**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-K/A**

(Amendment No. 1)

 

**For Annual and Transition Reports toSection 13 or 15(d) of theSecurities Exchange Act of 1934**

 

| **ý**                                                                                                                                                                | **Annual Report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.**                      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                | ** **                                                                                                                |
| **For the  calendar year ended December 31, 2004**                                                                                                                   |
| ** **                                                                                                                                                                | ** **                                                                                                                |
| **or**                                                                                                                                                                    |
| ** **                                                                                                                                                                | ** **                                                                                                                |
| **o**                                                                                                                                                                     | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 (No fee required)** |
| ** **                                                                                                                                                                | ** **                                                                                                                |
| **For the  transition period from           to           ** |
| ** **                                                                                                                                                                | ** **                                                                                                                |
| **Commission  file number 0-28362**                                                                                                                                       |

 

**ClearComm, L.P.**

(Exact Name of Registrant asSpecified in its Charter)

 
| **Delaware**                                                                        | ** ** | **66-0514434**                         |
|-------------------------------------------------------------------------------------|------------|----------------------------------------|
| (State or  Other Jurisdiction of  Incorporation or Organization)                    |       | (I.R.S.  Employer  Identification No.) |
| ** **                                                                          | ** ** | ** **                             |
| **City  View Plaza-Suite 700  No. 48 of Road 165  Guaynabo, Puerto Rico** | ** ** | **00968**                              |
| (Address of  Principal Executive Offices)                                           |       | (Zip Code)                             |

 

Registrant’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 ofLimited Partnership Interest**

(Title of class)

 

Indicate bycheck mark whether the registrant: (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý  No  o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K/A or anyamendment to this Form 10-K/A.  o

 

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

 

The Registrant’soutstanding securities consist of units of limited partnership interests whichhave no readily ascertainable market value since there is no public tradingmarket for these securities on which to base a calculation of aggregate marketvalue.

 

Documents incorporated byreference.          **None**.

 

 

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**ClearComm,L.P.**

 

**CLEARCOMM, L.P. ( THE “PARTNERSHIP”) RESTATEDITS CONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEARS ENDEDDECEMBER 31, 2001 AND DECEMBER 31, 2000. OUR PRIOR INDEPENDENTACCOUNTANTS, ARTHUR ANDERSEN LLP, ARE NOT ABLE TO REISSUE THEIR REPORT RELATINGTO THE PARTNERSHIP’S FINANCIAL STATEMENTS FOR 2001 AND 2000 OR TO AUDIT THERESTATEMENT ADJUSTMENTS BECAUSE THEY CEASED OPERATIONS IN 2002.   THE PARTNERSHIP BELIEVES THAT THE EFFECT OFTHE ADJUSTMENTS MADE IN THE RESTATED 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 THE PARTNERSHIP’SINVESTORS, CREDITORS, SUPPLIERS, EMPLOYEES OR CUSTOMERS.  THEREFORE, THE PARTNERSHIP BELIEVES THAT ARE-AUDIT OF THE PARTNERSHIP’S 2001 AND 2000 CONSOLIDATED FINANCIAL STATEMENTSIS UNNECESSARY.  ACCORDINGLY, OURCONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEAR ENDED DECEMBER 31,2001 AND DECEMBER 31, 2000 ARE RESTATED AND UNAUDITED.  OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTSFOR THE CALENDAR YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 ARE INCLUDEDAS PART OF THIS ANNUAL REPORT ON FORM 10-K/A.**

 

**THE RESTATEMENTS OF THE PARTNERSHIP’S CONSOLIDATED FINANCIAL STATEMENTSFOR THE CALENDAR YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 AREDESCRIBED IN DETAIL WITHIN ITEM 7, “MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.**

 

TABLE OF CONTENTS

 

| Part I   |   |                                                                                        | 3      |
|---------------|--------|---------------------------------------------------------------------------------------------|--------|
|          |   |                                                                                        |   |
| Item  1.      |   | Business                                                                                    | 3      |
| Item 2.       |   | Properties                                                                                  | 8      |
| Item 3.       |   | Legal Proceedings                                                                           | 8      |
|          |   |                                                                                        |   |
| Part II  |   |                                                                                        | 9      |
|          |   |                                                                                        |   |
| Item 5.       |   | Market for Registrant’s Common Equity and  Related Stockholder Matters                 | 9      |
| Item 6.       |   | Selected Financial Data                                                                     | 9      |
| Item 7.       |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 12     |
| Item 7A.      |   | Quantitative and Qualitative Disclosures  About Market Risk                                 | 20     |
| Item 8.       |   | Financial Statements and Supplementary Data                                                 | 22     |
| Item 9.       |   | Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure       | 56     |
| Item 9A.      |   | Controls and Procedures                                                                     | 56     |
|          |   |                                                                                        |   |
| Part III |   |                                                                                        |   |
|          |   |                                                                                        |   |
| Item 10.      |   | Directors and Executive Officers of the Registrant                                          | 56     |
| Item 11.      |   | Executive Compensation                                                                      | 58     |
| Item 12.      |   | Security Ownership of Certain Beneficial  Owners and Management                             | 59     |
| Item 13.      |   | Certain Relationships and Related Transactions                                              | 60     |
|          |   |                                                                                        |   |
| Part IV  |   |                                                                                        |   |
|          |   |                                                                                        |   |
| Item 14.      |   | Principal Accounting Fees and Services                                                      | 60     |
| Item 15.      |   | Exhibits, Financial Statement Schedules,  and Reports on Form 8-K                      | 61     |
|          |   |                                                                                        |   |
| SIGNATURES    |   |                                                                                        | 63     |

 

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##### **Part I**

 

##### **FORWARD-LOOKINGSTATEMENTS**

#####  

ThisForm 10-K/A and future filings by the Partnership on Form 10-Q andForm 8-K and future oral and written statements by the Partnership mayinclude certain forward-looking statements, including (without limitation)statements with respect to anticipated future operating and financialperformance, growth opportunities and growth rates, acquisition and divestitureopportunities, and other similar forecasts and statements of expectation. Wordssuch as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”and “should,” and variations of these words and similar expressions, areintended to identify these forward-looking statements.  Forward-looking statements by the Partnershipare based on estimates, projections, beliefs and assumptions of management andare not guarantees of future performance. The Partnership disclaims anyobligation to update or revise any forward-looking statement based on theoccurrence of future events, the receipt of new information, or otherwise.

 

Actual futureperformance, outcomes and results may differ materially from those expressed inforward-looking statements made by the Partnership as a result of a number ofimportant factors.  Examples of thesefactors include, without limitation, 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.  Inaddition to these factors, actual future performance, outcomes and results maydiffer materially because of other, more general, factors including, withoutlimitation, general industry and market conditions and growth rates, domesticand international economic conditions, governmental and public policy changesand the continued availability of financing in the amounts, at the terms and onthe conditions necessary to support the Partnership’s future business.

 

##### **ITEM 1.****  BUSINESS**

#####  

**General**

 

ClearComm,L.P., a Delaware limited partnership (the “Partnership” or “ClearComm”), wasformed on January 24, 1995 under the name PCS 2000, L.P., to own and operatebroadband personal communications services (“PCS”) licenses to be acquired inauctions conducted by the Federal Communications Commission (the “FCC”).  The Partnership competed for PCS licenses infrequency 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”).

 

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

 

The Agreementof Limited Partnership of the Partnership (the “Partnership Agreement”)provides that the Partnership will terminate on December 31, 2005. ThePartnership will dissolve on such date (unless terminated earlier or unless thePartnership Agreement is amended to change such date).  The Partnership Agreement also provides for areasonable time to wind-up the affairs of the Partnership in case oftermination.  The Partnership’s GeneralPartner, SuperTel Communications Corporation, is considering alternatives todissolution, including an extension of the Partnership’s termination date thatwould require the consent of the Partnership’s partners.

 

**NewComm**

 

In August 2004, the Partnership retainedthe services of a consulting firm (other than its external auditors) to auditthe operations and performance of NewComm under the management of TelefónicaMoviles, S.A. (“TEM”).  The results

 

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of the audit werereported to the Board of Directors of NewComm on September 30, 2004 withthe conclusion that TEM had not performed adequately.  Under the Partnership’s direction, the Boardof Directors of NewComm terminated TEM as Manager under the ManagementAgreement on October 28, 2004. Arbitration proceedings have begun in accordance to the Joint VentureAgreement.  See discussion below at ThePuerto Rico Network and Legal Proceeding sections.

 

**The Puerto Rico Network**

 

ThePartnership and NewComm started building its Puerto Rico Network during thefirst quarter of 1999 and the system commenced commercial operations onSeptember 24, 1999.  The Partnershipwas the fifth entrant into the Puerto Rico wireless telecommunications market.  It currently provides wireless coverage inthe areas where 95% of the Puerto Rico wireless traffic occurs andexpanding.  The Partnership hasestablished points of sale in all major shopping districts and has over 200points of sale throughout Puerto Rico. The Partnership believes that it currently has approximately 8% of thePuerto 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), thewireless communications affiliate of Telefónica, currently has approximately 32million subscribers worldwide.  Pursuantto the terms of the TLD Agreement, the Partnership transferred the Puerto RicoLicenses (including its related debt) and associated business plans and studiesto NewComm.  TLD provided NewComm a loanof approximately $19.96 million and received a secured convertible promissorynote (the “Note”) which entitles TLD to select a director for one of the fiveNewComm board of director seats (the “Board”).  The Note was assigned to TEM onSeptember 23, 2003.  The Note isconvertible into 49.9% of NewComm’s equity. The Note cannot be converted without FCC authorization.  NewComm and TEM entered into a managementagreement whereby TEM provided day-to-day management services for NewComm,subject to the supervision of NewComm’s Board. Pursuant to a certain Stock Purchase Agreement dated as ofMarch 12, 2002, by and between the Partnership and TLD, the Partnershiphad agreed to sell 0.2% control interest at market value to TEM.  The transfer of this control interest wasapproved by the FCC during 2004. As part of the requirements of the StockPurchase Agreement, TEM (and Telefónica Internacional, S.A., its parentcompany) had agreed to issue their corporate guarantee as collateral forlong-term financing of NewComm of approximately $110 million.  Together with the Stock Purchase Agreementand as part of the transaction a Shareholders’ Agreement and a Sale Agreementwere executed between the parties.  TheShareholders’ Agreement provides for a great number of general and specificprotections and rights for the Partnership as a minority shareholder inNewComm.  The Sale Agreement provides fora convenient exit for the Partnership from NewComm.  Under the Joint Venture Agreement thePartnership’s principal means of exiting from NewComm was by exercisingRegistration Rights against TEM.  Due toTelefónica’s re-organization and new market conditions, the possibility ofpublicly registering an exclusive wireless service company limited to thePuerto Rico market is very unlikely. However, under the Sale Agreement, the Partnership can force the sale ofNewComm to TEM and/or third parties.

 

The SaleAgreement provides that from and after May 12, 2003, either party (thePartnership or TLD) may trigger a shareholder obligation to sell NewComm.  Within 30 days of a notice of sale, TEM (orthe Partnership as the case may be) would have the right to purchase thePartnership’s (or TEM’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 TEM does not exercise itsright to buy out the Partnership’s interest, TEM is bound, together with thePartnership, to proceed with the sales process to attempt a sale ofNewComm.  TEM and the Partnership arebound to accept the highest price proposed by an interested buyer, which pricemust be payable in cash or freely tradable securities, or a combinationthereof, and which must be for a price not less than the valuation prepared bythe investment banker.  At the closing ofthe sale the Management Agreement and the Technology Transfer Agreementoriginally held by TLD (and assigned to TEM) will terminate withoutcompensation, and no premium for controlling interest or discount for holding aminority interest in NewComm will apply.

 

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

 

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

 

LucentTechnologies, Inc. (“Lucent”) built the Puerto Rico Network on behalf ofNewComm.  The Partnership continuesoptimizing the network to maintain and offer better quality service to itscustomers.

 

**The Puerto Rico Market**

 

ThePartnership believes that the Puerto Rico market provides many uniqueadvantages for telecommunications companies. Puerto Rico is politically stable, as it has been a territory of theUnited States for over 100 years and its economy is fully integrated with thatof the United States mainland.  It hasthe Caribbean’s best-educated, most skilled labor force and the most sophisticatedmanufacturing 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 with its U.S.-linked stability, Puerto Rico offers the advantageof emerging market type growth and significant cash based economy.  The Partnership believes that current percapita income and consumption in Puerto Rico, combined with continued economicgrowth will support continued demand for high quality telephone services, whichNewComm is offering.

 

**Competition in Puerto Rico**

 

The continuedsuccess of the Partnership’s PCS business in Puerto Rico will depend upon itsability to compete with five other wireless operators (including Verizon,Sprint PCS, SunCom, Centennial and Cingular) and potential future wirelesscommunications providers in the Puerto Rico market.  All wireless operators compete in theoptimization of their networks to provide a better service for theircustomers.  As wireless use increases,wireless operators compete more directly with traditional landline telephoneservice providers and other technologies including mobile satellite systems andcable operators offering voice communications. In addition, the availability of new spectrum and resale of existingspectrum and the entry of new participants may result in increased competitionin the Puerto Rico market.  At the end of2004, Puerto Rico had a wireless market penetration of approximately 47% whilethe United States mainland ended the same year with an approximate marketpenetration of 57%.

 

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**Markets**

 

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

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

 

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*              Basedon US Census Bureau 2000 figures.

 

**Internet Surfing Stores of Puerto Rico, Inc**

 

OnApril 16, 2002, the Partnership entered into a Shareholders’ Agreement toform a joint venture with eMilios International, L.L.C., a Florida limitedliability company, to promote and establish in Puerto Rico the eMilios concept(described below).  The joint venture wasformed under a Puerto Rico corporation named Internet Surfing Stores of PuertoRico, Inc. (“ISS”).  The Partnershipowns 49% and eMilios International owns 51% of ISS.

 

The eMiliosconcept involves internet communication galleries that are geared towardseducating people in the use of computers and the internet, and acts as acommunication and recreational center as well. The broadband connectivity that is offered at eMilios allows the stores toefficiently offer internet communications and also access to a great variety ofinteractive content, such as cyber games, as well as software and tools forfree lancers and small business entities. The service is provided and collected with a proprietary smart card andsoftware application.  The Partnership isresponsible for the management and day to day operations of ISS.  ISS opened its first store with 48 computerstations on October 23, 2002.  Asecond store with 40 computer stations was inaugurated on January 11, 2003to serve the western part of Puerto Rico. The Partnership has decided toconcentrate its operations on the San Juan area and decided to close the storelocated in Mayaguez effective December 31, 2004.  As a result, the Partnership has written downits investment in the subsidiary by $165,306 to reflect the change.  The investment has an exit mechanism wherebyat any time after 2003, the Partnership can force the acquisitions of itsshares in ISS or the sale of the whole company.

 

**Regulation**

 

Overview

 

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

 

PCS is aradio-based transmission technology, which, like cellular technology, uses thesame frequencies repeatedly in a multiple-transmitter cell design.  PCS is a digital technology, capable ofnumerous advanced service features, including caller-ID, voice-prompting, voice-recognition,scrambled (secure) calling, message and image delivery, intelligent calltransfer and follow-me calling, single number service (the same number can beassigned to multiple PCS telephones in different locations) and auto-trace ofcrank callers. The Partnership has been offering E-mail and internet accessfrom its handsets since June of 2000. The Partnership began offering wireless banking services inOctober of 2000.  The Partnershipalso pioneered in the Puerto Rico market short text messaging services from itshandsets in October of 2001.  Anaverage of 600,000 text messages per month is being sent by subscribers fromtheir handsets.

 

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Frequency Blocks

 

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

 

Entrepreneur Classes and Economic Preferences

 

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

 

SmallBusinesses were entitled to make interest-only payments for the first six yearsand can amortize interest and principal over the remaining four years of thelicense term.  The interest rateapplicable to Small Businesses is the 10-year treasurynote rate at the date of grant of the license. In addition, Small Businesses were entitled to a bidding credit of25%.  In March 1997, the FCC issuedan order suspending indefinitely interest payments on all Block C licenses;however, interest continued to accrue. Ultimately, in accordance with the FCC procedures specified in the FCC’sMarch 24, 1998 Order on Reconsideration of the Second Report and Order(the “Reconsideration Order”), the Partnership commenced interest paymentsduring July, 1998. The Partnership originally owed $51.3 million exclusively inconnection with the Puerto Rico License. As of December 31, 2004 thePartnership owes the FCC the principal amount of $33.6 million.

 

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

 

Build-Out Requirements

 

ThePartnership has complied with its build out requirements for the Puerto RicoLicenses.

 

Employees

 

ThePartnership, including its majority owned subsidiary NewComm, had approximately378 employees at the end of 2004. On November of 2004, approximately 35employees were terminated as part of an organizational restructuring plan.

 

Available Information

 

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

 

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

 

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

#####  

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

 

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

#####  

In August 2004, the Partnership retainedthe services of a consulting firm (other than its external auditors) to auditthe operations and performance of NewComm under the management of TEM.  The results of the audit were reported to theBoard of Directors of NewComm on September 30, 2004, with the conclusionthat TEM had not performed adequately. Under the Partnership’s direction, the Board of Directors of NewCommterminated TEM as the Manager of NewComm under the Management Agreement onOctober 28, 2004.

 

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

 

##### From time to time thePartnership 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.

 

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**Part II**

 

**ITEM 5.****  MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

 

There is notrading market for the Units, and it is unlikely that a trading market willexist at any time in the future.  Anytransfer of the Units is severely restricted by certain conditions outlined inthe Partnership Agreement, and requires the consent of the Partnership’sGeneral Partner, SuperTel Communications Corp., which can be withheld in theGeneral Partner’s sole reasonable discretion.

 

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

 

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

 

There havebeen 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 tothe Partnership’s Form 10-K, filed March 31, 1997.  As a general rule, the General Partner shallcause the Partnership to make distributions, if any, of cash flow received fromoperations of the Partnership which the General Partner, in its solediscretion, determines to distribute to Investors (“Cash Flow”).  All distributions will be made 75% to theInvestors and 25% to the General Partner. Distributions to the Investors shall be made in proportion to the numberof Units held by each Investor on the last day of the calendar quarter to whichsuch distribution relates.

 

Theavailability of Cash Flow for distribution to the Investors is dependent uponthe Partnership earning more than its expenses. No assurance can be given that income in any given year will besufficient to generate Cash Flow for distribution to the Investors or thatthere will not be cash deficits. Further, because operating expenses aresubject to increases, and increases in revenue from Partnership operations maybe subject to market limitations, income from the Partnership in any year maynot be sufficient to generate Cash Flow.

 

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

 

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

 

##### **ITEM 6.****  SELECTED FINANCIAL DATA**

#####  

The followingtable summarizes selected consolidated financial data of the Partnership fromthe period from January 1, 2000 to December 31, 2000, fromJanuary 1, 2001 to December 31, 2001 January 1, 2002 toDecember 31, 2002, from January 1, 2003 to December 31, 2003 andfrom January 1, 2004 to December 31, 2004.  This information should be read inconjunction with the Partnership’s audited consolidated financial statementsand related notes thereto and management discussion contained herein.

 

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**Statements of Operations Data**

 
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | **Restated and Unaudited** | ** **      |
|---------------------------------------------------------|------------|------------------|-----------------|------------------|------------|------------------|------------|----------------------------|-----------------|
| ** **                                              | ** ** | **December 31,** | ** **      | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,**           | ** **      |
| ** **                                              | ** ** | **2004**         | ** **      | **2003**         | ** ** | **2002**         | ** ** | **2001**                   | ** **      | **2000** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Revenues:**                                           | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Service revenues**                                    | ** ** | **$**            | **100,336,047** | ** **       | **$**      | **101,557,423**  | ** ** | **$**                      | **99,779,656**  | ** ** | **$** | **112,025,407** | ** ** | **$** | **79,906,400** | ** ** |
| **Handsets and accessories sales**                      | ** ** | **4,665,889**    | ** **      | **7,336,689**    | ** ** | **8,177,441**    | ** ** | **11,710,520**             | ** **      | **12,104,805** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Total Revenues**                                      | ** ** | **105,001,936**  | ** **      | **108,894,112**  | ** ** | **107,957,097**  | ** ** | **123,735,927**            | ** **      | **92,011,205** | ** ** |
| **Expenses:**                                           | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Operating expenses**                                  | ** ** | **125,455,367**  | ** **      | **117,358,908**  | ** ** | **117,905,555**  | ** ** | **136,940,300**            | ** **      | **133,397,603** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Income (loss) from operations**                       | ** ** | **(20,453,431**  | **)**           | **(8,464,796**   | **)**      | **(9,948,458**   | **)**      | **(13,204,373**            | **)**           | **(41,386,398** | **)** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Interest expense**                                    | ** ** | **(9,470,793**   | **)**           | **(13,312,468**  | **)**      | **(16,212,644**  | **)**      | **(20,172,216**            | **)**           | **(11,141,769** | **)** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Loss before other income (expense)**                  | ** ** | **(29,924,224**  | **)**           | **(21,777,264**  | **)**      | **(26,161,102**  | **)**      | **(33,376,589**            | **)**           | **(52,528,167** | **)** |
| **Other Income (expense)**                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Gain on sale of California Licenses**                 | ** ** | **4,168**        | ** **      | **—**       | ** ** | **—**       | ** ** | **—**                 | ** **      | **—** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Gain on sale of investment in stock of  subsidiary**  | ** ** | **—**       | ** **      | **—**       | ** ** | **13,000,000**   | ** ** | **—**                 | ** **      | **—** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Equity in net loss of subsidiary**                    | ** ** | **(115,382**     | **)**           | **(140,608**     | **)**      | **(114,746**     | **)**      | **—**                 | ** **      | **—** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Interest income**                                     | ** ** | **126,827**      | ** **      | **213,369**      | ** ** | **249,661**      | ** ** | **548,002**                | ** **      | **490,309** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Gain on sale of Visalia-Porterville license**         | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | **4,814,337**              | ** **      | **—** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Other**                                               | ** ** | **1,292**        | ** **      | **337**          | ** ** | **1,113**        | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Write-down of investment in subsidiary**              | ** ** | **(165,306**     | **)**           | **—**       | ** ** | **—**       | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Realized loss on sale of investment in  securities**  | ** ** | **(56,518**      | **)**           | **—**       | ** ** | **—**       | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Loss on write-off of inventories**                    | ** ** | **—**       | ** **      | **(4,742,559**   | **)**      | **—**       | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Write-off of discount on note payable to  FCC**       | ** ** | **—**       | ** **      | **(3,913,661**   | **)**      | **—**       | ** ** | **—**                 | ** **      | **—** | ** ** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Net loss**                                            | ** ** | **$**            | **(30,129,143** | **)**            | **$**      | **(30,360,386**  | **)**      | **$**                      | **(13,025,074** | **)** | **$** | **(28,014,250** | **)** | **$** | **(52,037,858** | **)** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Net loss attributable to General Partner**            | ** ** | **$**            | **(30,129,143** | **)**            | **$**      | **(30,360,386**  | **)**      | **$**                      | **(13,025,074** | **)** | **$** | **(28,014,250** | **)** | **$** | **(25,765,959** | **)** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Net loss attributable to Limited Partners**           | ** ** | **$**            | **—**      | ** **       | **$**      | **—**       | ** ** | **$**                      | **—**      | ** ** | **—** | ** ** | **$** | **(26,271,898** | **)** |
| ** **                                              | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Net loss per unit attributable to Limited  Partners** | ** ** | **$**            | **—**      | ** **       | **$**      | **—**       | ** ** | **$**                      | **—**      | ** ** | **—** | ** ** | **$** | **(9,035** | **)** |
|                                                         |            |                  |                 |                  |            |                  |            |                            |                 |  |  |  |  |  |  |  |  |

 

10

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**Balance Sheets Data**

 
| ** **                                                                                                                       | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | **Restated and Unaudited** | ** **      |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-----------------|------------------|------------|------------------|------------|----------------------------|-----------------|
| ** **                                                                                                                       | ** ** | **December 31,** | ** **      | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,**           | ** **      |
| ** **                                                                                                                       | ** ** | **2004**         | ** **      | **2003**         | ** ** | **2002**         | ** ** | **2001**                   | ** **      | **2000** | ** ** |
| **ASSETS:**                                                                                                                      | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Cash and cash equivalents**                                                                                                    | ** ** | **$**            | **10,612,430**  | ** **       | **$**      | **1,007,353**    | ** ** | **$**                      | **22,709,786**  | ** ** | **$** | **10,241,902** | ** ** | **9,338,798** | ** ** |
| **Cash in escrow account**                                                                                                       | ** ** | **—**       | ** **      | **1,500,000**    | ** ** | **—**       | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Accounts receivable, net**                                                                                                     | ** ** | **7,909,573**    | ** **      | **12,297,162**   | ** ** | **11,594,949**   | ** ** | **19,099,986**             | ** **      | **20,049,769** | ** ** |
| **Accounts receivable, other**                                                                                                   | ** ** | **4,204,524**    | ** **      | **7,457,028**    | ** ** | **6,483,255**    | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Insurance claim receivable**                                                                                                   | ** ** | **403,657**      | ** **      | **—**       | ** ** | **270,002**      | ** ** | **1,496,324**              | ** **      | **1,256,285** | ** ** |
| **Interest receivable**                                                                                                          | ** ** | **20,000**       | ** **      | **14,000**       | ** ** | **8,000**        | ** ** | **2,000**                  | ** **      | **—** | ** ** |
| **Inventories**                                                                                                                  | ** ** | **1,304,392**    | ** **      | **3,908,736**    | ** ** | **10,461,112**   | ** ** | **10,305,254**             | ** **      | **12,977,164** | ** ** |
| **Prepaid expenses**                                                                                                             | ** ** | **841,750**      | ** **      | **672,406**      | ** ** | **625,610**      | ** ** | **652,279**                | ** **      | **751,603** | ** ** |
| **Investment in Securities**                                                                                                     | ** ** | **—**       | ** **      | **7,338,288**    | ** ** | **10,000,000**   | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Leasehold rights, net**                                                                                                        | ** ** | **3,314,144**    | ** **      | **—**       | ** ** | **—**       | ** ** | **—**                 | ** **      | **—** | ** ** |
| **Investment in Subsidiary**                                                                                                     | ** ** | **247,959**      | ** **      | **397,980**      | ** ** | **277,254**      | ** ** | **—**                 | ** **      | **—** | ** ** |
| **PCS licenses, net**                                                                                                            | ** ** | **46,750,449**   | ** **      | **57,517,974**   | ** ** | **57,517,974**   | ** ** | **57,517,974**             | ** **      | **64,838,452** | ** ** |
| **Deferred financing costs**                                                                                                     | ** ** | **635,824**      | ** **      | **774,363**      | ** ** | **901,235**      | ** ** | **906,731**                | ** **      | **1,730,047** | ** ** |
| **Note receivable from officer**                                                                                                 | ** ** | **100,000**      | ** **      | **100,000**      | ** ** | **100,000**      | ** ** | **100,000**                | ** **      | **—** | ** ** |
| **Property and equipment, net**                                                                                                  | ** ** | **80,546,773**   | ** **      | **90,753,422**   | ** ** | **101,931,922**  | ** ** | **102,095,953**            | ** **      | **97,002,140** | ** ** |
| ** **                                                                                                                       | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| ** **                                                                                                                       | ** ** | **$**            | **156,891,475** | ** **       | **$**      | **183,738,712**  | ** ** | **$**                      | **222,881,099** | ** ** | **202,418,403** | ** ** | **207,944,258** | ** ** |
| ** **                                                                                                                       | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT):**                                                                            | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Accounts payable and accrued Liabilities**                                                                                     | ** ** | **$**            | **48,810,130**  | ** **       | **$**      | **40,224,333**   | ** ** | **$**                      | **47,022,094**  | ** ** | **$** | **41,642,052** | ** ** | **$** | **45,743,223** | ** ** |
| **Notes payable — short-term**                                                                                              | ** ** | **136,836,780**  | ** **      | **113,816,297**  | ** ** | **82,647,544**   | ** ** | **133,321,837**            | ** **      | **121,000,000** | ** ** |
| **Notes payable — long-term**                                                                                               | ** ** | **90,226,258**   | ** **      | **117,390,809**  | ** ** | **150,505,987**  | ** ** | **81,723,962**             | ** **      | **72,456,233** | ** ** |
| ** **                                                                                                                       | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **Unitholders’ capital (deficit) 2,765.20 Units in 2004, 2,906.1 Units  in 2003, 2002, and 1 general Partnership interest** | ** ** | **(118,981,693** | **)**           | **(87,692,727**  | **)**      | **(57,294,526**  | **)**      | **(54,269,448**            | **)**           | **(31,255,198** | **)** |
| ** **                                                                                                                       | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| ** **                                                                                                                       | ** ** | **$**            | **156,891,475** | ** **       | **$**      | **183,738,712**  | ** ** | **$**                      | **222,881,099** | ** ** | **$** | **202,418,403** | ** ** | **$** | **207,944,258** | ** ** |
| ** **                                                                                                                       | ** ** | ** **       | ** **      | ** **       | ** ** | ** **       | ** ** | ** **                 | ** **      | ** ** | ** ** |
| **BOOK VALUE PER UNIT**                                                                                                          | ** ** | **$**            | **(40,928**     | **)**            | **$**      | **(30,165**      | **)**      | **$**                      | **(19,708**     | **)** | **(18,668** | **)** | **(10,751** | **)** |

 

11

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| **ITEM 7.** | ** ** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

 

**Introduction**

 

ThePartnership was formed in January 1995 and is managed by its GeneralPartner, 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 is the controlling entity ofNewComm, which in turn owns and operates two 15 MHz PCS licenses coveringPuerto Rico (“the Puerto Rico Licenses”).

 

ThePartnership owned certain PCS licenses in California.  On August 28, 2000, the Partnershipentered into a Purchase and Sale Agreement with Leap Wireless International (“LeapWireless”), pursuant to which the Partnership sold the Visalia-Portervillelicense to Leap Wireless in exchange for a $9,500,000 cash payment.  The sale was approved by the FCC and closedon June 8, 2001.

 

OnNovember 26, 2003, the Partnership entered into a Purchase and SaleAgreement with Metro PCS pursuant to which the Partnership sold all of itsremaining California Licenses.  The salewas approved by the FCC and the licenses were transferred to Metro PCS onApril 15, 2004 for a $10,900,000 cash payment.  The Partnership has no other licenses inCalifornia.

 

ThePartnership commenced commercial operations of its PCS network in Puerto Ricoon September 24, 1999, when it began offering wireless services in PuertoRico to the public.  Prior to that 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.

 

ThePartnership established its Puerto Rico network by forming a wholly ownedsubsidiary, NewComm, on January 29, 1999. On February 4, 1999, the Partnership and NewComm entered into anagreement with TLD, whereby the Partnership contributed its two Puerto RicoLicenses to NewComm and TLD provided NewComm a $19,960,000 loan to develop thePuerto 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 could not be converted without FCC authorization, which wasgranted in 2004.

 

ThePartnership has agreed to sell shares in NewComm to TEM in sufficient amount toprovide TEM with an additional 0.2% share interest in NewComm, enabling TEM tohave a total of 50.1% control interest in NewComm.  The transaction involves a Stock PurchaseAgreement, a Shareholders Agreement, and a Sale Agreement.  A summary of the terms of the sale and theseagreements is provided below.

 

**The Stock Purchase Agreement**

 

The purchaseprice for the 0.2% share interest in NewComm will be determined after allconditions to closing are obtained.  Theprincipal conditions for this closing are the closing of the long termfinancing for NewComm and the final approval by the FCC, which was granted in2004.  At such time, the Partnership andTEM 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 investmentbanking firm will use a combination of various methodologies for its valuation,including:  discounted cash flows,comparable transactions and trading prices of comparable transactions, andtrading prices of comparable publicly held companies; and in the application ofsuch methodologies will use acceptable industry standards.  Payment will be in cash.

 

12

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**The Shareholders Agreement**

 

Inconsideration of the sale of a controlling interest in NewComm a newShareholders Agreement will become effective upon the closing of the StockPurchase Agreement.  The ShareholdersAgreement will 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 tothe above, the Partnership will have approval rights with respect to a number ofNewComm’s actions including the following: any transaction between NewComm anda shareholder or an affiliate of such shareholder, other than the ManagementAgreement and the Technology Transfer Agreement; the annual strategic businessplan and operating budgets for each calendar year and any variations ormodifications which individually or in the aggregate exceed 10 percent of theoperating budget for such annual period; the appointment of the generalmanager, the director of finance and all directors of each division of NewComm,as well as the compensation of each such person, consent to which shall not beunreasonably withheld; the engagement of a new marketing consultant and theemployment of marketing strategies, promotions, advertising and product developmentdifferent from those in effect on the date hereof, consent to which shall notunreasonably be withheld; any modification to the Certificate of Incorporationor Bylaws of NewComm that would have an adverse effect on any rights granted toa shareholder thereunder or under applicable law; and any amendments ormodifications to the Management Agreement or the Technology Transfer Agreementin effect as of the Effective Date.  ThePartnership will have the right to appoint four directors and TEM will have theright to appoint five directors.

 

13

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**The Sale Agreement**

 

The new SaleAgreement provides that the Partnership (or TEM) may trigger a shareholderobligation to sell NewComm.  Within 30days of a notice of sale, TEM (or the Partnership as the case may be) wouldhave the right to purchase the Partnership’s (or TEM’s) interest.  The purchase price to be paid at that timewould be based on a valuation performed by the investment-banking firm thatprepared the valuation under the Stock Purchase Agreement.

 

If TEM doesnot exercise its right to buy out the Partnership’s interest, the shareholderswill be bound to proceed with the sales process to attempt a sale ofNewComm.  All shareholders are bound tocooperate and undertake all that is necessary in that effort.  Further, the shareholders are bound to acceptthe highest price proposed by an interested buyer, which price must be payablein cash or freely tradable securities, or a combination thereof, and which mustbe for a price not less than the valuation prepared by the investment banker.

 

Someadditional points are that at the closing of the sale of NewComm the ManagementAgreement and the Technology Transfer Agreement held now by TEM willterminate.  Also, no premium forcontrolling interest or discount for holding a minority interest in NewCommwill apply.

 

The SaleAgreement shall continue in full force and effect even if the Stock PurchaseAgreement with TEM, for whatever reason, does not close.

 

**Project Finance Facility**

 

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

 

An agreementrestructuring Lucent’s outstanding debt has been attained and it was executedon June 4, 2003.  The nowoutstanding debt to Lucent is $48.5  million and is payable over a six-yearperiod at 8% annual interest rate.  OnJune 20, 2003, an agreement restructuring Alcatel’s debt wasexecuted.  Alcatel’s credit is now $2.5million at 6.5% payable over a three year period.

 

**California Licenses**

 

OnAugust 28, 2000, the Partnership entered into a Purchase and SaleAgreement with Leap Wireless International (“Leap Wireless”), pursuant to whichthe 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.

 

OnNovember 26, 2003, the Partnership entered into a Purchase and SaleAgreement with Metro PCS pursuant to which the Partnership sold all of itsremaining California Licenses.  The salewas approved by the FCC and the licenses were transferred to Metro PCS onApril 15, 2004 for a $10,900,000 cash payment.  The Partnership has no other licenses inCalifornia.

 

**Critical Accounting Policies**

 

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

 

We rely on the use ofestimates and make assumptions that impact our financial condition andresults.  These estimates and assumptionsare based on historical results and trends as well as our forecasts as to howthese might change in the future.  Someof the most critical accounting policies that might materially impact ourresults include:

 

14

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Valuation of Accounts 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

 

15

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

 

Effective January 1, 2003 we changed our method to account for theloss on sale of handsets to customers, from the recognition of such loss at thetime of sale, to the establishment of an inventory reserve to account for thatloss at the end of each accounting period.

 

*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 during2004, 2003 and 2002.  If the estimatesused to measure impairment are insufficient for any reason, our net income orloss would be reduced or increased, respectively.

 

*Valuation of Intangibles (PCS Licenses) –*Becauseof the adoption by the Partnership of SFAS 142 (Goodwill and other Intangibleassets) 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 years endedDecember 31, 2004, 2003 and 2002. We will perform the impairment test at least every quarter or as soon asanything comes to our attention that could cause us to believe that therecorded balance of the PCS Licenses may be affected.  If the estimates used to measure impairmentare insufficient for any reason, our net income or loss would be reduced orincreased, respectively.

 

Revenue Recognition

 

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

 

**Restatement of Financial Statements**

 

Management restated the Partnership’s financial statements for 2001 and2000, as described in Note 2 to the audited consolidated financial statementsincluded as part of the 2003 Annual Report on Form 10-K.  Our prior independent accountants are notable to reissue their report relating to the Partnership’s financial statementsfor 2001 and 2000 or to audit the restatement adjustments described in Note 2because they ceased operations in 2002. Our successor independent accountants, Kevane Soto Pasarell GrantThornton LLP have not audited such year and do not issue an opinion on thefinancial statements for the calendar year ended December 31, 2001 andDecember 31, 2000.  Our successorindependent accountants have only audited our financial statements for thecalendar years ended December 31, 2004, 2003 and 2002 and have issued theIndependent Auditor’s report included herein.

 

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

 

**Impact of Unaudited Financial Statements**

 

As explained above and in Note 2 to the audited consolidated financialstatements for the calendar years ended December 31, 2003 and 2002, ourconsolidated financial statements for the calendar year ended December 31,2001 and December 31, 2000 have been restated. Our prior independent accountantsare not able to reissue their report relating to the Partnership’s financialstatements for 2001 or to audit the restatement adjustments described inNote 2 because they ceased operations in 2002.  We believethat the effect of the adjustments made in the re-stated financial statements,and the nature of the accounting issues addressed by those adjustments, do nothave a material effect on the Partnership’s financial position as a whole or onthe Partnership’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 year ended December 31,2001 and December 31, 2000 are restated and unaudited.  Our audited consolidated financial statementsfor the calendar years ended December 31, 2004, 2003 and 2002 are includedas part of this Annual Report on Form 10-K/A.

 

16

----

 

**Results of Operations - 2004 Compared to 2003**

 

The Partnership’s Consolidated revenues for the year endedDecember 31, 2004, which amounted to $105,001,936 ($108,894,112 in 2003),included $100,336,047 ($101,557,423 in 2003) in service revenues and$4,665,889  ($7,336,689 in 2003) inhandset and accessories sales generated from NewComm’s wireless operations. The36% decrease in handsets and accessories revenues is mainly due to handset unitpricing adjustments.  The 1% decrease inservice revenues is related to a reduction of the subscriber base which wasmostly offset by airtime consumption of existing customers and to a shifting ofthe customer base from prepaid customers to contract customers.  The Partnership’s operations are notmaterially affected 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***

 

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

 

17

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| ** **                                            | ** ** | **2004**   | ** **  | **2003**   | ** ** | **Variances** | ** ** |
|-------------------------------------------------------|------------|------------|-------------|------------|------------|---------------|------------|
| Cost of handsets and accessories sold                 |       | $          | 24,352,074  |       | $          | 22,523,576    |       | 8 | % |
| Salaries and benefits                                 |       | 15,642,745 |        | 15,169,673 |       | 3             | %          |
| Provision for doubtful accounts                       |       | 14,762,108 |        | 8,907,241  |       | 66            | %          |
| Salesmen and dealers commissions                      |       | 11,652,417 |        | 8,375,695  |       | 39            | %          |
| Depreciation                                          |       | 17,811,034 |        | 17,272,191 |       | 3             | %          |
| Advertising expense                                   |       | 6,936,679  |        | 7,353,590  |       | -6            | %          |
| Rent expense                                          |       | 6,922,312  |        | 6,755,926  |       | 2             | %          |
| Network operation and maintenance expense             |       | 4,479,139  |        | 5,559,349  |       | -19           | %          |
| Taxes, other than income                              |       | 3,952,175  |        | 4,945,218  |       | -20           | %          |
| Interconnection expense                               |       | 2,798,991  |        | 4,245,415  |       | -34           | %          |
| Services rendered by related parties                  |       | 4,930,413  |        | 3,621,826  |       | 36            | %          |
| Legal and consulting fees rendered by related parties |       | 536,213    |        | 469,000    |       | 14            | %          |
| Legal and professional services                       |       | 2,700,917  |        | 2,682,232  |       | 1             | %          |
| Other expenses                                        |       | 7,973,982  |        | 9,477,976  |       | -16           | %          |
|                                                  |       |       |        |       |       |          |       |
| Total operating expenses                              |       | $          | 125,451,199 |       | $          | 117,358,908   |       | 7 | % |

 

 

The increasein expenses of 7% during 2004, as compared to 2003, is mainly due to theincrease in the provision for doubtful accounts which resulted in additional $6million reserves and is directly related to the full implementation of the newbillings and collections software migration. The increase in salesmen and dealers commissions is related to theshifting during the year from prepaid customer accounts to contract customersthat triggers higher commissions.  The19% decrease in network operation and maintenance expense is related tooperational efficiencies obtain at the subsidiary level and to the sale of 12network towers to a third party during the fourth quarter of 2004 as explainedin Note 11 of the combined financial statements.

 

Net losses of$30,129,143 for 2004 and $30,360,386 for 2003 reflect the costs of competing inthe Puerto Rico market against existing and new cellular and PCS operators inorder to continue to develop and maintain a strong subscriber base.  Such losses include certain non recurring other income and expense items.  For instance, the loss before other incomeand expenses for 2004 totaled $29.9 million compared to $21.8 million in2003.  The 37% increase in said losses isprimarily attributed to the $6 million increase in the provision for doubtfulaccounts and the $3.8 million decrease in total revenues netted by a 29%reduction in the interest expense account.

 

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

 

***Liquidity and Capital Resources***

 

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

 

As part of theagreement with TEM, NewComm entered into a contract with LucentTechnologies, Inc. (“Lucent”) that required Lucent to build a network thatuses Code Division Multiple Access (“CDMA”) protocol. The total cost wasapproximately $125 million.  OnJune 4, 2003, Lucent’s outstanding debt was restructured for a six-yearterm with an interest rate of eight percent (8%) annually and due inSeptember 2009.  As ofDecember 31, 2004, $48,470,205 was outstanding under this financingagreement (refer to Note 15(a) to the accompanying consolidated financialstatements).  During 2004 a total of $3million were paid as principal payments.

 

Alcatel USAInternational Marketing, Inc. (“Alcatel”) was contracted to build part ofthe CDMA network. On June 20, 2003, NewComm and Alcatel entered intoAmendment No. 2 to Promissory Agreement and Note dated as ofDecember 28, 2001.  The finalmaturity date on the 6.5% annual interest rate note is December 20,2005.  During 2004,

 

18

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$2,075,000 was paid in principal payments and $2,461,029 is outstandingas of December 31, 2004.

 

In addition,at December 31, 2004, the Partnership owes the United States Federalgovernment approximately $33.6 million plus accrued interest at 6.5% inconnection with the acquisition of its Puerto Rico PCS licenses.  In accordance to industry practices the notepayable was recorded net of a discount that has been amortized in prioryears.  Due to the refinancing of thedebt that is expected to be completed before December 2005, the discountbalance of $3,913,661 as of December 31, 2003 was written off andreflected as interest expense in the other expenses section of theaccompanying statement of operations. (Refer to Note 15(c) to theaccompanying consolidated financial statements). During the current year, thePartnership paid $9,073,831 in principal and interest related to thisnote.  Quarterly interest and principalpayments due at the subsidiary level total $3.7 million and are funded throughcontributions made by the Partnership and amounts loaned by TEM.

 

ThePartnership has a secured promissory note payable to TLD (now TEM), which bearsinterest at the floating rate of 90-day LIBOR plus 1.5% and was originally duein March 2004.  On January 1,2004, this secured promissory note was amended to be due in December 2004,and to bear interest at 1%.  In addition,in January 2000 the joint venture agreement with TLD was amended toprovide NewComm a revolving line of credit of approximately $30 million forworking capital from TLD.  This loan waspaid-off in December 2000 by means of a $60 million bridge loan (the “BridgeLoan 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 Telefónica Internacional, S.A. (“TISA”)and was extended again until April 30, 2005.  It is expected that the bridge loan will bereplaced with a permanent Project Finance Facility of approximately $110million.

 

ThePartnership, by means of Syncom, and TLD, each contributed $15 million ofadditional capital.  Syncom now hasownership of 8.02% of NewComm after having contributed a total of $25 millionof capital.  On March 2, 2002, thePartnership sold a portion its equity interest equal to 4.08% (on a fullydiluted basis) in NewComm to a group of investors led by Fleet DevelopmentVentures for $13 million.  ThePartnership believes it has obtained sufficient funds, together with TLD, toprovide NewComm with the capital necessary for the Project Finance Facility andto fully fund NewComm’s operations.

 

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

 

ThePartnership anticipates that earnings and cash distributions derived from itsPuerto Rico Network once it matures, interim and permanent financing and, ifnecessary, additional capital calls from its Investors or accessing the publiccapital markets, should provide it with the liquidity to meet its obligations

 

**Results of Operations - 2003 Compared to 2002**

 

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

 

***Expenses***

 

ConsolidatedOperating expenses for the year ended December 31, 2003 totaled$100,086,717, as compared to $103,734,297 for the same period in 2002.  During 2003, the Partnership’s expensesincluded  $ 22,523,576 ($20,297,712 for2002) in costs of handset and accessories, $ 15,169,673 ($15,662,484 for 2002)in salaries and benefits, $ 2,682,232 ($9,915,770 for 2002) for legal andprofessional services, $17,272,191 ($14,171,258 for 2002) in depreciation andamortization, $8,907,241 ($9,854,591 for 2002) in provision for doubtfulaccounts, $46,713,169 ($41,933,902 for 2002) in interconnection, networkmaintenance, sales commissions, advertising, rent, taxes and other expenses, $4,165,826($5,808,374 for 2002) for services rendered by related parties and $ 282,280($262,164 for 2002) for management fees paid to the general partner. Variancesin expenses such as legal and professional and services rendered by relatedparties

 

19

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are due toreclassification of accounts at the subsidiary level and are not related toactual variations in such accounts.  Thedecrease in expenses during 2003, as compared to 2002, is primarily associatedwith an overall decrease in operating expenses of $3.6 million resulting fromcost control management implemented at the Partnership and subsidiarylevel.  The increase in salaries andbenefits was offset by a decrease in legal and professional services and areduction in the provision for doubtful accounts, due to better collectionefforts and tighter credit policy.

 

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

 

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

 

**Contractual Obligations**

 

As ofDecember 31, 2004 the Partnership’s contractual obligations includingpayments due by period, are as follows:

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

 

----

(1). Rentalcommitments represent the balance due on the Partnership’s General Partneroffice lease which finalizes in July 2005.

(2). OperatingLease Agreement is related to the minimal annual rental commitments of thePartnership’s subsidiary at Guaynabo.

(3). Sales-Leasebackincludes the principal and imputed interest payments on the lease agreementwith Mountain Union for the lease of certain space on 12 towers.  Under the lease agreement, NewComm wasgranted a license to install, maintain and operate its wireless communicationsequipment and accessories on the towers for a 10 year period.

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

 

**ITEM 7A.****  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

ThePartnership’s exposure to market risk through derivative financial instrumentsand other financial instruments

 

20

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is not materialbecause the Partnership does not use derivative financial instruments and doesnot have foreign currency exchange risks. The Partnership invests cash balances in excess of operatingrequirements in short-term money market funds. As of December 31, 2004, the Partnership had cash equivalents andshort-term investments of $10,612,430 consisting of cash and highly liquid,short-term investments in money market funds.

 

ThePartnership’s cash and cash equivalents will increase or decrease by animmaterial amount if market interest rates increase or decrease, and therefore,its exposure to interest rate changes has beenimmaterial.  The Partnership’s loanspayable to the FCC have a fixed interest rate of 6.5% and therefore are notexposed to interest rate risks.  The TLDNote relating to indebtedness of NewComm bears interest at the floating rate ofthe 90-day LIBOR plus 1% and is due six months from date of issuance but can beextended for periods of six months, thereafter. 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 December 2004, the outstandingprincipal balance owed to Lucent was $48.5  million.  The Bridge Loan bears an interest rate of0.75% over 90-day LIBOR and is now guaranteed by TISA.  As part of this arrangement the Partnershipagreed to pay an annual fee of 2% over half of this guarantee (or $30 million),or provide an equivalent cash collateral to the Banks.  This loan guarantee fee is not due until thesale of the Partnership’s interest in NewComm. The Bridge Loan Facility has been extended again to April 30, 2005,with the option to extend by one or more additional periods of 30 days with thelender’s prior consent.

 

21

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##### **ITEM 8.****  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

#####  

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

 

All financial schedules have been omitted because they are notapplicable or because the information required is included in the financialstatements or notes thereto.

 

22

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**Report of Independent Public Accountants**

 

# To the Partners of

**CLEARCOMM L.P. AND SUBSIDIARY:**

 

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

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

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

 

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

 

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

 
| **/s/**Kevane Soto Pasarell Grant Thornton LLP |   |
|------------------------------------------------|--------|
|                                           |
|                                           |
| San Juan, Puerto Rico,                         |
| February  9, 2005.                             |

 

23

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**ClearComm, L.P.**

**ConsolidatedBalance Sheets**

**December 31, 2004, 2003, and 2002**

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

 

Theaccompanying notes are an integral part of these consolidated statements.

 

24

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**ClearComm, L.P.**

 

**Consolidated Statements of Operations for the years ended**

**December 31, 2004, 2003, 2002**

 
| ** **                                                                        | ** ** | **2004**    | ** **  | **2003**    | ** ** | **2002**    | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| **REVENUES:**                                                                     |       |        |        |        |       |        |       |
| Service revenues                                                                  |       | $           | 100,336,047 |        | $          | 101,557,423 |       | $ | 99,779,656 |   |
| Handset and accessories sales                                                     |       | 4,665,889   |        | 7,336,689   |       | 8,177,441   |       |
|                                                                              |       |        |        |        |       |        |       |
| Total revenue                                                                     |       | 105,001,936 |        | 108,894,112 |       | 107,957,097 |       |
|                                                                              |       |        |        |        |       |        |       |
| **OPERATING EXPENSES:**                                                           |       |        |        |        |       |        |       |
| Cost of handsets and accessories sold,  exclusive of items shown separately below |       | 24,352,074  |        | 22,523,576  |       | 20,297,712  |       |
| Salaries and benefits                                                             |       | 15,642,745  |        | 15,169,673  |       | 15,662,484  |       |
| Provision for doubtful accounts                                                   |       | 14,762,108  |        | 8,907,241   |       | 9,854,591   |       |
| Salesmen and dealers commissions                                                  |       | 11,652,417  |        | 8,375,695   |       | 4,241,827   |       |
| Depreciation and Amortization                                                     |       | 17,811,034  |        | 17,272,191  |       | 14,171,258  |       |
| Advertising expense                                                               |       | 6,936,679   |        | 7,353,590   |       | 8,461,265   |       |
| Rent expense                                                                      |       | 6,922,312   |        | 6,755,926   |       | 7,766,611   |       |
| Network operation and maintenance expense                                         |       | 4,479,139   |        | 5,559,349   |       | 8,057,442   |       |
| Taxes, other than income                                                          |       | 3,952,175   |        | 4,945,218   |       | 1,262,577   |       |
| Interconnection expense                                                           |       | 2,798,991   |        | 4,245,415   |       | 4,916,771   |       |
| Services rendered by related parties                                              |       | 5,466,626   |        | 4,090,826   |       | 6,070,538   |       |
| Legal and professional services                                                   |       | 2,700,917   |        | 2,682,232   |       | 9,915,770   |       |
| Other expenses                                                                    |       | 7,978,150   |        | 9,477,976   |       | 7,226,709   |       |
|                                                                              |       |        |        |        |       |        |       |
| Total operating expenses                                                          |       | 125,455,367 |        | 117,358,908 |       | 117,905,555 |       |
|                                                                              |       |        |        |        |       |        |       |
| **INCOME FROM OPERATIONS**                                                        |       | (20,453,431 | )           | (8,464,796  | )          | (9,948,458  | )          |
|                                                                              |       |        |        |        |       |        |       |
| **INTEREST EXPENSE**                                                              |       | (9,470,793  | )           | (13,312,468 | )          | (16,212,644 | )          |
|                                                                              |       |        |        |        |       |        |       |
| **LOSS BEFORE OTHER INCOME (EXPENSE)**                                            |       | (29,924,224 | )           | (21,777,264 | )          | (26,161,102 | )          |
|                                                                              |       |        |        |        |       |        |       |
| **OTHER INCOME (EXPENSE):**                                                       |       |        |        |        |       |        |       |
| Gain on sale of California License                                                |       | 4,168       |        | —      |       | —      |       |
| Gain on sale of investment in stock of  subsidiary                                |       | —      |        | —      |       | 13,000,000  |       |
| Realized loss on sale of investment in  securities                                |       | (56,518     | )           | —      |       | —      |       |
| Equity in net loss of 49% owned subsidiary                                        |       | (115,382    | )           | (140,608    | )          | (114,746    | )          |
| Interest income                                                                   |       | 126,827     |        | 213,369     |       | 249,661     |       |
| Write-down of investment in subsidiary                                            |       | (165,306    | )           | —      |       | —      |       |
| Loss on write-off of inventories                                                  |       | —      |        | (4,742,559  | )          | —      |       |
| Write-off of discount on note payable to  FCC                                     |       | —      |        | (3,913,661  | )          | —      |       |
| Other                                                                             |       | 1,292       |        | 337         |       | 1,113       |       |
|                                                                              |       |        |        |        |       |        |       |
| **NET LOSS**                                                                      |       | $           | (30,129,143 | )           | $          | (30,360,386 | )          | $ | (13,025,074 | ) |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

25

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**ClearComm, L.P.**

 

**Consolidated Statements of Changes in Partners’ (Deficit) for the yearsended**

**December 31, 2004, 2003, 2002**

 
| ** **                                             | ** ** | **Limited Partners** | ** ** | **General** | ** ** | **Other  Comprehensive** | ** ** | ** **   | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|-------------|------------|--------------------------|------------|--------------|------------|
| ** **                                             | ** ** | **Units**            | ** ** | **Amount**  | ** ** | **Partner**              | ** ** | **Loss**     | ** ** | **Total** | ** ** |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **BALANCES,**  December 31, 2001                  |       | 2,906.1              |       | $           | —     |                     | $          | (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                  |       | 2,906.1              |       | —      |       | (57,294,522              | )          | —       |       | (57,294,522 | ) |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **COMPREHENSIVE LOSS:**                                |       |                 |       |        |       |                     |       |         |       |   |   |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **Net loss for the year**                              |       | —               |       | —      |       | (30,360,386              | )          | —       |       | (30,360,386 | ) |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **Unrealized holding loss in investment  securities**  |       | —               |       | —      |       | —                   |       | (37,827      | )          | (37,827 | ) |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **Net comprehensive loss**                             |       | —               |       | —      |       | (30,360,386              | )          | (37,827      | )          | (30,398,213 | ) |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **BALANCES,**  December 31, 2003                  |       | 2,906.1              |       | —      |       | (87,654,908              | )          | (37,827      | )          | (87,692,735 | ) |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **Net loss for the year**                              |       | —               |       | —      |       | (30,129,143              | )          | —       |       | (30,129,143 | ) |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **Realized holding loss in investment in  securities** |       | —               |       | —      |       | —                   |       | 37,827       |       | 37,827 |   |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **Reacquired partner’s units**                    |       | (140.90              | )          | —      |       | (1,197,640               | )          | —       |       | (1,197,640 | ) |
|                                                   |       |                 |       |        |       |                     |       |         |       |   |   |
| **BALANCES,**  December 31, 2004                  |       | 2,765.20             |       | $           | —     |                     | $          | (118,981,691 | )          | $ | — |   | $ | (118,981,691 | ) |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

26

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**ClearComm, L.P.**

**Consolidated Statements of Cash Flows for the years ended**

**December 31, 2004, 2003, 2002**

 
| ** **                                                                                 | ** ** | **2004**   | ** **  | **2003**    | ** ** | **2002**    | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|-------------|-------------|------------|-------------|------------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                  |       |       |        |        |       |        |       |
| Net loss                                                                                   |       | $          | (30,129,143 | )           | $          | (30,360,386 | )          | $ | (13,025,074 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities- |       |       |        |        |       |        |       |
| Depreciation and amortization                                                              |       | 17,811,034 |        | 17,050,319  |       | 13,958,465  |       |
| Equity in losses of unconsolidated  subsidiary                                             |       | 115,382    |        | 140,608     |       | 114,746     |       |
| Amortization of loan origination fees                                                      |       | —     |        | 221,872     |       | 212,793     |       |
| Amortization of discount on note payable to  FCC                                           |       | —     |        | 2,404,215   |       | 3,388,039   |       |
| Write-off on discount of note payable to  FCC                                              |       | —     |        | 3,913,661   |       | —      |       |
| Realized loss on sale of investment in  securities                                         |       | 56,518     |        |        |       |        |       |
| Inventory Reserve                                                                          |       | —     |        | 4,742,559   |       | —      |       |
| Bad debt expense                                                                           |       | 14,762,108 |        | 8,907,241   |       | 9,854,591   |       |
| Write-down of investment in subsidiary                                                     |       | 165,306    |        | —      |       | —      |       |
| Gain on sale of property and equipment and  California License                             |       | (10,666    | )           | —      |       | —      |       |
| Changes in operating assets and liabilities-                                               |       |       |        |        |       |        |       |
| Increase in interest receivable                                                            |       | (288,067   | )           | (4,000      | )          | (6,000      | )          |
| Increase in accounts receivable, before  write-offs                                        |       | (7,197,016 | )           | (10,660,227 | )          | (8,833,805  | )          |
| Decrease (increase) in insurance claims  receivable                                        |       | (403,657   | )           | 270,002     |       | 1,226,322   |       |
| Decrease (increase) in inventories                                                         |       | 2,604,344  |        | 1,809,817   |       | (155,858    | )          |
| Decrease (increase) in prepaid expenses                                                    |       | (169,341   | )           | (46,796     | )          | 26,673      |       |
| Decrease (increase) accounts payable and  accrued liabilities                              |       | 1,860,195  |        | 201,443     |       | (3,798,100  | )          |
| Increase (decrease) in accounts payable to  related parties                                |       | 4,268,522  |        | (32,986     | )          | 3,826,632   |       |
| (Decrease) increase in accrued interest                                                    |       | 1,836,597  |        | (978,843    | )          | 6,516,694   |       |
| Decrease in checks drawn in excess of bank  balance                                        |       | (82,469    | )           | —      |       | —      |       |
| (Decrease) increase in deferred income                                                     |       | (682,098   | )           | 477,236     |       | 362,848     |       |
| Total adjustments                                                                          |       | 34,646,692 |        | 28,416,121  |       | 26,694,040  |       |
| Net cash provided by (used in) operating  activities                                       |       | 4,517,549  |        | (1,944,265  | )          | 13,668,966  |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                  |       |       |        |        |       |        |       |
| Redemption of investment securities                                                        |       | 7,319,598  |        | 2,616,584   |       | —      |       |
| Payment for the purchase of investment  securities                                         |       | —     |        | —      |       | (10,000,000 | )          |
| Acquisition of property and equipment                                                      |       | (5,876,171 | )           | (5,864,516  | )          | (13,794,432 | )          |
| Proceeds from the sale of property and  equipment and California License                   |       | 13,651,421 |        | —      |       | —      |       |
| Payment for the investment in subsidiary                                                   |       | (130,667   | )           | (261,334    | )          | (392,000    | )          |
| Net cash provided by (used in) investing  activities                                       |       | 14,964,181 |        | (3,509,266  | )          | (24,186,432 | )          |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                  |       |       |        |        |       |        |       |
| Proceeds from sale of shares of NewComm                                                    |       | $          | —      |        | $          | —      |       | $ | 10,000,000 |   |
| Proceeds from issuance of note payable to  Telefonica Moviles                              |       | 5,493,642  |        | 5,493,642   |       | —      |       |
| Principal payments of capital lease  obligations                                           |       | (23,813    | )           | —      |       | —      |       |
| Payments for deferred financing costs                                                      |       | —     |        | (95,000     | )          | (207,297    | )          |
| Payments made to reacquire partner’s units                                            |       | (1,197,650 | )           | —      |       | —      |       |
| Proceeds from extension of note payable to  ABN/AMRO                                       |       | —     |        | 1,000,000   |       | —      |       |
| Proceeds from issuance of notes payable to  TLD                                            |       | —     |        | —      |       | 18,960,080  |       |
| Payment of note payable to Lucent                                                          |       | (3,000,000 | )           | (11,102,065 | )          | —      |       |
| Payment of note payable to Alcatel                                                         |       | (2,075,000 | )           | (2,900,000  | )          | (5,767,433  | )          |
| Payment of notes payable to FCC                                                            |       | (9,073,832 | )           | (8,645,479  | )          | —      |       |
| Net cash provided by (used in) financing  activities                                       |       | (9,876,653 | )           | (16,248,902 | )          | 22,985,350  |       |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                              |       | 9,605,077  |        | (21,702,433 | )          | 12,467,884  |       |
| **CASH AND CASH EQUIVALENTS,**  beginning of year                                          |       | 1,007,353  |        | 22,709,786  |       | 10,241,902  |       |
| **CASH AND CASH EQUIVALENTS,**  end of year                                                |       | $          | 10,612,430  |        | $          | 1,007,353   |       | $ | 22,709,786 |   |
|                                                                                       |       |       |        |        |       |        |       |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOWS  INFORMATION:**                                   |       |       |        |        |       |        |       |
| **INTEREST PAID**                                                                          |       | $          | 7,916,260   |        | $          | 11,887,096  |       | $ | 6,314,000 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

27

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**ClearComm,L.P.**

 

**Notes to Consolidated FinancialStatements**

**December 31,2004, December 31, 2003, and December 31, 2002**

 

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

 

The ReportingEntity for purposes of these financial statements is ClearComm, L.P., aDelaware limited partnership (the “Partnership”), together with its subsidiaryNewcomm Wireless Services, Inc., a Puerto Rico corporation (“NewComm” and,together with the Partnership, the “Company”).

 

The Partnership wasorganized on January 24, 1995, under the laws of the state ofDelaware.  The Partnership was created tofile applications with the Federal Communications Commission (FCC) underpersonal communications service (PCS) frequency Block C, originally restrictedto minorities, small businesses and designated entities, to become a provider ofbroadband PCS.  The Partnership isscheduled to terminate on December 31, 2005, or earlier, upon theoccurrence of certain specific events as detailed in the Partnership Agreement.  The Partnership’s General Partner isconsidering alternatives to dissolution, including an extension of thePartnership’s termination date that would require the consent of thePartnership’s partners.

 

SuperTel CommunicationsCorp., a Puerto Rico corporation (“SuperTel”), is the Partnership’s GeneralPartner and its share of the income and losses of the Partnership is 25% inaccordance with the Partnership Agreement. Approximately 1,600 limited partners also invested in the Partnershipthrough a private placement.  OnJanuary 22, 1997, the Partnership was granted the PCS Block C licenses forPuerto Rico and certain cities in California.

 

On February 4, 1999, the Partnershipentered into an agreement (the Joint Venture Agreement) with Telefónica LargaDistancia de Puerto Rico, Inc. (“TLD”) to jointly develop and operatecertain PCS licenses in Puerto Rico. Some relevant provisions of this agreement are the following:

 

•      The Partnershiptransferred all of its Puerto Rico licenses including its related debt with theFCC (the Partnership’s contribution) to its subsidiary NewComm, a newlyorganized Puerto Rico corporation owned by the Partnership, in exchange for allof NewComm’s issued and outstanding common stock.  Subsequently, the Partnership sold part ofits investment in NewComm, and since December 31, 2002, the Partnershipowned 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 (now assigned to TELEFONICA MOBILES,S.A. or TEM) ownership to 50.1%; this transaction is subject to a third partyvaluation of NewComm’s stock and approval by the FCC.  During 2004, the Partnership and TLD receivedthe approval from the FCC, but the conversion and additional sale ofparticipation has not been consummated.

 

•      NewComm and TLDentered into certain management and technology transfer agreements.  These agreements were terminated effectiveOctober 28, 2004.

 

•      The Partnershipand TLD entered into Shareholders and Sale Agreements.  The Shareholders’ agreement provides forgeneral and specific protections and rights for the Partnership as a minorityshareholder in

 

28

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NewComm.  The Sale Agreement provides for an exit forthe Partnership from NewComm at any time after May 12, 2003.  At the closing of the sale, the managementand technology transfer agreements between the Company and several relatedentities (TEM and TISA) will terminate. See Note (16).

 

•      InAugust 2004, the Partnership retained the services of a consulting firm(other than its external auditors), to audit the operations and performance ofNewComm under the management of TEM.  Theresults of the audit were reported to the Board of Directors of NewComm onSeptember 30, 2004, with the conclusion that TEM had not performedadequately.  Under the Partnership’sdirection, the Board of Directors of NewComm terminated TEM as manager underthe management agreement on October 28, 2004. TEM has alleged unlawful andwrongful termination of the Technology and Management Agreements.  The Partnership, on behalf of NewComm, isproactively seeking compensation for damages caused by whatthe Partnership believes was TEM’s nonperformance and breach of theTechnology and Management Agreements.

 

•      The Partnershipand TLD’s sale agreement shall continue in full force and effect even if theStock Purchase agreement (“SPA”) with TEM, for whatever reason, does notclose.  Notwithstanding, the SPA and thesale agreement are subject to the arbitration proceedings that were filed byTEM upon their termination as manager of NewComm.

 

The Company commenced commercial operationsin September 1999, providing communications services to itscustomers.  Prior to that date, it was onits development stage.

 

On August 28, 2000,the Partnership entered into a Purchase and Sale Agreement with Leap WirelessInternational (Leap Wireless), pursuant to which the Partnership sold theVisalia, California license to Leap Wireless in exchange for a $9,500,000 cashpayment.  The transaction closed onJune 8, 2001.

 

NewComm received an aggregate equityinvestment of $25,000,000 ($10 million in 2000, $5 million in 2001 and $10million in 2002) from Syndicated Communications Venture Partners IV, L.P. (“Syncom”),a third party, in exchange for a 15.39% ownership.

 

On March 2, 2002,the Partnership sold approximately 4.08% of its investment in NewComm to agroup of investors led by Fleet Development Ventures for $13 million.

 

During 2004, thePartnership sold its California PCS licenses to a third party.  See note (9).

 

As of December 31,2004, 2003 and 2002, common stockholders of NewComm (Class A andClass C) and their percentages of ownership were:

 
| ClearComm, L.P.                                      |   | 76.89  | %      |
|------------------------------------------------------|--------|--------|--------|
| Syndicated Communications Venture Partners IV,  L.P. |   | 15.39  | %      |
| Fleet Development Ventures, LLC                      |   | 2.97   | %      |
| Opportunity Capital Partners IV, L.P.                |   | 2.97   | %      |
| Power Equities, Inc.                            |   | 1.78   | %      |
|                                                 |   |   |   |
|                                                 |   | 100.00 | %      |

 

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

 

The accompanying consolidated financial statements have been preparedon a going concern basis, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business.  The Company commenced operations in September 1999and has incurred net losses of approximately $30.1 million in 2004, $30.4million in 2003 and $13.0 million in 2002. It also has a working capital deficiency and a stockholders’ deficit of$149 million, and $119 million, respectively, as of December 31,2004.  The Company is likely to continueincurring losses until such time as its subscriber base generates revenue inexcess of the Company’s expenses. Development of a significant subscriber base is likely to take time,during which the

 

29

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Company must finance its operations by means other than its revenues.

 

As part of the agreement with TLD, NewCommentered into a contract with Lucent Technologies, Inc. (“Lucent”) thatrequires Lucent to build a network that uses Code Division Multiple Access (“CDMA”)protocol. NewComm has incurred approximately $119 million in the constructionof this network.  During 2000, NewComm’smanagement and Lucent agreed on formally extending the payment of up to $61million of the total amount of network construction costs, at the time, under aformal financial agreement.  OnJune 4, 2003, NewComm entered into a Senior Credit Agreement with Lucent,which extends the maturity date of the $61 million to September 30, 2009,with interest at 8% annually.  See Note15(a).

 

Alcatel USAInternational Marketing, Inc. (“Alcatel”) was contracted to build part ofthe CDMA network.  On December 18,2001, NewComm had outstanding invoices and past due interest to Alcateltotaling $14,361,732.  On that day,NewComm and Alcatel entered into a Promissory Agreement and Note for saidamount at an interest rate of 14%, and an original maturity date ofMarch 25, 2002.  This PromissoryAgreement and Note was amended with an extension of payment untilNovember 25, 2002.  On May 23,2002, NewComm paid Alcatel $6 million, including interest of $646,000.  On June 20, 2003, the Promissory Notewas amended to provide for the orderly repayment of the principal and accruedinterest on the Note, extending its maturity to December 20, 2005 anddecreasing the interest rate to 6.5%.  InJune 2003, NewComm repaid $2 million of principal and $337,372 of accruedinterest owed.  During 2004, NewCommrepaid $2,075,000 of principal and $234,439 of accrued interest owed.  See Note 15(b).

 

During November 2000, NewComm enteredinto a $60 million bridge loan agreement (the “Bridge Loan Facility”) with acommercial bank (originally it was two commercial banks).  The Bridge Loan Facility is guaranteed byTelefónica Internacional, S.A. (“TISA”), and a maturity date has been fixed atApril 30, 2005, with the option to extend by one or more additionalperiods of 30 days with the lender’s prior consent.  By means of letter agreement between andamongst the Partnership, Telefónica Móviles S.A. (TEM) and Telefónica, S.A. (TEF),the latter two have agreed to issue a corporate guarantee to cover therefinancing of this Bridge Loan and $42.6 million owed to the FCC.  During 2003, NewComm received an additional$1 million advance under the terms of this facility. This arrangement providesfor no amortization of principal until the fifth anniversary of the facilityand was subject to the FCC issuing an approval order authorizing the sale toTLD of a .2% ownership interest in NewComm. Such approval was issued during 2004.

 

During 2004 and 2003, NewComm received$5,493,642 each year in advances from Telefónica Móviles, S.A., to comply withthe payment requirements on the FCC debt. See Note 14.

 

Management believes that the Company hascomplied with all the requirements for obtaining the permanent financingarrangements discussed above and believes that 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 the endof 2005.  However, in the absence ofimproved operating results and cash flows, and the closing of this contemplatedpermanent financing, the Company may face liquidity problems to fund itsoperations and meet its obligations. However, and because of the existence of these matters, substantialdoubt exists as to the Company’s ability to continue operating as a goingconcern.  The accompanying financialstatements do not include any adjustments that might result should permanentlong-term financing not be obtained.

 

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

 

The following summarizes the most significantaccounting policies followed in the preparation of the accompanying financialstatements:

 

**(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 Company classifies its securities asavailable-for-sale.  The securitiesconsist of income funds, which

 

30

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are stated at fair value, with net unrealizedgains or losses on the securities recorded as accumulated other comprehensiveincome (loss) in partners’ capital. Realized gains and losses are included in earnings and are calculatedusing the specific identification method for determining the cost of thesecurities.

 

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

The Partnership’s investment in InternetSurfing Store of Puerto Rico, Inc. (“ISS”) is accounted for under theequity method 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 Company 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, 2003,the Company’s comprehensive loss was limited to its investment inavailable-for-sale securities. This loss was realized during the year endedDecember 31, 2004, when the securities were redeemed.

 

**(e)****    Cashand cash equivalents**–

For thepurpose of the statement of cash flows, the Company considers all highly liquidinvestment instruments purchased with maturity at acquisition of three monthsor less to be cash equivalents.

 

**(f)****    Accountsreceivable**–

Accounts receivable consist principally oftrade accounts receivable from customers and are generally unsecured and duewithin 30 days.  Credit losses relatingto these receivables consistently have been within management’sexpectations.  Expected credit losses arerecorded as an allowance for doubtful accounts.

 

**(g)****   Allowancefor doubtful accounts**–

Allowance for doubtful accounts provides forestimated losses on accounts receivable. The allowance is established based upon a review of the aggregateaccounts, historical write-off experience, economic condition, aging of theaccounts receivable balances, and other pertinent factors.  Account losses are charged and recoveries arecredited to the allowance for doubtful accounts.  The collection policies and procedures of theCompany vary by credit class and prior payment history of subscribers.

 

**(h)****   Inventories**–

The Company maintains inventories of wirelesshandsets 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 Company may sell handsetsto 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.

 

Effectively January 1, 2003, the Companychanged its method to account for the loss on sale of handsets to customers,from the recognition of such loss at the time of sale, to the establishment ofan inventory reserve to account for that loss at the end of each accountingperiod.  Management believes that thisnew method better matches costs and revenues.

 

In accordance with Accounting Principle BoardOpinion No. 20, “Accounting Changes”, the change in accounting methodexplained above, requires the determination of the cumulative effect, as if thenewly adopted method had been applied during all periods affected.  In this specific situation, the retroactiveapplication and determination of pro-forma information is impracticable,because the effects are not determinable, since it requires assumptions aboutmanagement’s intent in prior period, and significant management estimates.  The effect of the change on net income forthe year ended December 31, 2003 was $4,742,559.

 

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Allowance for inventory losses provides forestimated losses on inventory for obsolescence and for the lower of cost ormarket method.  The allowance is establishedbased upon a review of existing array of inventory models, the average sellingprices aggregate accounts and other pertinent factors.  Account losses are charged to the inventoryreserve accounts.

 

**(i)****    Deferredfinancing costs**–

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

 

**(j)****    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 Company expects to exercise the renewalprovisions.

 

The Puerto Rico licenses were being amortizedover a time period of twenty years.  TheCompany capitalized the interest related to the debt pertaining to the PuertoRico licenses during the development stage, which amounted to $12,174,000.  However, such capitalization was discontinuedin September 1999 when the commercial operations started.

 

Effective with the adoption of Statement ofFinancial Accounting Standards (SFAS) No. 142 on January 1, 2002,these licenses costs, no longer being amortized, are subject to impairmenttesting (See note 3 (k)).

 

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

Effective January 1, 2002, the Company adoptedSFAS No. 142, “Goodwill and Other Intangible Assets” which established newstandards related to how acquired goodwill and other intangible assets are tobe recorded upon their acquisition, as well as how they are to be accounted forafter they have been initially recognized in the financial statements.

 

Effective with the adoption of this standard,the Company reassessed the useful lives of previously recognized intangibleassets, which consist primarily of FCC licenses that provide the Company withexclusive 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 occurredroutinely and at a nominal cost. Moreover, the Company has determined that there are currently no legal,regulatory, contractual, competitive, economic or other factors that limit theuseful lives of its FCC licenses.  As aresult, the FCC licenses will be treated as an indefinite-lived intangibleasset under the provisions of SFAS No. 142 and will not be amortized butrather will be tested for impairment annually or when events and circumstanceswarrant.

 

The Company has elected to test for the FCClicense impairment as of December 31st of each year.  The Company utilizes a fair value approach,incorporating discounted cash flows, to complete the test.  The discounted cash flow model estimates therequired resources and eventual returns from the build-out of an operationalnetwork and acquisition of customers, starting with only FCC licenses.  In this matter, the cash flows are isolatedas specifically pertaining to the FCC licenses (present value of free cash flowattributable to the licenses).

 

The Company has completed its 2004 testingand has determined that there has been no license impairment.

 

**(l)****    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

 

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improvements. Upon retirement or sale, the cost of the asset disposed of and therelated accumulated depreciation are removed from the accounts and anyresulting gain or loss is credited or charged to income.

 

**(m)****  Softwarecapitalization**–

The Company 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 preliminary projectstage, as well as maintenance and training costs are expensed as incurred.  The Company also capitalizes initialoperating-system software costs and amortizes them over its useful life.

 

**(n)****   Accountingfor impairment of long-lived assets**–

The Company continually****evaluatesits long-lived assets, based on the requirements of SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, to determine whethercurrent events and circumstances warrant adjustment of the carrying values oramortization periods.  The Companymeasures impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable.  In performing the review for recoverability,an estimate of the future cash flows expected to result from the use of theasset and its eventual disposition must be made.  If the carrying amount of a long-lived assetis not recoverable from its projected future undiscounted cash flows, animpairment loss is recognized.  Theimpairment loss, if any, is determined as the difference between the carryingamount and fair value of the asset.  Noimpairment loss was recognized during the years ended December 31, 2004,2003 and 2002.

 

**(o)****    Revenuerecognition**–

The Company 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 theservice period.  Airtime revenue,including roaming revenue and long-distance revenue, for postpaid customers isbilled in arrears 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 billing cycle in which a particularsubscriber is placed.  As a result ofbilling cycle cut-off times, the Company 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 Company defers revenue based on an estimate of the portion of minutesexpected to be utilized prior to expiration. The Company’s estimate of expected future revenue is primarily based onhistorical 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 Company’s network, referred to as “outcollect”roaming revenues.

 

The Company offers enhanced servicesincluding caller ID, call waiting, call forwarding, three-way calling, noanswer/busy transfer, text messaging and voice mail.  Generally, these enhanced features generateadditional revenues through monthly subscription fees or increased wirelessusage through utilization of these features. Other optional services, such as unlimited mobile-to mobile calling,roadside assistance and handset insurance, may also be provided for a monthlyfee.  These enhanced features andoptional services may be bundled with package rate plans or soldseparately.  Revenue for enhancedservices and optional features 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

 

33

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process from the sale of wireless services.

 

**(p)****    Loyaltypoints program**–

In October 2003, the Company commenced aLoyalty Points Program (the “Program”) for its customers. The Company determineda redemption percentage of 15% to compute the end-of-year estimated liabilityfor awards redemption. This percentage of redemption was re-evaluated duringthe year and remained the same.  TheCompany charged the cost of operating the program to selling expenses and theestimated cost of award redemption to the cost of products available forredemption.

 

Effective December 31, 2004, the loyaltypoints program was eliminated and as a consequence, management has determinedthat all accumulated points have to be redeemed over a period of 24 months or,otherwise, will be lost.

 

**(q)****    Advertisingcosts**–

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

 

**(r)****    Incometaxes**–

Under U.S. tax rules the Partnership isnot subject to income tax; however, and only for Puerto Rico tax purposes, thePartnership and NewComm accounts for income taxes in accordance with the assetand liability method of accounting for income taxes prescribed by the Statementof Financial Accounting Standards No. 109, Accounting for IncomeTaxes.  Under the asset and liabilitymethod of Statement No. 109, deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss carry-forwards.

 

**(s)****    Fairvalue of financial instruments**–

The carrying amount of the Company’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.

 

**(t)****    Concentrationof credit risk –**

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

 

The Company 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 the Company’s customerbase, but is highly dependent on the strong competition among the companies whoprovide personal communication services in Puerto Rico.  No customer accounted for more than 10% ofrevenues in the years presented.

 

The Company relies on local and long-distancetelephone companies and other companies to provide certain communicationservices.  Although management believesalternative telecommunications facilities could be found in a timely manner,any disruption of these services could potentially have an adverse impact onoperating results.

 

The Company relies on roaming agreements withother wireless carriers to permit the Company’s customers to use their networksin areas not covered by the Company’s networks. If these providers

 

34

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decide not to continue those agreements dueto a change in ownership or other circumstances, this could cause a loss ofservice in certain areas and possible loss of customers.

 

The Company’s inventories are currently acquiredfrom only a few sources.  If thesuppliers are unable to meet the Company’s needs as it continues to sellservice and handsets, delays and increased costs or losses of potentialcustomers could result, which would adversely affect operating results.

 

**(u)****   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.

 

**(v)****    Saleand leaseback transactions**–

The Company follows the provisions of SFASNo. 13 and SFAS 98, “Accounting for Leases” to account for the sale andleaseback of equipment during the year. Based on the provisions of this statement, any profit or loss resultingfrom the sale of the equipment is deferred and amortized over the leaseterm.  On the other hand, since theleaseback was considered to be a capital lease, the related equipment iscapitalized and amortized over its estimated life.  See Note 11.

 

**(w)****   Leaseholdrights**–

The network communication transmission spaceacquired during 2004, as part of the sale and leaseback transaction of 12towers, has been capitalized as leasehold rights and amortized over the 10-yearperiod of the lease contract, using the straight-line method.  See Note 11.

 

**(x)****    Deferredrevenue**–

Deferred revenue represents up-front paymentson a portion of the airtime usage charged to customers recorded as revenue whenearned. It also includes the profit resulting from the sale and leasebacktransaction that is being amortized over the 10-year period of the leasecontract, under the straight-line method.

 

**(y)****    Reclassification**–

Certain amounts in the 2003 and 2002financial statements have been reclassified to conform to the 2004 and 2003 financialstatement presentation.

 

**(4)****   Recentaccounting pronouncements:**

 

a)     InJanuary 2003, the FASB issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements”and provides guidance on the identification of entities for which control isachieved through means other than through voting rights (“variable interestentities” or “VIE’s”) and how to determine when and which business enterpriseshould consolidate the VIE.  This newmodel for consolidation applies to an entity which either (1) the equityinvestors (if any) do not have a controlling financial interest or (2) theequity investment at risk is insufficient to finance that entity’s activitieswithout receiving additional subordinated financial support from other parties.

 

In December 2003, the FASB issued a revision ofthe interpretation No. 46 to defer the implementation, clarify some of itsprovisions and to exempt certain entities from its requirements.  Management does not expect that theapplication of this standard will have any effect on the Company’s consolidatedresults of operations or its financial condition.

 

b)    InMay 2003, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 150 (FAS-150), Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity.  FAS-150 addresses certain financialinstruments that, under previous guidance, could be accounted for as equity,but now must be classified as liabilities in statements of financialposition.  These financial instrumentsinclude: (1)

 

35

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mandatory redeemable financial instruments,(2) obligations to repurchase the issuer’s equity shares by transferringassets, and (3) obligations to issue a variable number of shares.  With limited exceptions, FAS-150 is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  The Companydoes not expect that the adoption of FAS-150 will have a material impact on itsconsolidated results of operations and financial position.

 

c)     InApril 2003, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 149 (FAS-149), Amendment of Statement133 on Derivative Instruments and Hedging Activities.  FAS-149 amends and clarifies accounting forderivative instruments, including certain derivative instruments embedded inother contracts, and for hedging activities under FAS 133, Accounting forDerivative Instruments and Hedging Activities. FAS-149 is effective for contracts entered into or modified afterJune 30, 2003.  The Company does notexpect that the adoption of FAS-149 will have an impact on its consolidatedresults of operations and financial position.

 

d)    InDecember 2003, the Financial Accounting Standards Board issued a revisedStatement of Financial Accounting Standards No. 132 (FAS-132R), Employers’Disclosures about Pensions and Other Postretirement Benefits, which replacesthe previously issued Statement.  FAS-132Rincreases the existing disclosures for defined benefit pension plans and otherdefined benefit postretirement plans. However, it does not change the measurement or recognition of thoseplans as required under FAS-87, Employers’ Accounting for Pensions, FAS-88,Employers’ Accounting for Settlements and Curtailments of Defined BenefitPension Plans and for Termination Benefits, and FAS-106, Employers’ Accountingfor Postretirement Benefits Other Than Pensions.  Specifically, FAS-132R requires companies toprovide additional disclosures about pensions plan assets, benefit obligations,cash flows, and benefit costs of defined benefit pension plans and otherdefined benefit postretirement plans. Also, companies are required to provide a breakdown of plan assets bycategory, such as debt, equity and real estate, and to provide certain expectedrates of return and target allocation percentages for these assetcategories.  The Company is currentlyevaluating the effect of this pronouncement on its financial statementdisclosures.

 

**(5)****   Allowancefor doubtful accounts:**

 

**(a)****   Accountsreceivable customers** –

The activityin the accounts receivable customers’ allowance for doubtful accounts duringthe years ended December 31, was as follows:

 
| ** **                           | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**   | ** ** |
|--------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| Beginning balance                    |       | $           | 15,032,114 |        | $          | 18,627,970 |       | $ | 18,404,570 |   |
|                                 |       |        |       |        |       |       |       |
| Provision for doubtful accounts      |       | 14,485,467  |       | 8,540,283   |       | 9,854,591  |       |
|                                 |       |        |       |        |       |       |       |
| Accounts receivable written off, net |       | (20,087,802 | )          | (12,136,139 | )          | (9,631,191 | )          |
|                                 |       |        |       |        |       |       |       |
| Ending balance                       |       | $           | 9,429,779  |        | $          | 15,032,114 |       | $ | 18,627,970 |   |

 

**(b)****  ****Accountsreceivable others** –

 

Accounts receivable others represent mainlybalances due from other communication providers with which the Company hasinterconnection agreements and to balances due from external dealers for eithercellular units sold or deposits received from customers.  At year-end, the Company established anallowance for doubtful accounts for the accounts receivable, others, amountingto $276,641 and $366,958 in 2004 and 2003, respectively, that was included aspart of the provision for doubtful accounts in the accompanying statements ofoperations.

 

**(6)****   Inventories:**

 

Inventories atDecember 31 consist of:

 

36

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| ** **                             | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                   |       |       |       |       |       |       |       |
| Handsets                               |       | $          | 4,341,975  |       | $          | 8,386,968  |       | $ | 10,036,851 |   |
|                                   |       |       |       |       |       |       |       |
| Accessories and other                  |       | —     |       | 264,327    |       | 424,261    |       |
|                                   |       |       |       |       |       |       |       |
| Total inventories                      |       | 4,341,975  |       | 8,651,295  |       | 10,461,112 |       |
|                                   |       |       |       |       |       |       |       |
| Reserve for losses on sale of handsets |       | (3,037,583 | )          | (4,742,559 | )          | —     |       |
|                                   |       |       |       |       |       |       |       |
| Net inventories                        |       | $          | 1,304,392  |       | $          | 3,908,736  |       | $ | 10,461,112 |   |

 

**(7)****  ****Investment in securities****:**

 

As of December 31,2003, the Company had invested in mutual funds with a cost of $7,376,116.  The fair value of such funds as ofDecember 31, 2003 amounted to $7,338,288; therefore, the Companyrecognized a comprehensive loss resulting from the unrealized holding loss oninvestment of $37,827.  The investmentswere redeemed during 2004.

 

**(8)****  ****Investment in subsidiary:**

 

During the year endedDecember 31, 2002, the Partnership acquired a 49% interest in Internet SurfingStores of Puerto Rico, Inc., (ISS), a company which is engaged in thedevelopment of internet surfing galleries, targeted to the segment ofpopulation that does not own computers. Total amount invested during the years ended December 31, 2004, 2003and 2002 amounted to $130,667, $261,334 and $392,000, respectively.  The Partnership’s investment in this companyis accounted for on the equity method of accounting.  Equity in losses for the years endedDecember 31, 2004, 2003 and 2002 amounted to $115,382, $140,608 and$114,746, respectively.

 

During the year endedDecember 31, 2004, the Partnership wrote-down $165,306 of its investmentin eMilios due to unfavorable market conditions in the store located inMayaguez, which resulted in the closing of such store and questionable marketvalue and uncertainty regarding future profitability.

 

The unaudited financialposition and results of operations of the Partnership’s equity investment aresummarized below:

 

**Condensed balance sheets information (as ofDecember 31, 2004, 2003 and 2002):**

 
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |     |       |
| Current assets               |       | $        | 36,832     |     | $          | 14,367   |       | $ | 9,028 |   |
|                         |       |     |       |     |       |     |       |
| Non-current assets           |       | 312,475  |       | 480,087  |       | 390,596  |       |
|                         |       |     |       |     |       |     |       |
| Total assets                 |       | $        | 349,307    |     | $          | 494,454  |       | $ | 399,624 |   |
|                         |       |     |       |     |       |     |       |
| Liabilities                  |       | $        | 63,153     |     | $          | 9,679    |       | $ | 31,576 |   |
|                         |       |     |       |     |       |     |       |
| Equity                       |       | 286,154  |       | 484,775  |       | 368,048  |       |
|                         |       |     |       |     |       |     |       |
| Total liabilities and equity |       | $        | 349,307    |     | $          | 494,454  |       | $ | 399,624 |   |

 

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**Condensed statementsof operations information (for the years ended December 31, 2004, 2003 and2002):**

 
| ** **   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
|         |       |     |       |     |       |     |       |
| Net revenues |       | $        | 221,729    |     | $          | 170,757  |       | $ | 16,221 |   |
|         |       |     |       |     |       |     |       |
| Net loss     |       | $        | (235,473   | )        | $          | (286,955 | )          | $ | (234,175 | ) |

 

**(9)****       Investmentin PCS licenses:**

 

PCS licenses at December 31 consist of:

 
| ** **                           | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                 |       |       |       |       |       |       |       |
| PCS licenses in use (Puerto Rico)    |       | $          | 52,696,295 |       | $          | 52,696,295 |       | $ | 52,696,295 |   |
| Accumulated amortization             |       | (5,945,846 | )          | (5,945,846 | )          | (5,945,846 | )          |
|                                 |       |       |       |       |       |       |       |
| Net                                  |       | 46,750,449 |       | 46,750,449 |       | 46,750,449 |       |
| PCS licenses not in use (California) |       | —     |       | 10,767,525 |       | 10,767,525 |       |
|                                 |       |       |       |       |       |       |       |
| Total                                |       | $          | 46,750,449 |       | $          | 57,517,974 |       | $ | 57,517,974 |   |

 

Each of the Company’sC-Block licenses is subject to an FCC requirement that the Company constructsnetwork facilities that offer coverage to at least one-third of the populationin the market covered by such license, within five years following the grant ofthe applicable license and to at least two-thirds of the population within tenyears following the grant.  Although theCompany’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 Company by the FCC.

 

On November 26,2003, the Partnership entered into an Agreement for Purchase and Sale ofLicenses with MetroPCS California/Florida, Inc. for the sale of thelicenses.  The adjusted selling price was$10,934,414, of which the Partnership received $1,500,000 as an option depositduring the year ended December 31, 2003. The licenses were sold during the year ended December 31, 2004,together with its related network infrastructure, with a book value at the saledate of $162,721.  Net gain in the saleof the California licenses amounted to $4,168.

 

**(10)****     Propertyand equipment:**

 

Property and equipment at December 31consist of:

 

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| ** **                                                                         | ** ** | **Estimated  Useful Lives  (In Years)** | ** ** | **2004**    | ** **  | **2003**    | ** ** | **2002**    | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
|                                                                               |       |                                    |       |        |        |        |       |        |       |
| Network infrastructure equipment                                                   |       | 10                                      |       | $           | 120,874,321 |        | $          | 119,201,947 |       | $ | 113,011,633 |   |
| Leasehold improvements                                                             |       | 5                                       |       | 5,651,228   |        | 5,126,022   |       | 4,906,427   |       |
| Furniture and fixtures                                                             |       | 5                                       |       | 24,499      |        | 24,499      |       | 23,964      |       |
| Computer and office equipment                                                      |       | 5                                       |       | 16,435,869  |        | 18,373,984  |       | 12,991,121  |       |
| Vehicles                                                                           |       | 5                                       |       | 375,499     |        | 665,682     |       | 706,639     |       |
| Network infrastructure equipment located in  California, not yet placed in service |       |                                    |       | —      |        | —      |       | 185,967     |       |
| California equipment                                                               |       | 10                                      |       | —      |        | 185,967     |       | —      |       |
|                                                                               |       |                                    |       |        |        |        |       |        |       |
| Total                                                                              |       |                                    |       | 143,361,416 |        | 143,578,101 |       | 131,825,751 |       |
|                                                                               |       |                                    |       |        |        |        |       |        |       |
| Less: accumulated depreciation and  amortization                                   |       |                                    |       | (66,290,076 | )           | (52,908,766 | )          | (35,890,721 | )          |
|                                                                               |       |                                    |       |        |        |        |       |        |       |
| Total                                                                              |       |                                    |       | 77,071,340  |        | 90,669,335  |       | 95,935,030  |       |
|                                                                               |       |                                    |       |        |        |        |       |        |       |
| Network under construction                                                         |       |                                    |       | 3,475,433   |        | 84,087      |       | 5,996,892   |       |
|                                                                               |       |                                    |       |        |        |        |       |        |       |
| Property and equipment, net                                                        |       |                                    |       | $           | 80,546,773  |        | $          | 90,753,422  |       | $ | 101,931,922 |   |

 

**(11)****     Saleand leaseback:**

 

Duringthe year ended December 31, 2004, the Company sold 12 network towers to athird party and leased back certain tower space, at a fixed monthly fee.  Following the provisions of SFAS No. 13and 98, the Company accounted for this transaction as a “sale and leaseback.”  Accordingly, the leased interest in thetowers was capitalized as a leasehold right for a total amount of $3,359,566,which represents the present value of the lease payments the Company will haveto make throughout the term of the agreements, at an imputed interest rate of12%.  The income generated on the sale,which amounted to $2,015,498, was deferred and will be amortized over a 10-yearperiod, which is the term of the lease. Deferred income recognized and leasehold amortization for the year endedDecember 31, 2004 amounted to $27,397 and $45,422, respectively.  See related Note (18)(a)(iii).

 

**(12)****     Short-termnotes payable – Bridge Loan facility:**

 

During November 2000, NewComm enteredinto a $60 million bridge loan agreement (the “Bridge Loan Facility”) withABN-AMRO and BBVA (the “Bank”) with interest at 1.5% over 90-day LIBOR, whichexpired on March 15, 2001, and was extended until June 22, 2001, withinterest at 2.50% over 90-day LIBOR.  TheBridge Loan Facility was then extended until March 17, 2002, with interestat .75% over 90-day LIBOR.  The BridgeLoan Facility is guaranteed by TISA and is 100% issued by ABN-AMRO, and itsmaturity date has been extended to April 30, 2005, with the option toextend by one or more additional periods of 30 days with the lender’s priorconsent.  During 2003, NewComm receivedan additional $1 million advance under the terms of this facility.  On December 18, 2003, the applicableinterest margin was reduced to LIBOR plus 0.40%, for the period commencingJanuary 2004.

 

This bridge loan agreement includes variousaffirmative and negative covenants.  Asof December 31, 2004, NewComm was in compliance with the requirementsunder such covenants.

 

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

 

Accounts payable and accrued liabilities atDecember 31 consist of:

 

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| ** **                                      | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**   | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Trade                                           |       | $         | 19,431,945 |      | $          | 16,456,872 |       | $ | 17,609,462 |   |
| Network construction costs                      |       | 2,370,676 |       | 59,339    |       | 483,211    |       |
| Other accounts payable and accrued  liabilities |       | 6,036,366 |       | 7,115,666 |       | 5,337,760  |       |
|                                            |       |      |       |      |       |       |       |
| Total                                           |       | $         | 27,838,987 |      | $          | 23,631,877 |       | $ | 23,430,433 |   |

 

**(14)****    ****Notes payable to TelefónicaMóviles, S.A.****-**

 

During 2003, NewComm received the principalsum of $5,493,642 from Telefónica Móviles, S.A., (TEM) a Spanish corporationand affiliated company through common management.  During January, April andJuly 2004, NewComm received additional advances from Telefónica Móviles,S.A. in the amount of $1,831,214 each, with the same terms and conditions.

 

The agreement provides for the principalamount to bear interest at a floating rate of one percent (1.00%) per annumover the 90 day LIBOR rate.  Accruedinterest shall be payable in arrears every six months.  Principal and interest on these notes, whichare unsecured, shall be payable in full within six months from the date ofissuance; however, such maturity date can be automatically extended for periodsof six months, thereafter.

 

These funds have been used to pay thequarterly principal and interest payments of the FCC debt.

 

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

 

**(a)****   LucentTechnologies –**

During 2000, NewComm’s management and Lucentagreed on formally extending the payment of up to $61.0 million of the totalamount due under the network construction payable.  The financing agreement was restructured as aPromissory Note on September 26, 2001, with a principal sum of $60.5million plus interest, due March 15, 2002. The interest rate on the Promissory Note was 14%, which increased to 16%if the promissory note was not satisfied by March 15, 2002.  NewComm was then given an extension onMarch 8, 2002 by****means of an AllongeLetter.  The letter came about as aresult of the signing of the Stock Purchase Agreement with TLD (refer to Note1) which agreement reduced the interest rate to 8%.

 

During June 2003, NewComm and Lucententered into a Senior Credit Agreement which refinanced the balance of theexisting promissory note balance.  Theinterest rate remained at 8% per annum and the maturity date was extended toSeptember 2009.  As part of therefinancing agreement, NewComm was required to make two principal payments of $5,551,032each, made during the first quarter of 2004.

 

The note payable is guaranteed by a securityagreement covering most of NewComm’s assets, as defined.

 

During the year ended December 31, 2004,NewComm paid the amount of $3,000,000.00 for principal payments.

 

The Senior Credit Agreement with Lucentincludes various affirmative, negative and financial covenants.  As of December 31, 2004, NewComm was incompliance with the requirements under such covenants.

 

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

On December 18, 2001, NewComm hadoutstanding invoices, payables, and past due interest due to Alcatel totaling$14,361,732.  In May 2002 NewCommpaid Alcatel $6,000,000 of which $5,437,184 was applied to the principalbalance. As per agreement the annual interest rate was fixed at 8%.  During June 2003, the promissoryagreement and note was amended as follows:

 

40

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•      Interest ratewas reduced to a fixed rate of 6.5% per annum.

 

•      Final maturitydate will be December 20, 2005.

 

NewComm madethe following payments as a result of the amendment:

 

•      Within threebusiness days after June 20, 2003 - $2,000,000 for principal.

 

•      OnJune 20, 2003, $337,372 for accrued interest.

 

•      Within threebusiness days after June 20, 2003 - $184,118 for outstanding invoices.

 

During the year ended December 31, 2004,NewComm paid the amount of $2,075,000 in principal payments.

 

The loan agreement with Alcatel includesvarious affirmative and negative covenants. As of December 31, 2004, NewComm was in compliance with therequirements under such covenants.

 

**(c)****   FCCnotes –**

Originally,the Company had approximately $51,340,000 in long-term debt related to the PCSlicenses granted to the Company 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 Company recorded the PCSlicenses and the related debt at their net present value, based on the Company’sestimate of borrowing costs for debt similar to that issued by the FCC.  The discount rate used by the Company was12.82%.  These notes are payable to theFCC as follows:

 

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

 

•      Quarterlyprincipal and interest payments of $3,669,768 from April 2003 throughJanuary 2007. (These quarterly payments have been made from funds loanedby TEM).

 

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

 

As of December 31, 2003, management from theCompany, TEM and TEF believed that they had enough and strong evidence that therefinancing of the Bridge loan and the FCC debt would be completed before theend of 2004.  Even with the FCC’sapproval of the conversion of the TLD Notes (see below) neither the refinancingof the Bridge Loan nor the FCC Note were completed during 2004.  As of the date of these financial statements,management was still in negotiations with TEM regarding the future payments andguarantees of these two debts.

 

Because of the evidence available as of December 31,2003, the Company’s management adjusted the balance as of that date of the FCCdebt discount, which amounted to $3,913,661. Following SFAS No. 145, “Rescission of FASB Statements No 4, 44 and64, Amendment of FASB Statement No. 13, and Technical Corrections,” theloss resulting from the adjustment of the FCC debt discount has been reflectedas interest expense in the other expenses section of the accompanyingstatement of operations.

 

**(d)****   TLDnotes –**

Originally, the Company had a securedpromissory note (the “Promissory Note”) payable to TLD amounting to$19,960,000, which bore interest at the floating rate of the 90-day LIBOR rateplus 1-1/2% and the balance of $24,852,533 was due in March 2004.  The principal amount of the Promissory Note,as amended, shall be converted into NewComm’s shares of common stock, asfollows:  (i)  shares of NewComm’sClass A common stock in an amount equal to thirty-three and one thirdpercent (33-1/3%) of NewComm’s issued and outstanding Class A common stockheld by ClearComm, and (ii) shares of NewComm’s Class B common stockin an amount equal to forty-nine point seven percent (49.7%) of all

 

41

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issued and outstanding shares of Class Acommon stock of NewComm (including the Class A common stock issued to TLDupon conversion of the Promissory Note). Upon the issuance of the FCC approval, TLD shall surrender thePromissory Note to NewComm, duly endorsed for cancellation, and NewComm shallissue (I) the certificates evidencing the number of shares of Class Acommon stock and Class B common stock into which the Promissory Note isconvertible, as set forth herein, and (II) a promissory note in a principalamount equal to the accrued interest on the Promissory Note as of such date(the “Interest Note”).  The promissorynote will be non-interest bearing and the principal amount may be convertedinto additional shares of NewComm’s stock. Because of restrictions in the PCS licenses, the Promissory Note cannotbe converted into shares of NewComm until such time as the FCC may authorizeTLD to hold more than a 25% equity interest in NewComm.  On January 1, 2004, this securedpromissory was amended to be due in December 2004, and to bear interest at1%.  During 2004, the FCC issued itsapproval for the conversion, but none of the events that were supposed to takeplace have occurred.

 

During 2001, the parties amended the JointVenture Agreement to eliminate TLD’s option to acquire a majority interest inNewComm from the Partnership, and revised the Promissory Note and correspondingunexecuted Interest Note to eliminate the Company’s conversion rights under thelatter instrument.

 

During November and December 2000,and May 2001, TLD loaned $14,970,000 to the Company and the Company issuedthree convertible unsecured promissory notes payable to TLD for the principalamount of $4,990,000 each.  Theconvertible promissory notes bear interest at .75% over the 180-day LIBOR(Notes one and two) and 1.50% over the 90-day LIBOR (Note three).  The principal amounts of the promissory notesare each convertible into 29.34 shares of NewComm’s Class A common stockat any time prior to their respective maturity dates of November 2, 2005,December 15, 2005 and May 1, 2006.

 

During May and December 2002, TLDloaned and the Company issued two additional unsecured promissory notes for$9.0 million and $9.9 million, respectively, convertible into 57.24 shares ofNewComm’s Class A common stock, with maturity dates of May 20, 2007and December 27, 2007, respectively. These convertible promissory notes bear interest at .25% over the 180-dayLIBOR (Note four) and .25% over the 90-day LIBOR (Note five).

 

On September 26, 2003, and as part of acorporate reorganization, TLD transferred all of NewComm’s notes to TLD 1,which in turn merged with Móviles 1, surviving TLD 1, which was later dissolvedresulting in TEM Puerto Rico, Inc., becoming the holder of all the securedand convertible promissory notes previously owned by TLD.

 

At December 31, 2004, future principalinstallments (after renegotiated terms) on these notes payables were asfollows:

 
| **Year ending  December 31,** | ** ** | **Lucent** | ** ** | **Alcatel** | ** ** | **FCC**     | ** ** | **TEM****(*)** | ** ** | **Total**   | ** ** |
|------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|-------------|------------|
|                               |       |       |       |        |       |        |       |           |       |        |       |
| 2005                               |       | $          | 6,000,000  |        | $          | 2,461,029   |       | $              | 16,133,067 |        | $          | 36,769,293 |   | $ | 61,363,389 |   |
| 2006                               |       | 6,000,000  |       | —      |       | 13,876,090  |       | 5,602,935      |       | 25,479,025  |       |
| 2007                               |       | 8,500,000  |       | —      |       | 3,611,088   |       | 19,725,702     |       | 31,836,790  |       |
| 2008                               |       | 10,000,000 |       | —      |       | —      |       | —         |       | 10,000,000  |       |
| 2009                               |       | 17,970,205 |       | —      |       | —      |       | —         |       | 17,970,205  |       |
|                               |       |       |       |        |       |        |       |           |       |        |       |
| Total                              |       | 48,470,205 |       | 2,461,029   |       | 33,620,245  |       | 62,097,930     |       | 146,649,409 |       |
|                               |       |       |       |        |       |        |       |           |       |        |       |
| Less current portion               |       | (6,000,000 | )          | (2,461,029  | )          | (16,133,067 | )          | (36,769,293    | )          | (61,363,389 | )          |
|                               |       |       |       |        |       |        |       |           |       |        |       |
| Long-term portion                  |       | $          | 42,470,205 |        | $          | —      |       | $              | 17,487,178 |        | $          | 25,328,637 |   | $ | 85,286,020 |   |

 

----

**(*)**  Includes principal balance and accruedinterest.

 

42

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**(16)****     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 establishingand developing NewComm’s strategic business policies, technical consultation inconnection with the design and development of networks, equipment selection,quality controls, billing platforms, customer service and in the identificationof new services and products.  NewComm isresponsible for all salaries, wages, benefits, expenses and any othercompensation of the officers, employees or agents selected by TLD in connectionwith its management services.  Thismanagement agreement required NewComm to pay an annual fee (payable quarterlyin arrears) based on the highest of 9% of Company’s earnings before interest,taxes, depreciation and amortization (“EBITDA”) as of the end of the previousyear or $750,000.  The initial term ofthis management agreement was five years beginning in February 4, 1999,and was automatically renewable.  During2002, the agreement was amended and as a result, this fee was payable to TEM.

 

In December 2003, TLD and TISA enteredinto an agreement whereby the Management Agreement was transferred to TEM withretroactive effect as of January 1, 2002, since TEM have been providingsuch services since that date.

 

The Management Agreement was terminatedeffective October 28, 2004.

 

**(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 $200,000. During 2004, the service agreement was amended to eliminate the legalconsultation services provided by TLD to NewComm.

 

**(c)****  **Inaddition, NewComm originally entered into a technology transfer agreement withTISA, 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. On January 1, 2000, the technology transfer agreement wastransferred to TEM.

 

The Technology Transfer Agreement wasterminated effective October 28, 2004.

 

**(d)****  **Atentode Puerto Rico, Inc., a related entity, provides NewComm call centerservices, including customer service and others based on arranged rates.  Please refer to Note (18)(b) for note oncancellation of agreement and related legal proceeding.

 

**(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, theGeneral Partner billed the partnership approximately $288,000, $282,280 and$262,164 during the years ended December 31, 2004, 2003 and 2002,respectively, in connection with these services.  As of December 31, 2004, 2003 and 2002,the Partnership owes its General Partner approximately $185,000, $155,000 and136,000, respectively related to management fees.

 

43

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**(f)****   **Thenote receivable from officer represents a loan made to the Partnership’sPresident.  This loan in unsecured, bearsinterest at 6% and is due on August 30, 2005.  Interest receivable related to this notereceivable amounted to $20,000, $14,000 and $8,000 at December 31, 2004,2003 and 2002, respectively.

 

**(g)****  **ThePartnership has incurred legal and consulting expenses paid to members of the Boardof Directors and shareholders of the General Partner amounting to approximately$536,213, $469,000 and $466,000 during the years ended December 31, 2004,2003 and 2002, respectively.

 

Total amounts charged by related partiesduring the years ended December 31, 2004, 2003 and 2002 for the aboveagreements and other charges amounted to $5,466,626, $4,090,826 and $6,070,538,respectively.

 

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

 
| ** **                                                      | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**   | ** ** |
|-----------------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| TLD                                                             |       | $         | 12,128,124 |      | $          | 9,608,940  |       | $ | 9,784,125 |   |
| TEM (TISA in 2001)                                              |       | 6,762,781 |       | 4,675,006 |       | 3,221,142  |       |
| Atento de  Puerto Rico, Inc.                               |       | 654,554   |       | 567,802   |       | 800,099    |       |
| Telefónica  Móviles y Soluciones y Aplicaciones, S.A. |       | 1,240,520 |       | 1,740,709 |       | 2,895,077  |       |
|                                                            |       |      |       |      |       |       |       |
|                                                            |       | $         | 20,785,979 |      | $          | 16,592,457 |       | $ | 16,700,443 |   |

 

**(17)****     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, 2004, 2003 and 2002 amounted to $195,345,$219,621 and $164,410, respectively.

 

**(18)****     Commitmentsand contingencies:**

 

**(a)**   **C****ommitments –**

 

(i)    TheCompany is committed under various operating lease agreements for its officespace as well as various sites for communication equipment and stores underdifferent terms and conditions.  Minimumannual rental commitments at December 31, 2004 are as follows:

 

44

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| **Year ending  December 31,** | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2005                               |       | $          | 6,362,828  |   |
| 2006                               |       | 4,051,337  |       |
| 2007                               |       | 3,621,645  |       |
| 2008                               |       | 3,422,824  |       |
| 2009                               |       | 1,665,353  |       |
|                               |       |       |       |
| Total                              |       | $          | 19,123,987 |   |

 

Rent expense for the years endedDecember 31, 2004, 2003 and 2002 was $6,929,312, $6,755,926 and$7,766,611, respectively.

 

(ii)   In December 2001, ClearComm enteredinto two lease agreements with Tower Asset Sub, Inc. (“Licensor”) for thelease of certain space on two towers operated by Licensor in California.  By means of the agreement, ClearComm wasgranted a license to install, maintain and operate its wireless communicationsequipment and accessories on the towers. Each agreement is for a five-year term, automatically renewed for fouradditional five-year terms.  Theagreements establish annual rental payments of $19,800 and $15,000,respectively, with an annual increase of 4%. These agreements were terminated during the year ended December 31,2004, after the sale of the California licenses.

 

(iii) NewCommentered into two lease agreements with Mountain Union for the lease of certainspace on 12 towers located in Puerto Rico. By means of the agreement, NewComm was granted a license to install,maintain and operate its wireless communications equipment and accessories onthe towers.  Each agreement is for a ten-yearperiod.

 

Futureinstallments of principal and imputed interest to be paid during the next fiveyears and thereafter are as follows:

 
| **Year Ending  December 31,**                           | ** ** | **Amount** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|
| 2005                                                         |       | $          | 578,400    |   |
| 2006                                                         |       | 578,400    |       |
| 2007                                                         |       | 578,400    |       |
| 2008                                                         |       | 578,400    |       |
| 2009                                                         |       | 578,400    |       |
| Thereafter                                                   |       | 2,813,800  |       |
|                                                         |       |       |       |
| Total future installments of principal and  imputed interest |       | 5,705,800  |       |
| Less imputed interest                                        |       | (2,370,046 | )          |
|                                                         |       |       |       |
| Present value of future principal  installments              |       | 3,335,754  |       |
| Less - current portion                                       |       | (185,164   | )          |
|                                                         |       |       |       |
| Long-term portion                                            |       | $          | 3,150,590  |   |

 

 

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

 

45

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•  Licensing agreement – for the use of theSCL software, specially designed for companies engaged in the operation ofmobile communication.  The total cost ofthe software for phase IV, capitalized during 2003, amounted to $973,735.

 

•  Maintenance and support services – forthe maintenance of the SCL software application and related consultingservices.  The agreement is for threeyears and the monthly fee is based on pre-determined rates and hours incurred.

 

•  Design, development and programmingservices – the agreement is for three years and the monthly fee is based onpre-determined rates and hours incurred.

 

As of December 31,2004, 2003 and 2002, the Company had an outstanding balance of $1,240,519,$1,740,709 and $2,895,078, respectively, related to these agreements, includedas accounts payable and accrued liabilities in the accompanying balancesheets.  Total expense pursuant to theseagreements for the years ended December 31, 2004, 2003 and 2002 was$1,509,283, $1,723,820 and $2,895,078, respectively.

 

(v)   The Company entered into an agreementwith Brightstar Corp. (“Brightstar”) for the selling, distribution andadministration of its inventories.  Thecontract was terminated effective January 31, 2005, by mutualagreement.  The warehousing and logisticfunctions are now performed under the Company’s management.

 

(vi)     The Companyentered into an Interconnection Agreement with Puerto Rico TelephoneCompany, Inc. (“PRTC”).  Theagreement, which is renewed on a yearly basis, provides for the delivery oflocal traffic to be terminated on each party’s local network so that customersof either party have the ability to reach customers of the other party.  The agreement establishes that compensationshall be paid by PRTC to NewComm and NewComm to PRTC at pre-determined rates.

 

(vii)    The Company entered into an Interconnection and Traffic InterexchangeAgreement for Telecommunications Services with Centennial Wireless PCSOperations Corporation (“Centennial”). The agreement, which is renewed on a yearly basis, provides for theparties to physically connect their switches and interchange traffic to allowsubscribers of Centennial to communicate with subscribers of NewComm and viceversa in their respective service areas. The agreement establishes that the cost of the communication servicesprovided are based on pre-determined rates.

 

(viii)   In July 1999, the Company entered into an Intercarrier RoamerService Agreement with Sprint Spectrum, LP (“Sprint”).  The agreement was entered into so that theparties can provide service to each other’s customers when the service isnecessary in a geographic area outside of the area served by the party withwhom it is registered and within the geographic service area served by theother party.  Each home carrier (NewCommand Sprint), whose customers receive service from the other serving carrier,shall pay 100% of the cost of such service (wireless services plus pass-throughcharges) to the other.

 

(ix)      During the yearended December 31, 2003, the Company entered into a service agreement withTelecommunication Systems, Inc. (TCS), whereby TCS agreed to providesoftware maintenance services in the areas of “assistance request management”(ARM) and product updates and upgrades. Services include: call receipt and routing, service restoration, problemresolution of reported conditions, on-site assistance, software updates andupgrades, hardware maintenance and hardware upgrades.  This service agreement is on a year-to yearbasis for a fixed annual fee of $299,450.

 

(x)       The Companyentered into an agreement with Lucent Technologies for the operation andmaintenance of the CDMA Network.  Theagreement was signed on March 1, 2004, valid for two years and shall beautomatically renewed by mutual agreement of the parties.  This service agreement is for a fixed monthlyfee of $125,750.

 

(xi)      In addition,the Company maintains other agreements with various service providers forperiods ranging

 

46

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from one to five years.  Services covered by these agreements includeelectronic checks, wireless local number portability, short message, invoiceprocessing, customer credit information and accounts receivable collections.

 

**(b)**   **Legal contingencies****–**

 

The Company is a defendant in a lawsuitbrought by Atento de Puerto Rico, Inc. (Atento) alleging breach ofcontract, damages, and collection of amounts for services rendered.  The plaintiff is seeking $665,540 ($484,212of this amount was owed and accrued by The Company as of December 31,2004) for services already rendered and $1,760,000 for breach of contract.  The case is in its early stages and nooutcome can be predicted.

 

The Company is also 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 Company’s financialposition and results of operations.

 

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

 

At December 31,2004, 2003 and 2002, the limited partners’ capital consisted of 2.765.2,2,906.1 and 2.906.1 units respectively, distributed among approximately 1,600limited partners.

 

The PartnershipAgreement provides that the Partnership may sell additional limited partnershipinterests after the initial offering to raise additional equity.  Cash flow received from normal operations ofthe Partnership which the General Partner, in its sole discretion, determinesto distribute to the investors of the Partnership, will be distributed 75% tothe limited partners and 25% to the General Partner.  For federal income taxes purposes, theoperating losses of the Partnership will be allocated first to the partners asnecessary to offset any profits previously allocated to them until each partnerhas cumulative losses equal to cumulative profits previously allocated to eachpartner, and second, 75% to the limited partners in accordance with the numberof units held by each limited partner and 25% to the General Partner.   However, any losses that would have theeffect of causing or increasing a partners’ capital account deficit will beallocated first, pro rata to the other partners in accordance with theirrespective share of partnership distributions, and second, when suchallocations can be made without increasing a partner’s capital account deficit,to the General Partner.

 

On May 12, 2004,the Partnership announced a voluntary program for its Limited Partners who ownfewer than two units of the Partnership to sell their units at a per-unit priceof $8,500.  Under the program, 140.9units were re-acquired by the Partnership, for a total of $1,197,640.

 

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

 

The Partnership, as a United States limitedpartnership, is not subject to federal income tax and the tax affect of itsactivities flow–through to the partners. For U.S. tax purposes the Partnership’s tax losses have been passedthrough to the limited partners to the extent of their investment.  The Partnership is subject to Puerto Ricoincome tax as a regular corporation.

 

For Puerto Rico taxpurposes the Partnership has net operating loss carryforwards totalingapproximately $7.6 million, available to reduce future taxable income.  The loss carryforwards expire in fiscal years2004 through 2010.

 

NewComm has net operating loss carryforwardstotaling approximately $182 million available to reduce future taxableincome.  The loss carryforwards expire infiscal years 2006 through 2010.

 

At December 31, 2004 the deferred taxasset resulting from future income tax benefits of the available operatinglosses was approximately $48 million, at the lower tax bracket.  A valuation allowance for the same amount hasbeen established due to the uncertainty as to the realization of the taxbenefit of such operating losses.

 

47

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

 

During the years ended December 31,2004, 2003 and 2002, the Company had the following non-cash investing andfinancing activities:

 

a.     Interestfor the period from January 1, 2003 through June 4, 2003, amountingto $2,040,572, was capitalized into the Lucent Technologies long-term debt.

 

b.     Interestfor the years ended December 31, 2004, 2003 and 2002, amounting to$897,421, $1,036,383 and $1,113,724, respectively, was capitalized as part ofthe TLD long-term debt.

 

c.     Invoicesdue to Alcatel in the amount of $413,319 were capitalized into the note payableduring 2002.  The amount was previouslypresented as accounts payable.

 

d.     Duringthe year ended December 31, 2004, the Company entered into asale-leaseback transaction where towers with a book value of $579,478 were soldfor $2,594,975, resulting in a gain of $2,015,498.  This gain was deferred and will be amortizedover a 10-year period.  The leaseinterest in the towers was capitalized as a leasehold right for a total amountof $3,359,566, of which $45,422 was amortized during 2004.

 

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

 

The amount presented as dilution gain in theaccompanying statements of changes in Partners’ deficit represents the effectof investments made by an outside minority interest investor during the year2002 ($10 million).  The equity gain isthe effect of the reduction of the Partnership’s participation in thestockholders’ deficit of NewComm, allocated to the limited partners and the GeneralPartner, based on their percentage of participation, 75% and 25%, respectively.

 

## **(23)****     Quarterlyfinancial information for 2004, 2003 and 2002:**

##  

Certain unauditedquarterly financial information for the years 2004, 2003 and 2002, follows:

 
| ** **                                             | ** ** | **2004**  | ** ** |
|--------------------------------------------------------|------------|-----------|------------|
| ** **                                             | ** ** | **March** | ** ** | **June** | ** ** | **September** | ** ** | **December** | ** ** |
|                                                   |       |      |       |   |   |   |   |   |   |
| **Revenues**                                           |       | $         | 28,314,821 |   | $ | 27,134,342 |   | $ | 25,131,484 |   | $ | 24,421,289 |   |
| ** **                                             |       |      |       |   |   |   |   |   |   |
| **Operating income (loss)**                            |       | $         | 2,053,411  |   | $ | 1,256,214 |   | $ | 287,351 |   | $ | (6,239,373 | ) |
| ** **                                             |       |      |       |   |   |   |   |   |   |
| **Net loss**                                           |       | $         | (4,539,179 | ) | $ | (5,694,373 | ) | $ | (6,623,282 | ) | $ | (13,272,309 | ) |
| ** **                                             |       |      |       |   |   |   |   |   |   |
| **Net income (loss) attributable to General  Partner** |       | $         | (4,539,179 | ) | $ | (5,694,373 | ) | $ | (6,623,282 | ) | $ | (13,272,309 | ) |
| ** **                                             |       |      |       |   |   |   |   |   |   |
| **Net income (loss) attributable to Limited  Partner** |       | $         | —     |   | $ | — |   | $ | — |   | $ | — |   |

 

48

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| ** **                                             | ** ** | **2003**  | ** **  |
|--------------------------------------------------------|------------|-----------|-------------|
| ** **                                             | ** ** | **March** | ** **  | **June** | ** ** | **September** | ** ** | **December** | ** ** |
|                                                   |       |      |        |   |   |   |   |   |   |
| **Revenues**                                           |       | $         | 26,294,881  |   | $ | 27,796,305 |   | $ | 26,719,677 |   | $ | 28,083,249 |   |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Operating income**                                   |       | $         | 2,658,790   |   | $ | 688,432 |   | $ | 3,836,544 |   | $ | 1,623,629 |   |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss)**                                  |       | $         | (14,067,360 | ) | $ | 6,805,295 |   | $ | (8,814,069 | ) | $ | (14,284,252 | ) |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss) attributable to General  Partner** |       | $         | (14,067,360 | ) | $ | 1,701,324 |   | $ | (3,710,098 | ) | $ | (14,284,252 | ) |
| ** **                                             |       |      |        |   |   |   |   |   |   |
| **Net income (loss) attributable to Limited  Partner** |       | $         | —      |   | $ | 5,103,971 |   | $ | (5,103,971 | ) | $ | — |   |

 
| ** **                                             | ** ** | **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 | ) | $ | — |   |

 

As discussed in Note 3(h) to theaccompanying consolidated financial statements, effective January 1, 2003,the Company changed its method to account for the loss on sale of handsets tocustomers.  The quarterly unauditedconsolidated financial information for the year ended December 31, 2003,was adjusted accordingly.

 

As discussed in Note 3(k) to the accompanyingconsolidated financial statements, the Company adopted SFAS 142 “Goodwill andother Intangibles Assets” on January 1, 2002.  The quarterly unaudited consolidatedfinancial information for the year ended December 31, 2002, was adjustedaccordingly.

 

49

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# **Report of Independent Public Accountants**

#  

# To the Boardof Directors of

#  

SuperTelCommunications Corp.:

 

We have audited the accompanying balancesheets of **SuperTel Communications Corp.**(“SuperTel”)as of December 31, 2004, 2003 and 2002, and the related statements ofincome and accumulated earnings (deficit), and cash flows for the years thenended.  These financial statements arethe responsibility of SuperTel’s management. Our responsibility is to expressan opinion on these financial statements based on our audits.

 

We conducted our audit in accordance withauditing standards generally accepted in the United States of America asestablished by the Auditing Standards Board of the American Institute ofCertified Public Accountants.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of SuperTel’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of **SuperTel Communications Corp**. asof December 31, 2004, 2003 and 2002, and the results of its operations andits cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.

 
| **/s/**Kevane Soto Pasarell  Grant Thornton LLP |   |
|-------------------------------------------------|--------|
|                                            |
| San Juan,  Puerto Rico,                         |
| February 9,  2005                          |

 

50

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**SuperTel Communications Corp.**

 

**Balance Sheets—December 31,2004, 2003, 2002**

 
| ** **                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **CURRENT ASSETS:**                                                                                          |       |     |       |     |       |     |       |
| Cash                                                                                                         |       | $        | 83,905     |     | $          | 2,188    |       | $ | 63,853 |   |
| Accounts receivable from affiliated company                                                                  |       | 178,756  |       | 154,934  |       | 136,154  |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total current assets                                                                                         |       | 262,661  |       | 157,122  |       | 200,007  |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Investment in partnership at equity, net                                                                     |       | —   |       | —   |       | —   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total assets                                                                                                 |       | $        | 262,661    |     | $          | 157,122  |       | $ | 200,007 |   |
|                                                                                                         |       |     |       |     |       |     |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                               |       |     |       |     |       |     |       |
|                                                                                                         |       |     |       |     |       |     |       |
| **CURRENT LIABILITIES:**                                                                                     |       |     |       |     |       |     |       |
| Accounts payable                                                                                             |       | $        | 94,650     |     | $          | 6,000    |       | $ | 69,900 |   |
| Income tax payable                                                                                           |       | 3,743    |       | 6,415    |       | 4,647    |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total current liabilities                                                                                    |       | 98,393   |       | 12,415   |       | 74,547   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| **STOCKHOLDERS’ EQUITY:**                                                                               |       |     |       |     |       |     |       |
| Preferred stock, no par value, 1,000 shares  authorized, non-voting, none issued                             |       | —   |       | —   |       | —   |       |
| 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     |       | —   |       | —   |       | —   |       |
| Additional paid-in capital                                                                                   |       | 148,746  |       | 148,746  |       | 148,746  |       |
| Retained Earnings (accumulated deficit)                                                                      |       | 14,522   |       | (5,039   | )          | (24,286  | )          |
|                                                                                                         |       |     |       |     |       |     |       |
| Total stockholders’ equity                                                                              |       | 164,268  |       | 144,707  |       | 125,460  |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                              |       | $        | 262,661    |     | $          | 157,122  |       | $ | 200,007 |   |

 

The accompanying notes are an integral part of these balance sheets.

 

51

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**SuperTelCommunications Corp.**

 

**Statements of Income and RetainedEarnings (Accumulated Deficit)For the Years Ended December 31, 2004, 2003, 2002**

 
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                |       |     |       |     |       |     |       |
| **REVENUES:**                                             |       |     |       |     |       |     |       |
| Management fees                                           |       | $        | 287,499    |     | $          | 282,280  |       | $ | 262,164 |   |
|                                                      |       |     |       |     |       |     |       |
| **EXPENSES:**                                             |       |     |       |     |       |     |       |
| Directors’ fees                                      |       | 250,000  |       | 250,000  |       | 218,750  |       |
| Other general and administrative expenses                 |       | 14,610   |       | 6,618    |       | 19,581   |       |
|                                                      |       |     |       |     |       |     |       |
| Total administrative expenses                             |       | 264,610  |       | 256,618  |       | 238,331  |       |
|                                                      |       |     |       |     |       |     |       |
| **INCOME BEFORE PROVISION FOR INCOME TAX**                |       | 22,889   |       | 25,662   |       | 23,833   |       |
|                                                      |       |     |       |     |       |     |       |
| Provision for income tax                                  |       | 3,328    |       | 6,415    |       | 4,647    |       |
|                                                      |       |     |       |     |       |     |       |
| **NET INCOME**                                            |       | 19,561   |       | 19,247   |       | 19,186   |       |
| ** **                                                |       |     |       |     |       |     |       |
| **ACCUMULATED DEFICIT, beginning of year**                |       | (5,039   | )          | (24,286  | )          | (43,472  | )          |
| ** **                                                |       |     |       |     |       |     |       |
| **RETAINED EARNINGS (ACCUMULATED DEFICIT),  end of year** |       | $        | 14,522     |     | $          | (5,039   | )          | $ | (24,286 | ) |

 

The accompanying notesare an integral part of these statements.

 

52

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**SuperTelCommunications Corp.**

 

**Statements of Cash FlowsFor the Years Ended December 31, 2004, 2003, 2002**

 
| ** **                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                     |       |     |       |     |       |     |       |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                |       |     |       |     |       |     |       |
| Net income                                                                               |       | $        | 19,561     |     | $          | 19,247   |       | $ | 19,186 |   |
|                                                                                     |       |     |       |     |       |     |       |
| Adjustments to reconcile income to net cash  provided (used in) by operating activities- |       |     |       |     |       |     |       |
| (Increase) decrease in accounts receivable  from affiliated company                      |       | (23,822  | )          | (18,780  | )          | 1,384    |       |
| Decrease in prepaid expenses                                                             |       | —   |       | —   |       | 2,760    |       |
| (Decrease) increase in accounts payable                                                  |       | 88,650   |       | (63,900  | )          | 32,169   |       |
| Increase in income tax payable                                                           |       | (2,672   | )          | 1,768    |       | 4,647    |       |
|                                                                                     |       |     |       |     |       |     |       |
| Total adjustments                                                                        |       | 62,156   |       | (80,912  | )          | 40,960   |       |
|                                                                                     |       |     |       |     |       |     |       |
| **NET CASH PROVIDED BY (USED IN) OPERATING  ACTIVITIES AND INCREASE (DECREASE) IN CASH** |       | 81,717   |       | (61,665  | )          | 60,146   |       |
|                                                                                     |       |     |       |     |       |     |       |
| **CASH, beginning of year**                                                              |       | 2,188    |       | 63,853   |       | 3,707    |       |
| ** **                                                                               |       |     |       |     |       |     |       |
| **CASH, end of year**                                                                    |       | $        | 83,905     |     | $          | 2,188    |       | $ | 63,853 |   |

 

The accompanying notesare an integral part of these statements.

 

53

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**SuperTelCommunications Corp.**

 

**Notes to Financial Statements**

**December 31,2004, 2003, 2002**

 

**(1)****   Reporting entity:**

 

SuperTel CommunicationsCorp., a Puerto Rico corporation (“SuperTel”), was organized on June 7,1996, under the laws of the Commonwealth of Puerto Rico.  SuperTel was created to serve as generalpartner (the “General Partner”) of ClearComm, L.P., a Delaware limitedpartnership (the “Partnership”). SuperTel is entitled to 25% of all distributions made by thePartnership.

 

Most of SuperTel’s transactions are relatedto the administration of ClearComm, a limited partnership organized onJanuary 24, 1995 under the laws of the State of Delaware, for whichSuperTel has served as General Partner since June 18, 1996.  The Partnership is scheduled to terminate onDecember 31, 2005, or earlier upon the occurrence of certain specificevents as detailed in the Partnership agreement.  SuperTel, as General Partner of thePartnership, is considering alternatives to dissolution, including an extensionof the Partnership’s termination date. On January 22, 1997, thePartnership was granted the PCS Block C licenses for Puerto Rico and certainwestern states of the United States.  OnFebruary 4, 1999, the Partnership entered into an agreement withTelefónica Larga Distancia de Puerto Rico, Inc. (TLD); several of therelevant provisions of this agreement are the following:

 

•      The Partnershiptransferred all of its Puerto Rico licenses including its related debt with theFCC (the Partnership’s contribution) to NewComm Wireless Services, Inc. (“NewComm”),a newly organized Puerto Rico corporation owned by the Partnership, in exchangefor all of NewComm’s issued and outstanding common stock.  Subsequently, the Partnership sold part ofits investment in NewComm, and as of December 31, 2004 and 2003, 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 this provisionof 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 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 (now assigned to Telefonica Moviles,S.A. or TEM) ownership to 50.1%; this transaction will be consummated after athird party valuation of NewComm’s stocks and should be subject to the approvalfrom the FCC. During 2004, the Partnership and TLD received the approval fromthe FCC, but the conversion and additional sale of participation has not beenconsummated.

 

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

 

On August 28, 2000,the Partnership entered into a Purchase and Sale Agreement with Leap WirelessInternational (Leap Wireless), pursuant to which the Partnership sold theVisalia, California license to Leap Wireless in exchange for a $9,500,000 cashpayment.  The transaction closed onJune 8, 2001.

 

On March 2, 2002,the Partnership sold approximately 4.08% of its investment in NewComm to agroup of investors led by Fleet Development Ventures for $13 million.

 

During 2004, thePartnership sold its California PCS licenses to a third party.

 

54

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**(2)****  ****Summary of significant   accountingpolicies:**

 

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 –**

SuperTel carries itsinvestment in its 25% owned partnership on the equity basis of accounting, thusreflecting its share of the partnership’s net income (loss) in the accompanyingstatements of operations.  (See Note 3).

 

**Income taxes-**

 

In accounting for incometaxes, SuperTel 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 any deferred tax asset for which, basedon management’s evaluation, it is more likely than not (a likelihood of morethan 50%) that some portion of the deferred tax asset will not be realized.

 

**(3)****  ****Investment in the Partnership:**

 

Originally, SuperTelacquired its 25% investment in the Partnership for $100,000.  Adjustments to the recorded amount of thisinvestment were made following the equity method of accounting and in 1996 thisinvestment was written-down to zero.  Asof December 31, 2004, 2003 and 2002, SuperTel’s share of the undistributedlosses of the Partnership amounted to approximately $7.5 million, $7.6 millionand $3.3 million, respectively.  SuperTelwould have to first recover its share of the Partnership undistributed lossesbefore it could pick-up any share of the Partnership’s gains.

 

**(4)****  ****Related party transactions:**

 

ClearComm’s partnershipagreement, as amended, provides for payment of a management fee to its GeneralPartner (SuperTel), equal to the reasonable costs of operating the business ofthe Partnership, plus 10% of such aggregate amount, which fee shall be payablemonthly, 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.  During 2004, 2003 and 2002, management feesbilled to ClearComm amounted to $287,499, $282,280 and $262,164, respectively.

 

All other related partytransactions are advances from / to affiliated entities made in the ordinarycourse of business.  These advances arenot interest bearing.

 

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

 

SuperTel is authorizedto issue 1,000 shares of restricted, non-voting, preferred stock without parvalue.  The preferred shares are dividedinto classes, from A to J with 100 shares of each class and upon theirissuance, SuperTel has the option to redeem them at their issuance price plusaccrued dividends.  At December 31,2004, 2003 and 2002, none of the preferred shares had been issue.

 

55

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

 

From time to timeSuperTel and/or the Partnership are involved in litigation arising in theordinary course of business, some of which are ongoing.  Management does not believe that anylitigation involving the SuperTel or the Partnership will have a materialadverse effect on the SuperTel or the Partnership’s business or financialcondition.

 
| **ITEM 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

None.

 

**ITEM 9A.CONTROLS AND PROCEDURES**

 

The Partnership’s management, including its Presidentand Chief Financial Officer, have conducted an evaluation of the effectivenessof the Partnership’s and Subsidiary’s disclosure controls and procedures asdefined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of adate within 90 days of the filing of this Annual Report on Form 10-K/A(the “Evaluation Date”).  Based on theevaluation, the President and Chief Financial Officer concluded that as of theEvaluation Date, the disclosure controls and procedures are effective in ensuringthat all material information required to be filed in this annual report hasbeen made known to them in a timely fashion. There have not been any changes in internal controls, or in factors thatcould significantly affect internal controls, subsequent to the date thePresident and Chief Financial Officer completed their evaluation.

 

##### **ITEM 10.  DIRECTORS AND EXECUTIVEOFFICERS**

#####  

SuperTelCommunications Corp. was incorporated in Puerto Rico in June 1996 for thepurpose of acting as the general partner (the “General Partner”) of thePartnership.  SuperTel was structured toensure that the Partnership would receive the maximum benefits eligible toEntrepreneurs.  The Partnership has noemployees and is managed and controlled by the Board of Directors and executiveofficers of the General Partner.

 

56

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*Fred H.Martinez, Director and Chairman of the Board*, age 60,has been chairman of the board of trustees of the University of Puerto Ricofrom 1993 to 1999.  Mr. Martinez isco-managing partner of Puerto Rico’s third largest law firm.  During 1977 to 1979, Mr. Martinez wasdirector of the Puerto Rico Income Tax Bureau, member of the Governor’sEconomic Advisory Council, chairman of the Committee on Section 936, Governmentof Puerto Rico, assistant secretary of the treasury, Internal Revenue, PuertoRico Treasury Department (1978- 1979), president of the Tax Committee, PuertoRico Chamber of Commerce (1978-1979).  In1993 he was chairman of the board of the Solid Wastes Management Authority,Government of Puerto Rico. Mr. Martinez has extensive experience in contract negotiations,corporate and tax law, and in directing major institutions.  He holds a BS in Economics from VillanovaUniversity (1967), an LLB (law) from the University of Puerto Rico (1971), andan LLM (taxation) from Georgetown University (1972).

 

*Javier O.Lamoso, Director and President,*age 40, has hadextensive experience in the telecommunications industry and has beenresponsible for developing, negotiating and overseeing numerous strategicoperational, economic and political aspects of the cellular telephone industry,including cell-site acquisition, environmental impacts, leasing contractualarrangements 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 theYoung Presidents’ Organization, Puerto Rico Chapter.  Until 1994, Mr. Lamoso acted as counselto the Puerto Rico Cable Operators Association in various matters, whichinclude the negotiation of rates and levies and the drafting of newlegislation.  From 1986 to 1987Mr. Lamoso held a non-legal position in the corporate finance departmentof Simpson, Thacher & Bartlett, and was involved with the successfulexternal debt restructuring of Chile in 1987. He holds a BA in Political Science/ Economics from Fordham University(1986), and a JD in law from the University of Puerto Rico (1990).

 

*Margaret W.Minnich, Director*, age 51, has held management andsupervisory positions in finance and accounting over a 20-year period in thenon-profit, manufacturing and public accounting field.  In the past, she has been a member of the boardof several privately-held companies and a private foundation.  From 1992 to the present, she has worked forThe California Wellness Foundation and since December 1997 has served asVice President of Finance and Chief Financial Officer, and is responsible forall financial reporting, accounting, budgeting and tax functions includinginvestment performance and asset allocation review of a $900 million investmentportfolio, and managing cash flow for an annual budget exceeding $45 million.  From 1984 through 1990, Ms. Minnich heldseveral key positions with MICOM Communications Corporation, including managerof financial planning where she directed all accounting and financialfunctions.  From 1981 to 1984, Ms. Minnichwas a senior accountant with Ernst & Young, Los Angeles, specializingin electronics, aerospace and heavy industry fields.  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 56, is theco-managing partner of Puerto Rico’s third largest law firm with substantialexpertise in the fields of corporate finance, administrative law, securitiesand banking.  He is a member of the TrialLawyers Association of America, served as a member of the Inter-American LawReview from 1973 to 1974, and has written for that publication in thepast.  He holds a BA (1971) and a JD(1974) from the Inter-American University of Puerto Rico, and a LL.M. in laborlaw from New York University (1975). Mr. Odell has served in the capacity of secretary for several majorcorporations, including Buenos Aires Embotelladora, S.A. (BAESA).

 

*James T. Perry, Director*,age 72, 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 beeninvolved in several wireless communication partnerships.  From 1987 to 1993, he was general partner ofTelenode Rincon, the original owner and developer of the RSA cellular telephonesystem for PR-1, which was successfully acquired by CellularCommunications, Inc., as well as managing other cellular telephone andtelecommunications holdings.  From 1959to 1975, Mr. Perry was the president and/or owner of several successfullicensed real estate firms including United Realty Group, Milwaukee, thelargest black-owned real estate firm in Wisconsin, and Perry and SherardRealty, Milwaukee, which specialized in rehabilitating and selling between 75to 100 properties per year utilizing a staff of approximately 30 people.  From 1975 to 1992, Mr. Perry owned andoperated a McDonald’s franchise in Saint Louis, Missouri, and was responsiblefor all operations of this successful business. Mr. Perry served in theU.S. Army in Korea, and has taken extensive courses in the fields of generalbusiness and real estate.  From 1988 to1992 he was vice president of the Ronald McDonald Children’s Charities, andfrom 1980 to 1984 he served as a member of the McDonald’s AdvertisingCommittee.  His memberships include theboard of directors of the Skinker DeBaliviere Business

 

57

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Association, Hamilton Community Schools, Saint Louis, and theadmissions committee of the Milwaukee Board of Realtors.  He is a past president of the Urban BrokersAssociation, and a director of the Multiple Listing Service.

 

*Edileen Salicrup, Chief Financial Officer*,age 41, has been engaged in the telecommunications industry since 1992 when shejoined the international accounting firm Arthur Andersen, LLP and was in chargeof the Telefónica Group account after 5 years as a Certified Public Accountantin the Tax Division of Deloitte and Touche, LLP.  Mrs. Salicrup joined the Partnership asan Independent Contractor on September 1999 to the present and as CFO iscurrently in charge of accounting, taxation and financial matters of thePartnership and its General Partner and oversees and integrates the financialoperations of the Partnerships subsidiaries. Mrs. Salicrup is an active member of the Puerto Rico Society ofCertified Public Accountants and the American Institute of Certified PublicAccountants.  She has been an instructorfor the Puerto Rico Society of CPA’s in taxation matters.

 

Section 16(a) Beneficial OwnershipReporting Compliance

 

Based solelyupon a review of any Forms 3, 4 and 5 and any amendments thereto furnished tothe Registrant pursuant to Rule 16a-3(e) of the Rules of theSecurities and Exchange Commission, the Registrant is not aware of any failureof any officer or director of the General Partner or beneficial owner of morethan ten percent of the Units to timely file with the Securities and ExchangeCommission any Form 3, 4 or 5 relating to the Registrant for 2003.

 

Codes of Ethics

 

ThePartnership has adopted a code of ethics that applies to all of its directors,officers, employees, and representatives. The Partnership will provide to any person without charge, upon writtenrequest sent to the Partnership’s principal executive office, a copy of suchcode of ethics.

 

Audit Committee Financial Expert

 

The Board of Directors of thePartnership’s General Partner has determined that the Partnership does not havean audit committee financial expert, as such term is defined in Item401(h)(2) of Regulation S-K, serving on its audit committee.  Nevertheless, the board members currentlyserving on the audit committee possess (i) an understanding of generallyaccepted accounting principles and financial statements, (ii) the abilityto assess the general application of such principles in connection with theaccounting for estimates, accruals and reserves, (iii) an understanding ofinternal control over financial reporting, and (iv) an understanding ofaudit committee functions.

 

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

#####  

ThePartnership is managed by the General Partner’s Board of Directors andexecutive 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 followingSummary Compensation Table sets forth certain information concerning the cashand non-cash compensation earned by or awarded to the chief executive officerof the Partnership’s General Partner. Other than the President, no executive officer of the General Partnerreceived compensation of $100,000 or more in 2004.

 

58

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**SUMMARYCOMPENSATION TABLE**

 
| ** **                    | ** ** | ** **              | ** ** | ** **       | ** ** | ** **   | ** ** | ** **       | ** ** | **Long-Term Compensat ion Awards** | ** ** | ** **        | ** ** |
|-------------------------------|------------|-------------------------|------------|------------------|------------|--------------|------------|------------------|------------|------------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **Annual Compensation** | ** ** | **Securities**   | ** ** | ** **   | ** ** |
| ** **                    | ** ** | ** **              | ** ** | ** **       | ** ** | ** **   | ** ** | **Other Annual** | ** ** | **Underlying**                     | ** ** | **All Other**     | ** ** |
| **Name & Principal** | ** ** | **Fiscal**              | ** ** | **Compensation** | ** ** | ** **   | ** ** | **Compensation** | ** ** | **Options/SA**                     | ** ** | **Compensations** | ** ** |
| **Position**                  | ** ** | **Year**                | ** ** | **($)**          | ** ** | **Bonus($)** | ** ** | **($)(1)**       | ** ** | **R’s**                       | ** ** | **($)**           | ** ** |
| Javier Lamoso, President      |       | 2004                    |       | $                | 76,000     |         | $          | 0                |       | $                                  | 185,000    |              | 0          |   | $ | 0 |   |
| and Director                  |       | 2003                    |       | $                | 76,931     |         | $          | 0                |       | $                                  | 185,000    |              | 0          |   | $ | 0 |   |
|                          |       | 2002                    |       | $                | 75,200     |         | $          | 0                |       | 203,750                            |       | 0                 |       | $ | 0 |   |

 

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(1)   Consists ofprofessional fees from the Partnership and director’s fees from SuperTel.

 

On August 30, 2001, the Partnership loaned $100,000 to JavierLamoso.  Mr. Lamoso signed apromissory note whereby he promised to pay the $100,000 plus six percent (6%)annual interest rate, on the earlier of August 30, 2005 or on the date oftermination of his employment with the Partnership.

 

**ITEM 12.  SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Exclusivemanagement and control of the Partnership’s business is vested in the GeneralPartner.  The Partnership has oneadministrative employee and is managed and controlled by the Board of Directorsand executive officers of the General Partner. The General Partner owns 100% of the Partnership’s general partnershipinterest.  The shares of General Partnerare held by certain individuals and Puerto Rico trusts.

 

The followingtable sets forth, as of December 31, 2004, information with respect tobeneficial ownership of the Partnership’s Units by: (i) all persons knownto 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 officersand Directors as a group of the General Partner.  All persons listed have sole voting andinvestment power with respect to their Units, unless otherwise indicated.

 

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| **Name of Beneficial Owner**                                                            | ** ** | **Units Beneficially  Owned** | ** ** | **Percentage  Ownership** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|
| Fred H. Martinez(1)                                                                     |       | 4.4                           |       | *                         |       |
| Javier O. Lamoso(2)                                                                     |       | 1.0                           |       | *                         |       |
| Margaret W. Minnich(3)                                                                  |       | 2.0                           |       | *                         |       |
| James T. Perry(4)                                                                       |       | 3.4                           |       | *                         |       |
| Lawrence Odell(5)                                                                       |       | 4.4                           |       | *                         |       |
|                                                                                    |       |                          |       |                      |       |
| All executive officers and directors of the  General Partner as a group (5 persons) (6) |       | 12.8                          |       | *                         |       |

 

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* Less than 1.0%.

 

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

(2)   Mr. Lamosois President of the General Partner and a member of the Board of Directors.

(3)   Ms. Minnichis a Director.  Ms. Minnich is theCo-Trustee of the J.B. Wharton Trust CF/B/O Margaret Minnich U/A/D 11/13/67, which owns 1 Unit reflected in thetable.

(4)   Mr. Perryis a Director.

(5)   Mr. Odellis a Director and Secretary of the General Partner.  Mr. Martínez and Mr. Odell aretrustees of Martínez Odell & Calabria Pension Fund, which owns 2.4Units reflected in the table.

(6)   Althoughownership of the 2.4 Units held in the Martínez Odell & CalabriaPension Fund is attributed to both Mr. Martínez and Mr. Odell intheir respective capacities as trustees of such Fund (see notes (1) and(5) above), the aggregate number of shares owned by all executive officersand directors of the General Partner as a group counts these 2.4 Units only onetime.

 

##### **ITEM 13.  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

#####  

**General Partnership Interest**

 

SuperTelcontributed $100,000, which entitled it to receive 100% of the Partnership’sgeneral partner interest.  The generalpartner interest entitles the General Partner to 25% of the equity of thePartnership.  See Item 5.

 

**Management Fee**

 

The PartnershipAgreement provides that the General Partner is entitled to a management fee forall reasonable operating expenses, plus 10% of such expenses.  The total management fee for 2004 and 2003was approximately $287,000 and $282,000, respectively.  The management fee is paid on a monthlybasis.

 

**Other Relationships and Transactions**

 

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

 

**ITEM 14,  PRINCIPAL ACCOUNTINGFEES AND SERVICES**

 

(a)** **Audit Fees:

Aggregate fees billed in connection with theaudits of the financial statements for the years ended December 31, 2004and 2003 amounted to $120,801 and $95,999, respectively.

 

Aggregate fees billed in connection with thereview of quarterly financial information amounted to $41,245 for the yearended December 31, 2004 and  $27,610for the year ended December 31, 2003.

 

(b)** **Audit-Related Fees:

None.

 

(c)** **Tax Fees:

Aggregate fees billed in connection with taxand related consulting services for the years ended December 31, 2004 and2003 amounted to $31,216 and $20,323, respectively.

 

60

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(d)** **All Other Fees:

None

 

**ITEM 15.  EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

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

 
| (1) Financial  Statements                                                                                            |
|---------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                      |
| ClearComm,  L.P.                                                                                                          |
|                                                                                                                      |
| Report of Independent Public Accountants —  December 31, 2004, 2003 and 2002                                    |
|                                                                                                                      |
| Consolidated Balance Sheets - December 31, 2004, 2003 and 2002                                                       |
|                                                                                                                      |
| Consolidated Statements of Operations for  the years ended - December 31, 2004, 2003 and 2002                        |
|                                                                                                                      |
| Consolidated Statements of Changes in  Partners’ Deficit for the years ended - December 31, 2004, 2003 and 2002 |
|                                                                                                                      |
| Consolidated Statements of Cash Flows for  the years ended - December 31, 2004, 2003 and 2002                        |

 

61

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| Notes to Consolidated Financial Statements                                                                             |
|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |
| SuperTel Communications Corp.                                                                                          |
|                                                                                                                   |
| Report of Independent Public Accountants —  December 31, 2004, 2003 and 2002                                 |
|                                                                                                                   |
| Balance Sheets - December 31, 2004,  2003 and 2002                                                                |
|                                                                                                                   |
| Statements of Income and Accumulated  Deficit for the years ended December 31, 2004, 2003 and 2002                |
|                                                                                                                   |
| Statements of Cash Flows for the years  ended December 31, 2004, 2003 and 2002                                    |
|                                                                                                                   |
| Notes to Financial Statements                                                                                          |
|                                                                                                                   |
| (2) Financial  Statement Schedules - None.                                                                        |
|                                                                                                                   |
| (3) List  of Exhibits:                                                                                            |
|                                                                                                                   |
| Exhibit  31.1:  Certification of Chief Executive Officer pursuant to Rule  13a-14(a)/15d-14(a).              |
|                                                                                                                   |
| Exhibit  31.2:  Certification of Chief Financial Officer pursuant to Rule  13a-14(a)/15d-14(a).              |
|                                                                                                                   |
| Exhibit  32.1:  Certification Pursuant to Section 1350 of Chapter 63 of  Title 18 of the United States Code. |
|                                                                                                                   |
| Exhibit  32.2:  Certification Pursuant to Section 1350 of Chapter 63 of  Title 18 of the United States Code. |
|                                                                                                                   |
| (b) Reports on Form 8-K                                                                                      |
|                                                                                                                   |
| None                                                                                                                   |
|                                                                                                                   |
| (c) Principal Officer Certifications – Exhibits 31 and 32.                                                   |

 

62

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf 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 tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**             | ** ** | **Capacity in Which Signed**       | ** ** | **Date**     |
|---------------------------|------------|------------------------------------|------------|--------------|
|                      |       |                               |       |         |
| /s/ Fred H. Martínez |       | Director and Chairman of the Board |       | June 1, 2005 |
| Fred H. Martínez     |       |                               |       |         |
|                      |       |                               |       |         |
| /s/ Javier O. Lamoso      |       | Director and President             |       | June 1, 2005 |
| Javier O. Lamoso          |       |                               |       |         |
|                      |       |                               |       |         |
| /s/ Margaret W. Minnich   |       | Director                           |       | June 1, 2005 |
| Margaret W. Minnich       |       |                               |       |         |
|                      |       |                               |       |         |
| /s/ Lawrence Odell        |       | Director                           |       | June 1, 2005 |
| Lawrence Odell            |       |                               |       |         |
|                      |       |                               |       |         |
| /s/ James T. Perry        |       | Director                           |       | June 1, 2005 |
| James T. Perry            |       |                               |       |         |

 

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