewComm shall bedetermined after all conditions to closing are obtained.  The principal conditions for this closingare the closing of the long term financing for NewComm and the final approvalby the FCC.  At such time, ClearComm andTLD will select an internationally recognized investment-banking firm who willperform a valuation of the shares to be sold. The investment banker will have an agreed upon period of time to preparethe valuation of the shares.  Afterdelivery of the valuation, a closing will occur.

 

The investment banking firm will use a combination of variousmethodologies for its valuation, that include: discounted cash flows, comparable transactions and trading prices ofcomparable transactions, and trading prices of comparable publicly heldcompanies and in the application of such methodologies shall use acceptableindustry standards.  Payment shall be incash.

 

**TheShareholders Agreement**

 

In consideration of the sale of a controlling interest in NewComm a newShareholders Agreement shall become effective upon the closing of the StockPurchase Agreement.  The ShareholdersAgreement shall incorporate all of the rights and benefits under the currentJoint Venture Agreement, which include, rights of first refusal, pre-emptiverights, drag along rights, registration rights, piggy back rights, financialreporting and other rights.

 

In addition to the above, ClearComm will have approval rights for agreat number of actions that have the intent of protecting the Partnership’sthen minority interest in NewComm, some of which are as follows: anytransaction between NewComm and a shareholder or an affiliate of suchshareholder, other than the Management Agreement and the Technology TransferAgreement; the annual strategic business plan and operating budgets for eachcalendar year and any variations or modifications which individually or in theaggregate exceed ten percent of the operating budget for such annual period;the appointment of the general manager, the director of finance and alldirectors of each division of NewComm, as well as the compensation of each suchperson, consent to which shall not be unreasonably withheld; the engagement ofa new marketing consultant and the employment of marketing strategies,promotions, advertising and product development different from those in effecton the date hereof, consent to which shall not unreasonably be withheld; anymodification to the Certificate of Incorporation or Bylaws of NewComm thatwould have an adverse effect on any rights granted to a shareholder thereunderor under applicable law; and any amendments or modifications to the ManagementAgreement or the Technology Transfer Agreement in effect as of the EffectiveDate.  ClearComm will have the right toappoint four directors and TLD five directors.

 

10

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**TheSale Agreement**

 

The new Sale Agreement provides that ClearComm (or TLD) may trigger ashareholder obligation to sell NewComm. Within 30 days of a notice of sale, TLD (or ClearComm as the case maybe) would have the right to purchase ClearComm’s (or TLD’s) interest.  The purchase price to be paid at that timewould be based on a valuation performed by the investment-banking firm thatprepared the one under the Stock Purchase Agreement.

 

If TLD does not exercise its right to buy out ClearComm’s interest, theshareholders will be bound to proceed with the sales process to attempt a saleof NewComm.  All shareholders are boundto cooperate and undertake all that is necessary in that effort.  Further, the shareholders are bound toaccept the highest price proposed by an interested buyer, which price must bepayable in cash or freely tradable securities, or a combination thereof, andwhich must be for a price not less than the valuation prepared by theinvestment banker.

 

Some additional points are that at the closing of the sale of NewCommthe Management Agreement and the Technology Transfer Agreement held by TLD willterminate.  Also, no premium forcontrolling interest or discount for holding a minority interest in NewCommwill apply.

 

The Sale Agreement shall continue in full force and effect even if theStock Purchase Agreement with TLD, for whatever reason, does not close.

 

**ProjectFinance Facility**

 

With the signing of the Stock Purchase Agreement ABN/AMRO (the “Bank”)has proceeded to work towards providing a $110 million Project Finance Facilityfor NewComm.   The Project FinanceFacility will consist of five-year term credit, with a balloon payment at theend of the term.

 

An agreement restructuring Lucent’s outstanding debt has been attainedand it was executed on June 4, 2003. The now outstanding debt to Lucent is $51.5M and is payable over asix-year period at 8% annual interest rate. On June 20, 2003, an agreement restructuring Alcatel’s debt wasexecuted.  Alcatel’s credit is $5.4 at6.5% over a three year period.  Also, bymeans of letter from TLD (and its parent, Telefónica Internacional, S.A., andits affiliate, Telefónica Móviles), TLD has agreed to issue a corporateguarantee to serve as collateral for a $110M bank loan.

 

**CaliforniaLicenses**

 

Since January 2002 the Partnership has had awireless DSL network in place throughout in certain areas within California incompliance with the FCC build out requirements.

 

**Critical Accounting Policies**

 

The consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the United States, which requirethe Partnership to make estimates and assumptions.  The Partnership has no off-balance sheet arrangements andbelieves that of its significant accounting policies (see Note 4 to theconsolidated financial statements), the following may involve a higher degreeof judgment and complexity.

 

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

 

Valuation ofAccounts Receivable, Inventories, Long-lived Assets and Intangibles

 

*Allowance for Doubtful Accounts*- Estimates used in determining our provision for doubtful accounts are basedon our historical collection experience, current trends, credit policy and apercentage of our accounts receivable by aging category.  In determining these percentages, we look athistorical write-offs of our receivables and our history is limited.  We also look at current trends in the creditquality of our customer base as well as changes in the credit policies.  Under NewComm’s credit policy, customers whodo 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 creditexposure.  If the estimates areinsufficient for any reason, our operating income, earnings before interest,taxes, depreciation and amortization (“EBITDA”) and available cash would bereduced.

 

*Write-down of Refurbished and Excess orObsolete Inventories* - We currently have written-downrefurbished handset inventories to the lower of cost or market value (whichapproximates cost to refurbish or replace the handsets).  We currently have written-down excess or

 

11

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obsolete handset accessories tonet realizable value.  As an inducementto obtain new customers the Partnership may sell handsets to customers for aprice that is less than cost.  The losson such sales is recognized at the time of sale.  We continue to monitor the depletion of our current inventorylevels.  If we do not deplete therefurbished handsets or the handset accessories, we may have to record anadditional write-down for any remaining refurbished and excess or obsoleteinventories due to lower realizable retail prices on those inventories.  If the estimated write-down for refurbishedand excess or obsolete inventories is understated, operating income, and EBITDAwould be reduced.

 

*Long-lived Assets* -We continually evaluate long-lived assets to determine whether current eventsand circumstances warrant adjustment to the carrying values or amortizationperiods.  The Partnership measuresimpairment whenever events or changes in circumstances indicate that the carryingamount of an asset may not be recoverable. In performing the review for recoverability, an estimate of the futurecash flows expected to result from the use of the asset and its eventualdisposition must be made.  If the sum ofthe future cash flows (undiscounted and without interest charges) is less thanthe carrying amount of the asset, an impairment loss is recognized.  The impairment loss, if any, is determinedbased on projected discounted future operating cash flows using a discount ratereflecting the Partnership’s average cost of funds.  No impairment loss was recognized during 2002, 2001 and2000.  If the estimates used to measureimpairment are insufficient for any reason, our net income or loss would bereduced or increased, respectively.

 

*Valuation of Intangibles (PCS Licenses) –*Becauseof the adoption by the Partnership of the SFAS 142 (Goodwill and otherIntangible assets) imposed by the FASB for calendar years commencing afterDecember 31, 2001, PCS Licenses are no longer amortized and instead theyare subject to periodic impairment testing. Based on analysis of future cash flows and other related variables, wedetermined that no impairment adjustment was necessary for the year endedDecember 31, 2002.  We will performthe impairment test at least every quarter or as soon as anything comes to ourattention that could cause us to believe that the recorded balance of the PCSLicenses may be affected.  If theestimates used to measure impairment are insufficient for any reason, our net incomeor loss would be reduced or increased, respectively.

 

RevenueRecognition

 

We recognize post paid PCS service revenue from ourcustomers as they use the service. Prepaid PCS service revenue are recognized based on estimates ofusage.  Additionally, we provide areduction of recorded revenue for billing adjustments and billingcorrections.  We record equipmentrevenue for the sale of handsets and accessories to customers in our retailstores and through our third party dealers. If the estimate used to recognize prepaid PCS service revenue usagevaries from actual results or if the estimate of certain revenue adjustments isinaccurate, our revenues would be adjusted accordingly.

 

**Restatement of Financial Statements**

 

Managementrestated the Partnership’s financial statements for 2001 and 2000, as describedin Note 2 to the audited consolidated financial statements included as part ofthis Annual Report on Form 10-K.  Ourprior independent accountants, Arthur Andersen, LLP, are not able to reissuetheir report relating to the Partnership's financial statements for 2001 and2000 or to audit the restatement adjustments described in Note 2 because theyceased operations in 2002.  Oursuccessor independent accountants, Kevane Soto Pasarell Grant Thornton LLP havenot audited those periods and do not issue an opinion on the financialstatements for the calendar years ended December 31, 2001 and 2000.  Our successor independent accountants haveonly audited our financial statements for the calendar year ended December 31,2002 and have issued the Independent Auditor’s report included herein.

 

Accordingly,our financial statements for the calendar years ended December 31, 2001and 2000 are restated and unaudited.

 

**Impact of Unaudited Financial Statements**

 

As explainedabove and in Note 2 to the audited consolidated financial statements for thecalendar year ended December 31, 2002, our consolidated financial statementsfor the calendar years ended December 31, 2001 and 2000 have beenrestated.  Our prior independent accountants, Arthur Andersen LLP, are not able toreissue their report relating to the Partnership’s financial statements for2001 and 2000 or to audit the restatement adjustments described in Note 2because they ceased operations in 2002. We believe that the effect ofthe adjustments made in the re-stated financial statements, and the nature ofthe accounting issues addressed by those adjustments, do not have a materialeffect on the Partnership’s financial position as a whole or on thePartnership’s investors, creditors, suppliers, employees or customers.  Therefore, we believe that a re-audit of thePartnership’s 2001 and 2000 consolidated financial statements isunnecessary.  Accordingly, ourconsolidated financial statements for the calendar years endedDecember 31, 2001 and 2000 are restated and unaudited.  Our audited consolidated financialstatements for the calendar year ended December 31, 2002 are included aspart of this Annual Report on Form 10-K.

 

As explainedin Item 5, there is no trading market for the Partnership’s Units, and it isunlikely that a trading market will exist at any time in the future.  Our access to the capital markets ispresently restricted because of our inability to include in future registrationstatements or reports audited financial statements for the calendar year endedDecember 31, 2001, for the reasons described above.  In order to access the public capitalmarkets, the Securities and Exchange Commission (the “SEC”) rules require us toinclude or incorporate by reference in any prospectus three years of auditedfinancial statements.  Until our auditedconsolidated financial statements for our calendar year endingDecember 31, 2004 become available, the SEC’s current rules would requireus to present in a registration statement audited financial

 

12

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statements for our calendaryear 2001.  Our financial statements forour calendar year 2001, however, were previously audited by ArthurAndersen LLP and have since been restated without re-audit, rendering themunaudited.  Accordingly, we expect wewill not be able to access the public markets until after the audited financialstatements for our calendar year ending December 31, 2004 are available.

 

**Resultsof Operations - 2002 Compared to 2001**

 

The Partnership’s revenues for the year ended December 31, 2002,which amounted to $107,957,097 ($123,735,927 in 2001), included $99,779,656($112,025,407 in 2001) in service revenues and $8,177,441 ($11,710,520 in 2001)in handset and accessories sales generated from NewComm’s wirelessoperations.  The decrease in servicerevenues is primarily due to the migration during the last quarter of 2002 to anew billings and collection system that accurately stops the billing cycle fordelinquent customers and reflects the corresponding nonbillable time andprovision for doubtful accounts, if any, that results.  The decrease in handset and accessoriesrevenues is related to a reduction in the retail pricing of handsets.  The Partnership’s operations are notmaterially effected by inflationary increases. Any inflationary impact on the cost of products and services offered bythe Partnership’s subsidiary, NewComm, is offset by pricing adjustments to theretail prices of handsets, accessories, and various offers available to thecustomers.

 

***Expenses***

 

Operating expenses for the year ended December 31, 2002 totaled$103,734,297, as compared to $119,309,062 for the same period in 2001.  During 2002, the Partnership’s expensesincluded  $20,297,712 ($32,583,589 for2001) in costs of handset and accessories, $15,662,484 ($13,884,281 for 2001)in salaries and benefits, $9,915,770 ($12,307,559 for 2001) for legal andprofessional services, $14,171,258 ($17,631,238 for 2001) in depreciation andamortization, $9,854,591 ($10,585,296 for 2001) in provision for doubtfulaccounts, $41,933,202 ($42,328,048 for 2001) in interconnection, networkmaintenance, sales commissions, advertising, rent, taxes and other expenses,$5,808,374 ($7,481,362 for 2001) for services rendered by related parties and$262,164 ($138,927 for 2001) for management fees paid to the generalpartner.  The decrease in expensesduring 2002, as compared to 2001, is primarily associated with the decrease in thecost of handsets and accessories and the non-amortization of the licenses undergenerally accepted accounting principles, which resulted in a reduction of $2.6million in depreciation and amortization expense.  The increase in salaries and benefits was offset by a decrease inlegal and professional services and a reduction in the provision for doubtfulaccounts, due to better collection efforts and tighter credit policy.

 

Net loss of $13,025,074 for 2002 and $28,014,250 for 2001, reflects thecosts of competing in the Puerto Rico market against existing and new cellularand PCS operators in order to continue to develop and maintain a strongsubscriber base.  The reduction of thenet loss as compared to the prior year is primarily due to the reduction of handsetcosts which had a favorable impact of $8.8 million on the subsidy granted inthe sale of handsets and accessories in 2002 as compared to 2001, on which anegative margin of $12,120,271 was generated during 2002 ($20,873,069 in2001).  In addition, sales commissions,advertising, and salaries and benefits expenses amounting to $28,365,576 for2002 ($32,306,687 for 2001), which have been required to penetrate the marketand serve the established subscriber base, have also reduced the net loss by $4million as compared to 2001.

 

Interest expense for the year ended December 31, 2002, totaled$16,212,644 as compared to $20,172,216 for the same period in 2001.  The decrease in interest expense during 2002is primarily attributable to the restructuring of the Partnership’s NotesPayable (refer to Notes 12 and 14 to the accompanying consolidated financialstatements) and to downward trends of interest rates in the markets.  In 2002, the Partnership had interest incomeof $249,661, as compared to $548,002 in 2001.

 

***Liquidity andCapital Resources***

 

As of December 31, 2002, the Partnership had cash and cashequivalents amounting to $22,709,786, which are mostly related to proceeds fromthe sale of the Visalia-Porterville license and the sale of investment in stockof subsidiary to an investor group.

 

As part of the agreement with TLD, NewComm entered into a contract withLucent Technologies, Inc. (“Lucent”) that required Lucent to build a networkthat uses Code Division Multiple Access (“CDMA”) protocol. The total cost wasapproximately $125 million.  OnJune 4, 2003, Lucent’s outstanding debt was restructured at a six-yearterm with an interest rate of eight percent (8%) annually.  As of December 31, 2002, $60,531,697was outstanding under this financing agreement (refer to Note 14(a) to theaccompanying consolidated financial statements).  As of September 2003, the balance owed to Lucent is $51.5million.

 

Alcatel USA International Marketing, Inc. (“Alcatel”) was contracted tobuild part of the CDMA network. On June 20, 2003, NewComm and Alcatelentered into Amendment No. 2 to Promissory Agreement and Note dated as ofDecember 28, 2001.  By means ofthis Amendment, the principal owed to Alcatel by NewComm was reduced to $5.4million at 6.5% annual interest rate with a three year term amortization.

 

In addition, the Partnership owes the United States Federal governmentapproximately $51,339,555 (undiscounted) plus accrued interest at 6.5% inconnection with the acquisition of its Puerto Rico PCS licenses.  As of December 31, 2002, the notespayable to FCC are

 

13

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presented net of adiscount of approximately $6,317,876 (refer to Note 14(c) to the accompanyingconsolidated financial statements).

 

The Partnership has a secured promissory note payable to TLD, whichbears interest at the floating rate of 90-day LIBOR plus 1.5% and is due inMarch, 2004.  In addition, inJanuary 2000 the joint venture agreement with TLD was amended to provideNewComm a revolving line of credit of approximately $30 million for workingcapital from TLD.  This loan waspaid-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 boreinterest at 1.5% over 90-day LIBOR, which was originally supposed to expire onMarch 15, 2001, and was then extended until March 17, 2002, with aninterest rate of .75% over 90-day LIBOR. The Bridge Loan is now guaranteed by TISA and was extended again untilDecember 31, 2003.  It is expected thatthe bridge loan will be replaced with a permanent Project Finance Facility ofapproximately $110 million.

 

The Partnership, by means of Syncom, and TLD, each contributed $15million of additional capital.  Syncomnow has ownership of 8.02% of NewComm after having contributed a total of $25million of capital.  On March 2,2002, the Partnership sold a portion its equity interest equal to 4.08% (on afully diluted basis) in NewComm to a group of investors led by FleetDevelopment Ventures for $13 million. The Partnership believes it has obtained sufficient funds, together withTLD, to provide NewComm with the capital necessary for the Project FinanceFacility and to fully fund NewComm’s operations.

 

Once TLD is able to convert its debt to 49.9% of NewComm, and the 0.2%control stock sale is consummated, Clearcomm will own 38.3% of New Comm equity.

 

As a result of the restructuring of its FCC debt in June 1998, thePartnership has no outstanding debt on its California Licenses, which consistof 15MHz of bandwidth covering an approximate population of 1.1 million peoplein Eureka, Redding, Merced, and Modesto, all within the state of California.

 

Since January 2002 the Partnership has had a wireless DSL networkin place throughout certain areas within California in compliance with the FCCbuild out requirements.

 

The Partnership anticipates that earnings and cash distributionsderived from its Puerto Rico Network once it matures, interim and permanentfinancing and, if necessary, additional capital calls from its Investors oraccessing the public capital markets, should provide it with the liquidity tomeet its obligations.  The Partnershipalso expects that once it is able to fully develop its California Licenses, itwill have additional sources of revenues and profits.

 

###### **Resultsof Operations - 2001 Compared to 2000**

######  

The Partnership’s revenues for the year ended December 31, 2001,which amounted to $123,735,927 ($92,011,205 in 2000), included $112,025,407($79,906,400) in service revenues and $11,710,520 ($12,104,805 in 2000) inhandset and accessories sales generated from NewComm’s wirelessoperations.  The increase in servicerevenues is primarily due to an increase in the wireless customer base during2001 as compared to 2000.

 

***Expenses***

 

Operating expenses for the year ended December 31, 2001 totaled$119,309,062, as compared to $112,939,103 for the same period in 2000.  During 2001, the Partnership’s expensesincluded $32,583,589 ($32,309,660 for 2000) in costs of handset andaccessories,  $13,884,281 ($10,747,715for 2000) in salaries and benefits, $ 12,307,559 ($5,928,431 for 2000) forlegal and professional services, $17,631,238 ($20,458,500 for 2000) indepreciation and amortization, $10,585,296 ($17,716,025 for 2000) in provisionfor doubtful accounts, $42,466,975 ($39,044,977 for 2000) in interconnection,network maintenance, sales commissions, advertising, rent, taxes, managementfees to the general partner and other expenses, and $7,481,362 ($7,062,610 for2000) for services rendered by related parties.  The increase in expenses during 2001, as compared to 2000 isprimarily associated with an increase in NewComm’s head count and operatingexpenses needed to expand NewComm’s operations and its market share.  The increase in operating expenses wasoffset by a decrease in the provision for doubtful accounts of $7,130,729during 2001, as compared to 2000, due to better collection efforts.  Depreciation and amortization expensedecreased after the handsets rented to customers were fully depreciated inMay 2001.

 

Net losses of $28,014,250 for 2001 and $52,037,858 for 2000, reflectthe costs of entering the Puerto Rico market and meeting the competition ofexisting cellular and PCS operators in order to develop a subscriber base.  To meet competition, a significant subsidyis granted in the sale of handsets and accessories, on which a negative marginof $20,873,069 was generated during 2001 ($20,204,855 in 2000).  In addition, salaries, sales commissions andadvertising expenses amounting to $32,306,687 ($25,842,980 in 2000) have beenrequired to penetrate the market and serve the established subscriber base.

 

Interest expense for the year ended December 31, 2001, totaled$20,172,216, as compared to $11,141,769 for the same period in 

 

14

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2000.  The increase in interest expense during 2001is primarily attributable to the FCC Note, the TLD notes, the Note Payable toLucent, and the Bridge Loan Facility (refer to Notes 12 and 14 to theaccompanying consolidated financial statements).  In 2001, the Partnership had interest income of $548,002, ascompared to $490,309 in 2000.

 

###### **Resultsof Operations - 2000 Compared to 1999**

######  

The Partnership’s revenues for the year ended December 31, 2000,which amounted to $92,011,205, included $79,906,400 in service revenues and$12,104,805 in handset and accessories sales.

 

***Expenses***

 

Expenses for the year ended December 31, 2000 totaled $133,397,603(including depreciation and amortization of $20,458,500) as compared to$28,072,321 (including depreciation and amortization of $2,957,683) for thesame period in 1999.  During 2000, thePartnership’s expenses included $32,309,660 ($4,430,637 for 1999) in costs of handset andaccessories,  $10,747,715 ($5,128,280for 1999) for salaries and benefits, $5,928,431( $2,144,349 for 1999) for legaland professional services, $17,716,025 ($625,000 for 1999) in provision fordoubtful accounts, $39,044,977 ($9,663,546 for 1999) in advertising, salescommissions, interconnection, management fee, rent, taxes and other expenses,and $7,062,610 ($2,980,718 for 1999) for consulting and legal servicesassociated with the start-up of NewComm charged by related parties such as TLDand TISA.  The increase in expensesduring 2000 is associated with a full year of NewComm’s operations, as comparedwith only three months during 1999.

 

In 2000, the Partnership had interest earnings of $490,309 compared to$832,006 in 1999.  The decrease ininterest income during 2000 is attributable to NewComm’s use of the funds loanedby TLD.  Interest expense increased in2000 to $11,141,769, as compared to $2,263,002 in 1999, mostly due to a fullyear of interest on the TLD and FCC notes.

 

**ITEM 7A****.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The Partnership’s exposure to market risk through derivative financialinstruments and other financial instruments is not material because thePartnership does not use derivative financial instruments and does not haveforeign currency exchange risks.  ThePartnership invests cash balances in excess of operating requirements inshort-term money market funds.  As ofDecember 31, 2002, the Partnership had cash equivalents and short-terminvestments of $22,709,786 consisting of cash and highly liquid, short-terminvestments in money market funds.

 

The Partnership’s cash and cash equivalents will increase or decreaseby an immaterial amount if market interest rates increase or decrease, andtherefore, its exposure to interest rate changes has been immaterial.  The Partnership’s loans payable to the FCChave a fixed interest rate of 6.5% and therefore are not exposed to interestrate risks.  The TLD Note relating toindebtedness of NewComm bears interest at the floating rate of the 90-day LIBORplus 1.5% and is due in March 2004. Lucent’s debt was restructured on June 4, 2003 to a six-year termcredit facility with an interest rate of eight percent (8%) annually.  As of August 2003, the outstandingprincipal balance owed to Lucent was $51.5 Million.  The Bridge Loan bears an interest rate of 0.75% over 90-day LIBORand is now guaranteed by TISA.  As partof this arrangement ClearComm agreed to pay an annual fee of 2% over half ofthis guarantee (or $30 million), or provide an equivalent cash collateral tothe Banks.  This loan guarantee fee isnot due until the sale of the Partnership’s interest in NewComm.  The Bridge Loan Facility has been extendedagain to December 31, 2003.

 

15

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##### **ITEM8****. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 
| ClearComm, L.P.                                                                                                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                          |
| Report of  Independent Public Accountants — December 31, 2002 (Audited), 2001 and  2000 (Restated and Unaudited)                                    |
|                                                                                                                                                          |
| Consolidated Balance  Sheets - December 31, 2002 (Audited),   2001 and 2000 (Restated and Unaudited)                                                |
|                                                                                                                                                          |
| Consolidated Statements  of Operations for the years ended - December 31, 2002 (Audited), 2001  and 2000 (Restated and  Unaudited)                       |
|                                                                                                                                                          |
| Consolidated Statements of Changes in Partners’ Deficit for the years  ended - December 31, 2002 (Audited), 2001 and  2000 (Restated and Unaudited) |
|                                                                                                                                                          |
| Consolidated Statements  of Cash Flows for the years ended - December 31, 2002 (Audited), 2001  and  2000 (Restated and  Unaudited)                 |
|                                                                                                                                                          |
| Notes to Consolidated  Financial Statements                                                                                                                   |
|                                                                                                                                                          |
| SuperTel Communications Corp.                                                                                                                                 |
|                                                                                                                                                          |
| Report of Independent  Public Accountants – December 31, 2002, 2001 and 2000                                                                        |
|                                                                                                                                                          |
| Balance Sheets -  December 31, 2002, 2001 and 2000                                                                                                       |
|                                                                                                                                                          |
| Statements of Income  and Accumulated Deficit for the years ended December 31, 2002, 2001 and  2000                                                      |
|                                                                                                                                                          |
| Statements of Cash  Flows for the years ended December 31, 2002, 2001 and 2000                                                                           |
|                                                                                                                                                          |
| Notes to Financial  Statements                                                                                                                                |

 

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

 

16

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###### **Report of Independent PublicAccountants**

#  

# To the Partners of

** **

**   CLEARCOMM L.P.:**

 

We have auditedthe accompanying consolidated balance sheet of **CLEARCOMM L.P. (a Delaware LimitedPartnership) AND SUBSIDIARY (“the Partnership”)** as ofDecember 31, 2002, and the related consolidated statements of operations,changes in partners’ deficit, and cash flows for the year then ended.  These consolidated financial statements arethe responsibility of the Partnership’s management.  Our responsibility is to express an opinion on these financialstatements based on our audit.  Theconsolidated financial statements of the Partnership as of and for the yearsended December 31, 2001 and 2000, were previously presented as auditedfinancial statements by other auditors who, subsequent to the dateApril 16, 2002, of their auditors’ opinion, have ceased operations and whosereport included an explanatory paragraph that described certain uncertaintiesregarding the Partnership’s ability to continue as a going concern.  These other auditors expressed their opinionprior to the restatement discussed in Note 2.

 

We conductedour audit in accordance with auditing standards generally accepted in theUnited States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of **ClearComm,L.P. and Subsidiary**as of December 31, 2002, and the results oftheir operations and their cash flows for the year then ended in conformitywith accounting principles generally accepted in the United States of America.

 

The accompanyingconsolidated financial statements have been prepared assuming that thePartnership will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, thePartnership has suffered recurring operating losses, has a working capitaldeficit and a partners’ capital deficit, and has not yet obtained permanentfinancing for the cost of its network and its working capital needs whichmatters raise substantial doubt about its ability to continue as a goingconcern.  Management’s plans in regardto these matters are also described in Note 3. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

As discussedin Note 2 to the accompanying consolidated financial statements, thePartnership has restated its consolidated financial statements as of and forthe years ended December 31, 2001 and 2000 (presented herein as restated),all of which were previously audited by other independent accountants who haveceased operations.  We performed noauditing procedures with respect to the consolidated financial statements as ofand for the years ended December 31, 2001 and 2000 (presented herein asunaudited), and we express no opinion on such financial statements.

 

As discussedin Note 4(i), effective January 1, 2002, the Partnership changed itsmethod for assessing the recoverability of its intangible assets.

 
| /s/ Kevane  Soto Pasarell Grant Thornton LLP |   |
|----------------------------------------------|--------|
|                                         |
| San Juan,  Puerto Rico,                      |
|   August 27,  2003.           |

 

17

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**ClearComm,L.P.**

**ConsolidatedBalance Sheets**

**December 31,2002, 2001 and 2000**

** **
|                                                                                                                          |   |         |        | **(Restated and Unaudited)** |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------|-------------|------------------------------|--------|
|                                                                                                                          |   | **2002**     |        | **2001**                     |   | **2000** |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **CURRENT ASSETS:**                                                                                                           |   |         |        |                         |   |   |   |
| Cash and cash equivalents                                                                                                     |   | $            | 22,709,786  |                         | $      | 10,241,902 |   | $ | 9,338,798 |   |
| Accounts receivable, net of allowance for doubtful accounts of  $18,627,970,  $18,404,570 and  $18,341,025, respectively |   | 18,078,204   |        | 19,099,986                   |   | 20,049,769 |   |
| Insurance claims receivable                                                                                                   |   | 270,002      |        | 1,496,324                    |   | 1,256,285 |   |
| Interest receivable                                                                                                           |   | 8,000        |        | 2,000                        |   | — |   |
| Inventories                                                                                                                   |   | 10,461,112   |        | 10,305,254                   |   | 12,977,164 |   |
| Prepaid expenses                                                                                                              |   | 625,610      |        | 652,279                      |   | 751,603 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| Total current assets                                                                                                          |   | 52,152,714   |        | 41,797,745                   |   | 44,373,619 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **INVESTMENT IN SECURITIES**                                                                                                  |   | 10,000,000   |        | —                       |   | — |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **INVESTMENT IN 49% SUBSIDIARY, AT EQUITY, NET**                                                                              |   | 277,254      |        | —                       |   | — |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **PCS LICENSES**                                                                                                              |   | 57,517,974   |        | 57,517,974                   |   | 64,838,452 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **DEFERRED FINANCING COSTS**                                                                                                  |   | 901,235      |        | 906,731                      |   | 1,730,047 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **NOTE RECEIVABLE FROM OFFICER**                                                                                              |   | 100,000      |        | 100,000                      |   | — |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **PROPERTY AND EQUIPMENT,**net                                                                                                |   | 101,931,922  |        | 102,095,953                  |   | 97,002,140 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| Total assets                                                                                                                  |   | $            | 222,881,099 |                         | $      | 202,418,403 |   | $ | 207,944,258 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **LIABILITIES AND PARTNERS’ DEFICIT**                                                                                    |   |         |        |                         |   |   |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **CURRENT LIABILITIES:**                                                                                                      |   |         |        |                         |   |   |   |
| Current portion of notes payable                                                                                              |   | $            | 22,647,544  |                         | $      | 73,321,837 |   | $ | 61,000,000 |   |
| Bridge Loan Facility                                                                                                          |   | 60,000,000   |        | 60,000,000                   |   | 60,000,000 |   |
| Accounts payable and accrued liabilities                                                                                      |   | 23,430,433   |        | 27,868,715                   |   | 40,314,401 |   |
| Accounts payable to related parties                                                                                           |   | 16,700,443   |        | 8,705,353                    |   | 2,041,767 |   |
| Accrued interest                                                                                                              |   | 4,977,700    |        | 3,517,319                    |   | 1,566,872 |   |
| Deferred income                                                                                                               |   | 1,913,514    |        | 1,550,665                    |   | 1,820,183 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| Total current liabilities                                                                                                     |   | 129,669,634  |        | 174,963,889                  |   | 166,743,223 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **LONG-TERM NOTES PAYABLE,**net of current portion                                                                            |   | 150,505,987  |        | 81,723,962                   |   | 72,456,233 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| Total liabilities                                                                                                             |   | 280,175,621  |        | 256,687,851                  |   | 239,199,456 |   |
|                                                                                                                          |   |         |        |                         |   |   |   |
| **PARTNERS’ DEFICIT:**                                                                                                   |   |         |        |                         |   |   |   |
| Limited partners’ capital (2,907.1 units issued and outstanding)                                                         |   | 73,039,616   |        | 73,039,616                   |   | 73,039,616 |   |
| General partner’s capital                                                                                                |   | 100,000      |        | 100,000                      |   | 100,000 |   |
| Accumulated losses                                                                                                            |   | (130,434,138 | )           | (127,409,064                 | )      | (104,394,814 | ) |
|                                                                                                                          |   |         |        |                         |   |   |   |
| Total partners’ deficit                                                                                                  |   | (57,294,522  | )           | (54,269,448                  | )      | (31,255,198 | ) |
|                                                                                                                          |   |         |        |                         |   |   |   |
| Total liabilities and partners’ deficit                                                                                  |   | $            | 222,881,099 |                         | $      | 202,418,403 |   | $ | 207,944,258 |   |

 

The accompanying notes are an integral part of theseconsolidated statements.

 

18

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**ClearComm,L.P.**

** **

**ConsolidatedStatements of Operations for the years ended**

**December 31,2002, 2001 and 2000**

** **
|                                                   |   |        |        | **(Restated and Unaudited)** |   |
|--------------------------------------------------------|--------|-------------|-------------|------------------------------|--------|
|                                                   |   | **2002**    |        | **2001**                     |   | **2000** |   |
| **REVENUES:**                                          |   |        |        |                         |   |   |   |
| Service revenues                                       |   | $           | 99,779,656  |                         | $      | 112,025,407 |   | $ | 79,906,400 |   |
| Handset and accessories sales                          |   | 8,177,441   |        | 11,710,520                   |   | 12,104,805 |   |
|                                                   |   |        |        |                         |   |   |   |
| Total revenue                                          |   | 107,957,097 |        | 123,735,927                  |   | 92,011,205 |   |
|                                                   |   |        |        |                         |   |   |   |
| **OPERATING EXPENSES:**                                |   |        |        |                         |   |   |   |
| Cost of handsets and accessories sold                  |   | 20,297,712  |        | 32,583,589                   |   | 32,309,660 |   |
| Salaries and benefits                                  |   | 15,662,484  |        | 13,884,281                   |   | 10,747,715 |   |
| Legal and professional services                        |   | 9,915,770   |        | 12,307,559                   |   | 5,928,431 |   |
| Provision for doubtful accounts                        |   | 9,854,591   |        | 10,585,296                   |   | 17,716,025 |   |
| Advertising expense                                    |   | 8,461,265   |        | 10,343,116                   |   | 8,471,116 |   |
| Network operation and maintenance expense              |   | 8,057,442   |        | —                       |   | — |   |
| Rent expense                                           |   | 7,766,611   |        | 7,976,654                    |   | 7,415,356 |   |
| Services rendered by related parties                   |   | 6,070,538   |        | 7,620,289                    |   | 7,192,295 |   |
| Interconnection expense                                |   | 4,916,771   |        | 3,478,164                    |   | 3,612,688 |   |
| Salesmen and dealers commissions                       |   | 4,241,827   |        | 8,079,290                    |   | 6,624,149 |   |
| Taxes, other than income                               |   | 1,262,577   |        | 3,089,172                    |   | 6,295,122 |   |
| Other expenses                                         |   | 7,226,709   |        | 9,361,652                    |   | 6,626,546 |   |
|                                                   |   |        |        |                         |   |   |   |
| Total operating expenses                               |   | 103,734,297 |        | 119,309,062                  |   | 112,939,103 |   |
|                                                   |   |        |        |                         |   |   |   |
| **INCOME (LOSS) FROM OPERATIONS**                      |   | 4,222,800   |        | 4,426,865                    |   | (20,927,898 | ) |
|                                                   |   |        |        |                         |   |   |   |
| **INTEREST EXPENSE**                                   |   | (16,212,644 | )           | (20,172,216                  | )      | (11,141,769 | ) |
|                                                   |   |        |        |                         |   |   |   |
| **DEPRECIATION AND AMORTIZATION**                      |   | (14,171,258 | )           | (17,631,238                  | )      | (20,458,500 | ) |
|                                                   |   |        |        |                         |   |   |   |
| **LOSS BEFORE OTHER INCOME (EXPENSE)**                 |   | (26,161,102 | )           | (33,376,589                  | )      | (52,528,167 | ) |
|                                                   |   |        |        |                         |   |   |   |
| **OTHER INCOME (EXPENSE):**                            |   |        |        |                         |   |   |   |
| Gain on sale of investment in stock of subsidiary      |   | 13,000,000  |        | —                       |   | — |   |
| Equity in net loss of 49% owned subsidiary             |   | (114,746    | )           | —                       |   | — |   |
| Interest income                                        |   | 249,661     |        | 548,002                      |   | 490,309 |   |
| Gain on sale of Visalia-Porterville license            |   | —      |        | 4,814,337                    |   | — |   |
| Other                                                  |   | 1,113       |        | —                       |   | — |   |
|                                                   |   |        |        |                         |   |   |   |
| **NET LOSS**                                           |   | $           | (13,025,074 | )                            | $      | (28,014,250 | ) | $ | (52,037,858 | ) |
|                                                   |   |        |        |                         |   |   |   |
| **NET LOSS ATTRIBUTABLE TO GENERAL PARTNER**           |   | $           | (13,025,074 | )                            | $      | (28,014,250 | ) | $ | (25,765,959 | ) |
|                                                   |   |        |        |                         |   |   |   |
| **NET LOSS ATTRIBUTABLE TO LIMITED PARTNERS**          |   | $           | —      |                         | $      | — |   | $ | (26,271,899 | ) |
|                                                   |   |        |        |                         |   |   |   |
| **NET LOSS PER UNIT ATTRIBUTABLE TO LIMITED PARTNERS** |   | $           | —      |                         | $      | — |   | $ | (9,037 | ) |

 

The accompanying notes are anintegral part of these consolidated statements.

 

19

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**ClearComm,L.P.**

 

**ConsolidatedStatements of Changes in Partners’ (Deficit) for the years ended**

**December 31,2002, 2001 and 2000**

 
|                                      |   | **Limited Partners** |   | **General** |       |        |   |
|-------------------------------------------|--------|----------------------|--------|-------------|------------|-------------|--------|
|                                      |   | **Units**            |   | **Amount**  |       | **Partner** |   | **Total** |   |
|                                      |   |                 |   |        |       |        |   |   |   |
| **BALANCES, **December 31, 1999 |   | 2,907.1              |   | $           | 26,271,899 |        | $      | (15,489,239 | ) | $ | 10,782,660 |   |
|                                      |   |                 |   |        |       |        |   |   |   |
| **DILUTION GAIN***                        |   | —               |   | 7,500,000   |       | 2,500,000   |   | 10,000,000 |   |
|                                      |   |                 |   |        |       |        |   |   |   |
| **NET LOSS - 2000***                      |   | —               |   | (33,771,899 | )          | (18,265,959 | )      | (52,037,858 | ) |
|                                      |   |                 |   |        |       |        |   |   |   |
| **BALANCES,**December 31, 2000*      |   | 2,907.1              |   | —      |       | (31,255,198 | )      | (31,255,198 | ) |
|                                      |   |                 |   |        |       |        |   |   |   |
| **DILUTION GAIN***                        |   | —               |   | 3,750,000   |       | 1,250,000   |   | 5,000,000 |   |
|                                      |   |                 |   |        |       |        |   |   |   |
| **NET LOSS - 2001***                      |   | —               |   | (3,750,000  | )          | (24,264,250 | )      | (28,014,250 | ) |
|                                      |   |                 |   |        |       |        |   |   |   |
| **BALANCES,**December 31, 2001*      |   | 2,907.1              |   | —      |       | (54,269,448 | )      | (54,269,448 | ) |
|                                      |   |                 |   |        |       |        |   |   |   |
| **DILUTION GAIN**                         |   | —               |   | 7,500,000   |       | 2,500,000   |   | 10,000,000 |   |
|                                      |   |                 |   |        |       |        |   |   |   |
| **NET LOSS - 2002**                       |   | —               |   | (7,500,000  | )          | (5,525,074  | )      | (13,025,074 | ) |
|                                      |   |                 |   |        |       |        |   |   |   |
| **BALANCES,**December 31, 2002       |   | 2,907.1              |   | $           | —     |        | $      | (57,294,522 | ) | $ | (57,294,522 | ) |

 

----

*                      Restated andUnaudited

 

The accompanying notes are anintegral part of these consolidated statements.

 

20

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**ClearComm,L.P**.

**ConsolidatedStatements of Cash Flows for the years ended**

**December 31,2002, 2001 and 2000**

** **
|                                                                                       |   |        |        | **(Restated and Unaudited)** |   |
|--------------------------------------------------------------------------------------------|--------|-------------|-------------|------------------------------|--------|
|                                                                                       |   | **2002**    |        | **2001**                     |   | **2000** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                  |   |        |        |                         |   |   |   |
| Net loss                                                                                   |   | $           | (13,025,074 | )                            | $      | (28,014,250 | ) | $ | (52,037,858 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities- |   |        |        |                         |   |   |   |
| Depreciation and amortization                                                              |   | 13,958,465  |        | 17,631,238                   |   | 20,458,500 |   |
| Equity in losses of unconsolidated subsidiary                                              |   | 114,746     |        | —                       |   | — |   |
| Amortization of loan origination fees                                                      |   | 212,793     |        | —                       |   | — |   |
| Amortization of discount on note payable to FCC                                            |   | 3,388,039   |        | —                       |   | — |   |
| Bad debt expense                                                                           |   | 9,854,591   |        | 10,585,296                   |   | 17,716,025 |   |
| Gain from sale of Visalia-Porterville license                                              |   | —      |        | (4,814,337                   | )      | — |   |
| Proceeds from sale of Visalia-Porterville license                                          |   | —      |        | 9,500,000                    |   | — |   |
| Changes in operating assets and liabilities-                                               |   |        |        |                         |   |   |   |
| Increase in interest receivable                                                            |   | (6,000      | )           | —                       |   | — |   |
| Increase in accounts receivable, before write-offs                                         |   | (8,833,805  | )           | (9,635,513                   | )      | (33,540,727 | ) |
| Increase in accounts receivable due from officer                                           |   | —      |        | (102,000                     | )      | — |   |
| Decrease (increase) in insurance claims receivable                                         |   | 1,226,322   |        | (240,039                     | )      | (1,256,285 | ) |
| Decrease (increase) in inventories                                                         |   | (155,858    | )           | 2,671,910                    |   | (3,775,341 | ) |
| Decrease (increase) in prepaid expenses                                                    |   | 26,673      |        | 922,640                      |   | (325,919 | ) |
| Decrease (increase) accounts payable  and accrued liabilities                              |   | (3,798,100  | )           | 344,453                      |   | (9,801,255 | ) |
| Increase (decrease) in accounts payable to related parties                                 |   | 3,826,632   |        | 6,663,586                    |   | (773,535 | ) |
| Increase in accrued interest                                                               |   | 6,516,694   |        | 4,175,492                    |   | 2,120,604 |   |
| (Decrease) increase in deferred income                                                     |   | 362,848     |        | (269,518                     | )      | 1,377,030 |   |
| Total adjustments                                                                          |   | 26,694,040  |        | 37,433,208                   |   | (7,800,903 | ) |
| Net cash provided by (used in) operating activities                                        |   | 13,668,966  |        | 9,418,958                    |   | (59,838,761 | ) |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                  |   |        |        |                         |   |   |   |
| Payment for the purchase of investment securities                                          |   | (10,000,000 | )           | —                       |   | — |   |
| Acquisition of property and equipment                                                      |   | (13,794,432 | )           | (8,207,046                   | )      | (15,500,122 | ) |
| Payment for the investment in subsidiary                                                   |   | (392,000    | )           | —                       |   | — |   |
| Payments for deferred financing costs                                                      |   | (207,297    | )           | —                       |   | (1,848,624 | ) |
| Net cash used in investing activities                                                      |   | (24,393,729 | )           | (8,207,046                   | )      | (17,348,746 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                  |   |        |        |                         |   |   |   |
| Proceeds from sale of shares of NewComm                                                    |   | $           | 10,000,000  |                         | $      | 5,000,000 |   | $ | 10,000,000 |   |
| Proceeds from Bridge Loan Facility                                                         |   | —      |        | —                       |   | 60,000,000 |   |
| Proceeds from issuance of notes payable to TLD                                             |   | 18,960,080  |        | 4,990,000                    |   | 39,980,000 |   |
| Payment of note payable to Lucent                                                          |   | —      |        | (8,298,808                   | )      | — |   |
| Payment of note payable to Alcatel                                                         |   | (5,767,433  | )           | (2,000,000                   | )      | — |   |
| Payment of notes payable to TLD                                                            |   | —      |        | —                       |   | (30,000,000 | ) |
| Net cash provided by (used in) financing activities                                        |   | 23,192,647  |        | (308,808                     | )      | 79,980,000 |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                              |   | 12,467,884  |        | 903,104                      |   | 2,792,493 |   |
| **CASH AND CASH EQUIVALENTS,**beginning of year                                            |   | 10,241,902  |        | 9,338,798                    |   | 6,546,305 |   |
| **CASH AND CASH EQUIVALENTS,**end of year                                                  |   | $           | 22,709,786  |                         | $      | 10,241,902 |   | $ | 9,338,798 |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOWS  INFORMATION:**                                   |   |        |        |                         |   |   |   |   |
| **INTEREST PAID**                                                                          |   | $           | 6,314,000   |                         | $      | 12,279,000 |   | $ | 5,526,000 |   |
| **INCOME TAX PAID**                                                                        |   | $           | —      |                         | $      | — |   | $ | — |   |
|                                                                                            |        |             |             |                              |        |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these consolidated statements.

 

21

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**ClearComm,L.P.**

 

**Notesto Consolidated Financial Statements**

**December 31,2002 (Audited) , and December 31, 2001 and 2000 (Restated and Unaudited)**

 

**(1)****          Reportingentity:**

 

ClearComm,L.P. (the Partnership) was organized on January 24, 1995, under the lawsof the state of Delaware.  ThePartnership was created to file applications with the Federal CommunicationsCommission (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 is scheduled to terminate on December 31, 2005, orearlier, upon the occurrence of certain specific events as detailed in thePartnership Agreement.

 

SuperTelCommunications Corp. (SuperTel), a Puerto Rico corporation, is thePartnership’s General Partner and its share of the income and losses of thePartnership is 25% in accordance with the Partnership Agreement.  Approximately 1,600 limited partners alsoinvested in the Partnership through a private placement.  On January 22, 1997, the Partnershipwas granted the PCS Block C licenses for Puerto Rico and certain cities inCalifornia.

 

OnFebruary 4, 1999, the Partnership entered into an agreement (the JointVenture Agreement) with Telefónica Larga Distancia de Puerto Rico, Inc. (TLD)to jointly develop and operate certain PCS licenses in Puerto Rico.  Some relevant provisions of this agreementare the following:

 

•                  The Partnershiptransferred all of its Puerto Rico licenses including its related debt with theFCC (the Partnership’s contribution) to its subsidiary NewComm WirelessServices, Inc. (NewComm), a newly organized Puerto Rico corporation owned bythe Partnership, in exchange for all of NewComm’s issued and outstanding commonstock.  Subsequently, the Partnershipsold part of its investment in NewComm, and as of December 31, 2002, thePartnership owned 76.89% of NewComm’s issued and outstanding common stock.

 

•                  TLD lentapproximately $20 million to NewComm by means of a secured convertiblepromissory note payable (the Promissory Note). Payment of the Promissory Note is collateralized through the provisionsof a separate agreement pursuant to which a security interest was imposed uponNewComm’s assets and a pledge and guaranty agreement issued by the Partnership.

 

•                  Once certainregulatory and other requirements are met, the Promissory Note may be convertedinto a certain number of shares of NewComm’s common stock corresponding toapproximately 49.9% of NewComm.  OnMarch 12, 2002, the Partnership agreed to sell an additional 0.2% of itsshares in NewComm to TLD to bring TLD’s ownership to 50.1%; this transaction issubject to a third party valuation of NewComm’s stock and approval by the FCC,permission for which has been formally requested.

 

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

 

InSeptember 1999, NewComm commenced providing PCS services in Puerto Rico.

 

OnAugust 28, 2000, the Partnership entered into a Purchase and SaleAgreement with Leap Wireless International (Leap Wireless), pursuant to whichthe Partnership sold the Visalia, California license to Leap Wireless inexchange for a $9,500,000 cash payment. The transaction closed on June 8, 2001.

 

NewComm receivedan aggregate equity investment of $25,000,000 ($10 million in 2002, $5 millionin 2001 and $10 million in 2000) from Syndicated Communications VenturePartners IV, L.P. (“Syncom”), a third party, in exchange for a 15.39% ownershipin NewComm.

 

OnMarch 2, 2002, the Partnership sold approximately 4.08% of its investmentin NewComm to a group of investors led by Fleet Development Ventures for $13million.

 

**(2)****          Restatementof prior year’s financial statements:**

 

ThePartnership’s previously issued consolidated financial statements as of and forthe years ended December 31, 2001 and 2000 have been restated to correctthe accounting for certain items, as described below:

 

22

----

 

(a)           Minority interest liability – During theyears ended December 31, 2001 and 2000, an outside group invested $15million in NewComm.  AtDecember 31, 2001 and 2000, the stockholders’ deficit of NewComm was $77.5million and $51.6 million, respectively. In the event of liquidation and if there are available funds, this newinvestor acquired a liquidation preference, but otherwise, there is no entitynor investor guarantee concerning the return of the amounts invested.  Therefore, the presentation in theconsolidated balance sheets of a minority interest liability of $13,362,939 in2001 and $9,717,529 million in 2000 was incorrect.  These amounts represent the gross amount of the new investments,reduced by the proportional and time dated accumulated share in the operatinglosses of NewComm ($1,637,061 in 2001 and $282,471 in 2000).

 

(b)         Thegain resulting from the new minority interest investment in the Partnership’ssubsidiary, NewComm – This issue is closely allied to the preceding issueconcerning the minority interest liability. Since there is no existing minority interest liability, then, at thelevel of the Partnership, there is a gain resulting from the investment inNewComm by the new investors.  The gainis an equity gain since the Partnership’s participation in the stockholders’ deficitof NewComm has been reduced from 100% to 95.08% in 2001 and to 96.72% in 2000which gain has been presented as a dilution gain in the accompanying restatedand unaudited financial statements as of and for the years endedDecember 31, 2001 and 2000.

 

Thereclassifications made to properly present the issues mentioned above, reducedthe partners’ deficiency by $5 million in 2001 and $10 million in 2000.

 

(c)          Allocationof operating losses to the Partnership’s limited partners -  The consolidated financial statements forthe years 2001 and 2000 indicated a negative capital balance for the limitedpartners of $32.5 million and $12.5 million, respectively.  By definition, their participation inoperating losses is limited to the amount of capital invested.  The presentation of a negative capitalbalance for the limited partners was restated by a reclassification to thegeneral partner of the balance amount of losses allocated to the limitedpartners in excess of the amount of their investment.  This reclassification had no effect on the financial position orthe results of operations of the Partnership.

 

Theeffect of the corrections to the Partnership’s consolidated financialstatements as of and for the years ended December 31, 2001 and 2000, issummarized as follows:

 

23

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|                                            |   | **December 31, 2001**      |   | **December 31, 2000**      |   |
|-------------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
| **Balance  Sheets**                             |   | **As originally  presented**    |   | **As restated  (unaudited)**    |   | **As originally  presented** |   | **As restated  (unaudited)** |   |
|                                            |   | **(all  amounts in $millions)** |   | **(all  amounts in $millions)** |   |
|                                            |   |                            |   |                            |   |   |   |   |   |
| Total assets                                    |   | $                               | 202.4  |                            | $      | 202.4 |   | $ | 207.9 |   | $ | 207.9 |   |
| Liabilities, other than minority interest       |   | $                               | 256.7  |                            | $      | 256.7 |   | $ | 239.2 |   | $ | 239.2 |   |
| Minority interest                               |   | 13.3                            |   | —                          |   | 9.7 |   | — |   |
|                                            |   |                            |   |                            |   |   |   |   |   |
| Total liabilities                               |   | 270.0                           |   | 256.7                           |   | 248.9 |   | 239.2 |   |
| Partners’ deficiency                       |   | (67.6                           | )      | (54.3                           | )      | (41.0 | ) | (31.3 | ) |
|                                            |   |                            |   |                            |   |   |   |   |   |
| Total liabilities and partners’ deficiency |   | $                               | 202.4  |                            | $      | 202.4 |   | $ | 207.9 |   | $ | 207.9 |   |
|                                            |   |                            |   |                            |   |   |   |   |   |
| **Statements  of Operations**                   |   |                            |   |                            |   |   |   |   |   |
|                                            |   |                            |   |                            |   |   |   |   |   |
| Revenues                                        |   | $                               | 123.7  |                            | $      | 123.7 |   | $ | 92.0 |   | $ | 92.0 |   |
| Operating costs and expenses                    |   | 136.9                           |   | 136.9                           |   | 133.4 |   | 133.4 |   |
|                                            |   | (13.2                           | )      | (13.2                           | )      | (41.4 | ) | (41.4 | ) |
| Gain on sale of license                         |   | 4.8                             |   | 4.8                             |   | — |   | — |   |
| Loss from operations                            |   | (8.4                            | )      | (8.4                            | )      | (41.4 | ) | (41.4 | ) |
| Interest expense, net                           |   | (19.6                           | )      | (19.6                           | )      | (10.7 | ) | (10.7 | ) |
| Loss before minority interest                   |   | (28.0                           | )      | (28.0                           | )      | (52.1 | ) | (52.1 | ) |
| Minority interest                               |   | 1.3                             |   | —                          |   | 0.3 |   | — |   |
| Net loss                                        |   | $                               | (26.7  | )                               | $      | (28.0 | ) | $ | (51.8 | ) | $ | (52.1 | ) |
| Net loss attributable to General Partner        |   | $                               | (6.7   | )                               | $      | (28.0 | ) | $ | (13.0 | ) | $ | (25.8 | ) |
| Net loss attributable to Limited Partner        |   | $                               | (20.0  | )                               | $      | — |   | $ | (38.8 | ) | $ | (26.3 | ) |

 
|                                                            |   | **As originally presented**     |       | **As restated (unaudited)**     |       |
|-----------------------------------------------------------------|--------|---------------------------------|------------|---------------------------------|------------|
|                                                            |   | **(all  amounts in $millions)** |       | **(all  amounts in $millions)** |       |
| **Statements  of Changes in  Partner’s Capital (Deficit)** |   | **Limited  Partner**            |       | **General  Partner**            |       | **Total** |   | **Limited  Partner** |   | **General  Partner** |   | **Total** |   |
|                                                            |   |                            | ** ** |                            | ** ** |
| Balance at December 31, 1999                               |   | $                               | 26.3       |                            | $          | (15.5 | ) | $ | 10.8 |   | $ | 26.3 |   | $ | (15.5 | ) | $ | 10.8 |   |
|                                                            |   |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Net loss - 2000                                                 |   | (38.8                           | )          | (13.0                           | )          | (51.8 | ) | (33.8 | ) | (18.2 | ) | (52.0 | ) |
|                                                            |   |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Dilution gain                                                   |   | —                          |       | —                          |       | — |   | 7.5 |   | 2.5 |   | 10.0 |   |
|                                                            |   |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Balances at December 31, 2000                              |   | (12.5                           | )          | (28.5                           | )          | (41.0 | ) | — |   | (31.2 | ) | (31.2 | ) |
|                                                            |   |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Net loss - 2001                                                 |   | (20.0                           | )          | (6.6                            | )          | (26.6 | ) | (3.8 | ) | (24.2 | ) | (28.0 | ) |
|                                                            |   |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Dilution gain                                                   |   | —                          |       | —                          |       | — |   | 3.8 |   | 1.2 |   | 5.0 |   |
|                                                            |   |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Balances at December 31, 2001                              |   | $                               | (32.5      | )                               | $          | (35.1 | ) | $ | (67.6 | ) | $ | — |   | $ | (54.2 | ) | $ | (54.2 | ) |

 

24

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**(3)****          Goingconcern issues and financing arrangements:**

 

The accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. The Partnership commenced operations in September 1999 and hasincurred net losses of approximately $13.0 million in 2002, $28.0 million in2001 and $52.0 million in 2000.  It alsohas a working capital deficiency and a stockholders’ deficit of $80.5 millionand $57.3 million, respectively, as of December 31, 2002.  The Partnership is likely to continueincurring losses until such time as its subscriber base generates revenue inexcess of the Partnership’s expenses. Development of a significant subscriber base is likely to take time,during which the Partnership must finance its operations by means other thanits revenues.

 

As part of the agreement with TLD, the Partnership entered into acontract with Lucent Technologies, Inc. (“Lucent”) that requires Lucent tobuild a network that uses Code Division Multiple Access (“CDMA”) protocol.  The Partnership has incurred approximately$119 million in the construction of this network.  During 2000, the Partnership’s management and Lucent agreed onformally extending the payment of up to $61 million of the total amount ofnetwork construction costs, at the time, under a formal financialagreement.  On June 4, 2003, thePartnership entered into a Senior Credit Agreement with Lucent, which extendsthe maturity date of the $61 million to September 30, 2009, with interestat 8% annually.  See Note 14(a).

 

Alcatel USAInternational Marketing, Inc. (“Alcatel”) was contracted to build part of theCDMA network.  On December 18,2001, ClearComm had outstanding invoices and past due interest to Alcateltotaling $14,361,732.  On that day,ClearComm and Alcatel entered into a Promissory Agreement and Note for saidamount at an interest rate of 14%, and an original maturity date of March 25,2002.  This Promissory Agreement and Notewas amended with an extension of payment until November 25, 2002.  On May 23, 2002, the Partnership paidAlcatel $6 million, including interest of $646,000.  On June 20, 2003, the Promissory Note was amended to providefor the orderly repayment of the principal and accrued interest on the Note,extending its maturity to December 20, 2005 and decreasing the interestrate to 6.5%.  During June 2003 thePartnership repaid $2 million of principal and $337,372 of accrued interestowed.  See Note 14(b).

 

 

During November 2000, the Partnership entered into a $60 millionbridge loan agreement (the “Bridge Loan Facility”) with a commercial bank(originally, two commercial banks).  TheBridge Loan Facility is guaranteed by Telefónica Internacional, S.A. (“TISA”), anda maturity date has been fixed at December 31, 2003.  By means of letter agreement between andamongst ClearComm, Telefónica Móviles, a wholly-owned subsidiary of TISA, andTISA, the latter two have agreed to issue a corporate guarantee to cover the refinancingof this Bridge Loan and also for the payment of $51 million owed to the FCC(collectively referred to as the permanent financing).  This arrangement provides for noamortization of principal until the fifth year anniversary of the facility andis subject to the FCC issuing an order authorizing the sale to TLD of a .2%ownership interest in NewComm. ClearComm has filed for such approval and expects said order to beissued before the end of 2003.

 

Management believes that the Partnership has complied with all therequirements for obtaining the permanent financing arrangements discussed aboveand believes that taking into consideration the cash and cash equivalents onhand, anticipated growth in revenues, vendor financing and this permanentfinancing will be adequate to fund its operations, at a minimum, through theend of 2003.  However, in the absence ofimproved operating results and cash flows, and the closing of this contemplatedpermanent financing, the Partnership may face problems to fund its operationsand meet its obligations.  Because ofthe existence of these matters, substantial doubt exists as to thePartnership’s ability to continue as a going concern.  The accompanying financial statements do not include anyadjustments that might result should, for whatever reason, the Partnership beunable to meet its obligations on a timely basis.

 

**(4)****          Summaryof significant accounting policies:**

 

The following summarizes the most significant accounting policiesfollowed in the preparation of the accompanying financial statements:

 

**(a)****           Principlesof consolidation**–

The accompanyingconsolidated financial statements include the accounts of the Partnership andof its majority-owned subsidiary, NewComm. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

**(b)****           Investmentin securities**–

The Partnership classifies its securities asavailable-for-sale.  The securitiesconsist of income funds, which are stated at fair value, with net unrealizedgains or losses (none) on the securities recorded as accumulated othercomprehensive income (loss) in partners’ capital.  Realized gains and losses are included in earnings and arecalculated using the specific identification method for determining the cost ofthe securities.

 

25

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**(c)****           Investmentin subsidiary at equity**–

The Partnership’s investment in InternetSurfing Store of Puerto Rico, Inc. (“ISS”) is accounted for under the equitymethod of accounting whereby the investment is carried at the cost ofacquisition adjusted for the Partnership’s share of ISS’s earnings or lossessince the date of acquisition.

 

**(d)****           Comprehensiveincome**–

The Partnership follows the provisions ofStatement of Financial Accounting Standards (SFAS) No. 130 ReportingComprehensive Income.  Comprehensiveincome represents operational net income plus all other changes in net assetsfrom non-owner sources.  SFAS No. 130requires presentation of comprehensive income and its components in thefinancial statements.

 

During the year ended December 31, 2002the Partnership did not report any comprehensive income (loss) since there wereno unrealized holding gains or losses from its securities classified asavailable-for-sale.

 

**(e)****           Allowancefor doubtful accounts**–

Allowance for doubtful accounts provides forestimated losses on accounts receivable. The allowance is established based upon a review of the aggregateaccounts, loss experience, economic conditions and other pertinentfactors.  Account losses are charged andrecoveries are credited to the allowance for doubtful accounts.  The collection policies and procedures ofthe Partnership vary by credit class and prior payment history of subscribers.

 

**(f)****             Inventories**–

The Partnership maintains inventories ofwireless handsets and accessories held for sale to customers.  Inventories are recorded at the lower ofaverage cost (which approximates first-in, first-out) or market (whichapproximates replacement cost from suppliers). As an inducement to obtain new customers, the Partnership may sellhandsets to customers for a price that is less than cost.  The loss on such sales is recognized at thetime of sale in accordance with practice in the industry.

 

**(g)****          Deferredfinancing costs**–

Represents debt financing costs capitalizedand amortized as interest expense over the terms of the underlying obligations.

 

**(h)****          PCSlicenses**–

This amount represents costs primarilyincurred to acquire Federal Communications Commission (FCC) licenses to providewireless services.  The licenses expirein January 2007 unless renewed. However, FCC rules provide for renewal expectancy provisions.  The Partnership expects to exercise therenewal provisions. To this date, no PCS Services have been offered by thePartnership in the geographical areas covered by the California licenses.  See Note 10.

 

The Puerto Rico licenses were being amortizedover a time period of twenty years [see Note 4 (i)].  The Partnership capitalized the interest related to the debtpertaining to the Puerto Rico licenses during the development stage, whichamounted to $12,174,000.  However, suchcapitalization was discontinued in September 1999 when the commercialoperations started.

 

Effective with the adoption of Statement ofFinancial Accounting Standards (SFAS) No. 142 on January 1, 2002, theselicenses costs, no longer being amortized, are subject to impairment testing.

 

**(i)****             Adoptionof Statement of Financial Accounting Standard (SFAS) No. 142**–

Effective January 1, 2002, thePartnership adopted SFAS No. 142, “Goodwill and Other Intangible Assets” whichestablished new standards related to how acquired goodwill and other intangibleassets are to be recorded upon their acquisition, as well as how they are to beaccounted for after they have been initially recognized in the financialstatements.

 

Effective with the adoption of this standard,the Partnership reassessed the useful lives of previously recognized intangibleassets, which consist primarily of FCC licenses that provide the Partnershipwith exclusive rights to utilize a certain radio frequency spectrum to providewireless communications services.  WhileFCC licenses are issued for only a fixed period of time, generally ten years,such licenses are subject to renewal by the FCC.  Renewals of FCC licenses have occurred routinely and at a nominalcost.  Moreover, the Partnership hasdetermined that there are currently no legal, regulatory, contractual,competitive, economic or other factors that limit the useful lives of its FCClicenses.  As a result, the FCC licenseswill be treated as an indefinite-lived intangible asset under the provisions ofSFAS No. 142 and will not be amortized but rather will be tested for impairmentannually or when events and circumstances warrant.

 

26

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The Partnership completed the transition impairment test of itsindefinite-lived intangible assets for the year ended December 31, 2002and determined that no impairment existed.

 

Pro-forma results of operations for the years ended December 31,2001 and 2000, presented exclusive of amortization expense recognized in thoseyears related to licenses no longer being amortized follows:

 
|                                    |   | **(Unaudited)** |       |
|-----------------------------------------|--------|-----------------|------------|
|                                    |   | **2001**        |       | **2000** |   |
|                                    |   |            |       |   |   |
| Net loss after amortization of licenses |   | $               | 28,014,250 |   | $ | 52,037,858 |   |
|                                    |   |            |       |   |   |
| Amortization of licenses                |   | 2,634,815       |       | 2,634,815 |   |
|                                    |   |            |       |   |   |
| Pro-forma net loss                      |   | $               | 25,379,435 |   | $ | 49,403,043 |   |

 

**(j)****             Propertyand equipment**–

Property and equipment are recorded atcost.  Major replacements andimprovements are capitalized while general repairs and maintenance are chargedto expense as incurred.

 

Depreciation is computed using thestraight-line method over the estimated useful life of the asset commencingfrom the time it is placed into service or the term of the lease, if shorter,for leasehold improvements.  Uponretirement or sale, the cost of the asset disposed of and the relatedaccumulated depreciation are removed from the accounts and any resulting gainor loss is credited or charged to income.

 

**(k)****         Softwarecapitalization**–

The Partnership capitalizes certain directdevelopment costs associated with internal use software, including externaldirect cost of materials and services, and internal payroll costs for employeesdevoting time to software development. These costs are included in property and equipment and are amortizedbeginning when the software is substantially ready for use.  Costs incurred during the preliminaryproject stage, as well as maintenance and training costs are expensed asincurred.  The Partnership alsocapitalizes initial operating-system software costs and amortizes them over itsuseful life.

 

**(l)****            ****Accounting for impairment of long-lived assets******–

The Partnership continually****evaluatesits long-lived assets to determine whether current events and circumstanceswarrant adjustment of the carrying values or amortization periods.  The Partnership measures impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Inperforming the review for recoverability, an estimate of the future cash flowsexpected to result from the use of the asset and its eventual disposition mustbe made.  If the carrying amount of along-lived asset is not recoverable from its projected future undiscounted cashflows, an impairment loss is recognized. The impairment loss, if any, is determined as the difference between thecarrying amount and fair value of the asset. No impairment loss was recognized during 2002, 2001 and 2000.

 

**(m)****      ****Revenue recognition******–

The Partnership earns service revenues byproviding access to its wireless network (access revenue) and for usage of itswireless system (airtime revenue). Access revenue is billed in advance and recognized ratably over the serviceperiod.  Airtime revenue, includingroaming revenue and long-distance revenue, for postpaid customers is billed inarrears based on minutes used and is recognized when the service isrendered.  Prepaid airtime sold tocustomers is recorded as deferred revenues prior to the commencement of services,and revenue is recognized when airtime is used or expires.  Access and airtime provided are billedthroughout the month according to the bill cycle in which a particularsubscriber is placed.  As a result ofbill cycle cut-off times, the Partnership is required to make estimates forservice revenues earned but not yet billed at the end of each month.  These estimates are based primarily uponactual and historical minutes of use. The Partnership defers revenue based on an estimate of the portion ofminutes expected to be utilized prior to expiration.  The Partnership’s estimate of expected future revenue isprimarily based on historical experience as to minutes of use.

 

Roaming revenues include revenues fromcertain customers who roam outside their selected home coverage area, referredto as “incollect” roaming revenues, and revenues from other wireless carriersfor roaming by their customers on the Partnership’s network, referred to as“outcollect” roaming revenues.

 

27

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The Partnership offers enhanced servicesincluding caller ID, call waiting, call forwarding, three-way calling, noanswer/busy transfer, text messaging and voice mail.  Generally, these enhanced features generate additional revenuesthrough monthly subscription fees or increased wireless usage throughutilization of these features.  Otheroptional services, such as unlimited mobile-to mobile calling, roadsideassistance and handset insurance, may also be provided for a monthly fee.  These enhanced features and optionalservices may be bundled with package rate plans or sold separately.  Revenue for enhanced services and optionalfeatures is recognized as earned.

 

Equipment sales consist principally ofrevenues from the sale of wireless mobile telephone handsets and accessories tonew and existing customers and to agents and other third-partydistributors.  The revenue and relatedexpenses associated with the sale of wireless handsets and accessories arerecognized when the products are delivered and accepted by the customer, atthis is considered to be a separate earnings process from the sale of wirelessservices.

 

**(n)****         ****Advertising costs******–

The Partnership expenses production costs ofprint, radio and television advertisements and other advertising costs as suchcosts are incurred.

 

**(o)****          ****Income taxes******–

Under U.S. tax rules the partnership is notsubject to income tax; however, and only for Puerto Rico tax purposes, thePartnership accounts for income taxes in accordance with the asset and liabilitymethod of accounting for income taxes prescribed by the Statement of FinancialAccounting Standards No. 109, Accounting for Income Taxes.  Under the asset and liability method ofStatement No. 109, deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss carry-forwards.

 

**(p)****          ****Fair value of financial instruments******–

The carrying amount of the Partnership’sfinancial instruments (excluding notes payable and the Bridge LoanFacility):  cash, accounts receivable,accounts payable and accrued liabilities, are considered reasonable estimatesof fair value due to the short period to maturity.

 

Management believes, based on currentinterest rates, that the fair value of its notes and the Bridge Loan Facilityapproximates the carrying amount.

 

**(q)****           Concentrationof credit risk:**

Financial instruments that potentially exposethe Partnership to concentration of credit risk include cash and accountsreceivable.  The Partnership maintainsits deposit accounts with several high quality financial institutions.  The funds deposited in these institutionsare insured by the Federal Deposit Insurance Corporation for aggregate customerbalances up to $100,000.  While thePartnership attempts to limit any financial exposure, its deposit balances may,at times, exceed federally insured limits. The Partnership has not experienced any losses on such accounts.

 

The Partnership performs ongoing creditevaluations of its customers’ financial condition and generally does notrequire collateral for accounts receivable arising during the normal course ofdoing business.  Concentration of creditrisk is limited due to the large number of customers comprising thePartnership’s customer base, but is highly dependent on the strong competitionamong the companies who provide personal communication services in Puerto Rico.

 

**(r)****           Useof estimates**–

In preparing financial statements inconformity with accounting principles generally accepted in the United Statesof America, management is required to make estimates and assumptions thataffect the reported amounts of assets, liabilities and disclosure of contingentassets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reporting periods.  The most significant estimates relate toallowance for uncollectible accounts receivable, depreciation, and intangibleasset valuation and useful lives.  Theseestimates may be adjusted as more current information becomes available, andany adjustment could be significant. Actual results could differ from those amounts.

 

**(s)****           Reclassification**–

Certain amounts in the 2001 and 2000financial statements have been reclassified to conform to the 2002 financialstatement presentation.

 

In the accompanying consolidated statement ofoperations for the year ended December 31, 2002, the Partnershipclassified various expense amounts as “Network operation and maintenanceexpense” which in the years 2001 and 2000 were distributed to other variousexpense accounts.  The Partnershipcannot determine the reclassifications and groupings

 

28

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needed to present this same expense classification in the restated andunaudited statements of operations for the years ended December 31, 2001and 2000.

 

**(5)****          Recentaccounting pronouncements:**

 

**(a)**          In July 2001, theFinancial Accounting Standard Board (FASB) issued SFAS No. 143, ***Accounting for Asset RetirementObligations***.  SFAS No.143 addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  SFAS No. 143 becomeseffective for fiscal years beginning after June 15, 2002.  The implementation of SFAS No. 143 is notexpected to have a material effect on the Partnership’s consolidated results ofoperations or its financial position.

 

**(b)****         **InApril 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 fromextinguishments of debt to be aggregated and, if material, classified as anextraordinary item, net of related income tax effect. As a result, the criteriain Opinion 30 will now be used to classify those gains and losses.  SFAS No. 145 becomes effective for financialstatements issued on or after May 15, 2002.  The implementation of SFAS No. 145 did not have a material effecton the Partnership’s consolidated financial position or results fromoperations.

 

**(c)****         **InJune 2002, the FASB issued SFAS No. 146, ***Accounting for Costs Associated with Exit or DisposalActivities***.  SFAS No. 146requires that a liability for a cost associated with an exit or disposalactivity to be recognized and measured initially at fair value only when theliability is incurred.  SFAS No. 146also establishes that fair value is the objective for initial measurement ofthe liability.  SFAS No. 146 applies tocosts associated with an exit activity but does not involve an entity newlyacquired in a business combination or with a disposal activity covered by SFASNo. 144.  SFAS No. 146 does not apply tocosts associated with a retirement covered by SFAS No. 143.  SFAS No. 146 becomes effective for exit ordisposal activities that are initiated after December 31, 2002.  The implementation of SFAS No. 146 is notexpected to have a material effect on the Partnership’s consolidated financialposition or results from operations.

 

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

 

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

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

 

The disclosure requirement of this Interpretation is effective forfinancial statements for fiscal years ending after December 15, 2002; itdid not have any effect on the Partnership’s financial statements.  The initial recognition and measurement provisionsare effective prospectively for guarantees issued or modified on or afterJanuary 1, 2003, which should not have any effect on the Partnership’sfinancial statements.

 

**(e)****         **InJanuary 2003, the FASB issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”). Fin 46 clarifies the application of Accounting Research Bulletin No. 51,“Consolidated Financial Statements” and provides guidance on the identificationof entities (“variable interest entities” or “VIE’s”) for which control isachieved through means other than through voting rights and how to determinewhen and which business enterprise should consolidate the VIE.  This new model for consolidation applies toan entity which either (1) the equity investors (if any) do not have acontrolling financial interest of (2) the equity  investment at risk is insufficient to finance that entity’sactivities without receiving additional subordinated financial support fromother parties.  The provisions of thisinterpretation are immediately effective for VIEs formed after January 31,2003.  For VIEs formed prior toJanuary 31, 2003, the provisions of this interpretation apply to the firstfiscal year or interim period beginning after June 15, 2003.  Management does not expect that theapplication of this standard will have any effect on the Partnership’s resultsof operations or financial condition.

 

29

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**(6)****          Allowancefor doubtful accounts:**

 

The activity in the account allowance for doubtful accounts during theyears ended December 31, was as follows:

 

|                                |   |       |       | **(Unaudited)** |   |
|-------------------------------------|--------|------------|------------|-----------------|--------|
|                                |   | **2002**   |       | **2001**        |   | **2000** |   |
|                                |   |       |       |            |   |   |   |
| Beginning balance                   |   | $          | 18,404,570 |            | $      | 18,341,025 |   | $ | 625,000 |   |
| Provision for doubtful accounts     |   | 9,854,591  |       | 10,585,296      |   | 17,716,025 |   |
| Accounts receivable writen off, net |   | (9,631,191 | )          | (10,521,751     | )      | — |   |
|                                |   |       |       |            |   |   |   |
| Ending balance                      |   | $          | 18,627,970 |            | $      | 18,404,570 |   | $ | 18,341,025 |   |

 

**(7)****          Inventories:**

** **

Inventories at December 31, consist of:

 
|                  |   |     |       | **(Unaudited)** |   |
|-----------------------|--------|----------|------------|-----------------|--------|
|                  |   | **2002** |       | **2001**        |   | **2000** |   |
|                  |   |     |       |            |   |   |   |
| Handsets              |   | $        | 10,036,851 |            | $      | 9,172,681 |   | $ | 12,418,439 |   |
| Accessories and other |   | 424,261  |       | 1,132,573       |   | 558,725 |   |
|                  |   |     |       |            |   |   |   |
| Total                 |   | $        | 10,461,112 |            | $      | 10,305,254 |   | $ | 12,977,164 |   |

 

**(8)****         ****Investment in securities****:**

 

As of December 31,2002 the Partnership had invested $10 million in mutual funds.  The fair value of such funds as ofDecember 31, 2002 approximated cost; therefore, no unrealized holding gainor loss was recognized.

 

**(9)****         ****Investment insubsidiary:**

 

During the year ended December 31, 2002,the Partnership acquired a 49% interest in Internet Surfing Stores of PuertoRico, Inc., (ISS), a company which is engaged in the development of internetsurfing galleries, targeted to the segment of population that does not owncomputers.  Total amount invested duringthe year amounted to $392,000.  ThePartnership’s investment in this company is accounted for on the equity methodof accounting and its share in losses for the year ended December 31, 2002amounted to $114,746.

 

30

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The combined results ofoperations and financial position of the Partnership’s equity investment aresummarized below:

 

**Condensed combined balance sheet information (as ofDecember 31, 2002):**

** **
| Current assets               |   | $       | 9,028   |   |
|------------------------------|--------|---------|---------|--------|
|                         |   |    |    |
| Non-current assets           |   | 390,596 |    |
|                         |   |    |    |
| Total assets                 |   | $       | 399,624 |   |
|                         |   |    |    |
| Current liabilities          |   | $       | 31,576  |   |
| Equity                       |   | 368,048 |    |
|                         |   |    |    |
| Total liabilities and equity |   | $       | 399,624 |   |

** **

**Condensed combined statement of operations information(for the year ended December 31, 2002):**

** **
| Net sales |   | $      | 16,221   |   |
|-----------|--------|--------|----------|--------|
|      |   |   |     |
| Net loss  |   | $      | (234,175 | )      |

 

 

**(10)****               Investmentin PCS licenses:**

 

PCS licenses at December 31, consist of:

 
|                                 |   |       |       | **(Unaudited)** |   |
|--------------------------------------|--------|------------|------------|-----------------|--------|
|                                 |   | **2002**   |       | **2001**        |   | **2000** |   |
|                                 |   |       |       |            |   |   |   |
| PCS licenses in use (Puerto Rico)    |   | $          | 52,696,295 |            | $      | 52,696,295 |   | $ | 52,696,295 |   |
| Accumulated amortization             |   | (5,945,846 | )          | (5,945,846      | )      | (3,311,031 | ) |
|                                 |   |       |       |            |   |   |   |
| Net                                  |   | 46,750,449 |       | 46,750,449      |   | 49,385,264 |   |
| PCS licenses not in use (California) |   | 10,767,525 |       | 10,767,525      |   | 15,453,188 |   |
|                                 |   |       |       |            |   |   |   |
| Total                                |   | $          | 57,517,974 |            | $      | 57,517,974 |   | $ | 64,838,452 |   |

 

Each of the Partnership’s C-Block licenses issubject to an FCC requirement that the Partnership construct network facilitiesthat offer coverage to at least one-third of the population in the marketcovered by such license, within five years following the grant of theapplicable license and to at least two-thirds of the population within tenyears following the grant.  Although thePartnership’s build-out plan calls for it to exceed these minimum requirements,failure to comply with these requirements could result in the revocation of therelated licenses of the imposition of fines on the Partnership by the FCC.  The Partnership has complied with thebuild-out requirements for the California Licenses.

 

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**(11)****               Propertyand equipment:**

 

Property and equipment at December 31,consist of:

 
|                                                                               |   | **Estimated  Useful Lives  (In Years)** |   | **2002**    |        | **(Unaudited)** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-------------|-------------|-----------------|--------|
| **2001**                                                                           |   | **2000**                                |
|                                                                               |   |                                    |   |        | ** **  |            |   |   | ** ** |
| Network infrastructure equipment                                                   |   | 10                                      |   | $           | 113,011,633 |            | $      | 106,982,181 |   | $ | 88,929,914 |   |
| Leasehold improvements                                                             |   | 5                                       |   | 4,906,427   |        | 4,373,540       |   | 3,706,389 |   |
| Handsets rented to customers                                                       |   | 1                                       |   | —      |        | —          |   | 7,941,943 |   |
| Furniture and fixtures                                                             |   | 5                                       |   | 23,964      |        | —          |   | — |   |
| Computer and office equipment                                                      |   | 5                                       |   | 12,991,121  |        | 6,934,298       |   | 5,460,523 |   |
| Vehicles                                                                           |   | 5                                       |   | 706,639     |        | 706,639         |   | 664,853 |   |
| Network infrastructure equipment located in  California, not yet placed in service |   |                                    |   | 185,967     |        | —          |   | — |   |
|                                                                               |   |                                    |   |        |        |            |   |   |   |
| Total                                                                              |   |                                    |   | 131,825,751 |        | 118,996,658     |   | 106,703,622 |   |
| Less:   accumulated depreciation and amortization                             |   |                                    |   | (35,890,721 | )           | (21,932,257     | )      | (15,173,002 | ) |
|                                                                               |   |                                    |   |        |        |            |   |   |   |
| Total                                                                              |   |                                    |   | 95,935,030  |        | 97,064,401      |   | 91,530,620 |   |
| Network under construction                                                         |   |                                    |   | 5,996,892   |        | 5,031,552       |   | 5,471,520 |   |
|                                                                               |   |                                    |   |        |        |            |   |   |   |
| Property and equipment, net                                                        |   |                                    |   | $           | 101,931,922 |            | $      | 102,095,953 |   | $ | 97,002,140 |   |

 

**(12)****               Bridgeloan facility:**

 

During November 2000, the Partnershipentered into a $60 million financing agreement (the “Bridge Loan Facility”)with ABN-AMRO and BBVA (the “Bank”) with varying favorable short-term interestrates.  This financing has been extendedseveral times and is now guaranteed by TISA, and its maturity date has beenextended to December 31, 2003.  Theinterest rate at December 31, 2002 was 2.13%.  Subsequently to December 31, 2002 the Partnership receivedan additional $1 million advance under this financing facility.

 

**(13)****               Accountspayable and accrued liabilities:**

 

Accounts payable and accrued liabilities at December 31, consistof:

 
|                                           |   |      |       | **(Unaudited)** |       |
|------------------------------------------------|--------|-----------|------------|-----------------|------------|
|                                           |   | **2002**  |       | **2001**        |       | **2000** |   |
|                                           |   |      | ** ** |            | ** ** |   | ** ** |
| Trade                                          |   | $         | 17,609,462 |            | $          | 15,457,177 |   | $ | 19,766,575 |   |
| Network construction costs                     |   | 483,211   |       | 1,881,734       |       | 10,055,040 |   |
| Other accounts payable and accrued liabilities |   | 5,337,760 |       | 10,529,804      |       | 10,492,786 |   |
|                                           |   |      |       |            |       |   |   |
| Total                                          |   | $         | 23,430,433 |            | $          | 27,868,715 |   | $ | 40,314,401 |   |

 

The payment terms with Lucent for amountsclassified as network construction costs, require payment on due dates rangingfrom 60 to 365 days after an invoice has been submitted to the Partnership.

 

**(14)****               Long-termnotes payable:**

 

**(a)****          LucentTechnologies –**

During 2000, the Partnership’s management and Lucent agreed on formallyextending the payment of up to $61.0 million of the total amount due under thenetwork construction payable.  Thefinancing agreement was restructured as a

 

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Promissory Note on September 26, 2001, with a principal sum of$60.5 million plus interest, due March 15, 2002.  The interest rate on the Promissory Note was 14%, which increasedto 16% if the promissory note was not satisfied by March 15, 2002.  The Partnership was then given an extensionon March 8, 2002 by****means of an Allonge Letter.  The latter came about as a result of thesigning of the Stock Purchase Agreement with TLD (refer to Note 1) whichagreement reduced the interest rate to 8%.

 

During June 2003 the Partnership and Lucent entered into a SeniorCredit Agreement which refinanced the balance of the existing promissory notebalance.  The interest rate remained at8% per annum and the maturity date was extended to September 2009; alsothe Partnership was required to make two principal payments of $5,551,032 each,during 2003.

 

As of December 31, 2002, $60,531,697 was outstanding under thisfinancing agreement.  The note payableis guaranteed by a security agreement covering most of the Partnership’sassets, as defined.

 

**(b)****          Notepayable to Alcatel and Promissory Agreement –**

On December 18, 2001, the Partnership had outstanding invoices,payables, and past due interest due to Alcatel totaling $14,361,732.  In May 2002 the Partnership paidAlcatel $6,000,000 of which $5,437,184 was applied to the principal balance. Asper agreement the annual interest rate was fixed at 8%.  During June 2003, the promissoryagreement and note was amended as follows:

 

•                  Interest rate was reduced to a fixed rate of 6.5% perannum.

•                  Final maturity date will be December 20, 2005.

•                  The Partnership shall made the following payments(payments were made on time):

 

- Within three business days after June 20, 2003 - $2,000,000 forprincipal.

 

- On June 20, 2003, $337,372 for accrued interest.

 

- Within three business days after June 20, 2003 - $184,118 foroutstanding invoices.

 

As ofDecember 31, 2002, $7,436,029 was outstanding under this financingagreement.

 

**(c)****          FCCnotes –**

The Partnership has $51,339,555 in long-term debt related to the PCSlicenses granted to the Partnership by the FCC.  This debt consists of notes payable bearing interest at 6.5% andguaranteed by the PCS licenses obtained. In accordance with industry practice, the Partnership recorded the PCSlicenses and the related debt at their net present value, based on thePartnership’s estimate of borrowing costs for debt similar to that issued bythe FCC.  The discount rate used by thePartnership was 12.82%.  These notes arepayable to the FCC as follows:

 

•                  Quarterlyinterest payments of $834,268 through April 2003.

 

•                  Quarterlyprincipal and interest payments of $3,669,768 from April 2003 throughJanuary 2007.

 

The Partnership is currently engaged in discussions for the purpose ofrestructuring these notes, together with the existing Bridge Loan Facility.

 

**(d)****          TLDnotes –**

The secured promissory note (the “Promissory Note”) payable to TLDbears interest at the floating rate of the 90-day LIBOR rate plus 1-1/2% (2.83%at December 31, 2002) and the balance of $24,852,533 is due inMarch 2004.  The principal amountof the Promissory Note, as amended, shall be converted into NewComm’s shares ofcommon stock, as follows:  (I)  shares of NewComm’s Class A common stock inan amount equal to thirty-three and one third percent (33-1/3%) of NewComm’sissued and outstanding Class A common stock held by ClearComm, and (II) sharesof NewComm’s Class B common stock in an amount equal to forty-nine point sevenpercent (49.7%) of all issued and outstanding shares of Class A common stock ofNewComm (including the Class A common stock issued to TLD upon conversion ofthe Promissory Note).  Upon the issuanceof the FCC approval, TLD shall surrender the Promissory Note to NewComm, dulyendorsed for cancellation, and NewComm shall issue (I) the certificatesevidencing the number of shares of Class A common stock and Class B commonstock into which the Promissory Note is convertible, as set forth herein, and(II) a promissory note in a principal amount equal to the accrued interest onthe Promissory Note as of such date (the “Interest Note”).  The Interest Note will be non-interestbearing and the principal amount may be converted into additional shares ofNewComm’s stock.  Because ofrestrictions in the PCS licenses, the Promissory Note cannot be converted into

 

33

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shares of NewComm until such time as the FCC may authorize TLD to holdmore than a 25% equity interest in NewComm.

 

On January 31, 2000, the Joint Venture Agreement was amended.  At that time, TLD provided the Partnership arevolving line of credit of approximately $30,000,000 for working capital.  The amounts advanced under this line ofcredit bore interest at 3% over the LIBOR rate and were secured under the sameterms as the Promissory Note of $20,000,000. During 2000, TLD advanced the Partnership up to $30,000,000.  The total balance outstanding, includingprincipal and interest, amounting to $30,191,878, was repaid by the Partnershipon December 31, 2000, with the proceeds from the Bridge Loan Facility.

 

During 2001, the parties amended the Joint Venture Agreement toeliminate TLD’s option to acquire a majority interest in NewComm fromClearComm, and revised the Promissory Note and corresponding unexecutedInterest Note to eliminate the Partnership’s conversion rights under the latterinstrument.

 

During November and December 2000, and May 2001, TLDloaned $14,970,000 to the Partnership and the Partnership issued threeconvertible unsecured promissory notes payable to TLD for the principal amountof $4,990,000 each.  The convertiblepromissory notes bear interest at .75% over the 180-day LIBOR (Notes one andtwo) and 1.50% over the 90-day LIBOR (Note three).  The principal amounts of the promissory notes are eachconvertible into 29.34 shares of the Partnership’s Class A common stock at anytime prior to their respective maturity dates of November 2, 2005,December 15, 2005 and May 1, 2006.

 

During May and December 2002, TLD loaned and the Partnershipissued two additional unsecured promissory notes for $9.0 million and $9.9million, respectively, convertible into 57.24 shares of the Partnership’s ClassA common stock, with maturity dates of May 20, 2007 and December 27,2007, respectively.  These convertiblepromissory notes bear interest at .25% over the 180-day LIBOR (Note four) and..25% over the 90-day LIBOR (Note five).

 

At December 31, 2002, future principal installments (afterrenegotiated terms) on these notes payables were as follows:

 
| **Year ending  December 31,** |   | **Lucent**  |       | **Alcatel** |   | **FCC**    |   | **TLD**    |       | **Total**   | ** ** |
|------------------------------------|--------|-------------|------------|-------------|--------|------------|--------|------------|------------|-------------|------------|
|                               |   |        |       |        |   |       |   |       |       |        |       |
| 2003                               |   | $           | 11,102,065 |        | $      | 2,900,000  |   | $          | 8,645,479  |        | $          | — |   | $ | 22,647,544 |   |
| 2004                               |   | 3,000,000   |       | 2,075,000   |   | 12,197,270 |   | 24,852,533 |       | 42,124,803  |       |
| 2005                               |   | 6,000,000   |       | 2,461,029   |   | 13,009,628 |   | 10,898,303 |       | 32,368,960  |       |
| 2006                               |   | 6,000,000   |       | —      |   | 13,876,090 |   | 5,328,546  |       | 25,204,636  |       |
| 2007                               |   | 8,500,000   |       | —      |   | 3,611,088  |   | 19,084,744 |       | 31,195,832  |       |
| Thereafter                         |   | 25,929,632  |       | —      |   | —     |   | —     |       | 25,929,632  |       |
|                               |   |        |       |        |   |       |   |       |       |        |       |
|                               |   | 60,531,697  |       | 7,436,029   |   | 51,339,555 |   | 60,164,126 |       | 179,471,407 |       |
|                               |   |        |       |        |   |       |   |       |       |        |       |
| Less discount on FCC notes         |   | —      |       | —      |   | (6,317,876 | )      | —     |       | (6,317,876  | )          |
|                               |   |        |       |        |   |       |   |       |       |        |       |
| Total                              |   | 60,531,697  |       | 7,436,029   |   | 45,021,679 |   | 60,164,126 |       | 173,153,531 |       |
|                               |   |        |       |        |   |       |   |       |       |        |       |
| Less current portion               |   | (11,102,065 | )          | (2,900,000  | )      | (8,645,479 | )      | —     |       | (22,647,544 | )          |
|                               |   |        |       |        |   |       |   |       |       |        |       |
| Long-term portion                  |   | $           | 49,429,632 |        | $      | 4,536,029  |   | $          | 36,376,200 |        | $          | 60,164,126 |   | $ | 150,505,987 |   |

 

**(15)****              Relatedparty transactions:**

 

**(a)****         **NewCommentered into a management agreement with TLD whereby TLD has agreed to combineits experience, know-how, synergies and resources in the development,preparation and implementation of NewComm’s business policies and organizationin all major areas of operations.  Aspart of this management agreement, TLD agreed to advise NewComm in 

 

34

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establishing and developing NewComm’sstrategic business policies, technical consultation in connection with thedesign and development of networks, equipment selection, quality controls,billing platforms, customer service and in the identification of new servicesand products.  NewComm is responsiblefor all salaries, wages, benefits, expenses and any other compensation of theofficers, employees or agents selected by TLD in connection with its managementservices.  This management agreementrequires NewComm to pay an annual fee (payable quarterly in arrears) based onthe highest of 9% of Partnership’s earnings before interest, taxes,depreciation and amortization (“EBITDA”) or $750,000.  The initial term of this management agreement is five yearsbeginning in February 4, 1999, and is automatically renewable.  During 2002 the agreement was amended and asa result, this fee is now payable to TISA.

 

**(b)****         **Also,NewComm entered into a services agreement with TLD, whereby TLD agreed toprovide support to NewComm in the areas of legal consultation, managementinformation systems and general services. This services agreement is on a year-to-year basis and requires annualpayment to TLD of approximately $320,000.

 

**(c)****         **Inaddition, NewComm entered into a technology transfer agreement with TISA,whereby TISA granted NewComm the right to use, during the term of thisagreement, all patents, trademarks, processes, planning resources, designs and,in general, all other intellectual property belonging to TISA (collectively,the “Technology”), which is deemed necessary for the efficient operation anddevelopment of the business of NewComm. NewComm shall pay TISA all costs incurred, directly, or indirectly byvirtue of granting NewComm the right to utilize the Technology.  In consideration for the right to use theTechnology, NewComm shall pay an annual fee (payable quarterly in arrears)equal to one percent (1%) of NewComm’s gross revenues as of the end of theprevious year.  NewComm shall beresponsible for all taxes, withholdings or similar deductions due on thefee.  The initial term of this agreementis five years and is automatically renewable.

 

**(d)****         **Atentode Puerto Rico, Inc., an affiliate of TLD, provides NewComm call centerservices, including customer service and others based on arranged rates.

 

**(e)****         **ThePartnership agreement, as amended, provides for payment of a management fee toits General Partner (SuperTel), equal to the reasonable costs of operating thebusiness of the Partnership, plus 10% of such aggregate amount, which fee shallbe payable monthly, on the first day of each month during the year.  Expenses reimbursed include, but are notlimited to, compensation costs, and expenses incurred by officers, directors,and employees in the performance of their duties.  In connection with this agreement, the General Partner billed thepartnership approximately $262,164 during the year ended December 31, 2002in connection with these services.

 

**(f)****           **Thenote receivable from officer represents a loan made to the Partnership’sPresident.  This loan in unsecured,bears interest at 6% and is due on August 30, 2005.

 

**(g)****        **ThePartnership has incurred legal and consulting expenses paid to members of theBoard of Directors and shareholders of the General Partner amounting toapproximately $466,000 during the year ended December 31, 2002.

 

Total amounts charged by related parties during the years endedDecember 31, 2002, 2001 and 2000 for the above agreements and othercharges amounted to $6,070,538, $7,620,289 and $7,192,295, respectively.

 

Accounts payable to related parties as of December 31, consist of:

 
|                                                            |   | **2002**  |       | **2001** |   | **2000**  |   |
|-----------------------------------------------------------------|--------|-----------|------------|----------|--------|-----------|--------|
|                                                            |   |      |       |     |   |      |   |
| TLD                                                             |   | $         | 9,784,125  |     | *      |      | *      |   |
| TISA                                                            |   | 3,221,142 |       | *        |   | *         |   |
| Atento de Puerto Rico, Inc.                                     |   | 800,099   |       | *        |   | *         |   |
| Telefónica Móviles y Soluciones y Aplicaciones,  S.A. |   | 2,895,077 |       | *        |   | *         |   |
|                                                            |   |      |       |     |   |      |   |
|                                                            |   | $         | 16,700,443 |     | $      | 8,705,353 |   | $ | 2,041,767 |   |
|                                                                 |        |           |            |          |        |           |        |  |  |  |

 

----

*      ThePartnership cannot determine the specific accounts that comprised the balancesin the restated and unaudited consolidated balance sheets as ofDecember 31, 2001 and 2000.

 

35

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**(16)****               Definedcontribution plan:**

 

In October 1999, NewComm established adefined contribution retirement plan (1165e Plan) covering all employees whohave at least three months of service and are at least 21 years old.  Participants may contribute from one to tenpercent of their compensation, as defined, up to a maximum of $8,000.  NewComm contributes 66% of the aggregateparticipant contributions up to a maximum of six percent of the participant’scompensation.  Contributions for theyears ended December 31, 2002, 2001 and 2000 amounted to $164,410,$166,950 and $151,102, respectively.

 

**(17)****               Commitmentsand contingencies:**

 

**(a)**          **Rental commitments –**

 

(i)             The Partnership is committed under variousoperating lease agreements for its office space as well as various sites forcommunication equipment and stores under different terms and conditions.  Minimum annual rental commitments at December 31,2002 are as follows:

 

| **Year ending  December 31,** |   | **Amount** |       |
|------------------------------------|--------|------------|------------|
|                               |   |       |       |
| 2003                               |   | $          | 7,402,795  |   |
| 2004                               |   | 4,773,762  |       |
| 2005                               |   | 2,686,983  |       |
| 2006                               |   | 915,459    |       |
| 2007                               |   | 430,959    |       |
|                               |   |       |       |
| Total                              |   | $          | 16,209,958 |   |

 

Rent expense for the years ended December 31, 2002, 2001 and 2000was $7,766,611, $7,976,654 and $7,415,356, respectively.

 

(ii)          InDecember 2001 the Partnership entered into two lease agreements with TowerAsset Sub, Inc. (“Licensor”) for the lease of certain space on two towersoperated by Licensor.  By means of theagreement, ClearComm was granted a license to install, maintain and operate itswireless communications equipment and accessories on the towers.  Each agreement is for a five-year term,automatically renewed for four additional five-year terms.  The agreements establish annual rentalpayments of $19,800 and $15,000, respectively, with an annual increase of 4%.

 

**(b)****         **InNovember 2002 the Partnership entered into the following agreements withTelefónica Móviles y Soluciones y Aplicaciones, S.A. (“TM-mAS”):

 

-                    Licensingagreement – for the use of the SCL software, specially designed for companiesengaged in the operation of mobile communication.  The total cost of the software is $973,254, to be billed asfollows: 20% after two days of signing the contract, 60% within five dayssubsequent to the delivery and installation of the product, and 20% within twodays subsequent to the registration of the product.

-                    Maintenanceand support services – for the maintenance of the SCL software application andrelated consulting services.  Theagreement is for three years and the monthly fee is based on pre-determinedrates and hours incurred.

-                    Design,development and programming services – the agreement is for three years and themonthly fee is based on pre-determined rates and hours incurred.

 

As of December 31,2002 the Partnership had an outstanding balance of $2,895,078 related to theseagreements, included as accounts payable and accrued liabilities in theaccompanying balance sheet.

 

**(c)****         **Subsequentto December 31, 2002 the Partnership entered into an agreement withBrightstar Corp. (“Brightstar) for the selling, distribution and administrationof its inventories.  Brightstar willsublease the Partnership’s warehouse premises located in Caguas, Puerto Rico,for a monthly fee still pending to be established.  In addition, the agreement establishes that the Partnership willpay five dollars for each unit dispatched under regular service and six dollarsfor each unit dispatched in any emergency service.  The agreement commenced in April 2003.

 

36

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**(d)****         **ThePartnership entered into an Interconnection Agreement with Puerto RicoTelephone Partnership, Inc. (“PRTC”). The agreement, which is renewed on a yearly basis, provides for thedelivery of local traffic to be terminated on each party’s local network sothat customers of either party have the ability to reach customers of the otherparty.  The agreement establishes thatcompensation shall be paid by PRTC to NewComm and NewComm to PRTC atpre-determined rates.

 

**(e)****         **The Partnershipentered into an Interconnection and Traffic Interexchange Agreement forTelecommunications Services with Centennial Wireless PCS Operations Corporation(“Centennial”).  The agreement, which isrenewed on a yearly basis, provides for the parties to physically connect theirswitches and interchange traffic to allow subscribers of Centennial tocommunicate with subscribers of NewComm and vice versa in their respectiveservice areas.  The agreement establishesthat the cost of the communication services provided are based onpre-determined rates.

 

**(f)****           **InJuly 1999 the Partnership entered into an Intercarrier Roamer ServiceAgreement with Sprint Spectrum, LP (“Sprint”). The agreement was entered into so that the parties can provide serviceto each other’s customers when the service is necessary in a geographic areaoutside of the area served by the party with whom it is registered and withinthe geographic service area served by the other party.  Each home carrier (NewComm and Sprint),whose customers receive service from the other serving carrier, shall pay 100%of the cost of such service (wireless services plus pass-through charges) tothe other and vice-versa.

 

**(18)****               Contingencies**:

 

The Partnership is the defendant in severallegal cases related to former employees, arising in the ordinary course ofbusiness.  In the opinion of management,after consultation with legal counsel, the ultimate disposition of thesematters will not have a material adverse effect on the Partnership’s financialposition and results of operations.

 

Other legal cases include:

 

*Sprint/Centennial*

On September 21, 2001, NewComm Wireless Services, Inc. d/b/aMoviStar (“MoviStar”) filed a *Complaint and Motion and Memorandum of Law RequestingTemporary Restraining Order and Preliminary Injuction* in the FederalDistrict Court for the District of Puerto Rico, which alleged serious andunlawful interruptions, interferences and irreparable damages to MoviStar’soperations rising out of Sprint’s refusal to broadcast a System IdentificationNumber (“SID”) for the Puerto Rico market that will not interfere with theservices presently being offered by MoviStar to its subscribers.  During October 15th and 18th,2001, the District Court held an evidentiary hearing related to the injunctiverelief sought.  In this *Opinion andOrder* of October 29, 2001, the District Court ordered Sprint to“immediately cease and desist from using SID 5142 and/or any other SID whichsimilarly interferes with plaintiffs operations in Puerto Rico.”

 

On October 30, 2001, Centennial filed a Motion of Intervention ofRight in which they requested leave from the District Court to join the Sprintlitigation.  Despite MoviStar’sopposition, the District Court granted Centennial’s motion on November 5,2001.  Both Sprint and Centennial arecurrently appealing, in the First Circuit of Appeals, the injunctive reliefgranted by the District Court of Puerto Rico. On April 6, 2002, the First Circuit Court of Appeals issued anorder reversing the injunction relief.

 

During 2003, the parties were able to reach a negotiatedsettlement.  The correspondingsettlement and release agreements were finalized and executed on March 13and 14, 2003.  On March 21, 2003,the Court entered judgment accordingly, dismissing all claims and counterclaims.

 

**(19)****             ****Partners’ capital:**

 

At December 31, 2001 and 2000, the limitedpartners’ capital consisted of 2,907.1 units distributed among approximately1,600 limited partners.

 

The Partnership Agreement provides that thePartnership may sell additional limited partnership interests after the initialoffering to raise additional equity. Cash flow received from normal operations of the Partnership which theGeneral Partner, in its sole discretion, determines to distribute to theinvestors of the Partnership, will be distributed 75% to the limited partnersand 25% to the General Partner.  Forfederal income taxes purposes, the operating losses of the Partnership will beallocated first to the partners as necessary to offset any profits previouslyallocated to them until each partner has cumulative losses equal to cumulativeprofits previously allocated to each partner, and second, 75% to the limitedpartners in accordance with the number of units held by each limited partnerand 25% to the General Partner.   However,any losses that would have the effect of causing or increasing a partners’capital account deficit will be allocated first, pro rata to the other partnersin accordance with their respective share of partnership distributions, andsecond, when such allocations can be made without increasing a partner’scapital account deficit, to the General Partner.

 

37

----

 

**(20)****              Incometax:**

 

The Partnership, as an United States limited partnership, is notsubject to federal income tax and the tax affect of its activities flow –through to the partners.  For U.S. taxpurposes the Partnership’s tax losses have been passed through to the limitedpartners to the extent of their investment. The Partnership is subject to Puerto Rico income tax as a regularcorporation.

 

For Puerto Rico tax purposes the Partnership has net operating losscarryforwards totaling approximately $4 million, available to reduce futuretaxable income.  The loss carryforwardsexpire in fiscal years 2003 through 2009.

 

NewComm has net operating loss carryforwards totaling approximately$120 million available to reduce future taxable income.  The loss carryforwards expire in fiscalyears 2006 through 2009.

 

At December 31, 2002 the deferred tax asset resulting from futureincome tax benefits of the available operating losses was approximately $31million, at the lower tax bracket.  Avaluation allowance for the same amount has been established due to theuncertainty as to the realization of the tax benefit of such operating losses.

 

**(21)****              Supplementarycash flows information:**

 

During the year ended December 31, 2002, the Partnership had thefollowing non-cash investing and financing activities:

 

a.               Interest for theyear ended December 31, 2002, amounting to $1,113,724 was capitalized aspart of the TLD long-term debt.

 

b.              Invoices due toAlcatel in the amount of $413,319 were capitalized into the note payable duringcurrent year.  The amount was previouslypresented as accounts payable.

 

**(22)****              Dilutiongain:**

 

The amount presented as dilution gain in the accompanying statements ofchanges in Partners’ deficit represents the effect of investments made by anoutside minority interest investor during the years 2002, 2001 and 2000 ($10million, $5 million and $10 million, respectively).  The equity gain is the effect of the reduction of thePartnership’s participation in the stockholders’ deficit of NewComm, allocatedto the limited partners and the General Partner, based on their percentage ofparticipation, 75% and 25%, respectively.

 

## **(23)****             ****Quarterly financial information for 2002 unaudited,and for 2001 and 2000 restated and unaudited****:**

 

Certain unaudited quarterly financialinformation for the year 2002 and restated and unaudited quarterly financialinformation for the years 2001 and 2000 follows:

 
|                                                   |   | **2002**  |       |
|--------------------------------------------------------|--------|-----------|------------|
|                                                   |   | **March** |       | **June** |   | **September** |   | **December** |   |
|                                                   |   |      |       |   |   |   |   |   |   |
| **Revenues**                                           |   | $         | 27,980,361 |   | $ | 33,519,358 |   | $ | 26,209,320 |   | $ | 20,248,058 |   |
|                                                   |   |      |       |   |   |   |   |   |   |
| **Operating (loss) income**                            |   | $         | 2,612,416  |   | $ | 1,454,412 |   | $ | 691,941 |   | $ | (539,969 | ) |
|                                                   |   |      |       |   |   |   |   |   |   |
| **Net income (loss)**                                  |   | $         | (5,680,363 | ) | $ | 7,185,858 |   | $ | (5,902,572 | ) | $ | (8,627,994 | ) |
|                                                   |   |      |       |   |   |   |   |   |   |
| **Net income (loss) attributable to  General Partner** |   | $         | (5,680,363 | ) | $ | 1,796,465 |   | $ | (513,182 | ) | $ | (8,627,994 | ) |
|                                                   |   |      |       |   |   |   |   |   |   |
| **Net income (loss) attributable to  Limited Partner** |   | $         | —     |   | $ | 5,389,393 |   | $ | (5,389,390 | ) | $ | — |   |

 

38

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|                                          |   | **2001**  | ** **  |
|-----------------------------------------------|--------|-----------|-------------|
|                                          |   | **March** |        | **June** |   | **September** |   | **December** | ** ** |
|                                          |   |      |        |   |   |   |   |   |   |
| **Revenues**                                  |   | $         | 28,012,266  |   | $ | 33,519,358 |   | $ | 30,844,992 |   | $ | 31,359,311 |   |
|                                          |   |      |        |   |   |   |   |   |   |
| **Operating (loss) income**                   |   | $         | (2,767,474  | ) | $ | 3,342,309 |   | $ | 3,151,611 |   | $ | 700,419 |   |
|                                          |   |      |        |   |   |   |   |   |   |
| **Net loss**                                  |   | $         | (12,968,934 | ) | $ | (690,864 | ) | $ | (4,142,306 | ) | $ | (10,212,146 | ) |
|                                          |   |      |        |   |   |   |   |   |   |
| **Net loss attributable to General  Partner** |   | $         | (12,968,934 | ) | $ | (690,864 | ) | $ | (4,142,306 | ) | $ | (10,212,146 | ) |
|                                          |   |      |        |   |   |   |   |   |   |
| **Net loss attributable to Limited  Partner** |   | $         | —      |   | $ | — |   | $ | — |   | $ | — |   |

 
|                                            |   | **2000**  | ** ** |
|-------------------------------------------------|--------|-----------|------------|
|                                            |   | **March** |       | **June** |   | **September** |   | **December** | ** ** |
|                                            |   |      |       |   |   |   |   |   |   |
| **Revenues**                                    |   | $         | 12,932,126 |   | $ | 22,013,267 |   | $ | 24,379,828 |   | $ | 32,685,984 |   |
|                                            |   |      |       |   |   |   |   |   |   |
| **Operating (loss)**                            |   | $         | (1,444,183 | ) | $ | (270,576 | ) | $ | (7,172,393 | ) | $ | (12,040,746 | ) |
|                                            |   |      |       |   |   |   |   |   |   |
| **Net loss**                                    |   | $         | (8,183,895 | ) | $ | (7,469,334 | ) | $ | (15,171,304 | ) | $ | (21,213,325 | ) |
|                                            |   |      |       |   |   |   |   |   |   |
| **Net loss attributable to General  Partner**   |   | $         | (2,045,974 | ) | $ | (1,867,333 | ) | $ | (3,792,826 | ) | $ | (18,059,825 | ) |
|                                            |   |      |       |   |   |   |   |   |   |
| **Net loss attributable to****Limited Partner** |   | $         | (6,137,921 | ) | $ | (5,602,000 | ) | $ | (11,378,478 | ) | $ | (3,153,500 | ) |

 

As discussed in Note 2 to the accompanyingconsolidated financial statements, the Partnership has restated itsconsolidated financial statements as of and for the years endedDecember 31, 2001 and 2000.  Theadjustments and reclassifications made as part of the restatements of theconsolidated financial statements were also adjusted into the quarterlyrestated and unaudited financial information for the years 2001 and 2000.

 

As discussed in Note 4(i) to the accompanying consolidated financialstatements, the Partnership adopted SFAS 142 “Goodwill and other IntangiblesAssets” on January 1, 2002.  Thequarterly unaudited consolidated financial information for the year endedDecember 31, 2002 was adjusted accordingly.

 

39

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**Reportof Independent****PublicAccountants**

 

 

# To the Board of Directors of

 

SuperTel Communications Corp.:

 

We have audited the accompanying balance sheet of **SuperTel Communications Corp.**asof December 31, 2002, and the related statements of income and accumulateddeficit, and cash flows for the year then ended.  These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit. The financial statements of **SuperTel Communications Corp.** as of and forthe year ended December 31, 2001 and 2000, were audited by other auditorswho have ceased operations and whose report dated April 16, 2002,expressed an unqualified opinion on those statements.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of **SuperTelCommunications Corp**. as of December 31, 2002, and the results ofits operations and its cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America.

 

 
| **/s/**Kevane  Soto Pasarell Grant Thornton LLP |   |
|-------------------------------------------------|--------|
|                                            |
| San Juan, Puerto Rico,                          |
| August 31,  2003.                          |

 

40

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**SuperTel Communications Corp.**

 

**Balance Sheets****—December 31,2002, 2001 and 2000**

 
|                                                                                                         |   | **2002** |       | **2001** |       | **2000** |       |
|--------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **CURRENT ASSETS:**                                                                                          |   |     |       |     |       |     |       |
| Cash                                                                                                         |   | $        | 63,853     |     | $          | 3,707    |       | $ | 32,016 |   |
| Accounts receivable from affiliated company                                                                  |   | 136,154  |       | 137,538  |       | 88,612   |       |
| Prepaid income tax                                                                                           |   | —   |       | 2,760    |       | 2,760    |       |
|                                                                                                         |   |     |       |     |       |     |       |
| Total current assets                                                                                         |   | 200,007  |       | 144,005  |       | 123,388  |       |
|                                                                                                         |   |     |       |     |       |     |       |
| Investment in partnership at equity, net                                                                     |   | —   |       | —   |       | —   |       |
|                                                                                                         |   |     |       |     |       |     |       |
| Total assets                                                                                                 |   | $        | 200,007    |     | $          | 144,005  |       | $ | 123,388 |   |
|                                                                                                         |   |     |       |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                |   |     | ** ** |     | ** ** |     | ** ** |
|                                                                                                         |   |     |       |     |       |     |       |
| **CURRENT LIABILITIES:**                                                                                     |   |     |       |     |       |     |       |
| Accounts payable                                                                                             |   | 69,900   |       | 37,731   |       | 29,744   |       |
| Income tax payable                                                                                           |   | 4,647    |       | 0        |       | 0        |       |
|                                                                                                         |   |     |       |     |       |     |       |
| Total current liabilities                                                                                    |   | 74,547   |       | 37,731   |       | 29,744   |       |
|                                                                                                         |   |     |       |     |       |     |       |
| **STOCKHOLDERS’ EQUITY:**                                                                               |   |     |       |     |       |     |       |
| Preferred stock, no par value, 1,000 shares  authorized, non-voting, none issued                             |   | 0        |       | 0        |       | 0        |       |
| Common stock, no par value, $1 stated value, 84,100  shares authorized, 1,000 shares issued and outstanding, |   | 1,000    |       | 1,000    |       | 1,000    |       |
| Common stock Class A-1, no par value, restricted,  non-voting shares 15,900 authorized, none issued          |   | 0        |       | 0        |       | 0        |       |
| Additional paid-in capital                                                                                   |   | 148,746  |       | 148,746  |       | 148,746  |       |
| Accumulated deficit                                                                                          |   | (24,286  | )          | (43,472  | )          | (56,102  | )          |
|                                                                                                         |   |     |       |     |       |     |       |
| Total stockholders’ equity                                                                              |   | 125,460  |       | 106,274  |       | 93,644   |       |
|                                                                                                         |   |     |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                              |   | $        | 200,007    |     | $          | 144,005  |       | $ | 123,388 |   |

 

The accompanying notes are anintegral part of these balance sheets.

 

41

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**SuperTelCommunications Corp.**

 

**Statementsof Income and Accumulated Deficit**

**For theYears Ended December 31, 2002, 2001 and 2000**

 
|                                        |   | **2002** |    | **2001** |   | **2000** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                        |   |     |    |     |   |     |   |
| **REVENUES:**                               |   |     |    |     |   |     |   |
| Management fees                             |   | $        | 262,164 |     | $      | 138,927  |   | $ | 129,685 |   |
|                                        |   |     |    |     |   |     |   |
| **EXPENSES:**                               |   |     |    |     |   |     |   |
| Directors’ fees                        |   | 218,750  |    | 117,194  |   | 117,500  |   |
| Other general and administrative expenses   |   | 19,581   |    | 9,103    |   | 395      |   |
|                                        |   |     |    |     |   |     |   |
| Total administrative expenses               |   | 238,331  |    | 126,297  |   | 117,895  |   |
|                                        |   |     |    |     |   |     |   |
| **INCOME BEFORE PROVISION FOR INCOME  TAX** |   | 23,833   |    | 12,630   |   | 11,790   |   |
|                                        |   |     |    |     |   |     |   |
| Provision for income tax                    |   | 4,647    |    | —   |   | —   |   |
|                                        |   |     |    |     |   |     |   |
| **NET INCOME**                              |   | 19,186   |    | 12,630   |   | 11,790   |   |
|                                        |   |     |    |     |   |     |   |
| **ACCUMULATED DEFICIT, beginning of  year** |   | (43,472  | )       | (56,102  | )      | (67,892  | )      |
|                                        |   |     |    |     |   |     |   |
| **ACCUMULATED DEFICIT, end of year**        |   | $        | (24,286 | )        | $      | (43,472  | )      | $ | (56,102 | ) |

 

The accompanying notes are an integral part of these statements.

 

42

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**SuperTelCommunications Corp.**

 

**Statements of Cash Flows**

**For theYears Ended December 31, 2002, 2001 and 2000**

 
|                                                                           |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                           |   |     |   |     |   |     |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                     |   |     |   |     |   |     |   |
| Net income                                                                     |   | $        | 19,186 |     | $      | 12,630   |   | $ | 11,790 |   |
|                                                                           |   |     |   |     |   |     |   |
| Adjustments to reconcile income to net cash  provided by operating activities- |   |     |   |     |   |     |   |
| Decrease in accounts receivable from affiliated  company                       |   | 1,384    |   | (48,926  | )      | 18,293   |   |
| Decrease in prepaid expenses                                                   |   | 2,760    |   | —   |   | —   |   |
| Increase in accounts payable                                                   |   | 32,169   |   | 7,987    |   | —   |   |
| Increase in income tax payable                                                 |   | 4,647    |   | —   |   | —   |   |
|                                                                           |   |     |   |     |   |     |   |
| Total adjustments                                                              |   | 40,960   |   | (40,939  | )      | 18,293   |   |
|                                                                           |   |     |   |     |   |     |   |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES AND INCREASE IN CASH**            |   | 60,146   |   | (28,309  | )      | 30,083   |   |
|                                                                           |   |     |   |     |   |     |   |
| **CASH, beginning of year**                                                    |   | 3,707    |   | 32,016   |   | 1,933    |   |
|                                                                           |   |     |   |     |   |     |   |
| **CASH, end of year**                                                          |   | $        | 63,853 |     | $      | 3,707    |   | $ | 32,016 |   |

 

The accompanying notes are an integral part of these statements.

 

43

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**SuperTelCommunications Corp.**

 

**Notesto Financial Statements**

**December 31,2002, 2001 and 2000**

 

**(1)****          Reportingentity:**

 

SuperTel Communications Corp. (the Company) wasorganized on June 7, 1996, under the laws of the Commonwealth of PuertoRico.  The Company was created to serveas general partner (the General Partner) of ClearComm, L.P. (the Partnership).

 

Most of the Company’s transactions are related to the administration ofthe Partnership, a limited partnership organized on January 24, 1995,under the laws of the State of Delaware, for which the Company has served asGeneral Partner since June 18, 1996. The Partnership is scheduled to terminate on December 31, 2005, orearlier upon the occurrence of certain specific events as detailed in thePartnership agreement. On January 22, 1997, the Partnership was grantedthe PCS Block C licenses for Puerto Rico and certain western states of theUnited States.  On February 4,1999, the Partnership entered into an agreement with Telefónica Larga Distanciade Puerto Rico, Inc. (TLD); several of the relevant provisions of this agreementare the following:

 

•                  ThePartnership transferred all of its Puerto Rico licenses including its relateddebt with the FCC (the Partnership’s contribution) to NewComm WirelessServices, Inc. (NewComm), a newly organized Puerto Rico corporation owned bythe Partnership, in exchange for all of NewComm’s issued and outstanding commonstock.  Subsequently, the Partnershipsold part of its investment in NewComm, and as of December 31, 2002, thePartnership owned 76.89% of NewComm’s issued and outstanding common stock.

 

•                  TLDlent approximately $20 million to NewComm by means of a secured convertiblepromissory note payable (the Promissory Note). Payment of the Promissory Note is collateralized through the provisionsof a separate agreement pursuant to which a security interest is imposed uponNewComm’s assets and a pledge and guaranty agreement issued by the Partnership.

 

•                  Oncecertain regulatory and other requirements are met, the Promissory Note may beconverted to a certain number of shares of NewComm’s common stock correspondingto approximately 49.9% of NewComm’s.  OnMarch 12, 2002, the Partnership agreed to sell an additional 0.2% of itsshares in NewComm to TLD to bring TLD’s ownership to 50.1%; this transaction issubject to a third party valuation of NewComm’s stock and approval by the FCC permissionfor which has been formally requested.

 

•                  NewComm and TLD entered into certainmanagement and technology transfer agreements.

 

In September 1999, NewComm commencedproviding PCS services in Puerto Rico. The Company is entitled to 25% of all distributions made by thePartnership.

 

**(2)****         ****Summary ofsignificant  accounting policies:**

 

The following summarizesthe most significant accounting policies followed in the preparation of theaccompanying financial statements:

 

**Use of estimates******–

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

**Revenue recognition******–

Management servicerevenues are recognized on a monthly basis as services are provided.

 

**Investment in Partnership******–

The Company carries its investment in its 25%owned partnership on the equity basis of accounting, thus reflecting its shareof the partnership’s net income (loss) in the accompanying statement ofoperations.  (See Note 3).

 

44

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**Income taxes-**

In accounting for incometaxes, the Company uses the asset and liability approach that requires therecognition of deferred tax liabilities and assets for the expected future taxconsequences of temporary differences between the carrying amounts and the taxbases of assets and liabilities.  Avaluation allowance is recognized for ay deferred tax asset for which, based onmanagement’s evaluation, it is more likely than not (a likelihood of more than50%) that some portion of all the deferred tax asset will not be realized.

 

**(3)****         ****Investment in thePartnership:**

 

Originally, the Company acquired its 25%investment in the Partnership for $100,000. Adjustments to the recorded amount of this investment were madefollowing the equity method of accounting and in 1996 this investmentwritten-down to zero.  As ofDecember 31, 2002, the Company’s share of the undistributed losses of thePartnership amounted to approximately $33 million.  The Company would have to first recover its share of thePartnership undistributed losses before it could pick-up any share of thePartnership’s gains.

 

**(4)****         ****Related partytransactions:**

 

ClearComm’s partnership agreement, as amended, providesfor payment of a management fee to its General Partner (the Company), equal tothe reasonable costs of operating the business of the Partnership, plus 10% ofsuch aggregate amount, which fee shall be payable monthly, on the first day ofeach month during the year.  Expensesreimbursed include, but are not limited to, compensation costs, and expensesincurred by to officers, directors, and employees in the performance of theirduties.  During 2002, management feesbilled to ClearComm amounted to $262,164.

 

All other related party transactions areadvances from/to affiliated companies made in the ordinary course ofbusiness.  These advances are notinterest bearing.

 

**(5)****         ****Preferred stock:**

 

The Company is authorized to issue 1,000 sharesof restricted, non-voting, preferred stock without par value.  The preferred shares are divided intoclasses, from A to J with 100 shares of each class and upon their issuance, theCompany has the option to redeem them at their issuance price plus accrueddividends.  At December 31, 2002,none of the preferred shares had been issued.

 

**(6)****         ****Contingencies:**

 

From time to time the Company and/or thePartnership are involved in litigation arising in the ordinary course ofbusiness, some of which are ongoing. Management does not believe that any litigation involving the Company orthe Partnership will have a material adverse effect on the Company’s or thePartnership’s business or financial condition.

 

**ITEM 9****.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A****. CONTROLS AND PROCEDURES**

 

TheCompany’s management, including its President and Chief Financial Officer, haveconducted an evaluation of the effectiveness of the Company’s disclosurecontrols and procedures as defined in Exchange Act Rules 13a-14(c) and15d-14(c) as of a date within 90 days of the filing of this Annual Report onForm 10-K (the “Evaluation Date”). Based on the evaluation, the President and Chief Financial Officer concludedthat as of the Evaluation Date, the disclosure controls and procedures areeffective in ensuring that all material information required to be filed inthis annual report has been made known to them in a timely fashion.  There have been no significant changes ininternal controls, or in factors that could significantly affect internalcontrols, subsequent to the date the President and Chief Financial Officercompleted their evaluation.

 

##### **ITEM10****. DIRECTORS AND EXECUTIVE OFFICERS**

 

SuperTel Communications Corp. was incorporated in Puerto Rico inJune 1996 for the purpose of acting as the general partner (the “GeneralPartner”) of the Partnership.  SuperTelwas structured to ensure that the Partnership would receive the maximumbenefits eligible to Entrepreneurs.  ThePartnership has no employees and is managed and controlled by the Board ofDirectors and executive officers of the General Partner.

 

45

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*Fred H.Martinez, Director and Chairman of the Board*, age 58, has been chairman of the board of trusteesof the University of Puerto Rico from 1993 to 1999.  Mr. Martinez is co-managing partner of Puerto Rico’s thirdlargest law firm.  During 1977 to 1979,Mr. Martinez was director of the Puerto Rico Income Tax Bureau, member of theGovernor’s Economic Advisory Council, chairman, Committee on Section 936,Government of Puerto Rico, assistant secretary of the treasury, InternalRevenue, Puerto Rico Treasury Department (1978- 1979), president, TaxCommittee, Puerto Rico Chamber of Commerce (1978-1979).  In 1993 he was chairman of the board of theSolid Wastes Management Authority, Government of Puerto Rico.  Mr. Martinez has extensive experiencein contract negotiations, corporate and tax law, and in directing majorinstitutions.  He holds a BS in Economicsfrom Villanova University (1967), an LLB (law) from the University of PuertoRico (1971), and an LLM (taxation) from Georgetown University (1972).

 

*JavierO. Lamoso, President,*age 38, has had extensive experience in the telecommunications industryand has been responsible for developing, negotiating and overseeing numerousstrategic operational, economic and political aspects of the cellular telephoneindustry, including cell-site acquisition, environmental impacts, leasingcontractual arrangements and inter-company relations with other operatingtelecommunications organizations, including interexchange carriers and localtelephone companies.  Since 2002, Mr.Lamoso has been a member and officer of the Board of Directors of the YoungPresidents’ Organization, Puerto Rico Chapter. Until 1994, Mr. Lamoso acted as counsel to the Puerto Rico CableOperators Association in various matters, which include the negotiation ofrates and levies and the drafting of new legislation.  From 1986 to 1987 Mr. Lamoso held a non-legal position inthe corporate finance department of Simpson, Thacher & Bartlett, and wasinvolved with the 1987 successful external debt restructuring of Chile.  He holds a BA in Political Science/ Economicsfrom Fordham University (1986), and a JD in law from the University of PuertoRico (1990).

 

*Gary H.Arizala, Director*,age 64, is an entrepreneur and successful businessman.  Mr. Arizala has experience in the cellulartelephone industry serving as chairman of United Cellular Associates from 1988to the present and of Aikane Cellular from 1991 to the present.  In these capacities he directed theexecutive committee activities to oversee the development of the ME-3 RSAcellular telephone system which was successfully acquired by Telephone &Data Systems in early 1994.  In 1972Mr. Arizala founded Alphabetland Preschool and Kindergarten, which he ownsand operates.  Alphabetland provideshigh-quality childcare and preschool education services to 350 to 400 familiesannually through four child care centers located on Oahu, Hawaii, and employsapproximately 60 people.  From 1963 to1971, Mr. Arizala was an assistant civil engineer with the State of Californiaresponsible for utilities relocation for the State Water Project.  His duties included negotiating plans andagreements with Southern California Edison, Southern California Gas, the UnitedState Forest Service among other major private and public agencies.  He is on the Guardian Advisory Council ofthe National Federation of Independent Businesses Hawaii Chapter, and an activemember of the Chamber of Commerce and Small Business Hawaii organizations.  Mr. Arizala holds a BS in Civil Engineeringfrom the University of Hawaii (1963).

 

*MargaretW. Minnich, Director*,age 49, has held management and supervisory positions in finance and accountingover a 20-year period in the non-profit, manufacturing and public accountingfield.  In the past, she has been amember of the board of several privately-held companies and a privatefoundation.  From 1992 to the present,she has worked for The California Wellness Foundation and sinceDecember 1997 is serving as Vice President of Finance and Chief FinancialOfficer, and is responsible for all financial reporting, accounting, budgetingand tax functions including investment performance and asset allocation reviewof a $900 million investment portfolio, and managing cash flow for an annualbudget exceeding $45 million.  From 1984through 1990, Ms. Minnich held several key positions with MICOM CommunicationsCorporation, including manager of financial planning where she directed allaccounting and financial functions. From 1981 to 1984, Ms. Minnich was a senior accountant with Ernst &Young, Los Angeles, specializing in electronics, aerospace and heavy industryfields.  Ms. Minnich is a member of theCalifornia Society of Certified Public Accountants and Southern CaliforniaAssociation for Philanthropy.  She holdsa BA in Philosophy from the University of Southern California (1978) and an MBAin accounting from USC (1981).

 

*LawrenceOdell, Director and Secretary*, age 55, is the co-managing partner of Puerto Rico’sthird largest law firm with substantial expertise in the fields of corporatefinance, administrative law, securities and banking.  He is a member of the Trial Lawyers Association of America,served as a member of the Inter-American Law Review from 1973 to 1974, and haswritten for that publication in the past. He holds a BA (1971) and a JD (1974) from the Inter-American Universityof Puerto Rico, and a LL.M. in labor law from New York University (1975).  Mr. Odell has served in the capacity ofsecretary for several major corporations, including Buenos Aires Embotelladora,S.A. (BAESA).

 

*JamesT. Perry, Director*,age 70, is a successful entrepreneur and businessman with substantialexperience in the real estate and retail foods industries. Since 1993, Mr.Perry has purchased and sold a two-way radio license, and has been involved inseveral wireless communication partnerships. From 1987 to 1993, he was general partner of Telenode Rincon, theoriginal owner and developer of the RSA cellular telephone system for PR-1,which was successfully acquired by Cellular Communications, Inc., as well asmanaging other cellular telephone and telecommunications holdings.  From 1959 to 1975, Mr. Perry was thepresident and/or owner of several successful licensed real estate firmsincluding United Realty Group, Milwaukee, the largest black-owned real estatefirm in Wisconsin, and Perry and Sherard Realty, Milwaukee, which specializedin rehabilitating and selling between 75 to 100 properties per year utilizing astaff of approximately 30 people.  From1975 to 1992, Mr. Perry owned and operated a McDonald’s franchise in SaintLouis, Missouri, and was responsible for all operations of this successfulbusiness. Mr. Perry served in the U.S. Army in Korea, and has taken extensivecourses in the fields of general business and real estate.  From 1988 to 1992 he was vice president ofthe Ronald McDonald Children’s Charities, and from 1980 to 1984 he

 

46

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served as a member of theMcDonald’s Advertising Committee.  Hismemberships include the board of directors of the Skinker DeBaliviere BusinessAssociation, Hamilton Community Schools, Saint Louis, and the admissionscommittee of the Milwaukee Board of Realtors. He is a past president of the Urban Brokers Association, and a directorof the Multiple Listing Service.

 

###### Section 16(a) Beneficial Ownership Reporting Compliance

 

Based solely upon a review of any Forms 3, 4 and 5 and any amendmentsthereto furnished to the Registrant pursuant to Rule 16a-3(e) of the Rules ofthe Securities and Exchange Commission, the Registrant is not aware of anyfailure of any officer or director of the General Partner or beneficial ownerof more than ten percent of the Units to timely file with the Securities andExchange Commission any Form 3, 4 or 5 relating to the Registrant for 2002.

 

##### **ITEM11****. EXECUTIVE COMPENSATION**

 

The Partnership is managed by the General Partner’s Board of Directorsand executive officers of the General Partner. The Partnership reimburses the General Partner for all reasonableexpenses incurred by it in connection with managing the Partnership, includingsalaries and expenses of the General Partner’s employees who manage thePartnership.

 

The following Summary Compensation Table sets forth certain informationconcerning the cash and non-cash compensation earned by or awarded to the chiefexecutive officer of the Partnership’s General Partner.  Other than the President, no executiveofficer of the General Partner received compensation of $100,000 or more in2002.

 

**SUMMARYCOMPENSATION TABLE**

 
|                                |   | **Annual Compensation** |   | **Long-Term  Compensation   Awards** |   |         |   |
|-------------------------------------|--------|-------------------------|--------|--------------------------------------|--------|--------------|--------|
| **Name &  Principal  Position** |   | **Fiscal  Year**        |   | **Compensation   ($)**               |   | **Bonus($)** |   | **Other Annual  Compensation  ($)** |   | **Securities  Underlying  Options/SAR’s** |   | **All Other  Compensations   ($)** |   |
| Javier Lamoso, President            |   | 2002                    |   | $                                    | 75,200 |         | $      | 0 |   | $ | 203,750 | (1) | 0 |   | $ | 0 |   |
| and Director                        |   | 2001                    |   | $                                    | 75,200 |         | $      | 0 |   | $ | 122,500 | (1) | 0 |   | $ | 0 |   |
|                                |   | 2000                    |   | $                                    | 75,200 |         | $      | 0 |   | $ | 72,500 | (1) | 0 |   | $ | 0 |   |

 

----

(1)          Consists of professional fees fromClearComm and director’s fees from SuperTel.

 

On August 30, 2001,the Partnership loaned $100,000 to Javier Lamoso.  Mr. Lamoso signed a promissory note whereby he promised to paythe $100,000 plus six percent (6%) annual interest rate, on the earlier ofAugust 30, 2005 or on the date of termination of his employment with thePartnership.

 

**ITEM 12****.  SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Exclusive management and control of the Partnership’s business isvested in the General Partner.  ThePartnership has one administrative employee and is managed and controlled bythe Board of Directors and executive officers of the General Partner.  The General Partner owns 100% of thePartnership’s general partnership interest. The shares of General Partner are held by certain individuals and PuertoRico trusts.

 

The following table sets forth, as of December 31, 2002,information with respect to beneficial ownership of the Partnership’s Units by:(i) all persons known to the General Partner to be the beneficial owner of 5.0%or more thereof; (ii) each Director of the General Partner; (iii) each of theexecutive officers of the General Partner; and (iv) all executive officers andDirectors as a group of the General Partner. All persons listed have sole voting and investment power with respect totheir Units, unless otherwise indicated.

 

47

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| **Name of Beneficial Owner**                                                        |   | **Units  Beneficially  Owned** |   | **Percentage  Ownership** |   |
|-------------------------------------------------------------------------------------|--------|--------------------------------|--------|---------------------------|--------|
| Fred H. Martinez(1)                                                                 |   | 4.4                            |   | *                         |   |
| Javier O. Lamoso(2)                                                                 |   | 1                              |   | *                         |   |
| Gary H. Arizala(3)                                                                  |   | 3.4                            |   | *                         |   |
| Margaret W. Minnich(4)                                                              |   | 1                              |   | *                         |   |
| James T. Perry(5)                                                                   |   | 3.4                            |   | *                         |   |
| Lawrence Odell(6)                                                                   |   | 4.4                            |   | *                         |   |
| All executive officers and directors of the  General Partner as a group (6 persons) |   | 15.2                           |   | *                         |   |

 

----

                                                *Less than 1.0%.

 

(1)          Mr. Martínez is Chairman of the Board of Directors ofthe General Partner. Mr. Martínez and Mr. Odell are Trustees of Martinez Odell& Calabria Pension Fund, which owns 2.4 Units reflected in the table.

(2)          Mr. Lamoso is President of the GeneralPartner and a member of the Board of Directors.

(3)          Mr. Arizala is a Director.

(4)          Ms. Minnich is a Director.

(5)          Mr. Perry is a Director.

(6)          Mr. Odell is a Director and Secretary of the GeneralPartner.  Mr. Martínez and Mr. Odell aretrustees of Martínez Odell & Calabria Pension Fund, which owns 2.4 Unitsreflected in the table.

 

##### **ITEM13****. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

###### **GeneralPartnership Interest**

 

SuperTel contributed $100,000, which entitled it to receive 100% of thePartnership’s general partner interest. The general partner interest entitles the General Partner to 25% of theequity of the Partnership.  See “Item5.”

 

###### **ManagementFee**

 

The Partnership Agreement provides that the General Partner is entitledto a management fee for all reasonable operating expenses, plus 10% of suchexpenses.  The total management fee for2002 was approximately $262,000.  Themanagement fee is paid on a monthly basis.

 

###### **OtherRelationships and Transactions**

 

Mr. Martínez and Mr. Odell are partners of Martínez, Odell &Calabria, a law firm, which provides legal services to the General Partner andthe Partnership.

 

**ITEM 14****.  EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a) The following documents are filed as part of thisreport:

 

(1) Financial Statements

 

ClearComm, L.P.

 
| Report of Independent Public Accountants —  December 31, 2002 (Audited), 2001 and 2000 (Restated and   Unaudited)                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                          |
| Consolidated Balance Sheets - December 31, 2002  (Audited),  2001 and 2000 (Restated  and Unaudited)                                                |
|                                                                                                                                                          |
| Consolidated Statements of Operations for the years  ended - December 31, 2002 (Audited), 2001 and 2000 (Restated and  Unaudited)                        |
|                                                                                                                                                          |
| Consolidated Statements of Changes in Partners’  Deficit for the years ended - December 31, 2002 (Audited), 2001 and 2000  (Restated and Unaudited) |
|                                                                                                                                                          |
| Consolidated Statements of Cash Flows for the years  ended - December 31, 2002 (Audited), 2001 and  2000 (Restated and Unaudited)                   |

 

48

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| Notes to Consolidated Financial Statements |
|--------------------------------------------|
|                                       |

SuperTel Communications Corp.
|                                                                                                    |
|---------------------------------------------------------------------------------------------------------|
| Report of Independent Public Accountants –  December 31, 2002, 2001 and 2000                  |
|                                                                                                    |
| Balance Sheets - December 31, 2002, 2001 and  2000                                                 |
|                                                                                                    |
| Statements of Income and Accumulated Deficit for the  years ended December 31, 2002, 2001 and 2000 |
|                                                                                                    |
| Statements of Cash Flows for the years ended  December 31, 2002, 2001 and 2000                     |
|                                                                                                    |
| Notes to Financial Statements                                                                           |

 

(2) Financial Statement Schedules - None.

 

(3) Exhibits- None.

 

(b) Reports on Form 8-K

 

No reports on Form 8-K were filed during the last quarter of fiscal2002.

 

(c) Principal Officer Certifications – Exhibits 31 and32.

 

49

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

ClearComm, L.P.

 
| By:  SuperTel Communications Corp., General  Partner |
|----------------------------------------------------------------|
|                                                           |
| By:                                                            | /s/  Javier O. Lamoso |   |
| Name: Javier O. Lamoso                                         |
| Title: President                                               |
|                                                           |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**             |   | **Capacity  in Which Signed**      |   | **Date**         |
|---------------------------|--------|------------------------------------|--------|------------------|
|                      |   |                               |   |             |
| /s/ Fred H. Martínez |   | Director and Chairman of the Board |   | November 4, 2003 |
| Fred H. Martínez     |   |                               |   |             |
|                      |   |                               |   |             |
| /s/ Javier O. Lamoso      |   | Director and President             |   | November 4, 2003 |
| Javier O. Lamoso          |   |                               |   |             |
|                      |   |                               |   |             |
| /s/ Margaret W. Minnich   |   | Director                           |   | November 4, 2003 |
| Margaret W. Minnich       |   |                               |   |             |
|                      |   |                               |   |             |
| /s/ Lawrence Odell        |   | Director                           |   | November 4, 2003 |
|  Lawrence Odell      |   |                               |   |             |
|                      |   |                               |   |             |
| /s/ James T. Perry        |   | Director                           |   | November 4, 2003 |
| James T. Perry            |   |                               |   |             |

 

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