**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-K/A**

(Amendment No. 2)

 

**For Annual and Transition Reports to Section 13or 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’s Telephone Number, Including AreaCode: **(787) 620-0140**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

Name of Each ExchangeTitle of Each Class on Which RegisteredSecurities registered pursuant to Section 12(g) of the Act:

 

**Units ofLimited Partnership Interest**

(Title of class)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  ý  No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405) is not contained herein, and will not be contained, to the best ofregistrant’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 by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes  o  No  ý

 

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

 

Documents incorporated byreference.          **None**.

 

 

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**ClearComm,L.P.**

 

**CLEARCOMM, L.P. ( THE “PARTNERSHIP”) RESTATEDITS CONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEARS ENDED DECEMBER 31,2001 AND DECEMBER 31, 2000. OUR PRIOR INDEPENDENT ACCOUNTANTS, ARTHURANDERSEN LLP, ARE NOT ABLE TO REISSUE THEIR REPORT RELATING TO THE PARTNERSHIP’SFINANCIAL STATEMENTS FOR 2001 AND 2000 OR TO AUDIT THE RESTATEMENT ADJUSTMENTSBECAUSE THEY CEASED OPERATIONS IN 2002.  THE PARTNERSHIP BELIEVES THAT THE EFFECT OF THE ADJUSTMENTS MADE IN THERESTATED FINANCIAL STATEMENTS, AND THE NATURE OF THE ACCOUNTING ISSUESADDRESSED BY THOSE ADJUSTMENTS, DO NOT HAVE A MATERIAL EFFECT ON THEPARTNERSHIP’S FINANCIAL POSITION AS A WHOLE OR ON THE PARTNERSHIP’S INVESTORS,CREDITORS, SUPPLIERS, EMPLOYEES OR CUSTOMERS. THEREFORE, THE PARTNERSHIP BELIEVES THAT A RE-AUDIT OF THE PARTNERSHIP’S2001 AND 2000 CONSOLIDATED FINANCIAL STATEMENTS IS UNNECESSARY.  ACCORDINGLY, OUR CONSOLIDATED FINANCIALSTATEMENTS FOR THE CALENDAR YEAR ENDED DECEMBER 31, 2001 AND DECEMBER 31,2000 ARE RESTATED AND UNAUDITED.  OURAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE CALENDAR YEARS ENDED DECEMBER 31,2004, 2003 AND 2002 ARE INCLUDED AS PART OF THIS ANNUAL REPORT ON FORM 10-K/A.**

 

**THE RESTATEMENTS OF THE PARTNERSHIP’S CONSOLIDATEDFINANCIAL STATEMENTS FOR THE CALENDAR YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31,2000 ARE DESCRIBED IN DETAIL WITHIN ITEM 7, “MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.**

 

TABLEOF CONTENTS

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

 

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##### **Part I**

#####  

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

#####  

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

 

Actual future performance,outcomes and results may differ 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 and changesin the telecommunications industry; ongoing deregulation (and the resultinglikelihood of significantly increased price and product/service competition) inthe telecommunications industry as a result of the Telecommunications Act of1996 and other similar federal and state legislation and the federal and state rules andregulations enacted pursuant to that legislation; regulatory limitations on thePartnership’s ability to compete in the telecommunications services industry;and continuing consolidation in the telecommunications services industry.  In addition to these factors, actual futureperformance, outcomes and results may differ materially because of other, moregeneral, factors including, without limitation, general industry and marketconditions and growth rates, domestic and international economic conditions,governmental and public policy changes and the continued availability offinancing in the amounts, at the terms and on the conditions necessary tosupport the Partnership’s future business.

 

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

#####  

**General**

 

ClearComm, L.P., a Delawarelimited partnership (the “Partnership” or “ClearComm”), was formed on January 24,1995 under the name PCS 2000, L.P., to own and operate broadband personalcommunications services (“PCS”) licenses to be acquired in auctions conducted bythe Federal Communications Commission (the “FCC”).  The Partnership competed for PCS licenses infrequency Block C, set aside for “designated entities” (“Entrepreneurs”) thatmet certain financial and equity structure requirements and that qualify for certainbenefits under rules, regulations and policies of the FCC and related statutoryprovisions (“FCC Rules”).

 

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

 

The Agreement of LimitedPartnership of the Partnership (the “Partnership Agreement”) provides that thePartnership will terminate on December 31, 2005. The Partnership willdissolve on such date (unless terminated earlier or unless the PartnershipAgreement is amended to change such date). The Partnership Agreement also provides for a reasonable time to wind-upthe affairs of the Partnership in case of termination.  The Partnership’s General Partner, SuperTelCommunications Corporation, is considering alternatives to dissolution,including an extension of the Partnership’s termination date that would requirethe 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 were reported to the Board of Directors of NewComm on September 30,2004 with the conclusion that TEM had not performed adequately.  Under the Partnership’s direction, the 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**

 

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

 

To build and operate its Puerto Rico network, the Partnership enteredinto an agreement, dated February 4, 1999 (the “TLD Agreement”) withTelefónica Larga Distancia de Puerto Rico, Inc. (“TLD”).  TLD is a wholly owned subsidiary ofTelefónica Internacional, S.A. which is a member of the Telefónica, S.A. group(Ticker: TEF) (the “Telefónica Group”), Spain’s largest traded company and oneof the world’s largest telecommunication companies.  Telefónica Móviles (Ticker: TEM), 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 on September 23, 2003.  The Note is convertible into 49.9% of NewComm’sequity.  The Note cannot be convertedwithout FCC authorization.  NewComm andTEM entered into a management agreement whereby TEM provided day-to-daymanagement services for NewComm, subject to the supervision of NewComm’sBoard.  Pursuant to a certain StockPurchase Agreement dated as of March 12, 2002, by and between thePartnership and TLD, the Partnership had agreed to sell 0.2% control interestat market value to TEM.  The transfer ofthis control interest was approved by the FCC during 2004. As part of therequirements of the Stock Purchase Agreement, TEM (and TelefónicaInternacional, S.A., its parent company) had agreed to issue their corporateguarantee as collateral for long-term financing of NewComm of approximately$110 million.  Together with the StockPurchase Agreement and as part of the transaction a Shareholders’ Agreement anda Sale Agreement were executed between the parties.  The Shareholders’ Agreement provides for agreat number of general and specific protections and rights for the Partnershipas a minority shareholder in NewComm. The Sale Agreement provides for a convenient exit for the Partnershipfrom NewComm.  Under the Joint VentureAgreement the Partnership’s principal means of exiting from NewComm was byexercising Registration Rights against TEM. Due to Telefónica’s re-organization and new market conditions, thepossibility of publicly registering an exclusive wireless service companylimited to the Puerto Rico market is very unlikely.  However, under the Sale Agreement, thePartnership can force the sale of NewComm to TEM and/or third parties.

 

The Sale Agreement providesthat from and after May 12, 2003, either party (the Partnership or TLD)may trigger a shareholder obligation to sell NewComm.  Within 30 days of a notice of sale, TEM (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 Sale Agreement willcontinue in full force and effect even if the Stock Purchase Agreement withTEM, for whatever reason, does not close. The Stock Purchase Agreement and the Sale Agreement are currentlysubject to arbitration proceedings that were filed by TEM upon TEM’stermination as manager of NewComm. See Legal Proceedings section below.

 

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The Partnership’s PuertoRico 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.

 

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

 

**The Puerto Rico Market**

 

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

 

**Competition in Puerto Rico**

 

The continued success of thePartnership’s PCS business in Puerto Rico will depend upon its ability tocompete with five other wireless operators (including Verizon, Sprint PCS,SunCom, Centennial and Cingular) and potential future wireless communicationsproviders in the Puerto Rico market.  Allwireless operators compete in the optimization of their networks to provide abetter service for their customers.  Aswireless use increases, wireless operators compete more directly withtraditional landline telephone service providers and other technologiesincluding mobile satellite systems and cable operators offering voicecommunications.  In addition, theavailability of new spectrum and resale of existing spectrum and the entry ofnew participants may result in increased competition in the Puerto Ricomarket.  At the end of 2004, Puerto Ricohad a wireless market penetration of approximately 47% while the United States mainlandended the same year with an approximate market penetration of 57%.

 

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**Markets**

 

The following table setsforth as of December 31, 2004, with respect to each Market in which thePartnership 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**

 

On April 16, 2002, thePartnership entered into a Shareholders’ Agreement to form a joint venture witheMilios International, L.L.C., a Florida limited liability company, to promoteand establish in Puerto Rico the eMilios concept (described below).  The joint venture was formed under a PuertoRico corporation named Internet Surfing Stores of Puerto Rico, Inc. (“ISS”).  The Partnership owns 49% and eMiliosInternational owns 51% of ISS.

 

The eMilios concept involvesinternet communication galleries that are geared towards educating people inthe use of computers and the internet, and acts as a communication andrecreational center as well.  Thebroadband 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 adoptedthe Omnibus Budget Reconciliation Act of 1993 (the “Reconciliation Act”) which,among other things, mandated auctions for the award of certain FCC licenses,including PCS licenses.  Pursuant toauthority granted to the FCC by the Reconciliation Act, the FCC awarded PCSlicenses through a process of competitive bidding auctions in which there weremultiple applications for the same license (the “Auctions”).

 

PCS is a radio-basedtransmission technology, which, like cellular technology, uses the samefrequencies 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 call transfer and follow-me calling, single number service (thesame number can be assigned to multiple PCS telephones in different locations)and auto-trace of crank callers. The Partnership has been offering E-mail andinternet access from its handsets since June of 2000.  The Partnership began offering wireless bankingservices in October of 2000.  ThePartnership also pioneered in the Puerto Rico market short text messagingservices from its handsets in October of 2001.  An average of 600,000 text messages per monthis being sent by subscribers from their handsets.

 

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Frequency Blocks

 

The FCC divided PCS into sixfrequency blocks, designated Blocks A through F, such that there are sixoverlapping licenses in each market in each geographic area of thecountry.  Blocks A, B and C are 30 MHzblocks, 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 F licenses werereserved for Entrepreneurs meeting certain limiting criteria set forth in FCCRules.  Entrepreneurs were granted a setof economic preferences in the Auctions. Under FCC Rules, an Entrepreneur is defined as an entity that, togetherwith its affiliates and persons or entities that holds attributable interestsin such entity and their affiliates, has less than (i) $500 million ofassets and (ii) $125 million of annual gross revenue over the prior twoyears.  In addition, FCC Rules definethree classes of Entrepreneurs, with each class eligible for different economicpreferences in the Blocks C and F Auctions. The Partnership’s Entrepreneur qualification is as a “Small Business,”which is an entity that at the date of grant of the license had less than $40million of aggregate annual gross revenue averaged over the last three years.

 

Small Businesses wereentitled to make interest-only payments for the first six years and canamortize interest and principal over the remaining four years of the licenseterm.  The interest rate applicable toSmall Businesses is the 10-year treasury note rate at the date of grant of thelicense.  In addition, Small Businesseswere entitled to a bidding credit of 25%. In March 1997, the FCC issued an order suspending indefinitelyinterest payments on all Block C licenses; however, interest continued toaccrue.  Ultimately, in accordance withthe FCC procedures specified in the FCC’s March 24, 1998 Order onReconsideration of the Second Report and Order (the “Reconsideration Order”),the Partnership commenced interest payments during July, 1998. The Partnershiporiginally owed $51.3 million exclusively in connection with the Puerto RicoLicense. As of December 31, 2004 the Partnership owes the FCC theprincipal 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 in October 2004was not made and was accumulated with its related interest and penalty chargeof approximately $122,000.  The subsequentpayment due in January 2005 was not made.

 

Build-Out Requirements

 

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

 

Employees

 

The Partnership, includingits majority owned subsidiary NewComm, had approximately 378 employees at theend of 2004. On November of 2004, approximately 35 employees wereterminated as part of an organizational restructuring plan.

 

Available Information

 

We file annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,amendments to these reports, and other information with the Securities andExchange Commission (“SEC”).  The publicmay read and copy any materials we file with the SEC at the SEC’s PublicReference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  The public may obtain information on theoperation 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 on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and if available,amendments to those reports filed or furnished pursuant to the Securities

 

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ExchangeAct of 1934, as soon as reasonably practicable after we electronically filesuch material with, or furnish it to, the SEC.

 

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

#####  

The Partnership leasesoffice 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 on October 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 the Partnership is involvedin litigation arising from the ordinary course of business, some of which isongoing.  The General Partner does notbelieve that any litigation involving the Partnership will have a materialadverse effect on the Partnership’s business or financial condition.

 

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**Part II**

 

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

 

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

 

During the months of May and June of2004, the Partnership conducted a voluntary tender offer program to allpartners holding less than 2 Units.  Theprogram was available to over 1,100 partners. The price per Unit offered was $8,500.00. A total of 130 Unit-holderstendered their Units, amounting to approximately 140 Units re-purchased andrepresenting approximately a 5% reduction of outstanding partnership Units.

 

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

 

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

 

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

 

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

 

The Partnership may realizenet proceeds (that is, proceeds available after the payment of certain fees andexpenses including payments to the General Partner or its affiliates) from aCapital Transaction.  No assurance can begiven, however, as to the availability of a Capital Transaction or the amountof net cash 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 Partnerdetermines to do so.

 

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

#####  

The following tablesummarizes selected consolidated financial data of the Partnership from theperiod from January 1, 2000 to December 31, 2000, from January 1,2001 to December 31, 2001 January 1, 2002 to December 31, 2002,from January 1, 2003 to December 31, 2003 and from January 1,2004 to December 31, 2004.  Thisinformation should be read in conjunction with the Partnership’s auditedconsolidated financial statements and related notes thereto and managementdiscussion 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** | **)** |

 

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

 

**Introduction**

 

The Partnership was formedin January 1995 and is managed by its General Partner, SuperTelCommunications Corp.  The Partnership wasorganized to acquire, own, consult and operate personal communication services(PCS) licenses in the Block C band and to take advantage of the benefits thatthe FCC has set aside for Entrepreneurs. The Partnership is the controlling entity of NewComm, which in turn ownsand operates two 15 MHz PCS licenses covering Puerto Rico (“the Puerto RicoLicenses”).

 

The Partnership ownedcertain PCS licenses in California.  On August 28,2000, the Partnership entered into a Purchase and Sale Agreement with LeapWireless International (“Leap Wireless”), pursuant to which the Partnershipsold the Visalia-Porterville license to Leap Wireless in exchange for a$9,500,000 cash payment.  The sale wasapproved by the FCC and closed on June 8, 2001.

 

On November 26, 2003,the Partnership entered into a Purchase and Sale Agreement with Metro PCSpursuant to which the Partnership sold all of its remaining CaliforniaLicenses.  The sale was approved by theFCC and the licenses were transferred to Metro PCS on April 15, 2004 for a$10,900,000 cash payment.  ThePartnership has no other licenses in California.

 

The Partnership commencedcommercial operations of its PCS network in Puerto Rico on September 24,1999, when it began offering wireless services in Puerto Rico to thepublic.  Prior to that date, its revenueshad consisted of interest income only. Since the Partnership commenced commercial operations in 1999, thecomparisons presented below may not be indicative of future operations.

 

The Partnership establishedits Puerto Rico network by forming a wholly owned subsidiary, NewComm, on January 29,1999.  On February 4, 1999, thePartnership and NewComm entered into an agreement with TLD, whereby thePartnership contributed its two Puerto Rico Licenses to NewComm and TLDprovided NewComm a $19,960,000 loan to develop the Puerto Rico Licenses.  TLD’s loan is pursuant to a securedconvertible promissory note (the “Note”) which is convertible into 49.9% ofNewComm’s equity.  The Note could not beconverted without FCC authorization, which was granted in 2004.

 

The Partnership has agreedto sell shares in NewComm to TEM in sufficient amount to provide TEM with anadditional 0.2% share interest in NewComm, enabling TEM to have a total of50.1% control interest in NewComm.  Thetransaction involves a Stock Purchase Agreement, a Shareholders Agreement, anda Sale Agreement.  A summary of the termsof the sale and these agreements is provided below.

 

**TheStock Purchase Agreement**

 

The purchase price for the0.2% share interest in NewComm will be determined after all conditions toclosing are obtained.  The principalconditions for this closing are the closing of the long term financing forNewComm and the final approval by the FCC, which was granted in 2004.  At such time, the Partnership and TEM willselect an internationally recognized investment-banking firm who will perform avaluation of the shares to be sold.  Theinvestment banker will have an agreed upon period of time to prepare thevaluation of the shares.  After deliveryof the valuation, a closing will occur.

 

The investment banking firmwill 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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**TheShareholders Agreement**

 

In consideration of the saleof a controlling interest in NewComm a new Shareholders Agreement will becomeeffective upon the closing of the Stock Purchase Agreement.  The Shareholders Agreement will incorporateall of the rights and benefits under the current Joint Venture Agreement, whichinclude rights of first refusal, pre-emptive rights, drag-along rights,registration rights, piggy back rights, financial reporting and other rights.

 

In addition to the above,the Partnership will have approval rights with respect to a number of NewComm’sactions including the following: any transaction between NewComm and ashareholder 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 productdevelopment different from those in effect on the date hereof, consent to whichshall not unreasonably be withheld; any modification to the Certificate ofIncorporation or Bylaws of NewComm that would have an adverse effect on anyrights granted to a shareholder thereunder or under applicable law; and anyamendments or modifications to the Management Agreement or the TechnologyTransfer Agreement in effect as of the Effective Date.  The Partnership will have the right toappoint four directors and TEM will have the right to appoint five directors.

 

13

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**TheSale Agreement**

 

The new Sale Agreementprovides that the Partnership (or TEM) may trigger a shareholder obligation tosell NewComm.  Within 30 days of a noticeof sale, TEM (or the Partnership as the case may be) would have the right topurchase the Partnership’s (or TEM’s) interest. The purchase price to be paid at that time would be based on a valuationperformed by the investment-banking firm that prepared the valuation under theStock Purchase Agreement.

 

If TEM does not exercise itsright to buy out the Partnership’s interest, the shareholders will be bound toproceed with the sales process to attempt a sale of NewComm.  All shareholders are bound to cooperate andundertake all that is necessary in that effort. Further, the shareholders are bound to accept the highest price proposedby an interested buyer, which price must be payable in cash or freely tradablesecurities, or a combination thereof, and which must be for a price not lessthan the valuation prepared by the investment banker.

 

Some additional points arethat at the closing of the sale of NewComm the Management Agreement and theTechnology Transfer Agreement held now by TEM will terminate.  Also, no premium for controlling interest ordiscount for holding a minority interest in NewComm will apply.

 

The Sale Agreement shallcontinue in full force and effect even if the Stock Purchase Agreement withTEM, for whatever reason, does not close.

 

**ProjectFinance Facility**

 

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

 

An agreement restructuringLucent’s outstanding debt has been attained and it was executed on June 4,2003.  The now outstanding debt to Lucentis $48.5  million and is payable over asix-year period at 8% annual interest rate. On June 20, 2003, an agreement restructuring Alcatel’s debt wasexecuted.  Alcatel’s credit is now $2.5million at 6.5% payable over a three year period.

 

**CaliforniaLicenses**

 

On August 28, 2000, thePartnership entered into a Purchase and Sale Agreement with Leap WirelessInternational (“Leap Wireless”), pursuant to which the Partnership sold theVisalia-Porterville license to Leap Wireless in exchange for a $9,500,000 cashpayment.  The sale was approved by theFCC and closed on June 8, 2001.

 

On November 26, 2003,the Partnership entered into a Purchase and Sale Agreement with Metro PCSpursuant to which the Partnership sold all of its remaining CaliforniaLicenses.  The sale was approved by theFCC and the licenses were transferred to Metro PCS on April 15, 2004 for a$10,900,000 cash payment.  ThePartnership has no other licenses in California.

 

**Critical Accounting Policies**

 

The consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States, which require the Partnership to make estimatesand assumptions.  The Partnership has nooff-balance sheet arrangements and believes that of its significant accountingpolicies (see Note 3 to the consolidated financial statements), the followingmay involve a higher 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 handset accessories to net realizable value.  As an inducement to obtain new customers, thePartnership may sell handsets to customers for a price that is less thancost.  Until December 31, 2002, theloss on such sales was recognized at the time of sale.  We continue to monitor the depletion of ourcurrent 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 thecarrying 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 sum of the future cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, an impairment loss is recognized. The impairment loss, if any, is determined based on projected discountedfuture operating cash flows using a discount rate reflecting the Partnership’saverage cost of funds.  No impairmentloss was recognized during 2004, 2003 and 2002. If the estimates used to measure impairment are insufficient for anyreason, our net income or loss 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 after December 31,2001, PCS Licenses are no longer amortized and instead they are subject toperiodic impairment testing.  Based onanalysis of future cash flows and other related variables, we determined thatno impairment adjustment was necessary for the years ended December 31,2004, 2003 and 2002.  We will perform theimpairment test at least every quarter or as soon as anything comes to ourattention that could cause us to believe that the recorded balance of the PCSLicenses may be affected.  If theestimates used to measure impairment are insufficient for any reason, our netincome or loss would be reduced or increased, 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 billing adjustmentsand billing corrections.  We recordequipment revenue for the sale of handsets and accessories to customers in ourretail 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’sfinancial statements for 2001 and 2000, as described in Note 2 to the auditedconsolidated financial statements included as part of the 2003 Annual Report onForm 10-K.  Our prior independentaccountants are not able to reissue their report relating to the Partnership’sfinancial statements for 2001 and 2000 or to audit the restatement adjustmentsdescribed in Note 2 because they ceased operations in 2002.  Our successor independent accountants, KevaneSoto Pasarell Grant Thornton LLP have not audited such year and do not issue anopinion on the financial statements for the calendar year ended December 31,2001 and December 31, 2000.  Oursuccessor independent accountants have only audited our financial statementsfor the calendar years ended December 31, 2004, 2003 and 2002 and haveissued the Independent Auditor’s report included herein.

 

Accordingly, our financial statements for thecalendar year ended December 31, 2001 and December 31, 2000 arerestated and unaudited.

 

**Impact of Unaudited Financial Statements**

 

As explained above and in Note 2 to theaudited consolidated financial statements for the calendar years ended December 31,2003 and 2002, our consolidated financial statements for the calendar yearended December 31, 2001 and December 31, 2000 have beenrestated.  Our prior independent accountants are not able to reissue their reportrelating to the Partnership’s financial statements for 2001 or to audit therestatement adjustments described in Note 2 because they ceased operationsin 2002.  We believe that the effect of the adjustments madein the re-stated financial statements, and the nature of the accounting issuesaddressed by those adjustments, do not have a material effect on thePartnership’s financial position as a whole or on the Partnership’s investors,creditors, suppliers, employees or customers. Therefore, we believe that a re-audit of the Partnership’s 2001 and 2000consolidated financial statements is unnecessary.  Accordingly, our consolidated financialstatements for the calendar year ended December 31, 2001 and December 31,2000 are restated and unaudited.  Ouraudited consolidated financial statements for the calendar years ended December 31,2004, 2003 and 2002 are included as 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 ended December 31,2004, which amounted to $105,001,936 ($108,894,112 in 2003), included$100,336,047 ($101,557,423 in 2003) in service revenues and $4,665,889  ($7,336,689 in 2003) in handset andaccessories sales generated from NewComm’s wireless operations. The 36%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 was mostlyoffset by airtime consumption of existing customers and to a shifting of thecustomer 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***

 

Consolidated Operatingexpenses for the year ended December 31, 2004 totaled $107,644,333, ascompared to $100,086,717 for the same period in 2003, as shown on the followingtable:

 

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 increase in expenses of7% during 2004, as compared to 2003, is mainly due to the increase in theprovision for doubtful accounts which resulted in additional $6 million reservesand is directly related to the full implementation of the new billings andcollections software migration.  Theincrease in salesmen and dealers commissions is related to the shifting duringthe year from prepaid customer accounts to contract customers that triggershigher commissions.  The 19% decrease innetwork operation and maintenance expense is related to operationalefficiencies obtain at the subsidiary level and to the sale of 12 networktowers to a third party during the fourth quarter of 2004 as explained in Note11 of the combined financial statements.

 

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

 

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

 

***Liquidity and Capital Resources***

 

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

 

As part of the agreementwith TEM, NewComm entered into a contract with Lucent Technologies, Inc. (“Lucent”)that required Lucent to build a network that uses Code Division Multiple Access(“CDMA”) protocol. The total cost was approximately $125 million.  On June 4, 2003, Lucent’s outstandingdebt was restructured for a six-year term with an interest rate of eightpercent (8%) annually and due in September 2009.  As of December 31, 2004, $48,470,205 wasoutstanding under this financing agreement (refer to Note 15(a) to theaccompanying consolidated financial statements).  During 2004 a total of $3 million were paidas principal payments.

 

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

 

18

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

 

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

 

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

 

The Partnership, by means ofSyncom, and TLD, each contributed $15 million of additional capital.  Syncom now has ownership of 8.02% of NewCommafter having contributed a total of $25 million of capital.  On March 2, 2002, the Partnership sold aportion its equity interest equal to 4.08% (on a fully diluted basis) inNewComm to a group of investors led by Fleet Development Ventures for $13million.  The Partnership believes it hasobtained sufficient funds, together with TLD, to provide NewComm with thecapital necessary for the Project Finance Facility and to fully fund NewComm’soperations.

 

Once TEM is able to convertits debt to 49.9% of NewComm, and the Partnership concedes to the sale of  0.2% control stock, the Partnership will own38.3% of NewComm equity.

 

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

 

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

 

The Partnership’sConsolidated revenues for the year ended December 31, 2003, which amountedto $108,894,112 ($107,957,097 in 2002), included $101,557,423 ($99,799,656 in2002) in service revenues and $7,336,689 ($8,177,441 in 2002) in handset andaccessories sales generated from NewComm’s wireless operations.  The increase in service revenues is primarilydue to an increase during 2003 of the subscriber base.  The decrease in handset and accessoriesrevenues is related to a reduction in the retail pricing of handsets.

 

***Expenses***

 

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

 

19

----

 

aredue to reclassification of accounts at the subsidiary level and are not relatedto actual variations in such accounts. The decrease in expenses during 2003, as compared to 2002, is primarilyassociated with an overall decrease in operating expenses of $3.6 millionresulting from cost control management implemented at the Partnership andsubsidiary level.  The increase insalaries and benefits was offset by a decrease in legal and professionalservices and a reduction in the provision for doubtful accounts, due to bettercollection efforts and tighter credit policy.

 

Net losses of $30,360,386for 2003 and $13,025,074 for 2002, reflect the costs of competing in the PuertoRico market against existing and new cellular and PCS operators in order tocontinue 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.

 

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

 

**Contractual Obligations**

 

As of December 31, 2004the Partnership’s contractual obligations including payments due by period, areas 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). Rental commitmentsrepresent the balance due on the Partnership’s General Partner office leasewhich finalizes in July 2005.

(2). Operating LeaseAgreement 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). Notes payableinclude the principal installments due by period on Lucent, Alcatel, FCC andTEM Notes.

 

**ITEM7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The Partnership’s exposureto market risk through derivative financial instruments and other financialinstruments

 

20

----

 

isnot material because the Partnership does not use derivative financialinstruments and does not have foreign currency exchange risks.  The Partnership invests cash balances inexcess of operating requirements in short-term money market funds.  As of December 31, 2004, the Partnershiphad cash equivalents and short-term investments of $10,612,430 consisting ofcash and highly liquid, short-term investments in money market funds.

 

The Partnership’s cash andcash equivalents will increase or decrease by an immaterial amount if marketinterest rates increase or decrease, and therefore, its exposure to interestrate changes has been immaterial.  ThePartnership’s loans payable to the FCC have a fixed interest rate of 6.5% andtherefore are not exposed to interest rate risks.  The TLD Note relating to indebtedness ofNewComm bears interest at the floating rate of the 90-day LIBOR plus 1% and isdue six months from date of issuance but can be extended for periods of six months,thereafter.  Lucent’s debt wasrestructured on June 4, 2003 to a six-year term credit facility with aninterest rate of eight percent (8%) annually. As of December 2004, the outstanding principal balance owed toLucent 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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##### **ITEM8.  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                                                                                              |   |

 

Allfinancial schedules have been omitted because they are not applicable orbecause the information required is included in the financial statements ornotes 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 consolidatedbalance sheets of **CLEARCOMM L.P. (a DelawareLimited Partnership) AND SUBSIDIARY (“the Company”)** as of December 31,2004, 2003 and 2002, and the related consolidated statements of operations,changes in partners’ deficit, and cash flows for the years then ended.  These consolidated financial statements arethe responsibility of the Partnership’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of **ClearComm, L.P. andSubsidiary**as of December 31, 2004, 2003 and 2002, and theresults of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern.  As discussed in Note 2 tothe consolidated financial statements, the Company has suffered recurringoperating losses, has a working capital deficit and a partners’ capitaldeficit, and has not yet obtained permanent financing for the cost of itsnetwork and its working capital needs which matters raise substantial doubtabout its ability to continue as a going concern.  Management’s plans in regard to these mattersare also described in Note 2.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

As discussed in Note 3(h), effective January 1,2003, the Company changes its method of accounting for the amount of lossincurred on the sale of handsets to customers. In addition, and as discussed in Note 3(k), effective January 1,2002, the Company changed its method for assessing the recoverability of itsintangible 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 theyears 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 years ended**

**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 theyears 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 toConsolidated Financial Statements**

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

 

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

 

The Reporting Entity forpurposes of these financial statements is ClearComm, L.P., a Delaware limitedpartnership (the “Partnership”), together with its subsidiary Newcomm WirelessServices, Inc., a Puerto Rico corporation (“NewComm” and, together withthe Partnership, the “Company”).

 

The Partnership wasorganized on January 24, 1995, under the laws of the state of Delaware.  The Partnership was created to fileapplications with the Federal Communications Commission (FCC) under personalcommunications service (PCS) frequency Block C, originally restricted tominorities, 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 PartnershipAgreement.  The Partnership’s GeneralPartner is considering alternatives to dissolution, including an extension ofthe Partnership’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.  On January 22,1997, the Partnership was granted the PCS Block C licenses for Puerto Rico andcertain 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.  On March 12,2002, the Partnership agreed to sell an additional 0.2% of its shares inNewComm 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 party valuation ofNewComm’s stock and approval by the FCC. During 2004, the Partnership and TLD received the approval from the FCC,but the conversion and additional sale of participation has not beenconsummated.

 

•      NewComm and TLDentered into certain management and technology transfer agreements.  These agreements were terminated effective October 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 for the Partnership from NewCommat any time after May 12, 2003.  Atthe closing of the sale, the management and technology transfer agreementsbetween the Company and several related entities (TEM and TISA) willterminate.  See Note (16).

 

•      In August 2004,the Partnership retained the services of a consulting firm (other than itsexternal auditors), to audit the operations and performance of NewComm underthe management of TEM.  The results ofthe audit were reported to the Board of Directors of NewComm on September 30,2004, with the conclusion that TEM had not performed adequately.  Under the Partnership’s direction, the Boardof Directors of NewComm terminated TEM as manager under the managementagreement on October 28, 2004. TEM has alleged unlawful and wrongfultermination of the Technology and Management Agreements.  The Partnership, on behalf of NewComm, isproactively seeking compensation for damages caused by what the Partnershipbelieves was TEM’s nonperformance and breach of the Technology and ManagementAgreements.

 

•      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 on June 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 and Class 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.  On June 4,2003, NewComm entered into a Senior Credit Agreement with Lucent, which extendsthe maturity date of the $61 million to September 30, 2009, with interestat 8% annually.  See Note 15(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 of March 25,2002.  This Promissory Agreement and Notewas amended with an extension of payment until November 25, 2002.  On May 23, 2002, NewComm paid Alcatel $6million, including interest of $646,000. On June 20, 2003, the Promissory Note was amended to provide forthe orderly repayment of the principal and accrued interest on the Note,extending its maturity to December 20, 2005 and decreasing the interestrate to 6.5%.  In June 2003, NewCommrepaid $2 million of principal and $337,372 of accrued interest owed.  During 2004, NewComm repaid $2,075,000 ofprincipal 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 at April 30,2005, with the option to extend by one or more additional periods of 30 dayswith the lender’s prior consent.  Bymeans of letter agreement between and amongst the Partnership, TelefónicaMóviles S.A. (TEM) and Telefónica, S.A. (TEF), the latter two have agreed toissue a corporate guarantee to cover the refinancing of this Bridge Loan and$42.6 million owed to the FCC.  During2003, NewComm received an additional $1 million advance under the terms of thisfacility. This arrangement provides for no amortization of principal until thefifth anniversary of the facility and was subject to the FCC issuing anapproval order authorizing the sale to TLD of a .2% ownership interest inNewComm.  Such approval was issued during2004.

 

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 theend of 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 ended December 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 (which approximatesreplacement cost from suppliers).  As aninducement to obtain new customers, the Company may sell handsets to customersfor a price that is less than cost.  Theloss on such sales is recognized at the time of sale in accordance withpractice 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 accounting period.  Management believes that this new methodbetter 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, becausethe 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 isestablished based upon a review of existing array of inventory models, theaverage selling prices 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 adopted SFASNo. 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 ofservices, 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 ofminutes expected to be utilized prior to expiration.  The Company’s estimate of expected futurerevenue is primarily based on historical experience as to minutes of use.

 

Roaming revenues include revenues fromcertain customers who roam outside their selected home coverage area, referredto as “incollect” roaming revenues, and revenues from other wireless carriersfor roaming by their customers on the 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 sold separately.  Revenue for enhanced services and optionalfeatures is recognized as earned.

 

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

 

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 Companydetermined a redemption percentage of 15% to compute the end-of-year estimatedliability for awards redemption. This percentage of redemption was re-evaluatedduring the year and remained the same. The Company charged the cost of operating the program to sellingexpenses and the estimated cost of award redemption to the cost of products availablefor redemption.

 

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’scustomer base, but is highly dependent on the strong competition among the companieswho provide 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 due toa 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 currentlyacquired from 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 SFAS No. 13and SFAS 98, “Accounting for Leases” to account for the sale and leaseback ofequipment during the year.  Based on theprovisions of this statement, any profit or loss resulting from the sale of theequipment is deferred and amortized over the lease term.  On the other hand, since the leaseback wasconsidered to be a capital lease, the related equipment is capitalized andamortized over its estimated life.  SeeNote 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 2003financial statement 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) obligationsto repurchase the issuer’s equity shares by transferring assets, and (3) obligationsto issue a variable number of shares. With limited exceptions, FAS-150 is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective atthe beginning of the first interim period beginning after June 15,2003.  The Company does not expect thatthe adoption of FAS-150 will have a material impact on its consolidated resultsof 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 after June 30,2003.  The Company does not expect thatthe adoption of FAS-149 will have an impact on its consolidated results ofoperations 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 activity in the accountsreceivable customers’ allowance for doubtful accounts during the 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)****  **Accounts receivable 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 at December 31consist 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 of December 31,2003 amounted to $7,338,288; therefore, the Company recognized a comprehensiveloss resulting from the unrealized holding loss on investment of $37,827.  The investments were redeemed during 2004.

 

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

 

During the year ended December 31,2002, the Partnership acquired a 49% interest in Internet Surfing Stores ofPuerto Rico, Inc., (ISS), a company which is engaged in the development ofinternet surfing galleries, targeted to the segment of population that does notown computers.  Total amount investedduring the years ended December 31, 2004, 2003 and 2002 amounted to$130,667, $261,334 and $392,000, respectively. The Partnership’s investment in this company is accounted for on theequity method of accounting.  Equity inlosses for the years ended December 31, 2004, 2003 and 2002 amounted to$115,382, $140,608 and $114,746, respectively.

 

During the year ended December 31,2004, the Partnership wrote-down $165,306 of its investment in eMilios due tounfavorable market conditions in the store located in Mayaguez, which resultedin the closing of such store and questionable market value and uncertaintyregarding future profitability.

 

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

 

**Condensed balance sheets information (as of December 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 commencing January 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 at December 31consist 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)****     Notespayable to Telefónica Móviles, 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 and July 2004,NewComm received additional advances from Telefónica Móviles, S.A. in theamount 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 on March 8,2002 by****means of an Allonge Letter.  The letter came about as a result of thesigning of the Stock Purchase Agreement with TLD (refer to Note 1) whichagreement reduced the interest rate to 8%.

 

During June 2003, NewComm and Lucententered into a Senior Credit Agreement which refinanced the balance of theexisting promissory note balance.  The interestrate remained at 8% per annum and the maturity date was extended to September 2009.  As part of the refinancing agreement, NewCommwas required to make two principal payments of $5,551,032 each, made during thefirst 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:

 

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

 

•      Final maturitydate will be December 20, 2005.

 

NewComm made the followingpayments as a result of the amendment:

 

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

 

•      On June 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 hadapproximately $51,340,000 in long-term debt related to the PCS licenses grantedto the Company by the FCC.  This debtconsists of notes payable bearing interest at 6.5% and guaranteed by the PCSlicenses obtained.  In accordance withindustry practice, the Company recorded the PCS licenses and the related debtat their net present value, based on the Company’s estimate of borrowing costsfor debt similar to that issued by the FCC. The discount rate used by the Company was 12.82%.  These notes are payable to the FCC asfollows:

 

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

 

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

 

During the year ended December 31, 2004,the Company paid the amount of $11,009,302 including interest andprincipal.  The payment due in October 2004was not made and was accumulated with its related interest and penalty chargeof approximately $122,000.  Thesubsequent 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 rate plus 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, as follows:  (i)  shares of NewComm’s Class Acommon stock in an amount equal to thirty-three and one third percent (33-1/3%)of NewComm’s issued and outstanding Class A common stock held byClearComm, and (ii) shares of NewComm’s Class B common stock in an amountequal 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 |   |

 

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

 

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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 $262,164during the years ended December 31, 2004, 2003 and 2002, respectively, inconnection with these services.  As of December 31,2004, 2003 and 2002, the Partnership owes its General Partner approximately$185,000, $155,000 and 136,000, respectively related to management fees.

 

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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 theBoard of 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 of December 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:

 

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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 ended December 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 aten-year period.

 

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 consulting services.  The agreement is for three years and themonthly 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 Telephone Company, Inc.(“PRTC”).  The agreement, which isrenewed on a yearly basis, provides for the delivery of local traffic to beterminated on each party’s local network so that customers of either party havethe 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 Interexchange Agreementfor Telecommunications Services with Centennial Wireless PCS OperationsCorporation (“Centennial”).  Theagreement, which is renewed on a yearly basis, provides for the parties tophysically connect their switches and interchange traffic to allow subscribersof Centennial to communicate with subscribers of NewComm and vice versa intheir respective service areas.  Theagreement establishes that the cost of the communication services provided arebased 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

 

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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.

 

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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 theGeneral Partner, 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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# **Reportof Independent Public Accountants**

#  

# To the Board of 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.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  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 the Company’sinternal control over financial reporting.  Accordingly, we express nosuch opinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable 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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**SuperTelCommunications Corp.**

 

**BalanceSheets—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.**

 

**Statementsof Income and Retained Earnings (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.**

 

**Statementsof 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 on January 24,1995 under the laws of the State of Delaware, for which SuperTel has served asGeneral Partner since June 18, 1996. The Partnership is scheduled to terminate on December 31, 2005, orearlier upon the occurrence of certain specific events as detailed in thePartnership agreement.  SuperTel, asGeneral Partner of the Partnership, is considering alternatives to dissolution,including an extension of the Partnership’s termination date. On January 22,1997, the Partnership was granted the PCS Block C licenses for Puerto Rico andcertain western states of the United States. On February 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:

 

•      ThePartnership transferred all of its Puerto Rico licenses including its related debtwith the FCC (the Partnership’s contribution) to NewComm Wireless Services, Inc.(“NewComm”), a newly organized Puerto Rico corporation owned by thePartnership, in exchange for all of NewComm’s issued and outstanding commonstock.  Subsequently, the Partnershipsold part of its investment in NewComm, and as of December 31, 2004 and2003, the Partnership owned 76.89% of NewComm’s issued and outstanding commonstock.

 

•      TLDlent approximately $20 million to NewComm by means of a secured convertiblepromissory note payable (the Promissory Note). Payment of the Promissory Note is collateralized through 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.

 

•      Oncecertain regulatory and other requirements are met, the Promissory Note may beconverted into certain number of shares of NewComm’s common stock correspondingto approximately 49.9% of NewComm.  On March 12,2002, the Partnership agreed to sell an additional 0.2% of its shares inNewComm 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 a third partyvaluation of NewComm’s stocks and should be subject to the approval from theFCC. During 2004, the Partnership and TLD received the approval from the 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 on June 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 are notinterest 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 their issuance,SuperTel has the option to redeem them at their issuance price plus accrueddividends.  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 inensuring that all material information required to be filed in this annualreport has been made known to them in a timely fashion.  There have not been any changes in internalcontrols, or in factors that could significantly affect internal controls,subsequent to the date the President and Chief Financial Officer completedtheir evaluation.

 

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

#####  

SuperTel CommunicationsCorp. was incorporated in Puerto Rico in June 1996 for the purpose ofacting as the general partner (the “General Partner”) of the Partnership.  SuperTel was structured to ensure that thePartnership would receive the maximum benefits eligible to Entrepreneurs.  The Partnership has no employees and ismanaged and controlled by the Board of Directors and executive officers of theGeneral Partner.

 

56

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*Fred H. Martinez, Directorand Chairman of the Board*, age 60, has been chairman of the board oftrustees of the University of Puerto Rico from 1993 to 1999.  Mr. Martinez is co-managing partner ofPuerto Rico’s third largest law firm. During 1977 to 1979, Mr. Martinez was director of the Puerto RicoIncome Tax Bureau, member of the Governor’s Economic Advisory Council, chairmanof the Committee on Section 936, Government of Puerto Rico, assistantsecretary of the treasury, Internal Revenue, Puerto Rico Treasury Department(1978- 1979), president of the Tax Committee, Puerto Rico Chamber of Commerce(1978-1979).  In 1993 he was chairman ofthe board of the Solid Wastes Management Authority, Government of PuertoRico.  Mr. Martinez has extensiveexperience in contract negotiations, corporate and tax law, and in directingmajor institutions.  He holds a BS inEconomics from Villanova University (1967), an LLB (law) from the University ofPuerto Rico (1971), and an LLM (taxation) from Georgetown University (1972).

 

*Javier O. Lamoso, Directorand President,*age 40, has had extensive experience in thetelecommunications industry and has been responsible for developing, negotiatingand overseeing numerous strategic operational, economic and political aspectsof the cellular telephone industry, including cell-site acquisition,environmental impacts, leasing contractual arrangements and inter-companyrelations with other operating telecommunications organizations, includinginterexchange carriers and local telephone companies.  Since 2002, Mr. Lamoso has been a memberand officer of the Board of Directors of the Young Presidents’ Organization,Puerto Rico Chapter.  Until 1994, Mr. Lamosoacted as counsel to the Puerto Rico Cable Operators Association in variousmatters, which include the negotiation of rates and levies and the drafting ofnew legislation.  From 1986 to 1987 Mr. Lamosoheld a non-legal position in the corporate finance department of Simpson,Thacher & Bartlett, and was involved with the successful external debtrestructuring of Chile in 1987.  He holdsa BA in Political Science/ Economics from Fordham University (1986), and a JDin law from the University of Puerto Rico (1990).

 

*Margaret W. Minnich,Director*, age 51, has held management and supervisorypositions in finance and accounting over a 20-year period in the non-profit,manufacturing and public accounting field. In the past, she has been a member of the board of severalprivately-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 for allfinancial 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).

 

*Lawrence Odell, Directorand Secretary*, age 56, is the co-managing partner of Puerto Rico’sthird largest law firm with substantial expertise in the fields of corporatefinance, administrative law, securities and banking.  He is a member of the Trial LawyersAssociation of America, served as a member of the Inter-American Law Reviewfrom 1973 to 1974, and has written for that publication in the past.  He holds a BA (1971) and a JD (1974) from theInter-American University of Puerto Rico, and a LL.M. in labor law from NewYork University (1975).  Mr. Odellhas served in the capacity of secretary for several major corporations,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. Perryhas purchased and sold a two-way radio license, and has been involved in severalwireless communication partnerships. From 1987 to 1993, he was general partner of Telenode Rincon, theoriginal owner and developer of the RSA cellular telephone system for PR-1,which was successfully acquired by Cellular Communications, Inc., as wellas managing other cellular telephone and telecommunications holdings.  From 1959 to 1975, Mr. Perry was thepresident and/or owner of several successful licensed real estate firmsincluding United Realty Group, Milwaukee, the largest black-owned real estatefirm in Wisconsin, and Perry and Sherard Realty, Milwaukee, which specializedin rehabilitating and selling between 75 to 100 properties per year utilizing astaff of approximately 30 people.  From1975 to 1992, Mr. Perry owned and operated a McDonald’s franchise in SaintLouis, Missouri, and was responsible for all operations of this successfulbusiness. Mr. Perry served in the U.S. Army in Korea, and has takenextensive courses in the fields of general business and real estate.  From 1988 to 1992 he was vice president ofthe Ronald McDonald Children’s Charities, and from 1980 to 1984 he served as amember of the McDonald’s Advertising Committee. His memberships include the board of directors of the SkinkerDeBaliviere 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 solely upon a reviewof any Forms 3, 4 and 5 and any amendments thereto furnished to the Registrantpursuant to Rule 16a-3(e) of the Rules of the Securities andExchange Commission, the Registrant is not aware of any failure of any officeror director of the General Partner or beneficial owner of more than ten percentof the Units to timely file with the Securities and Exchange Commission any Form 3,4 or 5 relating to the Registrant for 2003.

 

Codes of Ethics

 

The Partnership has adopteda code of ethics that applies to all of its directors, officers, employees, andrepresentatives.  The Partnership willprovide to any person without charge, upon written request sent to thePartnership’s principal executive office, a copy of such code of ethics.

 

Audit Committee Financial Expert

 

The Board of Directors of the Partnership’sGeneral Partner has determined that the Partnership does not have an auditcommittee financial expert, as such term is defined in Item 401(h)(2) ofRegulation S-K, serving on its audit committee. Nevertheless, the board members currently serving on the audit committeepossess (i) an understanding of generally accepted accounting principlesand financial statements, (ii) the ability to assess the generalapplication of such principles in connection with the accounting for estimates,accruals and reserves, (iii) an understanding of internal control overfinancial reporting, and (iv) an understanding of audit committeefunctions.

 

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

#####  

The Partnership is managedby the General Partner’s Board of Directors and executive officers of theGeneral Partner.  The Partnershipreimburses the General Partner for all reasonable expenses incurred by it inconnection with managing the Partnership, including salaries and expenses ofthe General Partner’s employees who manage the Partnership.

 

The following SummaryCompensation Table sets forth certain information concerning the cash andnon-cash compensation earned by or awarded to the chief executive officer ofthe Partnership’s General Partner.  Otherthan the President, no executive officer of the General Partner receivedcompensation of $100,000 or more in 2004.

 

58

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**SUMMARY COMPENSATION 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.

 

OnAugust 30, 2001, the Partnership loaned $100,000 to Javier Lamoso.  Mr. Lamoso signed a promissory notewhereby he promised to pay the $100,000 plus six percent (6%) annual interestrate, on the earlier of August 30, 2005 or on the date of termination ofhis employment with the Partnership.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

Exclusive management andcontrol of the Partnership’s business is vested in the General Partner.  The Partnership has one administrativeemployee and is managed and controlled by the Board of Directors and executiveofficers of the General Partner.  TheGeneral Partner owns 100% of the Partnership’s general partnershipinterest.  The shares of General Partnerare held by certain individuals and Puerto Rico trusts.

 

The following table setsforth, as of December 31, 2004, information with respect to beneficialownership of the Partnership’s Units by: (i) all persons known to theGeneral Partner to be the beneficial owner of 5.0% or more thereof; (ii) eachDirector of the General Partner; (iii) each of the executive officers ofthe General Partner; and (iv) all executive officers and Directors as agroup of the General Partner.  Allpersons listed have sole voting and investment power with respect to theirUnits, 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 C F/B/OMargaret Minnich U/A/D 11/13/67, which owns 1 Unit reflected in the table.

(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 officers and directors ofthe General Partner as a group counts these 2.4 Units only one time.

 

##### **ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

#####  

**General Partnership Interest**

 

SuperTel contributed$100,000, which entitled it to receive 100% of the Partnership’s generalpartner interest.  The general partnerinterest entitles the General Partner to 25% of the equity of thePartnership.  See Item 5.

 

**Management Fee**

 

The Partnership Agreementprovides that the General Partner is entitled to a management fee for allreasonable 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. Martínez and Mr. Odellare partners of Martínez, Odell & Calabria, a law firm, which provideslegal services to the General Partner and the Partnership.

 

**ITEM 14, PRINCIPAL ACCOUNTING FEES 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, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a) Thefollowing 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.                                                            |   |

 

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

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

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe dates indicated.

 
| **Signature**             | ** ** | **Capacity in Which Signed**       | ** ** | **Date**            |
|---------------------------|------------|------------------------------------|------------|---------------------|
|                      |       |                               |       |                |
| /s/ Fred H. Martínez |       | Director and Chairman of the Board |       | July 26,  2005 |
| Fred H. Martínez     |       |                               |       |                |
|                      |       |                               |       |                |
| /s/ Javier O. Lamoso      |       | Director and President             |       | July 26,  2005 |
| Javier O. Lamoso          |       |                               |       |                |
|                      |       |                               |       |                |
| /s/ Margaret W. Minnich   |       | Director                           |       | July 26,  2005 |
| Margaret W. Minnich       |       |                               |       |                |
|                      |       |                               |       |                |
| /s/ Lawrence Odell        |       | Director                           |       | July 26,  2005 |
| Lawrence Odell            |       |                               |       |                |
|                      |       |                               |       |                |
| /s/ James T. Perry        |       | Director                           |       | July 26,  2005 |
| James T. Perry            |       |                               |       |                |

 

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